Japanese turn envious eyes on the UK's Big Bang reforms
We think of Japanese industry as very efficient and in terms of labour productivity it is. But in its use of capital, Japanese industry is very inefficient
Tuesday 28 January 1997
It is interesting to note, too, that structural reform in the case of Japan (and for that matter Germany) is basically a shift in the tax and financial systems towards the Anglo-American models. Note that in Germany this week, the big issue is the government's plan for a cut in income tax to be financed (almost certainly) by a rise in VAT, bringing both the top rate of income tax and VAT rates virtually to UK levels.
In Germany the tax plan has run into opposition, but it is in Japan - witness Mr Nishimuro's outburst - that the tardy approach to reform is having its most serious economic impact. The Japanese government's reform platform had many planks, but the one of most immediate importance to the stock market was its plans for a Big Bang.
The provisional translation of the government paper outlining the plan is striking for its references to New York and London. For example, it starts "Goal - An international market comparable to the NY and London markets by the year 2001", and argues that the Japanese financial market "needs to play its true role of optimal resource distribution, as the markets in NY and London do..." to use Japanese savings fully.
The plans for reform, which on paper seem very similar to those which London brought into practice with Big Bang in October 1986, have also to take into account the pile of bad debts accumulated by the Japanese banking system. There is a lot of stress about the need for transparency in financial accounts. Indeed, the market can carry out its "optimal resource distribution" if it has correct accounts on which to work. But publishing accurate accounts means revealing the true weakness of the balance sheets of the Japanese banks, which have been made much worse by the collapse of share prices.
So there is a catch-22. Reform is stymied because it requires disclosure of hitherto concealed losses, which are in part the result of weak securities prices (they are also the result of weak land prices). But reform is necessary to restore confidence in the market, and until that happens prices are unlikely to nudge back up, and so help restore the bank balance sheets.
There is a further twist to this. Until bank balance sheets are restored the banks are unwilling to lend to new customers, particularly small and expanding businesses. But these businesses are the only ones which are likely to pull the economy out of stagnation. But until the economy is on a clear growth path the pile of bad debts cannot be cleared. So it is not just the financial economy which is gummed up by the failure to reform; the real economy is too.
You can see one effect of economic stagnation in the labour market. As the graph on the left shows, job creation in Japan was very low last year. In the first nine months of the year employment rose by 0.8 per cent, but 75 per cent of all new employment came from part-time employees. While this may represent a shift to a more flexible labour market, in the short term it means that consumers do not have much incentive to boost their spending.
So consumption will not stimulate recovery. Exports will help but the export sector in Japan is quite small relative to the whole economy. (UK exports of goods and services per head of population are more than double those of Japan.) So the export sector is simply not big enough to pull the economy out of recession.
So what will pull up the economy? Here we come back to structural reform. If the market can signal more clearly where savings should receive the greatest return, this will propel the economy to more efficient use of capital. We think of Japanese industry as very efficient and in terms of labour productivity its factories are. But in its use of capital, Japanese industry is very inefficient. The London-based investment boutique, Smithers & Co, recently published a bearish assessment of the Japanese stock market. One of the reasons for its bearishness was this. As you can see on the chart, Japanese firms are almost as productive as those in the US when it comes to using plant and buildings. But they are very unproductive in their use of land and their levels of inventories.
The reason for this is partly the high cost of land, but it is also a function of the land speculation by Japanese business, itself a function of over-cheap capital. Inventories are also much higher than in the US, again probably a function of overly cheap finance. So you see, the cheap finance provided by the banks to industry, much touted by people critical of the Anglo-American stock market-driven financial system, has had the effect of encouraging inefficient use of that finance. Surprise, surprise: if you subsidise something - in this case industrial capital - it will be used inefficiently.
So what is to be done? Some economists in Japan have been arguing that the only way forward is to press on with structural reform, in particular a shift away from manufacturing to service industry, even if in the short term that led to further job losses. Now the head of one of Japan's largest manufacturing companies is arguing for structural reforms too. This is big news for the rest of the world. Anyone accustomed to looking enviously at the Japanese economic system should be aware how enviously the Japanese leadership is looking at the reforms that have taken place in the UK.
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