View from City Road: Japanese show the way on research

The Bank of Japan's latest analysis of the Japanese corporate sector has some interesting lessons for UK companies.* Last year's fall in sales reduced manufacturing profits for the third successive year, and pushed margins to their second lowest level in Japanese corporate history. Only the squeeze after the first oil shock in 1973 hit Japanese companies harder.

Corporate Japan reacted by squeezing the pay bill (up overall by just 0.9 per cent, barely ahead of the 0.6 per cent rise in employees), paring fixed costs and allowing the strong yen to cut import costs. It has also stretched most product model life cycles: VTR models lasted 16.5 months as opposed to 11 months in the previous survey, although the introduction of headphone stereos and refrigerators quickened.

But the real contrast with Western companies is that the Japanese did so much to maintain their research and development. Spending was up marginally in real terms despite the profits squeeze.

*Corporate business during the recent economic downturn, special paper no 232.