Just Another Day Under Rising Sun

Japan is emerging from an economic period that is largely comparable with the U.S.' Great Depression. The Bank of Japan has signaled an end to its quantitative easing strategy under which it provided something on the magnitude of 5 to 6 times the amount of liquidity Japanese banks required. It has slowly begun reducing that excess liquidity.

The gradual normalization of monetary policy, the robust economic performance (5.5% GDP growth in the fourth quarter of 2005) and the stabilization of real estate prices have given rise to speculation that Japan is back. But the real situation is more complicated, and in many ways, rather than the return of the Rising Sun, it is just another day in Japan.

Changing Relationships

In fairness, though, one must acknowledge that in many important respects the Japanese economy now is not the same one that entered economic malaise more than 15 years ago. Most importantly, several key relationships have been fundamentally altered.

The relationship between Japanese companies has generally been weakened. This is evident in the reduction of cross-shareholdings. Some studies suggest that cross-shareholdings fell from 46% of the total outstanding shares in the early 1990s to 27% in 2002 and now are believed to stand closer to 20%.

Another important relationship that has changed is between Japanese companies and their main banks. This seems especially true for manufacturing companies. Many, though clearly not all, have reduced their dependence on their banks. The process that economists call disintermediation has taken root in Japan. Many large manufacturing companies use their own cash flow and their record profits to finance investment rather than relying on bank loans. More than previously, Japanese companies are going directly to the capital markets to raise funds by issuing stocks and bonds.

The relationship between employees and employers has been altered as well. Although lifetime employment still is offered by some firms, reports suggest it is not as widely practiced as in the past. More importantly, there has been a significant increase in the use of contract workers. Some reports suggest that contract workers now account for almost one-third of the workforce, when previously that figure was closer to one-fifth.

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