I’ve been a booster of Shinzo Abe’s money-printing crusade from the very start. I always thought it would do Japan a lot of good.
That’s not to say I knew much about Japan. I knew as much about it as the average Economist reader, which is to say not a lot.
I’ve been in favour of Abenomics because I’m into monetary policy. Japan is just one of the places I thought could do with an invigorating blast of money printing.
That’s been my perspective: central bankers, monetary policy, QE, yield curves. And I’ll admit it’s a dry way of looking at things. It’s devoid of people, culture, laws, history, and all the other things that make the world go round.
That’s why I’ve come all the way over here. I want to flesh it out. I want to see if my theories hold up.
A culture shock
I’ve delivered my potted economic history of Japan a few times lately so you should be familiar with it. Let’s see if I can do it in 50 words:
Japan boomed after the war. Caught, then surpassed Western economies. 1989: the crash. Economy goes down and stays down. 25 years of deflation. Ageing population. Shinzo Abe elected in 2012: aggressive reforms and even more aggressive money printing. Now, signs of progress. But much more to do. Can it last?
The numbers tell a story: more people are working, deflation is on its way out, corporate profits are rising, investment too.
But on the ground in Japan, nobody knows about the statistics. People experience Abenomics more like a culture shock. Abe’s reforms are shaking up the entire society, the entire basis of Japan’s economy for the last 50 years.
Culture and capitalism
The disruptive part of Abe’s agenda isn’t so much the money printing as the corporate reforms.
You might think “capitalism is capitalism”, and a Japanese corporation is little different from an American or British one. But there are differences.
In the UK, shareholders come first. Company executives shovel cash out to shareholders whenever they can in the form of dividends or buybacks. They cull unneeded workers without a second thought. And they live in fear of activist investors, who prowl the markets looking for companies to extort.
Shareholder capitalism doesn’t stop at the boardroom. We all live it, every day. British workers live in fear of the chop. They show little loyalty to their employer, jumping around multiple times in their career. And they often take matters into their own hands by starting new businesses.
Japanese companies put the interests of workers and suppliers first. Japanese shareholders don’t hound and terrorise Japanese CEOs, seeking to extract every last drop of value.
At the boardroom level, this means Japanese companies tend to hoard much more cash. I discussed this last week. It means mergers and acquisitions are much less common; instead Japanese companies bunch together in informal groupings called keiretsu, owning big stakes in one another. And it’s why Japanese judges tend to rule against activist investors and hedge funds.
Japanese workers get ahead by working within the system. They try to get into the right university, get a job at a big publicly listed company, and pay their dues. In exchange they get job security and a wage that rises with seniority. And they rarely leave to start their own businesses — according to the Global Entrepreneurship Monitor, 4% of Japanese workers started a business last year, as opposed to 14% in the USA.
The Japanese model has its benefits. Who doesn’t like job security? And it’s a great fit for certain industries. It’s why just-in-time , the manufacturing system in which companies and suppliers are tightly integrated, has taken over the world.
But the collegial, hierarchical Japanese system doesn’t work as well as it used to. Japanese companies don’t dominate high tech industries any more. Japan’s rigid corporate structures look like a bad fit for 21st century industries, which are all about innovation and intellectual property.
Shinzo Abe is trying to shake things up. He wants shareholders to demand more from companies, and companies to demand more from themselves. To that end he’s created a new corporate governance code which, for example, calls on companies to appoint outside directors (right now, many don’t); and a new institutional investors’ code which implores investors to demand more from companies.
But it’s hard for Abe. It’s one thing appointing a new Bank of Japan Governor, and letting him off the leash. Abe can railroad that through. It’s quite another to change the habits of hundreds of thousands of executives, judges, fund managers and investors.
Japan’s companies are the way they are not because of directives and laws from the top, but because of broader Japanese culture. And culture is very hard to change.
Abe has been in the job four full years. The Japanese business lobby — the Keidanren — has fought him tooth-and-nail all the way. It didn’t like the new corporate governance code, or his “equal pay for equal work” schemes. And last year we had the bizarre sight of Abe, a conservative, trying and failing to get the biggest labour union to ask for a raise.
The role model
I’ve written plenty about Abenomics’ successes. These can mostly be chalked down to money printing. The successes manifest themselves in stuff like higher corporate profits, investment, and labour force participation.
Corporate reform is much slower. That’s not surprising. Culture goes deep. Realistically, is reform even possible?
The only way I can see reforms taking root is if they’re shown to work.
The Hitachi Corporation shows the direction things could go. It had been an old-fashioned collegial Japanese company, which looked after employees and suppliers ahead of shareholders. But then Hitachi consciously decided to change. It replaced its seniority-based wage system with performance-based wages, and spun off unprofitable divisions.
The reforms worked: in the last year and a half, Hitachi shareholders are up 74%.