Japan feels shame of cutting back

Dateline: Tokyo

FOR SOME Japanese executives the thought of taking early retirement is an unbearable humiliation. It pushed Masaharu Nonaka, a 58-year-old manager at Bridgestone, to suicide, still seen by many in Japan as an honourable escape from shame.

"I will resist the cruel restructuring the company is now carrying out," Nonaka wrote in a letter to his fellow workers at Japan's largest tyre maker, Bridgestone, before his death last month.

"Since joining Bridgestone I have worked for my company for more than 30 years without paying attention to my family. The efforts of such employees have led to today's Bridgestone."

The Japanese have come to expect their companies to provide lifetime employment guarantees, in effect relying on a corporate welfare state. Little wonder then that firms have become bloated, allocating money and staff with little regard for shareholders.

Now, with the country stuck in recession, these companies find they need heavy cutbacksand a wave of changes appears to be sweeping Japanese boardrooms.

More than 100 firms have pledged in recent weeks to turn their fortunes around through risutora, or restructuring. Their proposals mean spinning off loss-making operations, cutting capital spending and, most painfully, axing thousands of jobs. "Over the last eight months, and for the first time in the 1990s, Japan has begun to adopt policies which go in the right direction," says Kenneth Courtis, chief economist at Deutsche Bank Group Asia Pacific. "The country's corporate sector has begun to take the hard decisions to reposition and restructure."

Foreign investors, enticed by the promise of improved earnings, poured money into Tokyo's stock market, pushing the Nikkei index up 22 per cent this year. Four industrial giants, Sony, NEC, Hitachi and Mitsubishi Electric, have pledged to cut 53,000 jobs over the next four years. Japan's top 15 banks have promised to cut another 20,000 staff, and that figure may rise even higher since many economists doubt all these banks will survive the next four years.

At Bridgestone more than 3,000 jobs have already gone. After starting reforms earlier than many, Bridgestone has profits at a record level.

As Japan's worst postwar recession drags on, with no sign of a revival in private demand, companies are finally acknowledging the need to cut back and regroup.

The rising tide of bankruptcies has reminded executives of the price of delaying tough decisions. More than 1,200 firms went bankrupt in Japan last month alone and the US ratings agency Standard and Poor's warns more will follow. In the past 18 months, since the collapse of the brokerage Yamaichi Securities came close to triggering a financial panic, the business environment has changed. Japan's keiretsu, powerful business conglomerates, are breaking down, and banks, desperate to cut loan portfolios, are offering less help to their traditional allies.

Companies are also offloading troubled operations. So Sony, which unveiled a drastic reform plan in March, will close 15 of its 70 plants worldwide in the next four years. The electronics giant will absorb three affiliates and base its core business around its lucrative PlayStation game console.

Nippon Steel, the world's biggest steelmaker, is ending its six-year flirtation with microchip production, giving up its Japan operations and handing control of its stake in a Singapore venture to a rival.

Japanese steel firms have been hard hit by complaints of dumping from US steel mills and are being forced to wipe off excess capacity. "I believe it is inevitable that in steel industry consolidation we would need to scrap excess capacity," says Akira Chihaya, Nippon Steel's president. His firm is the only Japanese steelmaker expecting profits in fiscal year just ended.

At Nikko Securities, Japan's number three brokerage, executives have sought refuge by selling a 25 per cent stake in the firm to the US banking giant Citigroup.

The 220bn yen (pounds 1.2bn) deal, signed last June, was a rude shock for Nikko's top shareholder and erstwhile ally Bank of Tokyo-Mitsubishi and signalled a breakdown in longstanding business ties. Nikko has since decided to liquidate a troubled real estate affiliate and close offices across Asia.

The Japanese authorities have hailed the moves, recognising the need for change. Newspaper editorials tell readers to be more independent in their career plans. "In such a world it is impossible to draw up a lifetime plan based on success in one company entrance examination," the Yomiuri Shimbun newspaper said.

As risutora encourages companies to spin off sideline businesses so others are stepping in to pick up the pieces. Britain's 3i Group, Europe's top venture capital firm, is to set up a joint venture with the Industrial Bank of Japan to offer management buy-out advice in Japan. Their firm will start with a 20bn yen (pounds 180m) investment fund.

Others have already started buying, notably GE Capital, the finance arm of the US industrial giant General Electric. In its latest purchase, in January this year, GE Capital spent 800bn yen (pounds 4.4bn) buying a leasing firm once run by the Long-Term Credit Bank, which collapsed in October.

Yet although there are new opportunities it is by no means certain this wave of restructuring, or the sudden stock boom it has encouraged, herald an imminent recovery in Japan. "The actual restructuring plans investors have been enthusiastic about are still pretty limited," said Peter Morgan, economist at HSBC Securities in Tokyo.

After all, there was a similar burst of restructuring earlier this decade, when the yen climbed to record highs against the dollar, but that did little to break Japan out of its post-1980s slump.

This time economic conditions are considerably worse, and troubles are being felt across Japan's principal market, Asia.

"The risk is that most firms are still closely tied to the old ways and remain reluctant to change," said Ron Bevacqua, senior economist at Merrill Lynch in Tokyo.

"The market has focused on a few substantive restructuring announcements and other Japanese firms seem to have discovered the positive impact that restructuring announcements have on their share price, even if the contents of the plan are not as bold as those which have captured the headlines."

Though announcements of job losses seem impressive, they represent little more than early retirement programmes and a cutback on graduate recruitment.

Few firms, particularly among the large corporations, are prepared to face the social opprobrium of making staff redundant.

Already unemployment in the world's second largest economy is at its worst level since the war, and officials warn that the current 4.6 per cent jobless rate can only worsen.

In the central bank's latest Tankan business survey companies across industry warned of a heavy cutback in investment this year.

"Japan's decade-long problems of stagnant demand, a weak financial system and massive bad loans will continue," Standard and Poor's said in a recent report.

Change may be reaching Japan's boardrooms but many warn it is still not enough to restore the nation's fortunes.