Why Corporate Governance is Central to Japan’s Growth Strategy

Just to add a few additional points in addition to Nick’s insightful comments–>  Given (a) evidence that productivity in Japan is very strongly influenced by investment-specific technology, and (b) evidence that services sectors in the non-IT sector were “left behind” while manufacturing and IT sectors were able to capitalise on the technology boom, it makes sense to focus efforts on structural reform in the services sector.

Still, as Fukao, Miyagawa and Hisa demonstrated in their 2012 paper,increasing intangible capital alone has proven no indicator of rising TFP in the services sector.  This may explain why policies designed to promote growth via intangible investment in services sector in the early 2000’s were misplaced.

So what are the policy alternatives?  The second TFP paper gives us some key policy ingredients:

Naomi Fink:”Heterogeneity in Japanese TFP, Part 2: Regulation, Capital Allocation, and TFP in Japan”

Columbia University Academic Commons

This second essay by Naomi Fink make its points very clear: (a) overcoming deflation alone will not solve Japan’s economic problems; (b) deregulation of the services sector, and increased innovation will be necessary to increase total productivity.  This is exactly the same conclusion reached by Professors Kyoji Fukao, Hyeog Ug Kwon and Robert Eberhart (from Hitotsubashi University and Stanford University) in the analysis they did that supported the American Chamber in Japan’s “Growth Strategy White Paper” – Charting a New Course for Growth ~ Recommendations for Japan’s Leaders . I am proud to say that this analysis and the White Paper had a profound impact on Japanese economic policy, and indeed, formed the basis of Abenomics “third arrow”. I only hope the government does not lose the momentum that it has started.    – Nicholas Benes

Naomi Fink:”Heterogeneity in Japanese TFP, Part 1: Why Overcoming Deflation Alone is Not Enough”

Columbia University Academic Commons

Insightful analysis from Naomi Fink. The sectors with the slowest TFP grown did not show the deepest or most consistent negative deflation. Instead, the most deflationary sectors were out-performers in terms of TFP: manufacturing and IT.  The problem is, many of those companies are globalizing and investing offshore (instead of in Japan) precisely because they have the wherewithal and competitiveness to do so.  I would think there is a connection here.   –  Nicholas Benes

”Corporate governance report card”

”Japanese companies appear to be steadily implementing the corporate governance code introduced by the Tokyo Stock Exchange a year ago, at least in form. Of the 2,018 firms listed on the first and second sections of the TSE, 78 percent say they are now in compliance with at least 90 percent of the principles set […]

GPIF Sues Toshiba: Japan’s Securities Law that Makes it Easy to Sue

The the news of the day is that GPIF is suing Toshiba for $10 million. It is only one asset manager that is suing, almost certainly under Article 21-2 Japan securities law (FIL) which makes it very easy for plaintiffs to sue and claim a “presumed damages amount”, and then shifts the burden of proof to the defendant company (unlike US law) to disprove its negligence.  The stock has come down by about 26% or so.   (Interestingly, Japanese securities law in this area is much harsher than US law, which never shifts the burden of proof in such cases.)

”Arora’s departure shakes SoftBank’s global strategy”


”Arora also assembled a reliable, well-connected team of assistants and advisers within SoftBank. A weekly conference call connecting members of “Team Nikesh” in Tokyo, London, India and on the U.S. West Coast to their leader to discuss possible investments has become established practice — an arena for information to be brought in from around the world, and the merits of promising ventures debated.

One of SoftBank’s early — and often talked about — investments is Chinese e-commerce giant Alibaba Group Holding. Son funded Alibaba with 2 billion yen ($19 million at current rates) out of a fondness for founder Jack Ma, who was unknown at the time. That stake has yielded some 10 trillion yen in latent gains 14 years later. Though Son is famed for his sharp foresight, what lurks behind his investment decisions is “something akin to a hobby,” he has said. “It’s produced success on occasion, but quite a few failures as well.”

Schroders: ”Investing in the future: Japan’s focus on sustainability”

”Schroders is proud to be one of a very small group of UK companies with a corporate history stretching back more than 200 years. Astonishingly, Japan is home to as many as 3,146 companies which were founded more than 200 years ago; some of which can be traced back more than 1,000 years.

Of course most of these are small, family-run and operate in niche areas, such as hotels and restaurants. Nevertheless, we can consider whether this Japanese aptitude for corporate longevity can tell us anything about the sustainability of Japanese business models in the future, and their ability to reward shareholders over time.

IMF Official in Interview: ”Japan must take Abenomics even further”

”A: The decision makes sense in light of the pace of growth in the country and the pace of growth in the global economy. At the same time, I think it’s important that attention be put on securing sustainable public financing in the long run. I think a postponement makes sense because the economy needs fiscal support rather than fiscal contraction right now. But at the same time, we would like to see a redesign of the consumption tax, where it’s introduced with increases coming in small percentages every year in the regular way, so that the decision is not political. It’s automatic, so that the effects aren’t so big, so that the growth needs of the economy can be taken care of.

But we certainly agree that the amount of public debt will need to be brought down. Getting to a primary balance is an important goal. [Japan needs to] continue to make progress in consolidation and make sure that public financing is made sustainable.

”How are Japanese companies becoming better stewards of capital? Improving corporate governance”

Japanese corporate profits are way up, even if real GDP is not.

”If you were to use just one measure, such as real GDP, to assess how Prime Minister Shinzo Abe was performing, you would conclude his policies are clearly not working: real GDP itself is flat to slightly negative since he took office.

On the other hand, if you look at the aggregate operating profit of Tokyo Stock Exchange Price index constituents as a reflection of corporate profits, it has grown more than 60% since he took office.