Prepared for the IIPS Symposium on

Upcoming Changes in Japanese Society and theFuture Shape of the Nation
Tuesday, 6 December 2005
TokyoSession 2

Sources of Competitiveness—
Japan’s Strengths and Globalization

Akio Mikuni
CEO, Mikuni & Co., Ltd.

Sources of Competitiveness—
Japan’s Strengths and Globalization
Akio Mikuni
CEO, Mikuni & Co., Ltd.
In 1983 the author founded Mikuni’s Credit Rating and began providing credit rating
information on Japanese companies and banks. This presentation describes theauthor’s observation and understanding of the competitiveness of the Japanese
economy, based on his analysis of company financial statements.
After World War II, Japanese companies raised their international
competitiveness, rebuilt the post-war economy, and achieved a high level of economic
growth by relying more heavily on debt and actively engaging in capital investment.
Some Japanese companies secured the power to set prices and emerged asinternationally recognized brands, for example Toyota, Panasonic, Sony, and Honda.
As a result, from the mid-1960s Japan’s balance of trade remained firmly in the black,and in 1970 it became a net creditor nation, as its external credit exceeded its foreign
debt and it became effectively free of debt. As Japanese corporations competed
strongly on the international stage, their finances improved and the credit ratings oftheir bond issues looked set to rise. Hence, the author decided to begin rating them.
Japan’s current account surplus subsequently grew larger every year and, in thelatter half of the 1980s, Japan surpassed the United States as the world’s largest
creditor nation [see Figure 1, Comparison of Cumulative Current Account Balance(versus Nominal GDP) between Japan and the USA]. In the process, the yen
continually increased in value against the dollar, wages increased in comparativeinternational terms, costs soared, and in the labor-intensive manufacturing industry,
Japan began to lose its competitive edge in the international arena. In order tomaintain their international competitiveness, Japanese companies sought to deeply cut
costs by moving domestic production overseas. This transition to local production
catapulted the Chinese economy to even greater prominence in the international
market.
As a result, the level of industrial production in Japan has scarcely registered any
increase since 1990 and remains essentially flat [see Figure 2, Index of Industrial
Production for Japan]. Japanese manufacturers and other companies have since
enjoyed significantly higher profits in overseas markets than in the domestic market.
Since the latter half of the 1990s, the accumulated current account surplus has
exerted deflationary pressure on the Japanese economy, precipitating an economicslump. Since the war the Japanese economy had been rapidly closing the gap with theUS economy, but in 1995 this trend reversed and the US economy began to pull away
again [see Figure 3, Comparative Sizes of the US and Japanese Economies
Year-on-Year]. This graph illustrates the strength of the US economy as comparedwith deflation-stricken Japan.
The reasons why the current account surplus may be viewed as the root cause of
deflation are as follows.
In 1971 US President Richard Nixon fundamentally changed the rules of theinternational currency game when he severed the link between gold and the dollar,
and switched to a floating exchange rate system instead. Because Japan wanted topreserve its exports in spite of this move, it resisted increases in the value of the yen1

and attempted to prop up the dollar. Instead of converting dollars into yen andbringing them back to Japan, Japan simply lent the excess dollars, which it
accumulated through its trade surplus, back to the United States—that is, it exported
the surplus in the form of capital. This meant that the capital that was needed forexport manufacturing back in Japan never materialized, which led to a domestic
shortfall in capital. This was the root cause of deflation. In an attempt to make up forthe lack of capital caused by capital exports, the Bank of Japan instigated a system of
indirect financing to ease the credit situation. In the 1980s this credit easing did notlead to increased consumption, but instead created a bubble in the securities and realestate markets. The period from 1990 onwards saw a sharp rise in the amount ofbonds issued by the government, as it increased fiscal spending. However, because
this spending occurred at the same time that the Bank of Japan was trying to disposeof a great number of non-performing loans resulting from the bursting of the bubble,
the period has witnessed emerging signs of deflation despite the bank’s Herculean
efforts at deregulation.
Although money has reached the export manufacturing industry and related
sectors (the beneficiaries of deregulation by the Bank of Japan), it has not filteredthrough to sectors that focus on domestic demand, and there has been little increase inemployee compensation or growth in consumption. Hence, capital investment indomestic-oriented markets, such as electrical power, has declined sharply. Although
Japanese companies have remained competitive on the international scene, Japan’seconomy has undeniably deteriorated in competitive terms. Partly as a result of this,over the past 20 years Mikuni’s Credit Rating has downgraded credit ratings in 1,318
cases, and upgraded credit ratings in 747 instances. Contrary to the optimistic outlookthat existed when the author began evaluating credit ratings, downgrades
subsequently continued to exceed upgrades by a wide margin. However, this hitherto
unbroken trend was reversed last year (due in part to a revitalization in businessactivity), and upgrades greatly exceeded downgrades [see Figure 4, Changes in Credit
Ratings from 1983 to 2004].
Based on the author’s study of corporate finances, it is clear that significant
changes in policy will be necessary in order to fully revive and strengthen thecompetitiveness of the Japanese economy[see Figure 5, Japanese Economic
Competitiveness=a High Growth Rate). That is, in order to re-invigorate economic
growth, it will be necessary to increase domestic demand and consumption, andachieve greater added value, rather than continue increasing production that relies onexports. This will require offering increased value to the consumer in the form ofproducts and services with a high degree of added value, in addition to lower
production costs.
Since the current economic framework puts a premium on increased production,measures to improve profitability and productivity—essential for economic growth
driven by domestic demand—are being neglected. For example, since industry stillclings to the dysfunctional system of life-time employment (regarding it as afundamental tenet), there is little mobility within the labor market. In addition, thepractice of whole industries acting en bloc remains entrenched, and there is little
attempt to improve business efficiency through competition between individualcompanies. Furthermore, an enormous money supply system based on bank deposits
and post office savings—the indirect financing system—exists to promote increased
production through capital expenditure. Since money is distributed to manufacturers
at low interest rates through this system of indirect financing, capital expenditure andproduction can easily be increased, irrespective of whether or not such investment2

will prove profitable. This also enables exports to be facilitated through the buying ofdollars to support the currency (thus encouraging a weak yen).
Given this status quo, four major changes need to be made to the economic
framework in order to make Japan properly competitive. These are listed below [SeeFigure 6, Measures for Strengthening the Competitiveness of the Japanese Economy].
First, abandon the dependence on exports and a surplus, and pursue a strong yen.
Specifically, promote the use of the yen internationally and let the market determine
exchange rates. Yen capital from abroad must be put to good use and yen-based
securities must be made appealing. In particular, stop the practice of having the Bankof Japan support the price of government bonds and leave it entirely up to the market.
Making the yen a more user-friendly currency will make matters easier both forJapanese companies and individuals, at home and abroad.
Second, the pursuit of richer lifestyles will promote Japanese culture, and will inturn give rise to new products and services that reflect the unique values of theJapanese. Around two years ago the Wall Street Journal published an article
describing how delighted the president of US elevator manufacturer Otis was that thecompany had succeeded in supplying ultra-high-rise elevators in Japan for the firsttime, when it supplied elevators for Roppongi Hills. In the 1930s Otis had thedistinction of installing the world’s first ultra-high-rise elevator in the USA in thetower of the Waldorf Astoria Hotel. It had taken Otis a long time to win acceptance inJapan because in contrast to users in the United States, Japanese customers disliked
the swaying motion of the elevators, and it had taken the company a long time todevelop sway-suppression technology on a par with that of Japanese manufacturers.
This impressed the author as an example of how Japanese sensibilities could give rise
to a higher standard of technology. At one time, consumption was despised asextravagance, and saving was encouraged. Nowadays, however, consumption ought
to be viewed as an investment that yields new technology and products.
Third, increase consumption in the pursuit of affluence by increasing the level ofhealthy debt in household finances and put the focus on economic activity. For
example, consider a tax system for the individual similar to the corporate tax system,
allowing deductions for interest paid on housing loans. It will also be necessary tofacilitate the mortgage backed securities (MBS) market by liquidated housing loans,enable individuals to obtain low-interest housing loans, and allow such loans to be
used as multi-purpose capital, for example in the purchase of durable goods or inother expenditures.
Fourth, make the securities market, where values fluctuate with profits, thecentral source of corporate funding. If the supply of capital by individual investors,
who set great store by profitability in the securities market, becomes the norm, cheapcapital will be made available to companies that win the support of the consumer andincrease their profits. This would involve a major shift from the existing system of
indirect financing—which is used to increase production and in which the banks
represent the main source of low-cost capital—to a system of direct financing via thesecurities market. Improved corporate productivity would thus become the very factor
that drives higher employee compensation.
It is clear that implementing these four policies will stimulate lively economic
activity, sow the seeds of innovation, and nurture the development of humanresources. However, the existing top-down system of governance, which protects andcoddles industry, is simply not up to the task of implementing the measures that thiswill require. With its commanding view of the entire nation, the Japanese government3

has yet to demonstrate firm leadership and this is probably the reason why theJapanese economy has lost its competitive edge.

Figure 1. Comparison of Cumulative Current
Account Balance (versus Nominal GDP)between Japan and the USA

60%

Japan

50%
40%
30%
20%
10%
0%
-10%
-20%

USA

-30%

2004

2000

1990

1972/12

1980-40%

Compiled by Mikuni and Co., Ltd. using data from theBank of Japan, the Ministry of Finance, the Cabinet
Office, and the Bureau of Economic Analysis© 2005 Mikuni & Co., Ltd.

Figure 2. Index of Industrial Production for Japan110100(Yearly average)
Figures prior to 1978 are estimates.

90

80

70

60

50
Index level for 2000=100%
2004

2000

1990

1980

1970

40

Compiled by Mikuni and Co. Ltd using data from theCabinet Office and the Bureau of Economic Analysis© 2005 Mikuni & Co., Ltd.

4Figure 3. Comparative Sizes of the US andJapanese Economies Year-on-Year(x)(Ratio of US nominal GDP to Japanese nominal GDP)

14

Nominal GDP of US (yen equivalent)/nominal GDP of Japan

12108642(x1)
2000

1990

1980

1970

1960

/121955

2004

0Compiled by Mikuni and Co. Ltd using data from theCabinet Office and the Bureau of Economic Analysis© 2005 Mikuni & Co., Ltd.

（社） Figure 4. Changes in Credit Ratings from 1983 to 2004

Companies

120
100

97

Upgraded

80

69

60

42

40
20

29

24

20
9436

41

38

43

42
28

27

39

30

32

-109

-98 -99
-106

98

99

25

28

31

130-20-6-17 -20-21 -20-40-49-60-40-32-42-45-54-70-80-61-80

Downgraded-100-75-120
83

8485

8687

88

8990919293949596

9700

01-91
02-80
-93
03 04 Year（年）* Mikuni’s Credit Rating began operations in July 1983.
* In all cases ratings apply to the company’s most senior debt.
© 2005 Mikuni & Co., Ltd.

5Figure 5. Japanese Economic
Competitiveness=a High Growth Rate
The Past

The Future

Imitation of Western culture

Japanese culture

Increased production throughexports and capital investment

Increased production throughconsumption and investment in housing

A strong dollar

A strong yen

Price cutting through cost
reduction

Price rise through increases in added
value

Increased productivity

Improved profitability & productivity

Static management resources

Mobile management resources

The “convoy system”
Lifetime employment
Indirect financing

Competition in the marketplace
Labor market
Securities market (direct financing)© 2005 Mikuni & Co., Ltd.

Figure 6. Measures for Strengthening theCompetitiveness of the Japanese Economy(1) Pursue a strong yen.
(2) The pursuit of richer lifestyles and the promotion of Japaneseculture will spark the creation of new products and services thatreflect the unique values of the Japanese.
(3) Develop the market to facilitate mortgage backed securities(MBS) market by liquidated housing and use housing as security
for household finances, enabling individuals to obtain lowinterest housing loans. Consider changes to the tax system thatfacilitate and promote housing construction, moving to houses
that better suit individual lifestyles, purchasing of durable goods,
and other expenditure.
(4) Companies win the support of the consumer and increase
their profits. The more profitable they are, the more cheaply they
will be able to obtain financing. This will establish a link
between profitability and higher compensation.
© 2005 Mikuni & Co., Ltd.

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