In part 3 of our continued positive analysis of the Japanese Economy, we study what is different now from what made everything seem so bad ten years ago…
There is a striking and new postive factor in the current Japanese Econony-: Stronger Companies.
Firms have largely succeeded in tackling the excesses of the 1990s by trimming costs, reducing unused capacity, and using increased profits to reduce their indebtedness. The focus has been on the following issues:
With persistent efforts to cut labor and other costs, the exit of inefficient producers and suppliers, and stronger demand, firms of all sizes have enjoyed a surge in profitability. Indeed, the ratio of current profits to sales stands at the peak levels of the late 1980s for both the manufacturing and non-manufacturing sectors.
Improved Balance Sheets.
Strenuous efforts to reduce debt burdens have paid off, particularly for medium and large firms. The nominal value of corporate debt has been slashed by ¥125 trillion since 1996, and debt-sales ratios are back down to historical pre-bubble averages in manufacturing, with steep declines in the rest of the economy as well. As a result, firms’ cash flows have been freed to upgrade physical and human capital and to reward both employees and shareholders with higher bonuses and dividend payouts.
Elimination Of Capacity Overhang.
Along with repaying debt, corporate restructuring efforts since the mid-1990s have involved slashing new investments to deal with excess capacity. As a result, the fixed capital overhang was eliminated; by 2005, capacity utilization had returned to its 1980–89 average range.
Completion Of Adjustment In Labor Costs.
Company efforts to shed surplus labor also appear to have borne fruit. After initially relying on more conventional strategies, such as cutting back on new hires and overtime work, firms have shifted to a more aggressive approach—laying off workers and beginning to replace full-time workers with part-time ones or workers on fixed-term contracts. But with sales declining in nominal terms in a deflationary environment, unit labor costs continued to rise through 1999. The labor cost burden declined thereafter, however, and by 2005 had returned to early 1990s levels. Although some further adjustment may be forthcoming, just as the success in reducing excess capacity has been supporting investment since 2003, the improved labor cost position has supported employment and wage growth since early 2005. Job-offer ratios are at an all-time high, and full-time jobs are now growing faster than part-time jobs.