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Introduction
- Hong Kong University Press, HKU
- Chapter
- Additional Information
Introduction The history of Japan’s economy during the 60 years after the Second World War followed a trend of internationalization. Many corporations switched from doing business domestically to doing business internationally. Because Japan is geographically small with limited natural resources, economic growth and a higher per capita income became viable only through the export of products to overseas markets. As a result, every company concentrated on producing inexpensive goods of better quality in a cost-effective manner. Internationalization was the goal for every company. While globalization of the Japanese economy has been advancing with astounding speed, significant differences remain between the management philosophy and techniques used within Japanese companies and those used in the West. These include the significant differences in the use of capital budgeting techniques, economic and political assessment of projects, decision-making styles, and techniques of corporate governance. Furthermore, Keiretsu (interlocking shareholdings) still plays an important role in the financing of companies in Japan. Such differences have a momentous impact on decision-making processes within companies, and this book illustrates many of the key differences that exist in the realm of corporate governance and finance. September 1985 marked a change in the progression of the Japanese economy. Six industrialized countries of the world signed the Plaza Accord, increasing the value of the yen until it reached its peak in August 1995 of ¥79/$, more than four times stronger than it had been during the fixed exchange rate period, i.e., ¥360/$. Encouraged by the yen’s appreciation and super fluidity of currency in the domestic market, many Japanese companies rushed to buy real estate overseas, including the famous Plaza Hotel where the abovementioned Plaza Accord was signed. However, contrary to the expectation of Japanese industries, this strong yen introduced a long-term economic downturn and a substantial deterioration of the economy. The export industry, which was the foundation of the Japanese economy, was hit hard by the sharp yen appreciation. The Japanese economy went into the most serious recession in 70 years since the Great Depression in 1930, during the early Showa period. Financial uncertainty and plunging prices added to the recession, creating a severe deflation spiral. Industrial companies, tormented by excess product supplies due to the lack of demand for exports, sought relief through employment adjustments, which, in turn, caused further weakening of consumption and demand. The economic growth rate was –0.7% in 1997 and –2.8% in 1998 — an unbelievable downturn for the Japanese economy that had been growing continuously since the end of the Second World War. The Nikkei average, which reached its historical peak of ¥38,916 in December 1998, started to drop. The land price index, which is based on the price in 1983 as 100, reached its peak at 488 in 1990, but dropped sharply to 144 in 1995. The Japanese economy suffered from the aftermath of this recession for a long time. Reduction of personal and business financial assets caused severe shrinkage in personal spending and business capital investments. Banks had to cope with huge bad debts and ch_00(1-10).indd 1 2007/9/27 11:30:30 AM Cases on International Business and Finance in Japanese Corporations place borrowing companies under a credit crunch in order to reduce assets. Starting in 1995, the economy entered a period that is now referred to as “the lost age,” a period of compound depression in which prices dropped and the net gross national product growth rate was negative. To combat the situation, the Bank of Japan introduced a zero interest policy, i.e., a super money-easing policy, which had not been seen in the world’s economic history for many years. However, its effect was dubious, to say the least. It is a common belief that, although inflation can be cured by a mix of monetary and fiscal policies, there is no cure for deflation. Consumers are wise and will not spend money today if they know that prices will drop tomorrow. Moreover, the per capita income level of the Japanese was high, and they already owned everything they wanted. There was no reason for them to spend money hastily. Japanese companies’ executives used various hard and soft policies in order to survive this “lost age.” Japan is currently in an up phase. In fact, the economy has continued expanding for 58 months since February 2002, beating the 57 months of the Izanagi boom, from November 1965 to July 1970. However, the Japanese economy has a basic structural...