Japan: The descent of the rising sun

Not long ago, Japan's economy was the second-largest in the world. But its sense of common purpose has curdled into corporate sclerosis, managerial timidity and cover-up. And now the Japanese economy is stagnating.

by Matthew Gwyther
Last Updated: 12 Oct 2015

Make Love Not War. There's a thing for the Japanese navy ratings to think about as they charge around the East China Sea in their gunboats to defend the disputed remote and uninhabited Senkaku/Diaoyu islands from Chinese aggression. For Japan is a demographic disaster and if the Japanese don't start reproducing soon, rather than locking horns with their neighbours, there won't be many of them left.

Japan's population of 127 million, already hugely skewed towards the unproductive and costly elderly - average female life expectancy is 86 years - is set to shrink by 800,000 every year between now and 2060. That will then be 32% of its 2010 level. Such is the profound Japanese distaste for inward-migrating foreigners who might keep the population numbers up that the more fatalistic demographers have worked out that there will be only one person left in Japan by 2900. Little wonder that Takahisa Takahara, head of Unicharm, Japan's largest nappy producer, was recently bemoaning the fact that he sells more products these days to the elderly than to the infantile incontinent.

Japan has been falling behind for some while, and not just in its birth rate. By the time the rest of us felt our own global economic malaise following the crash of 2008, the Japanese had been dwelling in a deflationary economic mire of zero or very low growth for nigh on two decades. The nation is stuck in perma-slump and on monetary life-support, with terrifying debt and deficit problems: public debt is 239% of GDP, and taxes cover just about half of total government spending. And its leaders - six prime ministers in as many years - seem clueless and lacking in the political will to do anything about it. The government has just launched an eighth round of quantitative easing in an attempt to weaken the yen, and Japan's GDP, once nearly 20% of the global economy, will be down to less than 5% by 2042. (And you thought the UK was in schtuck.)

While tensions with the Chinese remain high - a cynical ploy on the part of Japan's poor-quality leadership to boost nationalism and thus divert attention from domestic angst - there is an export cost to be paid. In September, Toyota sold only 44,100 new vehicles in China, a 48.9% drop on a year earlier. How many of them will have to come back to the factory is anybody's guess - this luckless outfit, already hard-hit by the effects of last year's tsunami, has just announced a recall of 7.5 million vehicles. Meanwhile, in South Korea - with which Japan has another 'chopsticks at dawn' territorial dispute - Samsung, the 'Sony-killer', has just announced an increase of 85% in operating profit.

Howard Stringer had failed to turn Sony round when he retired as boss this yearFor its part, the once mighty Sony is in poor shape. Once the proudest and mightiest of Japanese corporations, the company's last great idea was the Walkman and it is now making more money from selling insurance than from cool hi-tech kit. When its Welsh-born boss, Sir Howard Stringer, retired, wounded in battle, from the top job at Sony earlier this year, he had failed to turn the behemoth around. Now desperate, Sony has announced 10,000 redundancies and an expected annual loss of $2.9bn (£1.8bn). That was Sony's fourth consecutive year in the red and it has lost money on every single TV it has sold for the past eight years. The reins, have, unpromisingly, been handed back to a Japanese national.

Sony isn't the only corporation on the rack: Panasonic, Sharp, NEC, Fujitsu and Mitsubishi are all suffering. Between 2000 and 2010, Japan's electronics production tumbled by 41% and exports by 27%. Japan's global market share fell by nearly half to 10% by 2009, whereas South Korea's rose to nearly 10%.

Poor corporate governance


The plight of another Japanese titan, Olympus - just seven years short of its centenary - and its battle with ex-CEO Michael Woodford perfectly encapsulate what is wrong with Japan.  Woodford's story was met with amazed disbelief around the world. Shortly after taking up his role as president, he became aware of a massive $1.7bn fraud dating back to the early 1990s. His initial attempts to discover what had been going on were stonewalled, and when he raised his level of protest by bringing in outside auditors he was fired for 'cultural insensitivity' - for which read 'asking too many awkward questions'. He was summarily relieved of his mobile phone, limo and office pass and told to take the bus to the airport.

The Olympus affair highlighted many serious, long-standing worries about the conduct of Japanese business. Not merely dodgy dealing and the hiding of financial losses - tobashi, as the widespread practice is known (literally 'fly away') - but also poor levels of corporate governance; the most tin-eared approach to PR and communications outside the North Korean politburo; scant regard for the interests of shareholders; weak and indifferent regulators; and a culture of denial that persists in believing that problems, if kicked like a can down the road, will eventually just go away.

'Really, I'd feel better investing with Bernie Madoff or the Marx brothers than Olympus's board,' noted the Bloomberg columnist William Pesek a year ago, as the Olympus share price halved within days of Woodford's arriving back at Heathrow and hot-footing it to the SFO, FBI and anyone one else who cared to listen to his shocking narrative. Olympus handled the whole affair so badly that Pesek suggested that future MBA courses should include an Olympus module in how not to handle crises.

It's a measure of Olympus's woeful incompetence that it appointed Woodford in the first place. The hard-driving, obsessional salesman had a history of whistleblowing within the organisation and exposing malfeasance in its European operations. He was certainly given a Sisyphean task and seemed doomed to fail. Like Sony with its TVs, Olympus was losing money on its once-famous, David Bailey-promoted cameras and was hugely flabby, with outside consultants crawling all over it. By 2011, losses in its imaging systems division had reached $175m.

With so many people now taking photos on smartphones rather than Olympus cameras, the whole show was being kept afloat by the highly lucrative medical division and its high-margin, IP-protected endoscopes. A refusal to close loss-making divisions is a classic Japanese habit. As Michael Porter points out in his excellent book Can Japan Compete?, Japanese corporations cannot bear not doing everything, even when their offerings have little to distinguish them from the products of rivals. And when individual strengths exist, weak marketing fails to highlight them. 'Japanese companies do not have distinctive strategies,' Porter writes. 'In addition to each offering a full line of products and serving all types of customers, they all employ the same vertically integrated business model.'

They don't make them like legendary industrialist Soichiro Honda any morePorter's book forensically takes apart most of the supposedly superior methods practised by Japanese business: high quality and low cost; a wide array of models and features; lean production; regarding employees as assets; permanent employment; leadership by consensus; strong inter-corporate networks; long-term goals; internal diversification into high-growth industries; and staying close to a pliant government.

Take the strong intercorporate networks (keiretsu), for example. This system of cross-holding of stocks was devised during the period of rapid economic growth in the 1950s and '60s, when Japan was forced to remove restrictions on the holding of Japanese stocks by foreigners as a condition of entry to the OECD. Typically, 30% to 50% of stocks were cross-held by companies in the same keiretsu, as a means of preventing takeovers by outside investors. Keiretsu fostered incestuous long-term relationships between buyers and suppliers. When applied to banks it proved even more insidious.

Although he'd worked for Olympus for 25 years, Woodford remained an outsider. His undoing has its origin in his inability to speak, read, write or be Japanese. Indeed, this may have been precisely why he was appointed to the job, admitting at the time to the FT: 'If I had been Japanese, then I wouldn't be president ... Harmony and consensus have their place and time but scrutiny and challenging ... leads to better decision-making. You have to be able to confront and say: "Oi!" too.'

Olympus probably thought an unpopular gaijin (foreigner) could force through culturally unacceptable job and cost cuts before he was dispensed with. Although he was constantly accompanied by interpreters and did all the dinners, he was never going to be one of the boys in the inner circle. The Japanese inner sanctum is notoriously impenetrable, and Woodford didn't even play golf.

He was not alone as a gaijin in this. Almost without exception, whenever Japanese corporations have gone for foreign talent to lead them in an effort to shape up, it has ended in disaster. Craig Naylor, who had previously enjoyed 36 years of success at Du Pont, threw in the towel at Nippon Sheet Glass in April after just two years, citing 'fundamental disagreements'. The one exception is Carlos Ghosn of Nissan, who is revered to the extent that his life story was turned into a superhero comic book series in Japan. His first move, incidentally, was to smash up Nissan's keiretsu.

Uneasy relationship


Japan's relationship with the outside world has long been uneasy. At the end of the World War II, the new direction in which Japan was set was established by the Americans. It's easy to forget that before the manufacturing-led export boom that began in the 1950s and '60s, Japan had been anything but outward-looking. It was a private, introverted and highly chauvinistic country, convinced that its ways and customs were infinitely superior to those of others. Many believe this underlying mindset persists. It remains an odd, if frequently delightful, place: most foreign when you expect it to be familiar and most familiar when you expect foreignness.

Born in 1960, Woodford watched the sunrise of Japanese economic power. In his bedroom, he had a small Sony cassette player and, downstairs, the family listened to a Sharp music deck. The third-rate tat in those days had 'Made in Hong Kong' or, worse, 'Made in China' written on it. He grew up in Liverpool, which besides being a famous port was also a motor town, with many employed at Ford and British Leyland. Down the road from where he lived, the Speke 2 plant in the 1970s produced the Leyland/Triumph TR7 - which was an utter disaster. Speke had dreadful management and the lowest productivity in British Leyland (which was saying something), and up to 25% of the workforce regularly went sick on Mondays and Fridays. This wasn't how they behaved at Toyota City in Aichi.

Woodford recalls sitting in the newly acquired Datsun Cherry of a friend's parents and thinking, they're very clever, the Japanese. Indeed they were, and the rest of the world was forced to learn and adopt all the Japanese manufacturing techniques of kaizen and lean production to make themselves more efficient. All their foreign rivals practise them now, so they no longer offer competitive advantage.

Ejected CEO Michael Woodford won a £10m settlement from OlympusJapanese success reached its zenith, with the sun high in the sky, in the mid-1980s, and then the long, slow descent began. Olympus's problems, like those of so many Japanese corporations, started when it was hit by the rapid rise in value of the yen, which made its exports uncompetitive. Olympus's profits fell from Yen6.8bn in 1985 to Yen3.1bn a year later. The company listened to the siren voices of third-rate Japanese investment bankers, who promised to conjure easy money from nothing through the dodgy world of speculative investments in arcane financial products. The gambles backfired spectacularly and by the end of 1990 Yen100bn had gone down the drain. Olympus was unusual in not fessing up, hiding its losses for two decades.

With the going tough, Japan has lacked the leadership to move forward. The acts of selfless heroism shown by workers at the Fukushima nuclear power reactor after the tsunami have reaffirmed that Japan is a nation of quiet lions led by donkeys. The Japanese are a hard-working, dutiful, courteous, resourceful and steadfast people who deserve better leaders. But most who reach the top are bloodless and faceless box-ticking characters lacking the courage and vim to take difficult decisions, except to send more foot soldiers over the top in futile attempts to win back global market share. This is a grave disappointment.

Japan's success was founded on single-minded mavericks, often engineers who were willing to go against the grain, take risks and stick their necks out. When he was interviewed by MT in 1981 about his decision to retire aged 66, the legendary Japanese engineer, entrepreneur and industrialist Soichiro Honda noted: 'I know what I can't do. Today, automobiles require automation and I am too old to study computers. Also, I have lost my sex power. I won't say I have lost all my sex, but I must admit that frequency of doing and recovery have not been the same as when I was young. Great leaders love sex, and I am not a great leader any more.' Then he went on to complain: 'I can't drink any more, either. Two cups of sake is enough. Presidents should be able to drink more.'

A hard-drinking, mega-shagging boss is not going to be the answer to every Japanese corporation's problems, but their ranks-closing, consensus-insisting refusal to take hard decisions fatally weakens them. A favoured expression in the Japanese language is 'the nail that stands up gets hammered down'. The pervasive cultural fear of failure and the loss of face that such a disaster brings mean there is a very low level of interest in starting businesses anew. A new Soichiro Honda or, for that matter, a Steve Jobs would have been whacked back down to size inside any modern Japanese organisation.

Most major corporations also have backward attitudes towards women. Woodford was most likely to find a female either kneeling to put his slippers on in his first class seat on ANA or bringing him his coffee. He publicly wondered why their leaders continued to ignore 50% of the nation's talent pool. It was interesting that the journalists who ran hardest with his revelations in Japan were female, although they were mostly employed by foreign media owners.

What's troubling is the likelihood of a political lurch to the right as Japan seeks to cast out the old order, reject bureaucrat-led national drift and return to growth. Corruption in government and politics has been rife for years and a groundswell against the old order of the National party is growing. The current man of action with a new broom is Toru Hashimoto, the mayor of Osaka and the son of a smalltime gangster. 'What this country needs now is a dictatorship,' he has pronounced. One of his ideas has been to force schoolteachers to sing the national anthem or face the sack.

Japan is surrounded by countries on the move. China's might is increasing, India does not intend to be left behind, South Korea grows more competitive and Indonesia is in boom times. Meanwhile, Japan's standing wanes fast. But still it looks inward and tries to solve problems within its tight-knit old boys' network.

Olympus announced in October that as a short-term fix for the ravaged state of its balance sheet, it was receiving a cash injection of £400m in the form of 11.5% of its shares from its fellow sufferer Sony. Woodford received a £10m settlement at an employment tribunal in Stratford, east London, and the likelihood of him taking a senior executive position in a large corporation, Japanese or otherwise, is slim. Salvation will have to come from elsewhere.



Michael Woodford's book, Exposure - My journey from CEO to whistleblower, is available to MT readers at the special offer price of £16, including free p&p (the RRP is £20). To order, call Penguin on 0843 060 0021, quoting reference 'Exposure & Management Today' and ISBN 9780670922222. This offer is subject to availability. Customers should allow up to 14 days for delivery.

Offer open to UK residents only.


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