Does Japan need more bankruptcies, or less?

The Economist has come out with a bold argument in favor of a tough “creative destruction” policy for Japan to promote efficiency, productivity growth, and economic recovery by letting more companies fail (emphasis added):

[Japan’s long-standing “convoy” system of keeping underperforming firms alive] does enormous harm. Weak firms need to exit the market, either by going bust or being sold to another firm, or the whole business environment gets stifled. Japan has far too much capacity in many businesses—eight mobile-phone makers, for instance, few of which make much money. This squeezes prices and margins, thus denying better-run firms the surplus capital they need to hire talented people, buy competitors or invest in research and development. It also locks up resources, both human and financial, that could be used more productively by stronger firms. Before the downturn, Japanese companies’ return on equity averaged around 10%, about half the level of American firms.

Tellingly, the shut-down rate of companies in Japan is around half that in America and Britain. And the number of corporate insolvencies is expected to increase in Japan this year by only 15%, despite the depth of its recession, compared with more than 30% in western Europe and 40% in America. Normally a scarcity of corporate bankruptcies is a sign of economic vitality; in Japan, it is a sign of its economic weakness. Of course, keeping struggling firms alive protects jobs. But it also fossilises industry structures and hinders the development of a more flexible labour market and a business environment more supportive of new-company creation—two areas where Japan is also sadly deficient.

As if in direct response, an anonymous Nikkei op-ed says that letting companies fail in Japan can be dangerous by erasing critical knowledge and ruining the macroeconomy. As there is no online version right now, I paraphrase here:

Everyone agrees that raising efficiency in the economy is a good thing. But if some Japanese companies currently in a management crisis are allowed to go bankrupt, there would be no net efficiency gain because there’s a chance they could right themselves. For a company to go bankrupt and out of business not only harms the managers and employees, it can have an even bigger impact on the macro economy. Letting companies fail destroys more than the of the firms’ collective employees, plant and equipment, it also destroys the built-up knowledge of an organized entity that is more than the sum of its parts; specifically, their organizational strengths and customer bases. These elements have been overlooked by traditional microeconomics, but they are critical elements of business. Once destroyed they are not easily restored.

It should be possible to encourage firms to transition their businesses without bankruptcy by pushing them to expand into related fields. This would maintain manager and employee morale while simultaneously boosting the overall economy.Though obvious sectors for these transitions would be green technology, biotech, or nursing/welfare, companies should be left to decide their new businesses on their own. It might take a long time for companies to turn around and succeed like Toray or Asahi Kasei.

Therefore, the government should make it a priority to provide tax incentives and subsidies to these sorts of companies.

As much as I usually trust op-ed writers who are refuse to go on the record, does anyone else smell a conflict of interest here? Something tells me the author (pen-name: 真和) has a specific company on the tip of his tongue but just can’t bring himself to say it.

10 thoughts on “Does Japan need more bankruptcies, or less?”

  1. I’m not sure the focus on corporate bankruptcies is on target. Perhaps the issue is personal, not corporate. I recall reading an economist (Krugman?) claiming that in Japan, debts are inherited, so a Japanese mortgage holder’s debt would pass to his children and were inescapable through bankruptcy. He described this as akin to indentured servitude, and called it the core injustice in Japan’s economy. I’ve never been able to verify if this is true.

  2. Debts are only inherited if the heirs choose to inherit the assets as well. The heirs also have the option to inherit nothing.

    Has the second author never heard of corporate restructuring? You don’t have to kill a company when it goes bankrupt. For that matter, you can liquidate a company unit by unit without destroying its book of business at all.

  3. The second article is clearly a backhanded ploy to try and convince the government to bail out a particular firm, so in that sense the argument isn’t fully thought out. I get the feeling that the two articles are both ignoring the Chapter 11 bankruptcy option in order to make the economic argument simpler.

    Even if you don’t die, it’s apparently kind of hard to shake debts in Japan if your business goes bankrupt (or so I vaguely remember reading in Nikkei). If you will always be personally ruined if things go wrong, that would be kind of a disincentive to start a new business, right?

  4. This piece is about a decade late. Since the complete overhaul of the system and introduction of minji saisei, Japan’s bankruptcy system has been greatly improved and in some ways superior to many continental and even Anglo bankruptcy regimes.

  5. I only care about it enough to read a short paragraph of explanation, so yes.

  6. I think the government should keep propping up the mid-tier banks. They had a stellar record so far in recouping their initial investment and working together with Wall St. vulture fund fat cats.

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