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Japan's Job-Loss 'Recovery'


I'v made myself a promise to try and look a bit more at Japan this week, since I'm sure I've been neglecting things there. This piece serves to kill two birds with one stone, since it also relates to the ongoing 'structural reforms' theme. I think the argument demonstrates two things: that job creation is getting harder everywhere, and that the Asia Times (following on from the previous post) is a neglected source of good-quality information. BTW I've put the 'R' word in scare quotes, since that is the topic I will be trying to investigate this week.

Japan: the rising specter of unemployment By Hussain Khan

TOKYO - Higher labor costs, yen appreciation resulting in the outsourcing of production facilities and growing computerization all point to a long-term structural increase in Japan's jobless. Due to heavy losses in labor-intensive sectors, companies are planning further outsourcing of their production facilities to countries where labor costs are much lower.

It is difficult to describe how profound these changes are in Japanese society. They are breaking down a system of lifetime security for the low-paid but loyal sarariman (salaryman) of legend, whose antecedents sociologists trace back to the samurai system in which a warrior class dedicated their lives to their feudal lords. In modern society, the Japanese company has served as the locus of social stability for the sarariman, with loyalty to the firm resembling earlier fealty to nobles. Today, as outsourcing continues and jobs go overseas, the essential nature of the country�s work force and its values are being challenged in an unprecedented way. The office lady, who joined her equally inefficient sarariman colleague in the work force, is also likely to be a victim of the aggressive rationalization of Japan's notoriously disorganized office operations.

Japan's seasonally adjusted unemployment rate stood at 5.1 percent in August, the lowest level since the 5 percent posted in August 2001, according to a report released by the Ministry of Public Management, Home Affairs, Posts and Telecommunications. That means that during the last two years, employment has not improved. Rather it has deteriorated. The number of part-time workers fell for the first time in 20 months, while the total of all people who worked during the month also dropped 100,000 from a year before to 63.61 million, the first negative growth in four months, indicating that the nation's employment situation remains bleak. The number of employed people decreased by 160,000 year on year to 53.47 million.

The number of people out of work due to corporate restructuring and other reasons related to their employers totaled 970,000. This was the first time since January 2002 that the figure had fallen below 1 million, an indication that corporate restructuring may have run its course. But this optimism over a drop of mere 3 percent in one month is not justified after 1 million have been unemployed for the last 20 months.

The weakening dollar and the stronger yen had not taken their toll as the Bank of Japan heavily intervened in the currency market. But after John Snow, the United States Treasury Secretary, criticized Japanese exchange rate intervention in a congressional committee in Washington, the yen rose as high 107 yen to US$1, breaking the psychological barrier of 108 yen. Speculation is for a trend toward 105 yen and more yen appreciation shortly.

Under such a scenario, the pressure is increasing for further corporate restructuring, and with it further job losses. The one-month drop of 3 percent and the 20-month old trend averaging more than 1 million unemployed can be expected to resume with greater force as long the yen continues to appreciate, since a lot of export-related corporations have started fresh plans to outsource their production facilities, especially in the electrical white goods sector.

Even apart from the pressure of yen appreciation, corporate restructuring is continuing, with no signs of abating. Although the banking sector has been the main beneficiary of the recent stock market rise, some banks like the Resona Group expect to cut employees, with the group dismissing some 4,000 employees,reducing its staff from 19,000 to 15,000 by March 2005 in a bid to complete its revised restructuring program two years ahead of schedule.

A draft of Resona's new restructuring plan also calls for reducing outstanding loans to smaller businesses at fiscal year-end next March by 1 trillion yen on the year as an attempt to shift its focus from quantity to quality. The draft fails to set the schedule for repaying public funds, foreseeing that the group's profits will remain flat from fiscal 2004 through fiscal 2006. It also calls for skipping all dividend payouts through fiscal 2004, including those to the government. The latest plan by the banking group, which is effectively under the government's control, is expected to be finalized by the end of next month for submission to the Financial Services Agency.

This is a revised version of the business reconstruction plan crafted in June after the government decided to inject about 2 trillion yen of taxpayer's money into the group. Under the updated plan, Resona group is to also reduce its number of branches to 495 by the end of fiscal 2004, 20 more than called for under the current plan. With these aggressive restructuring efforts, the group's expenses as of the end of March 2005 are projected at 90 billion yen less than those of two years earlier. The ratio of labor and property costs to gross operating profit is to be slashed to 52 percent from 59 percent as well.

The banks are not alone in their restructuring plans. Sanyo is emblematic of the new and unsettling Japan. In the electrical goods manufacturing sector, as a part of its effort to provide secure employment, Sanyo continued to produce white goods at its domestic plants. But with the white goods business unlikely to stop bleeding red ink in the immediate future, Sanyo has decided to downsize its operations in Hyogo Prefecture and another in Shiga prefecture. The Hyogo plant is to cease production of vacuum cleaners, massage chairs and all other products by year-end and focus on research and development. The Shiga plant is scheduled to stop making microwave ovens, washing machines and double-tub washing machines by the end of this fiscal year.

As a result, sales from domestic production are expected to account for about 20 percent of the firm's overall home appliance sales, down sharply from the current 60 percent. Sanyo intends to reduce employees at the two plants from the current 1,250 to around 900 by April 2004 through relocations to other divisions and transfers to subcontractors. The company plans to maintain its product lineup by outsourcing production at the two plants to outside firms and transferring it to overseas factories. Sanyo's home appliance division recorded a 10.5 billion yen operating loss on a consolidated basis for the fiscal year ended March 31, making it the only one of the firm's six divisions to be in the red.

Other companies in the same or related sectors like Futjitsu and Hitachi have also announced losses. Like Sanyo, these companies also must reduce employees to meet their restructuring goals. Fujitsu, the major computer maker, said that it posted a consolidated net loss of 58.5 billion yen for the fiscal first half ended September 30, mainly due to money-losing operations in the computer software service division caused by a general decline in information technology investment among corporate clients.

Profit from the software division, the firm's core operation, declined by more than 40 percent. The manufacturing sectors for electronics parts and for information and telecommunications stayed in the red despite cost reduction efforts, according to company officials. The company reported a special profit of 34.4 billion yen, mainly from sales of its stockholding in Fanuc Ltd, the major industrial robot maker, but the gain was not enough to offset the net loss.

As for Hitachi, growing losses from a hard-disk drive business it acquired the previous year were the main contributor to a 5 percent fall in consolidated net profit to 5.3 billion yen in the fiscal first half, even after Hitachi sold portions of its stock in affiliate Nitto Denko Corp, which generated a special profit of more than 90 billion yen. Hitachi officials said that an increase in pension payments and other factors reduced operating profit by 67 percent to 20.2 billion yen.

Hitachi�s heavy and industrial machinery division also suffered a decline in profit due to cutbacks in investment, mainly among electric power companies. Earnings from refrigerators, washing machines and other household appliances were also weak because Japan experienced an unusually cool summer. Unlike Sharp Corp and Matsushita Electric Industrial Co, neither Fujitsu nor Hitachi is a major player in the fast-growing digital home appliances sector, which is another factor for their poor performance.

The effect of computerization on employment cannot be neglected. On the second day of the Nikkei Global Management Forum, Scott McNealy, chairman and chief executive officer of US computer firm Sun Microsystems Inc, said information technology will bring about drastic changes in the corporate world. Since the spread of IT will render obsolete conventional ways of working, personnel ability and corporate activities, companies will have to adapt to the changes, for example, by reorganizing their employment structure, he said.

McNealy pointed out that companies can enjoy the benefits of a ubiquitous computing environment such as improved productivity and the need for less office space. The Sun executive noted that companies also need to accept the negative aspects of IT, such as changes in working conditions and increases in corporate bankruptcies as the natural consequences of a computerized society. He said that although governments tend to try to stop such changes, companies should be forward-looking.

That means that if Japan's companies are to become more competitive, the job cuts will continue, changing long-held standards of Japanese society. Those changes are bound to be painful for a society not used to pain.
Source: Asia Times
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Japan Pensions: Where is the Incentive?

It seems that, little by little, the world is waking up to the importance of all this. Last week it was the Italian Minister of the Interior, this week it is the director of economic policy in Japan's cabinet office. When I started blogging about this, just over a year ago, it was much harder to get a hearing. This change is positive. OTOH too many people are continuing to fool themselves by thinking of this as a linear process. Here, non-linearities will be everything. Two examples in the report: number one, is the cost of having children, and the inability of society collectively to address this because of the scale of the fiscal problem which already exists coping with the elderly. Secondly, young people are dropping out of the pensions system. It is logical: if you put more in than you are ever going to get back, where is the incentive?

Already mired in its worst economic slump in decades, Japan may well see its growth decline even further as its citizens age and its population shrinks, the government said in an annual economic assessment released Friday. The report suggested Japan needs to take stronger measures to encourage people to have more children, and to make its domestic markets more attractive to foreign investment. "Japan is experiencing aging unprecedented in history," said Jun Saito, the director of economic policy and analysis at the Cabinet Office, which authored the report.


Addressing the aging problem for the first time, the annual assessment noted the country's population between the ages of 16 and 54 has already started to slide and added that growing numbers of retirees are trimming the nation's huge savings pool. Economists say Japan's high saving rate was a major factor driving the country's rapid growth in the decades after World War II. The savings households deposited in Japanese banks provided a ready supply of capital that industry borrowed to invest in new plants and equipment. But today, Japan is a net creditor to the world and attracts little in the way of foreign savings - one source of funds countries often turn to when there is a shortage at home, Saito said.


Along with attracting overseas capital and raising labor productivity, the report stressed the need to help women have careers and children, instead of choosing one or the other. Saito said one option would be to set up more day-care centers, a step the government pursues now. The report said the average Japanese woman now faces incentives not to have children: She loses 85 million yen ($772,000) over her lifetime if she quits her job to give birth - even if she returns to work afterward.

Japan's birthrate - which measures the average number of times a woman gives birth during her lifetime - dropped to 1.32 in 2002, the lowest on record, and after peaking in 2005, the population is on track to shrink by nearly a fifth by 2050, the government says. The changing demographic is already straining the country's pension system, with the government forecasting those now in their 20s through 40s will pay more into the system than they will receive due to the large numbers of elderly the country will support in coming years. This is causing more young people to opt out of paying into the system, creating an additional burden on government coffers.
Source: Yahoo News
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Row Over Resona Bailout

This is obviously part of the backdrop to the election campaign, and it is always hard to judge the significance of things in this context. But Resona is interesting, since it is a strange case, and it could give us some clues as to the real determination for serious reform in Japan. On the face of it, not encouraging.

The Democratic Party of Japan, the country's main opposition, is accusing the government of Junichiro Koizumi of "state-sponsored window dressing and fraud" when it bailed out Resona, the Japanese bank. DPJ officials will meet representatives of the Financial Services Agency, the banking regulator, on Monday and will argue that the government was aware that Resona was insolvent when the FSA decided to inject Y1,960bn ($17.9bn) to prevent the bank collapsing. The opposition's decision to accuse the government of acting illegally escalates the potential political fallout from the Resona rescue and is designed to put pressure on the prime minister and his ruling Liberal Democratic party ahead of a general election in November.

The DPJ will argue that the government deliberately used an inappropriate clause of the Deposit Insurance Corporation law to avoid the stigma of an embarrassing nationalisation as well as protecting shareholders from having the value of their holdings completely wiped out. Following the bail-out, Resona's share price rose sharply.

When it bailed out Resona, the government cited a section of the DIC law that can only be used for banks with a positive net worth. Other sections, however, are for use with "bankrupt financial institutions or financial institutions where assets are unable to fully repay liabilities".

An official at a credit rating agency who asked not to be named said: "In Resona's case, if it did have negative net worth at end-March 2003, as is suggested by the subsequent independent audit, it should have been declared insolvent and dealt with either under [sections] 102(2) or under 102(3)." Section 102(2) allows for the failed institution to be merged with another company, while section 102(3) allows for the full nationalisation of the bank, which would result in shareholders' equity being written down to zero.

Controversy over the Resona bail-out intensified after it was announced this month that the bank would report a far higher than expected loss of Y1,760bn for the first half of the year - a figure almost equal to the Y1,960bn injected by the government.
Source: Financial Times
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