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Opinion

Coronavirus gives Japan Inc push it needs for radical reform

Previous external shocks have not prompted long-lasting change

| Japan
Tokyo's Marunouchi central business district: Japan is facing a wave of transformation on an unimagined scale.   © VWPics/AP

Jochen Legewie is the Tokyo partner and Asia Chairman of strategic communications consultancy Kekst CNC.

The COVID-19 crisis will lead to a deep economic recession, in Japan as well as globally. Any other prediction would be naive. It will also spur global restructuring and business transformations far beyond replacing client meetings by video conferences, and I believe this change will be most profound in Japan.

In the past, opposition from employees, business partners, local communities or other important stakeholders had often prevented such measures from being implemented on a large scale. This was the often decried inertia or unwillingness of the Japanese economy to reform.

Even external shocks like the Asian financial crisis of 1997, the Lehman Brothers collapse of 2008 or the Great East Japan Earthquake and tsunami of 2011 did not prove turning points for the structures of Japan Inc.

But today is different from earlier points in history when observers had declared Japan ripe for reform. The fallout of the COVID-19 crisis threatens to be so big that formerly unthinkable steps become inevitable. We should expect the accelerating sale and spinoff of non-core businesses, or even the summary closure of whole business segments accompanied by significant layoffs.

Japan Inc. could do with restructuring, or at least refreshing. Back in 2009 there were six Japanese companies among the global top 100 by market capitalization; in 2019, only Toyota Motor and SoftBank Group were left, eclipsed by U.S. and Chinese competitors. Despite possessing unique technological and capital strengths, most Japanese businesses lag global peers by performance metrics including operating profit.

The fundamentals of this restructuring will not come out of the blue. Rather, Japan Inc. has already half willingly, half unwillingly embarked on a reform course.

Since 2014, Japanese businesses have felt the tightening of corporate governance and stewardship codes. Large corporations such as Hitachi or Toshiba have started in earnest to sell off non-core businesses or have taken private their listed subsidiaries.

Large corporations such as Toshiba have started to sell off non-core businesses. (Photo by Takaki Kashiwabara)

The rise of the shareholder continues unabated. On April 8, Hong Kong based activist investor Oasis Management scored a landmark win at Sun Corp. when shareholders voted in favor of the activist's proposals for board changes at an extraordinary shareholder meeting.

A week earlier, activist investor ValueAct Capital announced its second Japanese investment following its success with Olympus, where it became the first activist in Japan ever to gain a board seat, just 10 months ago. On April 22, ValueAct again made headlines, disclosing a $1.1 billion stake in Nintendo as its third major investment in Japan.

Finally, we are witnessing the public and corporate acceptance of private equity, especially those firms with a solid record and an established Japanese presence going back 20 years or more, like Carlyle Group from the U.S. or local player Advantage Partners. (Disclosure: I have worked with Carlyle.)

The COVID-19 pandemic will make such private equity firms sought-after partners to businesses in need, whose number is certain to surge, not only to survive this phase but ultimately to pursue sustainable growth and value creation.

More than two months into the crisis, it is obvious that Japan is facing a wave of transformation on an unimagined scale. Companies have to move fast, which will bring about a plethora of deals starting in the second half of 2020.

Using the term "deal" in the current climate where many lives are at risk is difficult and may well be regarded as opportunistic. But we cannot afford to ignore the facts: the economy and its participants have a crucial role to play in protecting and maintaining the welfare of our society, now and in the future, once we have overcome the health impact of COVID-19.

Restructuring still has negative connotations in Japan, understood by many to mean, first, layoffs, so such steps will face criticism and opposition from affected shareholders and probably even from parts of the government.

Society and media will closely monitor and comment on any move. Companies will need to choose a careful, intelligent approach to communicate any drastic reform steps to the directly affected parties as well as the general public in Japan.

It will help both companies and the government to look at restructuring examples in non-Anglo-Saxon markets such as France or Germany. Benchmarking with other stakeholder-oriented societies will provide valuable lessons.

Regardless of this communication challenge, transformation and restructuring are sure to take place at a level many cannot yet imagine. It is the opportunity which lies in every crisis for individual corporations as well as for the Japanese economy.

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