Toyota’s Sin

Ichiro Suzuki

On the table of per capita income, Japan ranked 22nd in 2023 among the 38 OECD countries, down from near the top at the turn of the 21st century. In fact, per capita GDP hasn’t change much for Japanese from a quarter century ago. Mired in mild deflation, the Japanese economy grew little for two decades. In the last several years, size of the economy and income were adversely affected by a sharp fall of the Japanese yen against not only the U.S. dollar but also many other currencies. Lack of productivity growth is often considered as a major reason behind this absence of income growth. 

Contrary to what’s believed commonly, Corporate Japan’s productivity has been rising handsomely since the turn of the century. Facing sprawling operations in a variety of businesses at the time of the bubble’s bust, the vast majority of Japanese companies spent much of the next two decades in getting focused and lean, through divesting non-strategic businesses, shedding debt to boost cash on hand and worst of all, reducing the number of employees. Layoffs were the last resort in reducing costs, but some jobs had to go on management’s decision to shut down divisions that had been bleeding severely and no longer fit the direction the company. Such actions let the unemployment rate to rise ‘as high as 5.5%’ at the outset of the century and again in the years of the Great Recession. Corporate Japan eventually were rewarded with greater profitability once the global economy stabilized and Japan began to move toward the exit of economic slump that persisted for almost a generation. Results are shown in their share prices. Once the market began to see the end of deflation in the 2010s, share prices rose powerfully, on improving cashflow as well as expansion of valuation. 

Corporate Japan’s restructuring efforts were unprecedentedly aggressive by the standards of Japan, where lifetime employment was often taken for granted as the country’s virtue. As the peak unemployment rate at 5.5% showed, however, it was still lukewarm by the standards of the rest of the world where double-digit unemployment rates are not uncommon in a severe economic downturn. At the outset of the 21st century, Toyota Motor made it clear that they would not lay off any worker to protect their employment. Instead, their base salaries would be kept at where they were though their pay would still rise as they got promoted. Toyota always leads Corporate Japan every spring in wage negotiations. What Toyota decides is duly followed by other corporations. This decision on freezing base salary was no exception. 

Private sector union in Japan is organized inside the company. This makes union leaders and management of the company close. Unions usually don’t fight fiercely as long as they think they are given a fair deal for improved welfare of the members. Japan has been a land of stakeholder capitalism where management isn’t as intensely focused on maximizing profits for shareholders, and welfare of other stakeholders, including employers, is given a fair amount of considerations.  When management offered a trade-off between salaries/ wages freeze and no layoffs, unions took it as a good deal and accepted it. Some companies went a little further by letting unions accept a slight pay cut for a no layoff pledge. 

The deal worked. Corporate Japan slowly restored profitability as the global economy recovered in the 2010s from the deepest recession since the 1930s. Salaries and wages, however, remained frozen despite rising productivity among workers. Management had learned how sweet it was not to bother to raise workers’ pay. While the Japanese economy was improving, albeit very slowly, mild deflation continued to persist. Workers were relatively well off. Prices were not rising at all and they received higher salaries as they got promoted. It was only the pay attached to the job’s rank that didn’t rise. Profits rose and management distributed them almost exclusively to shareholders. In the 2010s, shareholder capitalism became a vogue, departing from excessive stakeholder capitalism. Activist investors from the Anglo-Saxon world shouted about it, and the Financial Services Agency pushed management for it in order to revitalize the Tokyo Stock Exchange from two decades of slump. Shareholders were overwhelming beneficiaries of the Japanese economy’s recovery and enhanced efficiency of Corporate Japan. Here was a catch, however. Japan had to pay the price for it, in stalled income growth and a precipitous fall in global income rankings.  

Rise of shareholder capitalism was inevitable since Corporate Japan was obviously too bloated and too unconcerned about shareholders. Management often thought that the company belonged to them and their employees. Worse, their share prices performed simply miserably for such a long time. The Nikkei index lost 80% of its peak value before it reached bottom at last after two long decades of decline, with many false dawns. It was evident that the market had to be revitalized. Here came topdown enforcement of shareholder capitalism by the FSA in the 2010s. The decade turned out to be a golden age for shareholders. Corporate Japan’s productivity began to rise from utterly deplorable levels and all the fruits of improved productivity were passed onto shareholders, with very little going to employees. In the 2020s, the Tokyo Stock Exchange pressed listed companies hard to raise their price to book value ratio. The market boomed, of course. 

On the other hand, workers got almost nothing despite improved productivity on their part. Prices of goods and services hardly moved though stock prices were running high and house prices were beginning to rise. Persisting mild deflation kept their purchasing power. Their salaries and wages were stuck at the levels at the outset of the century, whereas income in other countries rose steadily. In two decades, Japan’s per capita income hasn’t changed much, and fell from near top of the world to the latter half of the 38 OECD countries. 

A quarter century ago, it looked that Toyota made a good decision to freeze workers’ pay in return for not laying people off. The company seriously takes its responsibility to local communities where its factories are located. Toyota did its job, but there was a price to pay for it. With everyone following Toyota’s suit, salaries and wages were frozen nationwide and expectations for higher wages were eliminated from the economy, letting mild deflation to persist. Thus, Japan fell in global per capita income rankings precipitously. In retrospect, it was better to have 10% of the workforce unemployed and the remaining 90% with a job being rewarded a raise. Then, the economy overall had expectations for higher pay, with goods and services priced for pay that rises steadily.

The last few years, with inflation’s return to the Japanese economy at long last, Toyota has shifted the gear to a different mode, to the direction of raising salaries and wages that beat the inflation. The government is pushing Corporate Japan for higher pay and major companies are competing for it. Amid rising inflation, real wages and salaries are barely keeping up with higher prices on an economy-wide basis,  but Japan has at last got onto to a right path to a more normal economy. 

About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.