Introduction

Abstract

In this book, we argue that excess capacity and difficulty of exit are responsible for the two lost decades. Non-performing loans and zombie lending are the consequences of overcapacity in the banking industry due to financial deregulation in the 1980s. The large-scale bubble burst is a result and a trigger of the first lost decade. In parallel with the bursting of the bubble economy, regulatory, technological, and economic changes have been the main causes of excess capacity in the electronics industry after 1990. However, Japan’s employment practices make it difficult for prompt downsizing and exit to take place. We demonstrate that two major electronics companies generated waste of cash flow for investment in declining core electronics businesses after 1990. Ultimately, it took 20 years or more for major Japanese electronics companies to exit from their slumped PC business. Analysis of segment investment shows that Japanese electronics conglomerates allocated more credit to segments with more employment even if they were making losses. Naturally, segment profitability is negatively related to unnatural segment investment. This evidence is in support of the employment consideration hypothesis. At the same time, the stand-alone electronics companies also continued to invest regardless of poor investment opportunities. The sluggish post-mergers and acquisitions (M&A) employment adjustment in stand-alone Japanese electronics firms suggests that employment considerations also hinder the success of M&A to restructure electronics component businesses. The two lost decades are a result of the slow response to the rise of cheap and high-quality electronics products of Apple, Samsung, and Lenovo. Many well-known Japanese electronics companies globally enjoyed rapid growth, dominant market positions, and high profits till the 1980s; however, we expect to see fast-growing startups that can take their place.

We are deeply grateful to Prof. Akiyoshi Horiuchi for the insightful comments on employment practice in Japan. Any opinions, findings, or conclusion expressed in this book are those of the authors and do not reflect the views of the Development Bank of Japan or the authors’ affiliations.