Focus: Industrial Revitalization

JETRO, 1221 Avenue of the Americas, NYC, NY 10020 July 21, 1999
Japanese Cabinet Approves Industrial Revitalization Plan
The cabinet of Prime Minister Obuchi today approved a program ofSpecial Measures for the Promotion of Industrial Revitalization to stimulate corporate restructuring and renewal in Japan. This new initiative is part of an ongoing effort to re-energize and restructure the Japanese economy and reflects a continuation of the economic reform measures initiated by the Japanese government over the last two years. 

The Japan External Trade Organization (JETRO) provides the following information examining these developments in greater detail. 

The Need for Industrial Revitalization
The collapse of Japan's bubble economy in the early 1990's marked the end of a period of four decades of strong economic growth. In the fall of 1997, the Japanese economy entered a serious recession and suffered five successive quarters of negative growth before regaining positive momentum in the first quarter of 1999. To rectify this situation and to help Japan retain its economic competitiveness, the Japanese government has developed a comprehensive reform program. Moreover, it passed a series of fiscal stimulus measures to restore economic growth and demand and initiated a program to stabilize its banking system.

During the bubble economy, Japanese corporations actively increased their asset portfolios with little regard to profitability. The resulting negative economic growth, rising corporate debt, bankruptcies and inefficient use of management resources accentuated the need for a program of industrial revitalization in Japan. This situation was complicated by a banking system that maintained an artificially low cost of capital.

These factors have contributed to an environment where the return on assets of most Japanese companies is far behind those of the United States and Europe. The productivity of Japanese business is also currently below the Organization for Economic Co-operation and Development average. The average productivity growth rate from 1987-1993 was 0.8 percent versus 0.9 percent for OECD countries. Business formation has also declined and the number of new businesses formed is far lower than in the United States, even when adjusting for differences in population.

Japan's new industrial revitalization legislation is based on the need to improve the efficiency of Japanese corporations. A declining birth rate suggests that Japan will see a tightening of its labor force. Similarly, the trend toward economic globalization has increased the mobility of capital, which now flows to the asset classes and locations that provide the highest return on investment. This is a very tough fact for Japanese companies as they have proven less attractive to investors than many competitors in other OECD countries in recent years. The resulting lack of investment capital has proved particularly troublesome during Japan's current period of difficult economic adjustment. Even large companies have become non-investment grade, and it is now recognized that Japanese firms need to focus on their core competencies, in an effort to achieve greater profitability and efficiency. 

The Need for Corporate Restructuring and Reorganization
  Corporate restructuring and reorganization is necessary to help companies focus their resources on profitable areas and the new emerging industries of the 21st century. This will help Japanese companies to realize major increases in business efficiency and to facilitate labor flexibility as well as new enterprise development.

Although this process will prove difficult and the results will not be immediate, there are now numerous examples of corporate restructuring and reorganizations, initiating a trend that is likely to accelerate over time. Recent merger and acquisition activity includes Mitsubishi Chemical and Tokyo Tanabe Pharmaceutical in October, 1999, Japan Tobacco acquiring Asahi Chemical's food business in January 1999, and Asahi Beer's pharmaceutical subsidiary in November 1998. Moreover, General Electric/Hitachi/Toshiba agreed in April 1999 to create an international atomic fuel company and Toshiba and Mitsubishi Electric are scheduled to establish an industrial motor company by October 1999. Other significant developments include an investment in Nissan by Renault in April 1999, and Cable and Wireless's acquisition of IDC in 1999 as well. These major changes in the Japanese corporate world are only going to be enhanced by the development of new financing vehicles such as the recent cooperative arrangement announced by Softbank and NASDAQ. 

The Contents of Japan's Industrial Revitalization Program
The Japanese government’s industrial revitalization program is designed to "clean-up" the debts of the past and to develop a more competitive business environment. The program incorporates a wide range of initiatives to: a) help companies restructure their operations, b) promote the development of start-ups and the growth of small- and medium-sized enterprises and c) facilitate R&D and technology development.

Measures to Facilitate Corporate Restructuring
  A comprehensive range of incentives will be made available to all companies who submit an eligible restructuring plan by March 2003. Approval of these plans by appropriate ministerial agencies will be based on clear, transparent criteria without regard or favoritism to any particular industrial sector. Once approved, plan outlines will be released for public viewing. Companies who submit eligible plans will be able to access special measures to encourage the restructuring and renewal of their business operations. This will help existing firms to strengthen their competitiveness through M&A activity. It will also help them to enter new lines of business. These measures include:

Streamlining Takeover Procedures: Special measures have been introduced to simplify the ability of firms to initiate corporate transactions. For example, a special shareholders meeting has traditionally been required when one company acquires the entire business of another firm. Under the new legislation, acquisitions under or equal to 1/20th of the capitalization of the receiving company will only require board approval.

Additionally, in the past, when a company acquired a business, the assumption of debt required the approval of creditors. Under the new legislation, the buyers only need to give the creditors notice. 

Creating Tax Incentives:If a company has a loss on the disposal of equipment and buildings, it can carry that loss forward for seven years or backward for one year. Another option adopted to facilitate the transfer of unproductive assets allows a parent company to realize any profits gained in the sale of excess assets to a joint subsidiary over several years.

Special depreciation allowances have been granted to promote new capital investment. Rates range from 18 to 30 percent in the first year depending on the size of the business and whether the equipment is to be used to introduce new products and services, new production methods and efficiencies or to facilitate corporate restructuring and reorganization. 

Introducing Financial Incentives: Under the new legislation, numerous financial incentives have been introduced to promote more efficient business organization:

Promoting Stock Options: Employees/directors in a subsidiary can now hold stock options in a parent, providing the parent owns 95 percent of the subsidiary.

Encouraging Debt/Equity Swaps: To help facilitate the disposal of non-productive assets, the new legislation seeks to encourage the use of debt/equity swaps. Previously, when equity was issued through a debt/equity swap, the proportion of equity issued in exchange for debt was very limited. This limit has now been raised to one half of available equity. 

Facilitating Mergers & Acquisitions: Companies that seek government incentives to facilitate the acquisition of additional assets must seek regulatory approval. If approved, they become eligible for special incentives, including management or employee buy-out options (companies are now allowed to enlarge their distribution of stock options to 1/4 of total equity), and preferred stock options (companies can now issue preferred stock in amounts of up to 1/2 of total equity). 

Measures to Promote Small and Medium Enterprise Development and Entrepreneurship
  The new legislation takes note of the need to enhance start-ups and the development of the small business sector, which in the U.S. has helped to make an inordinate contribution to the development of new technologies and the growth in employment. Individuals and companies which form new business enterprises within several months will not need government approval to access incentives. For example, no-interest loans to facilitate capital investment will be made available for a period of seven years for up to 50 percent of the amount required.

To maintain and enhance their dynamism, existing small and medium-sized enterprises can also access special incentives by gaining the approval of the local prefectural government where they are located. These incentives include :

  • Existing companies with an approved plan will be entitled to access no-interest loans in amounts of up to 66% of the required amount for up to seven years; 
  • The new legislation will also increase the loan guarantee limits provided by the government to help companies develop their capital infrastructure and operations. In the case of start-ups, guarantees of up to 10 million yen will be made available and in existing companies, increases of up to twice the usual amount will be made available.

Measures to Support R&D and Technology Development
  Noting the technological dynamism and spirit of innovation that currently exists in the United States, Japan is now introducing similar patent ownership guidelines. In particular, Japanese legislation is initiating a similar approach to government-funded research as was adopted by the U.S. in 1980 when Senators Baye and Dole drafted legislation allowing companies to own 100% of the intellectual property rights gained through government funded research.

As in the United States, the Japanese government in the past owned the products of research it commissioned. Under the new measures, this will be completely changed. Companies receiving government research contracts will now be able to own the intellectual property rights gained through their efforts. This is a highly significant development and will help to stimulate private sector R&D and technological development in Japan.

Along the same track, Technology Licensing Organizations (TLO) have been established in the last few years within major universities to facilitate the transferal of university research to private companies. Supporting legislation was adopted in August1998 and further measures adopted within the current legislation will reduce the fee for patent transfers from TLO's to private companies by one-half.

These changes are designed to support the viability and competitiveness of existing businesses and to promote the creation and growth of new firms. Together with the Japanese government's on-going economic reformprogram, the measures are expected to revitalize and reinvigorate the Japanese economy as it enters the 21st century.

For additional information on current trends within the Japanese economy, please contact Hidehiko Nishiyama, Executive Director of JETRO NY at Tel: 212-997-0416, Fax: 212-997-0464, E-mail:

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