Because the companies have done so badly. As we ponder the implications of a stock market trading somewhere around two-decade lows, it’s worth remembering that stocks don’t exist in a bubble. Sure, they fluctuate around, but over any length of time, they usually bear a close relationship to the underlying performance of the companies.
James Surowiecki: What this means is that for much of the past two decades, Japanese companies have been destroying economic value for shareholders, using far more capital than they’re generating. Japanese firms’ profit growth is also well below what American companies would consider acceptable. And on softer metrics, too, Japanese companies don’t look like good investments: they’re still concentrated in capital-intensive industries, and are surprisingly weak in industries where immense profits can be reaped after small investments, like most notably software. Obviously, there are important exceptions, companies like Nintendo, Toyota and Honda (although even the latter two require tremendous amounts of capital to keep growing). But they really do prove the rule.
None of this is too surprising — historically, Japanese companies have been disdainful of the idea of shareholder value and of traditional profit metrics. In 1998, the chairman of Mitsubishi Heavy Industries famously said, “I openly brag that I don’t cater to shareholders,” and, even more amazingly, “We don’t give a hoot about things like return on equity.” In part, this is because companies’ heavy reliance on debt financing and interlocking relationships meant that they felt they didn’t need shareholders. It’s also because many companies saw themselves as fulfilling a social role.
We can’t help but wonder whether the ongoing failure of Japanese corporate capitalism was crystalized by the Mitsubishi-Morgan Stanley deal, notable primarily because Mitsubishi didn’t walk away from it or demand drastic changes once conditions deteriorated. We’ve all heard the about Japanese firms unwilling to lay people off in hard times, and how that only exacerbated their condition. It’s not clear that that’s changed at all.
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