Japan's economic reforms finally reach critical mass

By David Williams

TOKYO (AFP): The big guns of Japanese industry are finally biting the bullet by cutting staff and factories but the immediate impact will hurt economic growth, analysts said.

In the past week, Nissan Motor Co. Ltd. announced it was cutting 21,000 jobs and closing five factories. Reports said Nippon Telegraph and Telephone Corp. was cutting 20,000 jobs, or 16 percent, of its workforce.

"The drastic restructuring announcements ... indicated that the long-awaited wave of corporate restructuring seems to have finally reached critical mass," said Ronald Bevacqua, economist at Commerzbank.

The implementation of such ambitious programs was hardly guaranteed, said the analyst, and Japanese companies had a history of failing to live up to such plans.

"Nevertheless, corporate Japan is increasingly recognising that it can no longer afford to maintain its high cost structure."

Renault SA chief Louis Schweitzer, whose company has a 36.8 percent stake in Nissan and is credited with pushing through the reforms, told journalists the reasons for shutting factories had nothing to do with efficiency.

"The simple fact is, however efficient a plant is, it does not work well when it does not work at capacity," he said.

"Nissan is closing plants in Japan because clearly Nissan has too many plants which means each of these plants is not used to capacity and so it cannot work efficiently at low cost."

Bevacqua said Japanese companies also could no longer rely on their banks to bail them out in tough times.

"With the onset of financial reform ... banks are unwilling or unable to make such loans. The risk that the corporate sector backslides on cost-cutting is therefore diminishing."

The cost-cutting was still in its infancy, the economist said, and as other firms followed the lead of Nissan and NTT, progress was "undeniable."

Actual capacity reductions by manufacturers had been rare, he said, but the Nissan and NTT decisions showed closing unneeded factories was no longer a taboo.

"Like the employment cuts already under way, capacity reduction is negative news for the economy in the near term," Bevacqua added, forecasting growth of zero to one percent in the fiscal year to March 2001.

"Nevertheless, we believe it is only through this kind of structural reform that the economy can return to a self- sustaining growth path."

Shigenori Okazaki, political analyst at Warburg Dillon Read, said he expected parliament to pass in early December a supplementary budget to keep the economy moving.

"Meanwhile, with an election coming in less than 12 months, politicians are adding more items and nudging up the numbers in the stimulus package," he said in a report.

But with tax revenue shortfalls, expected at about one trillion yen (US$9.5 billion) in the fiscal year to March 2000, the supplementary was unlikely to exceed seven trillion yen, he said.

Warburg Dillon Read forecast real economic growth of minus 0.1 percent in the year to March 2001, before a recovery to 0.5 percent growth in the following year.