NCPA - National Center for Policy Analysis


June 24, 2009

Japan has long practiced a form of familial capitalism, and for decades this has ensured that competition was never too fierce and everyone prospered at least a bit.  It certainly smoothed out the ups and downs during the country's stunning post-war economic development.  So it's not surprising that many politicians and business leaders are advocating an even stronger dose of such medicine now as Japan struggles with its deepest recession since the war, says the Economist.

Japan's stronger firms have responded relatively quickly to the recession, in marked contrast to the dithering during the "lost decade" of the 1990s.  However, it's still unclear whether they have done enough, but it's certain that efforts to keep their struggling rivals afloat are hurting them.

All of this does enormous harm, says the Economist:

  • Tellingly, the shut-down rate of companies in Japan is around half that in America and Britain:
  • And the number of corporate insolvencies is expected to increase in Japan this year by only 15 percent, despite the depth of its recession, compared with more than 30 percent in Western Europe and 40 percent in America.
  • Normally a scarcity of corporate bankruptcies is a sign of economic vitality; in Japan, it is a sign of its economic weakness.

Of course, keeping struggling firms alive protects jobs, but it also fossilizes industry structures and hinders the development of a more flexible labor market and a business environment more supportive of new-company creation -- two areas where Japan is also sadly deficient.

Furthermore, Japan's experience -- a downturn followed by years of stagnation -- serves as a reminder of the importance of destruction in capitalism. Instead of continuing to prop up struggling companies, Japan and other countries need to let them go under, so that new, better ones can be created, says the Economist.

Source: Editorial, "No exit," The Economist, June 18, 2009.

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