- The Washington Times - Tuesday, November 26, 2002

Japan's corporate management style is changing, according to a leading Japanese economist, and for the past decade the nation has entered a gradual process of institutional transformation.

Thus, said Nobel Prize-nominee and Stanford University professor Masahiko Aoki, Japan may now be in a juncture point of institutional revolution.

"These corporate governance issues will not be resolved simply by a wholesale attempt at emulating American practices, as some people strongly suggested until recently," he said.

Mr. Aoki spoke recently in Washington at the 2002 Mansfield American-Pacific Lecture sponsored by the Library of Congress and the Mansfield Center for Pacific Affairs.

Old ways of doing things cease to be taken for granted, he said, while new ways start to emerge and eventually become accepted by a critical mass of people.

"Institutions are more than laws. They are rules of the game perceived and observed by almost all people, or mind-sets of people, such as lifetime employment," said Mr. Aoki, who is also president of Japan's Research Institute of Economics, Trade and Industry.

He elaborated: Lifetime employment was considered a distinct institution in Japan until recently, but it was neither initially dictated by statutory law nor explicitly written into private contracts. It rather evolved as generally shared beliefs in mutual commitments between the employer and the employee conditional on the absence of extraordinary events.

It is fashionable to call the last 10 years of Japan "the lost decade," Mr. Aoki said. The bubble burst, the banking crisis has remained unresolved, the manufacturing base has eroded as industrial China arises, and the innovation capability has lagged, he said.

Japan was slow to adapt the U.S.-style market-oriented corporate management.

"Then Enron and WorldCom debacles took place," Mr. Aoki said. "Whither the Japanese corporate governance? Should Japan still emulate American practice?

"It is misleading to conclude that Japan's reform is a failure just by looking at [Prime Minister Junichiro] Koizumi's achievements," he said.

The institutional arrangements in Japan that bound corporations, banks and government bureaucrats together are no longer taken for granted, he said.

"The impact of the [information technology] evolution is considered crucial" by reducing the value of information that previously had been tacitly shared among the three institutions, he said.

"For Japanese firms to sustain their competitive advantage in their superior ability to share tacit knowledge internally, their size may be becoming too large," he said.

There are bright new signs, he said.

Many spinoffs from large corporations are successful, having absorbed systemic knowledge from "parent" companies.

Corporations are being restructured by new ways such as selling assets, establishing holding companies and splitting a company.

"There are more than 300 cases since the tax reform of the last year," he said.

University reform is another positive development.

"All national universities will be independently corporatized within two years, and human resource mobility in and out academia will follow," he said.

"A new corporate governance cannot be designed or created overnight," Mr. Aoki said. "It will emerge through a evolutionary selection."

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