Cost and Profitability Restructuring of Japanese Companies --Current Status and Prospects--

Masato Ono

Summary

The success and speed of corporate restructuring activities in improving profitability and reducing costs is critical to the future of the Japanese economy. In this paper， we consider profitability and other problems companies are facing from the viewpoint of earnings and financial structure.
From a long-term point of view， the financial condition of companies has improved since the oil shocks. Financial stability has improved substantially in terms of dependence on borrowing and liquidity in hand， and financial strength has increased in terms of off-balance sheet items such as hidden assets. On the other hand， total capital turnover， return on equity， and fixed cost ratios have tended to deteriorate， and corporate profitability and efficiency are worsening over the long term.
The postwar Japanese economy has experienced four periods of adjustment--stock adjustment during the high-growth era (around 1965)， prolonged recessions after the oil shocks (after 1974)， the recession caused by the yen appreciation following the Plaza Accord (after 1985)， and the current Heisei recession. In the first two cases， recovery was led by exports， while the strong yen recession following the Plaza Accord relied on a quick boost to domestic demand to solve cost problems.
The current problem with corporate profitability is characterized by depressed profit levels and a decline in ROE (return on equity). This is due to a deflationary phenomenon in which both volumes and prices of domestic sales have declined， combined with higher indirect costs centered around "other fixed costs." In addition， lower returns from investment and loan assets accumulated in the diversification and overseas investment boom of the late 1980s pushed asset efficiency down further. At the company level， the customary trend of uneven profit expansion among companies during recession has not occurred; in fact， what is prominent is the declining profitability of companies once known for high profits.
The latest financial statements have finally started to show sings of improvement in profitability. Among listed companies， total assets in FY 1993 for all industries decreased 1.4% from the previous year， while fixed costs also fell 2.4%， indicating that restructuring is proceeding gradually. However， reductions in labor costs have not yet yielded any results. Due to the high cost of adjusting employment among middle aged and older employees， who comprise half of labor costs， companies are pursuing other means of improving profitability.
Presently， there is huge gap between the actual profit level and the level required to attract investors. Moreover， since the economy is not expected to grow in the medium tern， it is highly likely that improvement in profitability will take longer than ever before. Companies must do the following: adopt profit-oriented management， something that has been avoided in the past; pay more attention to valuation criteria used by shareholders and creditors (become more market-oriented); and continue restructuring by moving out of businesses with low returns and into high-growth areas.