Corporate Investment and Restructuring

This chapter discusses corporate investment in the Japanese economy over the last few decades and the policy prescriptions that are now required to induce efficient investment. The chapter complements that by Hashimoto and Higuchi, since both discuss the problems at the real side of the Japanese economy and their possible solutions. The present chapter is closely related to that by Hoshi and Kashyap; while they deal with the nonperforming loan problem from the perspective of financial institutions, I discuss the problem here from the perspective of companies. Macroeconomic issues are discussed first, followed by microeconomic issues. The next section assesses aggregate nonpublic investment in the Japanese economy. Section 2 discusses the necessity of structural change and the absence of ‘the cleansing effect’ of the recession in the postbubble economy period -- the reallocation resources to more efficient uses as companies restructure or close down and workers shift to other jobs. In the traditional Japanese ‘main bank’ system in the 1960s and 70s, banks played a key role in reallocating capital to more productive investment opportunities and in restructuring old companies. However, in the second half of the 1990s, the nonperforming loan problem overwhelmed and paralyzed both the banks and any prospects for the development and implementation of a sustained corporate restructuring policy. In Section 3, several individual corporate restructuring cases are examined and the reasons that the restructuring process in Japan has been so ineffective and inefficient are discussed. Section 4 draws policy implications and concludes the chapter.