Ichiro Suzuki
In the summer of 1961, Japanese women’s volleyball national team toured Europe and won stunning 24 consecutive matches. The European media called these volleyballers ‘the Oriental Witches’.
Volleyball was going to have its first Olympics competition in the upcoming 1964 Games in Tokyo. Japan’s gold medal hopes on volleyball grew as the year approached. Holding onto that momentum from the 1961 tour, Japanese women became inaugural Olympic volleyball champions, defeating the Soviet Union in straight sets in the championship match. They lost only two sets in the entire tournament. The Soviet match registered a whopping 67% TV viewership. With an Olympic gold, these women became the biggest stars in the 1964 Games, securing a firm place in Japan’s sports history.
The vast majority of the national volleyball team, including the coach, belonged to a textile factory in southern Osaka, called Nichibo Kaizuka. It became the most famous factory in the country. Textile made immense contribution to the post-war Japanese economy, making it possible to recover from devastation inflicted by WWII. It was a star industry at the time of Japan’s super-normal growth in the 1950s and the 1960s. Over the years, however, Japanese textiles became overly competitive under the fixed exchange rate regime of 360 yen to the dollar, giving rise to a trade friction with the United States, the first of many to come in the next few decades. After long trade negotiations, voluntary caps were imposed on textile export volume to the U.S. Then, in the late summer of 1971, President Richard Nixon announced scrapping the peg of the dollar to gold. The announcement had immediately devalued the dollar against the world’s hard currencies. Overnight, the yen jumped to 330 to the dollar up from 360. This was the JPY’s first upward move, to be followed by a shift to the free float regime in February 1973, which would cause what looked like a permanent ascent in the next four decades. Textile became the first industry to be crushed as the Japanese economy moved up the ladder of development to higher value-added products, leaving the business to lower wage countries in Asia.
Sixty years after the exuberance of Olympic gold, Unitika, successor company to Nichibo, announced closure of its textile division. Time has changed. It was also announced that Unitika is going to rebuild the company without the textile division that consists of 40% of revenue, focusing on higher value-added resin and film businesses. The company plans to borrow from Regional Economy Vitalization Corporation of Japan (REVIC), which is one of the government-owned funds. Mitsubishi UFJ Bank is asking Unitika creditors to forgive ¥43 billion. The company then plans to recapitalize its balance sheet raising ¥20 billion with issuance of new shares allotted to existing shareholders.
Here is Japan’s bad habit that refuses to go away, omnipresence of the government. It is one thing to lay out an industrial policy to set a strategic direction of industries in Japan. Creation of a new semiconductor foundry, Rapidus, falls into this category. The Japanese government has made up its mind to be back in the game of making semiconductors that the country once led the world, though success of this ambitious project is far from certain.
It is entirely another thing, however, that the government offers a helping hand to a company whose historic role is essentially over. Unitika is still a public company with equity market capitalization of mere ¥10 billion. From every perspective, this is a company that has outlived its usefulness. Were it not for the Bank of Japan’s ultra loose monetary policy in the recent decades, Unitica might not have been still in operation. Simply put, this is a zombie company that has been kept afloat by near free money, and its future is now in question as the BOJ is getting itself out of the zero interest rate policy.
The government appears to think that this zombie is worth rescuing through REVIC that is funded by tax payers’ money. REVIC is also an institution that has outlived its usefulness. It was created amid the 2007-09 Great Recession in order to prevent mass failures of ailing businesses hit hard by the severest economic downturn since the 1930s. After accomplishing its original mission, this organization was refashioned to extend help to generally struggling businesses due to weak management and/ or a challenging environment that surrounds particular industries in order to protect local economies. Helping zombie companies might save some jobs in the short run. However, it comes at the expense of pushing back necessary structural changes and may weigh on the economy in the longer-term through lower productivity growth. Nonetheless, the government shows little interest in letting such an institution fade even if its mission was over. Bureaucracy never relinquishes an authority once it got it even on a temporary basis. REVIC is a kind of organization that would be hammered first by Elon Musk’s Department of Government Efficiency.
On the other hand, Unitika’s management should have considered MBO if they think the company is worth saving, instead of begging creditors to forgive what they owe to them. The fact that lenders are responding to Unitika’s plea implies two things. They don’t want to do it if they have a choice, but are bound by implicit pressure under ‘collectivism’ of lenders. A law suit by shareholders is not considered as a serious risk upon giving up a chance to get Unitika pay the lenders back. The Unitika deal contains elements that are too uniquely Japanese, implying why Japan has always been struggling to keep up with the changing world.
About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.
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