Legal Background to the Low Profitability of Japanese Enterprises

Kinoshita, Nobuyuki

Japanese enterprises have shown low profitability for quite some time now. This paper presents several hypotheses regarding the influence of Japan’s legal systems on this phenomenon. The laws discussed in this paper cover not only corporate law but also ‘enterprise law’ as a whole, including bankruptcy law, capital markets law and civil litigation law. Besides, I examine not only the ‘laws on the book’ but also ‘legal systems in practice’. As for the research design of this paper, I identify major differences in the enterprise laws among Japan, the United States, and Germany. On the other hand, I assume incentive structures of the parties concerned, such as management, shareholders, creditors, investors and regulators that they play their role on the basis of economic rationality. Then I combine both examinations so as to consider the possible effects caused by the differences in legal systems. Under this approach, this paper discusses the individual law system that may influence the behavior of the enterprises. First I discuss the business reorganization system. Here I point out Japanese enterprises might retain significant cash reserves to avoid the danger of being compelled to file for bankruptcy protection. To the next, I examine the takeover systems and argue that a potential bidder might regard the takeover of a Japanese enterprise as irrationally difficult. This system might bring about an insufficient industry reorganization and weak market pressure on individual enterprises. As for the shareholders’ activities, I suggest that corporate governance disclosure system in Japan might provide negligible pressure on enterprises and investors because of the separation of corporate law and market law. Concerning the enforcement of enterprise law such as lawsuits by shareholders or actions by regulators, I show that the characteristics of enforcement system in Japan might contribute to weak market discipline and risk aversion in the business decisions of directors. I hope this paper stimulates further research and widespread constructive discussion on this issue.

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Academic Units
Center on Japanese Economy and Business
Center on Japanese Economy and Business, Graduate School of Business, Columbia University
Center on Japanese Economy and Business Working Papers, 316
Published Here
April 24, 2013