Annual Report on

The Japanese Economy and Public Finance

2006

- Japanese Economy Heading for New Growth Era

with Conditions for Growth Restored -

Cabinet Office

Government of Japan


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Chapter 2

Changes in Business Behavior and Companies' Evaluation of Structural Reforms

Key Points of Chapter 2

Section 1 Business Behavior Being Normalized after Post-bubble Adjustments
- Through its tough restructuring, the business sector is earning even greater profits than in the bubble era. However, business behavior is now more cautious. In capital investment, corporations now give higher priority to profitability and capital efficiency.
- Although business behavior is cautious, the elimination of the "three excesses" in employment, capacity and debt, has allowed companies to increase capital investment and dividends steadily. Within the business sector, the past restructuring efforts have been making visible contributions to corporate earnings.

Section 2 Changing Characteristics of Japanese Companies
- Globally, Japanese companies have a comparative advantage in technology-intensive industries. This is because Japanese firms have accumulated excellent human capital under their traditional long-term employment commitments.
- Such Japanese-style management elements are deep-rooted, even at present, according to a questionnaire survey. Companies that give priority to employees have fared better than others. On the other hand, changes have been seen in some traditional Japanese business practices such as companies' heavy dependence on main banks and long-term inter-company business relations.

Section 3 Structural Reforms and Business Environment for Companies
- Since the late 1990s, legal, accounting, tax, and other systems surrounding companies have been reformed dramatically. Many companies have appreciated these reforms, according to a questionnaire survey.
- At the same time, many companies hope to see further reforms in administrative procedures, corporate tax, deregulation, and opening of government services to the private sector.

Section 4 Present Conditions and Problems at Japanese Banks
- Banks' non-performing loan disposal through the financial system reform has made steady progress. As companies' close relations with their main banks, among traditional Japanese business practices, have been changing, however, it has been growing difficult for banks to depend on lending services for expanding earnings.
- Banks are now required to meet needs for financial services for households, pursue solutions to various problems facing companies, and make efforts to add value to services in order to boost profitability and enhance their financial base.

Section 5 Summary
(Omitted)


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