Japanese businesses are trapped between America and China

Not since the 1980s have Japanese businesses generated so much excitement. Japanese companies’ profit margins have doubled in the past decade or so. They are forking out twice as much to their owners in the form of dividends and share buy-backs as they did ten years ago. Shareholder-friendly changes to corporate governance in Japan have caused foreign investors to flock to the country once again. Having languished for decades, the Nikkei 225 index, which tracks the value of the country’s largest listed firms, is up by 25% over the past year (see chart 1). In February it at last exceeded the record it set in 1989, just before Japan’s bubble burst.

Much of this success reflects Japan Inc’s transformation over the past 35 years. Faced with economic torpor at home, brought on by the stockmarket crash and an ageing population, Japan’s industrial giants have spent the past few decades hunting for growth abroad. In 1996 revenue booked by the foreign subsidiaries of Japanese manufacturers was just 7% of their total sales. Last year that figure reached 29%, a record high.