Corporate restructuring in Japan

Abstract

Corporate restructuring, by addressing the excess capacity and debt overhang problems currently plaguing Japan’s corporate sector, is a key element in revitalizing the country’s economy. Towards this end, Japanese firms have been adopting new business practices and the government has engineered an ambitious and comprehensive package of reforms during the past years. The implementation of the Commercial Rehabilitation Law (CRL) on April 1, 2000, signaled that most of the official infrastructure conducive towards real restructuring was already in place. This article analyzes whether the new official infrastructure has helped the corporate sector to address the problems of excess capacity and to improve the current corporate governance system. Using event-study analysis, it finds that the market credibility of restructuring announcements based on better disclosure, mergers, and to a lesser extent, labor forced reductions, increased after the CRL implementation. Announcements aimed at reducing excess capacity were viewed skeptically by the market, though. These results suggest that reducing excess capital in Japan still requires substantial work.