10.5. Insular Approach to the Capital Markets

Many Japanese companies attribute their success to their long-term view of investment to continually expand market share for future growth, sometimes at the expense of short-term profit. They say that this is how many of them became dominant players in industries such as consumer electronics during the 1970s and 1980s. However, during the same period, profitability at these companies slowly declined relative to their non-Japanese competitors, with return on assets (ROA) only half that of their U.S. counterparts.[] The long-term focus of Japanese companies is based on expectations that projects generating big returns over the long term override the need to be profitable today. This approach works as long as markets are expanding, but when Japan's bubble economy burst in the early 1990s, many Japanese companies continued expanding capacity while revenues stagnated, resulting in severe financial losses.

Toyota followed this pattern of continuing to invest in capacity but also monitored short-term financial health, and it accumulated capital by paying out a low dividend—practices learned during the early days of financial hardship in the 1950s. This helped it to weather the storm of the post-bubble years in Japan and continue to grow throughout the 1990s. However, Toyota's low dividend and lower level of return on investment capital (ROIC) relative to competitors also depressed its share price to below the inherent value based on company ...

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