Kathryn Ibata-Arens: Solving the Japanese Paradox

This blog post is part of a series entitled Is Japan in Decline?, in which leading experts analyze Japan’s economy, politics, and society and give their assessment of Japan’s future.

Is Japan in economic decline, eclipsed by rapid growth in China and India? To paraphrase Mark Twain: the news of Japan’s demise is greatly exaggerated. Japan does face a paradox, however, and if unresolved it will lead to (perhaps irreversible) decline. What follows is an outline of the Japanese Paradox—and a proposed solution.

Japan leads in numerous measures of innovative capacity including technology, high-skill human capital, and advanced communication and logistics infrastructure. Despite this capacity, Japan has on the whole—in what has become the “lost decades”—been unable to translate this capacity into new business and new market based growth. Herein lies the Japanese Paradox: awash with talent, yet so far from its economic potential.

Chalmers Johnson’s seminal work MITI and the Japanese Miracle (1982) introduced the concept of the “developmental state” comprised of “three treasures”: enterprise unionism, lifetime employment, and seniority-based wage system (within an export-oriented, vertically integrated production system that refined Western technology in incremental innovation led by large Japanese “keiretsu” conglomerates). These institutions, it was said, were the source of Japanese economic prowess and rapid economic growth in the mid-20th century. Now that Japan is a mature economy, these institutions (and the developmental state paradigm) have proven a drag on innovation at the technological frontier. Advanced economies maintain lead status by producing new product innovations that become market disruptive new products and new businesses—engines of economic growth. Japan is in dire need of new “treasures” on which to base future economic success. I propose three: “womenomics”, internationalization (e.g. of labor markets and inward FDI), and entrepreneurial ecosystem development.

Womenomics. A recent NHK television program Close Up Gendai—asking “can women save Japan?”—met with such overwhelming viewer interest it was re-broadcast. The show, featuring Christine Lagarde, managing director of the International Monetary Fund (IMF), highlighted the findings of an October IMF analysis which estimated that an 7 percent increase (from 63 percent to 70 percent—to put Japan on track with other G7 economies) in women’s labor market participation would translate into a 4 percent “permanent” boost in Japan’s GDP per capita. In short, facing an aging society and falling birth rates, Japan needs “womenomics” (an economic system that harnesses the potential contributions of women in the labor force). Inroads have been made in the last decade, to be sure, even in entrepreneurial ventures. Fujiyo Ishiguro, of Net Year Group and Tomoko Namba, DeNA are two examples of Japanese women who have forged a path for others.

Challenges remain. First, the government should lead in the provision of quality extended day care facilities (what an opportunity for the Montessori franchise). Second, companies should be required to hire—for management track jobs—a greater percentage of women. This would not be so-called affirmative action. A 2011 report by the industry group Keidanren found that if all (career track) new hires were gender blind, 70 percent would be women (currently member firms hire less than 12 percent women). Further, once hired, Equal Opportunity Laws already on the books must be followed (e.g. an end to the strange coincidence of performance appraisals going negative after year four of employment, proper whistle blower protections, and an end to “tea lady” culture).

The Ministry of Foreign Affairs and foreign firms have led in employing—and advancing—talented women (the president of the American Chamber of Commerce in Japan Mike Alfant says only half jokingly that this is a secret competitive advantage of leading foreign-owned firms in Japan). Foreign firms—and a few domestic—have also been an important part of gradual internationalization of the Japanese economy.

Internationalization. Internationalization is underway, albeit at a slow pace, led by the business practices of domestic and foreign firms. Leading domestic firms like Fast Retailing (Uniqlo) and Rakuten have adapted their hiring practices to the reality of global competition. Successful international market entry requires “global enabled” employees. For example, in 2011 when Fast Retailing’s Tadashi Yanai saw domestic applicants plummet after announcing that the company was switching to English for all in-house communications, he was undaunted. Rather than hire Japanese, the company has looked abroad for new talent, especially in its largest growth market, China. How can Japan keep its leading firms at home and attract more foreign firms and money? Immigration policies that attract the world’s best-and-brightest are a start. Japan also needs a shift in attitudes about foreigners (expelling numbers of Nikkei Brazilians last year reflects lingering anti-foreigner biases). Japan faces competition from other Asian countries whose governments have effectively branded and marketed their countries as “foreign investment friendly,” including Singapore. Womenomics and internationalization are not enough. Japan needs a real entrepreneurial ecosystem (the set of institutions and practices supporting new business ventures).

An Ecosystem for Entrepreneurs. New ventures play important roles in economies, from creating new employment and stimulating macro-economic growth to introducing new products and absorbing displaced labor in economic downturns. The Japan-U.S. bilateral Innovation and Entrepreneurship Council on which I serve just published a White Paper. Our analysis indicates a number of “actionable” policies in the immediate and medium term.  These include government purchasing of products of new firms (“unproven” firms struggle to find buyers) and raising the social profile of entrepreneurs through “celebrating” their risk embracing stories. Some progress has been made for example, in equity financing schemes and new business incubation.

Japan has a unique opportunity to capitalize on its geostrategic position, low corruption, high safety (on the streets and in its products), advanced infrastructure, talented workforce, and a myriad of other strengths. It faces demographic hurdles, to be sure. An aging society and low birth rates if un-remediated will lead to a demographic cliff in the next half-century. However, like any new business in need of money and talent, Japan can start by hiring and promoting its women, internationalization through attracting foreign talent and inward-foreign direct investment and stimulating entrepreneurial ecosystem development. With a bit of tweaking, the Japanese Paradox can be resolved.

Kathryn Ibata-Arens is associate professor in the Department of Political Science at DePaul University.