Japan: The model for post-Brexit Britain?

We aren't the only island nation off the coast of an economic superpower, facing a narrative of decline.

by Paul Simpson
Last Updated: 29 Jul 2019
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Future Business

When cats began throwing themselves into the sea, people in Minamata city began to worry. Soon other ominous things began happening in Minamata Bay, on the southwestern Japanese island of Kyushu. Seaweed stopped growing on the seabed. Birds fell from the sky. And 14 inhabitants, whose voices changed pitch and who found it increasingly hard to walk, see or hear, had to be strapped to their beds to contain the thrashing that preceded a coma and death. 

It may sound like an apocalyptic scenario from science fiction or, given what we know now, an environmental catastrophe. Yet back in 1956, people in Minamata were baffled – and scared. 

Doctors and scientists discovered that the victims were suffering from a neurological disorder (quickly dubbed "Minamata disease") caused by severe mercury poisoning. And the cause? Fish and shellfish that were part of the city’s staple diet had been contaminated with the heavy metal after Chisso Corporation, a large local fertiliser company, dumped it in the waste water.

Corporate and official Japan’s initial response to this disaster was swift and unequivocal. The company paid victims mimaikin (sympathy money) if they promised not to demand compensation. The university researchers who had identified the problem had their funding cancelled. When the authorities finally began dredging toxic sludge out of the bay in 1977, it took 20 years to make it safe.

Official Japan’s response to the triple catastrophe of 11 March 2011 – when the country was struck by an earthquake, tsunami and an accident at the Fukushima nuclear power plant – was not impressive but it was, at least, not veiled in the secrecy that had shrouded Minamata disease. 

Policy paradox

Both disasters illustrate the paradoxes of Japan’s environmental policy, an area where new emperor Naruhito wants the country to become a global leader. On one hand, the nation is leading the charge to eliminate plastic waste, on the other, it still generates 30 per cent of its energy from coal, a proportion the government doesn’t expect to decrease significantly by 2030.

Brad Glosserman is not surprised by such contradictions. "Japan is an infinite onion," says the author of a new book Peak Japan: the End of Great Ambitions, who spent 10 years on the editorial board of The Japan Times and lives in Tokyo. 

The country’s refusal to be explained has confounded many gaijin (foreigners) who have, over the centuries, proved consistently vulnerable to the illusion that they have discovered the "real Japan". 

If there is a real Japan, Glosserman suggests, it lies in the people’s ability to manage so many apparent contradictions while getting on with their daily lives. They understand why Shinzo Abe’s government wants to recruit more foreign workers and, on a personal level, will welcome them. Yet the gaijin who already work there say that company processes and practices – which can be as mundane as not giving them the office keys or refusing to delegate certain tasks – often subtly remind them that their employer is judging them differently.

One particularly intriguing contradiction is Japanese voters’ repeated re-election of a prime minister whose bold global ambitions, surveys repeatedly suggest, they do not share. While the Western media obsesses about Abenomics, it is arguable, as Glosserman suggests, that Abe cares as much about revising the country’s pacifist constitution as he does about the economy. Like many politicians, though, he is astute enough to recognise that this is what most voters really care about.

If you set aside the clichéd "lost decades" narrative, Japan’s economy is not in bad shape. Sure, there’s the national debt – at 256 per cent of GDP, heftier than that of any other major economy – but, as Glosserman says, because that is almost all owed internally, the prevailing view among Japan’s leaders is that it is manageable. That said, debt will have to be paid sometime and the sheer magnitude of it exposes the economy to macroeconomic volatilities even Abe cannot control.

Yet for most Japanese, the "lost decades" narrative of stagflation makes no sense. In 2000, the country’s per capita income (on a purchase power parity basis) stood at $27,910. By 2019, according to the World Bank, it had risen to $45,470. On this crude measure, the Japanese have fared slightly better than the British and French but not as well as the Germans or Americans. It is certainly not clinching evidence that Japan’s days as an economic superpower are over, even though few would argue it is a power on the rise.

Japan will always slip in and out of fashion. In the 1870s, after American gunboat diplomacy had forced the country to open up to foreign trade, Europe’s artists became so besotted by Japanese art, the trend was dubbed "Japonism". In the 1970s, a hard-nosed variant of Japonism emerged in which the Western media and many management theorists became obsessed by the idea that the country was reinventing capitalism. So much so that on 10 May 1971, Sony’s inspirational leader Akio Morita was Time magazine’s cover star. 

So does Japan still have lessons to teach the world in general and, at this strange time in the history of the UK, to British business in particular? The country knows a thing or two about pulling off economic miracles. Japan’s dramatic rise from the post-war rubble was driven, after all, by an act of political will in the form of the Ministry of International Trade and Industry (MITI). It is easy to understand why other national leaders might look at MITI and think "I want one of those." Yet the relationship between government initiatives and business prosperity is a little more complicated. 

From the late 1940s to the early 1970s, MITI took a long-term strategic view of Japan’s economic needs and acted accordingly. MITI’s civil servants had three great advantages: they were effectively building an economy from ground zero with few legacy systems to factor in; their efforts were initially aided by a large, heavily protected home market and they were politically independent enough to make their own financial bets on companies – and industries – they believed would succeed. 

They weren’t infallible. In 1963, they told motorcycle magnate Soichiro Honda that to diversify into cars would be a waste of Japan’s resources. As Honda recalled in a BBC interview: "In those days, the officials controlled everything. But I thought I was free to make what I wanted, and told them: ‘We’re not at war now, you know.’"

Japan Inc was buoyed by the willingness of industrialists like Honda to commit vast sums to research, development, experimentation and engineering. Many of these industrialists – especially in the automotive industry – were also extremely lucky in their choice of competitors. In his seminal book The Reckoning, David Halberstam outlines, in excruciating detail, how Detroit’s Big Three (General Motors, Ford and Chrysler) effectively lost control of their domestic market to the likes of Toyota, Nissan and Honda.

Looking outward, Japan’s carmakers were researching markets, customer needs and production philosophies. They quickly grasped the significance of quality control, as advocated by the engineer W Edwards Deming, regarded as something of an eccentric figure in conformist corporate America in the 1950s.

Global players

The big three were also not driven by long strategic goals (such as Toyota’s ambition to become the world’s biggest carmaker, which it finally became in 2008) but by the need to keep delivering quarterly financial results that met, or better yet exceeded, the expectations of analysts and investors. Unfortunately, despite much posturing by chief executives about the need to think long term, too many British companies still, like their American counterparts, obsess about short-term budgets and results.

Such coups occurred in many other sectors – from shipbuilding to consumer electronics – in which Japanese companies became global players. In a state of denial, many Western incumbents cried foul (with some justification) about Japan’s protectionism, insisted that some of the goods were shoddy (they soon weren’t) and snorted that these products only sold because they were so cheap (a criticism that was both irrelevant and self-defeating).

Many governments have tried to replicate MITI’s success by crafting their own industrial policies. Few have succeeded. As Honda said, in MITI’s heyday, its officials controlled everything. No elected government in the West has willingly delegated such power to civil servants and it is unlikely this will change in Brexit Britain – industrial strategy or no industrial strategy.  

Besides, the lessons of Japan’s 20th-century success are no longer necessarily relevant in 2019. As Japan Inc prospered, MITI struggled to control the agenda, a development accelerated by the digitalisation of the global economy. Whether they like it or not, ministries like MITI are now more likely to succeed if they think more and intervene less. 

This doesn’t mean UK plc can’t learn anything from Japan Inc as it is today. The two countries have much in common. Both island states – and former imperial powers – have noisy neighbours (Japan has China, the UK has Germany and the EU). Both find America simultaneously attractive and repellent. 

Both also have greying populations – 26 per cent of the Japanese are aged 65 or over, compared with 20.4 per cent in the UK. Both have recently invested their faith – and a lot of money – in the restorative power of the Olympic Games. Yet the most significant thing they have in common is that they are both trying to define a new role in the world – and are finding it difficult. As one of Japan’s top business executives declared some years ago: "Japan is lost and moving into the future with no sense of direction."

Fukushima proved the point. A catastrophe of that magnitude could, Glosserman says, have "broken Japan out of its torpor and spurred the country to embrace the kind of radical change needed to restart the growth and optimism of its go-go years". Despite Abe’s apparent decisiveness – he returned to power in 2012 and has led the country ever since – that has not happened.

"With the internet transforming the economy – and the rise of China – it is clear that what Japan needs if it is to retain global influence is to create a more fast moving, entrepreneurial, start-up culture," Glosserman says.

There is a saying in Japanese culture: the nail that sticks out gets hammered in. Today, that philosophy encourages the smartest university graduates to aspire to work for one of the traditional conglomerates, rather than take the risk of joining a start-up. 

Industry estimates suggest that there are 50 start-ups in the US for every one in Japan. Abe wants to rectify this but as Sotaro Nishikawa, the director of innovation promotion at Jetro, the country’s export promotion agency, told The Japan Times: "The roadblocks include an unchallenging environment, a disjointed effort between the government and the private sector to form a start-up ecosystem, and the lack of cross-cultural and cross-industrial communication." Would-be entrepreneurs are also deterred by a culture that regards failure as a personal disgrace, a "safety first" attitude reflected in the terms "wife block" and "parent block".

Last year, Japan’s GDP grew by a modest 0.8 per cent. That isn’t great and it looks even more worrying when you consider the destiny-defining demographic challenge the country faces: its shrinking and ageing population. "There are about 127 million people in Japan," says Glosserman. "And the government has indicated that it wants to stop the decline at around 100 million – which is, in itself, pretty remarkable. What they are saying is that they will accept a 25 per cent reduction in the population. But how do they hold the line at 100 million?"

It’s a good question. In crude terms, if Japan’s population shrinks by 25 per cent, it somehow needs to increase income per capita by 33 per cent just to keep its GDP where it is now.

A new reality

Japan’s story may look like one of lost glories – and in some respects it is – but this is where its lessons lie: the original tiger economy is a test case in managing decline.

Abe’s plans to invigorate the economy include "womenomics", his strategy to get more women into work. Results have been mixed so far. While it is true that one million women have returned to work since 2012, many have only been able to find lower-paid jobs. Women occupy only four per cent of managerial positions, compared with eight per cent in China. 

There’s been more success in increasing the workforce by engaging older workers in a country where most firms still mandate retirement at the age of 60, which is anachronistically low, given that life expectancy has now reached 84 years. Cosmetics company Pola, for instance, sets no retirement age and estimates more than 10 per cent of its 50,000-strong sales force is aged over 70, while sheet-metal business (and Boeing supplier) Kato Manufacturing only hires over-65s.

The simplest way for him to improve productivity, Abe’s adviser David Atkinson insists, is to raise the minimum wage. Real wages in Japan have hardly improved in 20 years and there is a consensus – which doesn’t include the Japanese equivalent of the CBI – that raising it from £6 to around £11 an hour would be good for millions of Japanese people (especially women) in the economy.

Out of the political sphere, the other known unknown that could determine Japan’s future prosperity is the dividend on the new technologies in which Japanese companies are investing heavily – and here the UK should take note. Electric and autonomous vehicles, precise and personalised health data, AI, robots and the Internet of Things are all high on the corporate agenda. Robots are already firefighting, acting as butlers and moving pallets and, in news that will secretly thrill everyone who isn’t a lawyer, a Japanese venture capital firm reckons that its AI programme has passed the bar exam.

Some investment analysts say Japan has SoftBank to thank for inspiring a change of heart within the keiretsu – the network of large Japanese corporations that took on the world in the "go-go years" – to refocus on innovation.

Driven by energetic CEO Masayoshi Son, SoftBank is the world’s largest technology fund and is famous for making huge bets on high-growth scale-ups from Tokyo to Silicon Valley. The most stunning evidence of that new venturing spirit is SoftBank and Toyota’s recent decision to invest $1bn in Uber’s autonomous ride-sharing unit.

A more adventurous corporate spirit may do more for the Japanese economy than the opening of casino resorts (mainly catering to foreign tourists) or the latest stimulus package from Abe’s government. It may also stimulate the small but disruptive start-up scene, which includes ecommerce platform Mercari, reductively described as the new eBay, and valued at more than $500m.  

Experts can argue over whether either the SoftBank effect or Abenomics have made Japan more competitive internationally – in Glosserman’s view, the difference is marginal at best – but few would argue that the PM has succeeded in his central purpose of inspiring a new dawn for the country.

If anything, Glosserman says, the Japanese people themselves are becoming more inward-looking. Fewer Japanese now study abroad, a trend the government is trying to reverse. Leaders of businesses, such as the Sharp Corporation, have highlighted the urgent need to make their corporate culture more outward-looking. Many Japanese companies suffer from "Galapagos syndrome", developing products that suit their home market’s needs but not others. 

Cliché of insularity

Yet the trope of Japanese insularity can be overdone: the highest-grossing movie in the country last year was Bohemian Rhapsody. If you sit outside a Tokyo Starbucks – there are 1,392 in Japan today, with hundreds more planned over the next few years – on a Saturday afternoon and people-watch, you will be struck by the diversity of the clothes Japanese people wear. True, you will still see a few stereotypical dark-suited salarymen but you will also glimpse middle-aged men dressed in tennis club flannels, young women with bright, fluorescent hair and clothes, young men dressed like 1950s beatniks, children who resemble brand ambassadors for Disney and occasionally – although not as often as a few years ago – a geisha in a kimono with an iPhone. 

Japan is changing, embracing diversity with a lower-case "d" while both welcoming, and being alarmed by, diversity with an upper-case "d". In their personal lives, the Japanese are as – if not more – willing to experiment, innovate and try new things than Americans. It is this lesson, perhaps, that Brexit Britain needs to learn most urgently from Japan: that to have any chance of navigating economic and demographic headwinds, you have to look forwards, not backwards.

Main image: Dang Son/Wikimedia (public domain)

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