Beyond the Myth of the Economic Superpower

As the nation debates the best way to fuel a new burst of economic growth in the twenty-first century, it is important to first have a sound understanding of the factors that propelled Japan’s growth in the past and their applicability to the new global economy.

I do not believe growth in the twenty-first century can be powered by the sort of centrally directed industrial policy in which the government determines the winners and losers, and allocates resources accordingly. Given our rapidly aging society and the continued strength of the yen, some have called on the government to take an active role in channeling resources toward the health-care industry, to encourage a wholesale shift from an export-led economy to growth powered by domestic demand. But it is highly unlikely that investment in things like nursing care services and the treatment of chronic diseases of the elderly can substantially boost total value added on a sustainable basis.

As I see it, Japan’s new growth strategy must be built with a view to achieving annual increases in gross domestic product.

Japan’s Rapid Growth in Historical Context

A clear understanding of the history of the post–World War II Japanese economy is essential to any productive discussion of our growth strategy going forward.

Postwar Japan sustained an exceptionally high rate of growth during a particular period in history, the era spanning the 1960s and the early 1970s. Other countries have had periods of rapid growth as well, and looking back, we can see that while a given country may experience rapid growth at a given time, no country can lay claim to the kind of enduring strengths that guarantee sustained growth from one era to the next. In fact, no nation in history has sustained high-paced economic growth as the norm. We must begin by realizing that Japan’s “economic miracle” was a passing phenomenon of the 1960s and early 1970s, and nothing more.

China likewise has experienced rapid economic expansion since the Communist government introduced market-based reforms near the end of the 1970s. But this, too, is a temporary phenomenon; it seems unlikely to me that China will be able to sustain that level of growth throughout the twenty-first century. I also think that a causal relationship within China is coming to light, where the slowdown in growth leads to social change and also undermines the conditions that have sustained rapid economic growth until now. 

Of course, one can also identify specific historical factors contributing to Japan’s extended economic slump since 1991, known as its two “lost decades”—but that is another subject altogether.

Each period in history has its own lessons to offer. In debating the ideal growth strategy for the twenty-first century, we must take care to draw the appropriate lessons and consider if and how they apply today.

Myth 1: Fostering Growth Industries

I believe we must begin by confronting and debunking the myths about the fundamental sources of Japan’s economic strength, ideas that took hold during the period of rapid economic growth and have long since lost their validity. I refer to these as “the six myths” of Japan’s economic success.

Myth 1 is the efficacy of a national strategy involving the selection and cultivation of key “growth industries.” Steel once enjoyed such a privileged status, as did semiconductors more recently.  At one time, the government hatched plans to build new industrial centers all over the Japanese archipelago centered on heavy and chemical industries. Underlying such policies was the firm belief that the best way to boost industrial development and economic growth was to identify specific industries with high growth potential and build industrial “clusters” around them.

Whatever the success of such policies in the past, recent developments should convince anyone that they are not the path to growth in the twenty-first century.

In the past decade or so it has become increasingly clear that the key to growth lies in the ability of individual companies or corporate groups to “create customers” through innovation. A stellar example is Apple Inc. With the development of the iPod, the firm embarked on a steep growth trajectory by creating whole new classes of customer. The resulting surge in corporate value expanded the resources Apple could devote to further research and development, laying the foundation for the iPhone and the iPad. The same mechanism powered the growth of Facebook from its inception until its stock market launch. Such success stories have demolished the case for government selection and support of specific industries as engines of economic growth. The emerging consensus today is that growth begins, rather, with customer creation.

Myth 2: Japan Inc.

Next we come to the myth of Japan Inc. It is true that Japanese industry has traditionally stressed horizontal and vertical coordination and integration, not only within but also among its large keiretsu business groups. Such integration and coordination created a seemingly monolithic structure—Japan Inc.—that was seen as one of the keys to the nation’s rapid growth. But the reputation of domestic integration and coordination as a force for economic growth has taken a beating over the past two decades.

In the course of the protracted slump that set in after the end of the Cold War, Japanese business leaders saw that however closely Japanese business groups and industries coordinated and cooperated, the possibilities for continued growth were limited as long as participation was confined to Japanese businesses. Japan’s major “trading companies” (sōgō shōsha), for example, found that their extensive domestic organizations were of very little use when it came to competing and expanding overseas. It soon became clear that in the new global economy, the key to growth was transnational capability. With this in mind, many of the Japanese corporate groups that drove domestic growth in the past have sought to generate value added by linking up with other business groups around the world. The growth of global supply chains and the rise of global supply-chain management gave birth to intra-firm and intra-group trade. Over the past 20 years, the belief that Japanese industry can prevail merely by virtue of its domestic vertical and horizontal linkages has been slowly but surely discredited.

Myths 3 and 4: Infrastructure Investment and High-Tech Appliances

Myth 3 is the key role of infrastructure investment. During a particular period in Japanese history, government investment in industrial structure to support key “growth industries” was regarded as a pillar of economic growth. But with each progressive economic downturn over the past 20 years, it has become more and more evident that reliance on public works as an engine of growth is no longer practical, and continuing down that road has led only to massive fiscal deficits. While some measure of spending will always be needed to repair or upgrade aging infrastructure, it should now be evident to anyone that once the industrial infrastructure has reached a certain level, additional spending will not fuel another round of rapid economic growth.

A fourth myth grew up around the Japanese flare for miniaturization, which made possible the development and manufacture of ever more compact and function-packed consumer electronics. Certainly this miniaturization technology once helped Japan dominate the consumer electronics industry, but the rise of the emerging markets as the prime engines of global growth in recent years has not been accompanied by a commensurate jump in global demand for Japanese electronics. Unsurprisingly, many consumers in these countries have opted for non-Japanese brands that lack the latest bells and whistles but can be bought at half the price. And so died the myth of Japanese miniaturization technology as a ticket to enduring economic growth.

Myths 5 and 6: Fine-Tuned Integration and Educated Workers

Myth 5 relates to Japan’s special skill at suriawase, the art of fine-tuning and precision integration, particularly within the vertically integrated keiretsu. It is true that the Japanese excel at this sort of precision integration and harmonization. But with so many parts and processes being outsourced overseas, the benefits of suriawase are greatly diminished. A critical factor underlying this trend was the shift from analog to digital technology; assembly of flat-screen TV sets, for example, is a straightforward process, much like assembling a plastic model from a kit. As a result of these changes, the competitive advantage conferred by Japan’s superior suriawase technology has dwindled, leading to a structural decline in the profitability of Japanese manufacturing.

The sixth and last myth is the enduring economic advantage conferred by the Japanese education system. During the era of rapid economic growth, the relatively high level of education of the average Japanese worker was frequently cited as a major contributing factor. But as East Asian nations have beefed up elementary and secondary schooling, Japanese education no longer seems so special. Japan needs to redefine a quality school education in the light of the skills and abilities needed to succeed in the twenty-first century. Until it does so, no one should imagine that high educational levels are a key to future growth.

At one time it was an article of faith that these six factors were part of a surefire formula for economic growth. Moreover, because the six factors were seen as inextricable parts of an integrated system, we were unwilling to abandon our commitment to any of them, lest their collapse lead to the collapse of others or force a reevaluation of the entire system. All too often, our economic discourse has been circumscribed by an unspoken commitment to the over-arching system built from these six interdependent myths.

Building the Foundation for Growth in a Global Economy

Japan needs to lay a new foundation for economic growth in the twenty-first century. And there can be no doubt that a economic globalization must be a primary consideration in this process.

At the level of government policy, this means making the most of such multilateral frameworks as free-trade agreements and economic partnerships, including the Trans-Pacific Partnership. One reason such frameworks are vital to Japan is that globalization has given rise to an international division of labor within industries, making companies increasingly reliant on parts and materials from overseas. This is becoming the rule even within Japan’s largest corporate groups. And this is now an important means for an industry to display its own uniqueness.

As for the seeds of new economic growth, these are for individual businesses to identify and nurture selectively, using their own corporate resources. And in planning their own growth strategies, they will clearly need to take globalization into account.

In the East Asian context, for example, Japanese businesses will need to decide what part of the industrial pyramid they mean to occupy in a rapidly industrializing region and identify new business areas accordingly. From this perspective, membership in the TPP is vital if Japanese industry is to effectively identify and nurture the seeds of future economic growth. The fierce opposition from within Japan to TPP participation can only be the result of ignorance or a lack of understanding. Japan’s economic and business analysts must make it their mission to dispel such misunderstandings.

What Are Japan’s Strengths?

I have spent much of this essay challenging conventional wisdom regarding Japan’s enduring strengths. But this is not to say that we have no such strengths to build on.

The most important and enduring economic asset of the Japanese people is a tradition of exacting artisanship married to a unique and sophisticated aesthetic. If China is a nation of merchants, Japan is a nation of artisans. Japan has always accorded the highest respect to its master artisans, people who attained the pinnacle of their craft and who were charged with passing on that tradition—including their knowledge, the pride they took in their work, and their uniquely Japanese sense of beauty—to the next generation.

Without suggesting that Japan should model itself on any foreign country in particular, it might be instructive to take note of a recent tendency among world travelers—whether Japanese or foreign—to compare twenty-first-century Japan with Switzerland. Indeed, some have even begun speaking of Japan as the “Switzerland of the East.” What reminds them of Switzerland is probably the beauty of Japan’s cityscapes; the focus on clean water, air, and soil; and a growing impulse to redesign the living environment with attention to beauty and artisanship.

In contrast to the strident self-confidence and assertiveness displayed by some of the rapidly developing countries of East Asia, Japan seems to be in the midst of a major course correction. A renewed focus on artisanship and aesthetics in Japan could have profound repercussions for the broader regional and urban environment. This course correction seems to have accelerated since the March 2011 tsunami.

Finally, I would like to conclude with a few words about Japanese leadership. Japan’s leaders have failed again and again over the past 20 years to lift the country out of its economic stagnation because they have systematically rejected any new solutions at odds with their established belief system, which includes the six myths of economic growth outlined above. It is not far-fetched to regard this failure as a kind of organized resistance to change. Certainly there are many people here whose livelihoods depend on the social systems that have evolved in conjunction with the myths of economic growth. But now that Japanese businesses have come—individually—to accept globalization as a premise for new growth, we need to open the door to new combinations and linkages suited to a new era. Japan’s economic, social, and political leadership should be selected with this capability in mind. When such leadership emerges, it will be a sign that Japan is on its way to a new growth era.

(Originally written in Japanese.)