Japanese Economy—Economists frequently portray Japan’s economy in a negative light. The conventional view is that Japan’s economy is stagnant, deflation is rampant, the government is heavily indebted, the population is aging, few births, and men dominate the country. With that said, we have seen the country’s old products replaced by new ones from businesses like Samsung and China’s Haier in our homes.
True, these claims are correct. It was only when we were not looking that Ulrike Schaede documented in her recent book that the Japanese economy silently reinvented itself.
Eventually, Japanese manufacturers recognized they couldn’t compete with the South Korean and Chinese firms that had taken control of popular products like toaster ovens, blow dryers, and washing machines. Low-cost advantages had been lost. As a result, they shifted their focus away from low-value manufacturing operations and toward the high-value advanced materials, parts, and components used in Asia’s consumer goods supply chains, particularly in the electronic industry.
Acer’s Stan Shih came up with the grin curve to show the relationship between value-added and various stages of production. High-value activities are involved at both ends of this value chain: first, the design and development of high-tech products, and subsequently, the marketing of those products. Lower-value operations like manufacturing and assembly fall in the middle and are confined mainly to China and South Asia. Both ends of the “smile curve” had to be improved upon.
Japanese businesses, Toshiba and Murata, were responsible for a third of the iPhone’s production value in 2011, according to 2011 research. This was an early hint of a shift in Japanese industry. In contrast, only 3.5% of the overall value was contributed by mainland China during the assembly process (a similar scenario of a high-value Japanese contribution was uncovered in 2019 in a strip-down of China’s Huawei mobile phones).
Some 500 product categories, with an average value of $5 billion, were found to have more than 50 percent market share by Japanese enterprises, according to a Japanese government analysis of over 900 product categories.
As a result, new ties between Japan and East Asia are being established due to the widespread adoption of Japanese technologies. As Korea, Taiwan, and China rely on Japanese inputs, a new competitive equilibrium has emerged in Asia.
However, just because you don’t see a Japanese brand name on your electronics or other products doesn’t mean these brands are tiny, hidden winners. Large publicly traded firms like Mitsui, Mitsubishi, Nitto, Fujifilm, JSR, Showa Denko, and DIC Kaneka are involved. This deep tech innovation strategy has no mastermind or government ministry behind it. Successful Japanese companies are responding to changes in the market with a fresh competitive push.
It’s been interesting to see how Japanese corporations have remade themselves throughout time. In the case of Hitachi, reducing the size of vast conglomerates and focusing on core skills has played a role. When this corporation was big, it made everything from nuclear power plants to toaster ovens and hair dryers. The new strategy has also necessitated massive investments in new R&D capabilities. Companies in Japan also buy innovation by acquiring firms in Silicon Valley and elsewhere.
Tight Culture Impacts Japanese Economy
Japan’s path to rebirth has been long and arduous, and corporate structures and processes have taken a generation to implement. Compared to the more free-wheeling California, Japan’s society and businesses have “tight cultures,” which means tighter social norms (the way you are expected to behave) in place.
American and European observers typically misunderstand how long it takes for change to occur. “Tight societies have more order—they are more coordinated, uniform, and have people who have more self-control,” says Professor Michele Gelfand.
The different countries’ reactions to COVID-19 show the substantial influence of tight and loose cultures. Layoffs and company closures have been avoided in Japan.
However, Japan isn’t stuck in a rut because of its glacial pace of change. In Japan, COVID-19 has sparked a surge in digitization. In the past few years, online education has become more common, and it is now taking over the whole education industry. Zoom’s frequent conferences expose Japan’s academic sector to the rest of the world. Consumers are increasingly purchasing goods and services via the internet.
A performance-based work ethic and an end to Japan’s corporate and bureaucratic cultures could be on their way thanks to Japan’s “salarymen,” who work part of the week from home. COVID-19 may be helping to reinvigorate Japanese business unexpectedly.
The electronic industry is not the only one that is being reimagined. With Toyota, Honda, and Nissan consistently listed among the world’s top automaker companies, Japan’s fuel-efficient and reliable motor cars remain the world’s best.
In the 1980s, CEO Tadashi Yanai transformed Uniqlo from a small Hiroshima store to a global clothing powerhouse. Muiji is introducing the Japanese style to the rest of the world in household goods. And Kinokuniya, which has roughly 100 stores globally, including 12 in the United States, proves that book stores have a bright future.
The innovative economy of Japan is still a source of great pride for the country. Sony, Nintendo, Sega Sammy, and Bandai Namco are among the world’s leading video game publishers. More Japanese architects have won the Nobel Prize for architecture, the Pritzker Prize, than any other nation.
Certain Japanese enterprises have not risen to the challenge of reinvention. As in every country, Japan has its share of inefficient businesses and sectors of the economy. Changing yourself is a never-ending process. China’s “Made in China 2025” plan will require Japan to keep innovating to maintain its technological superiority. As the population grows older and government debt rises, the country’s economy will be challenged on several fronts. Japan appears to be an abysmal creative and innovative powerhouse on the surface.
