The miss­ing ar­row of Abe­nomics

Financial Mirror (Cyprus) - - FRONT PAGE -

In his drive to kick-start the Ja­panese econ­omy, Prime Min­is­ter Shinzo Abe, shortly af­ter tak­ing of­fice in 2012, in­tro­duced a large fis­cal stim­u­lus and put in place a bold pro­gramme of mon­e­tary eas­ing. Since then, Ja­panese pol­i­cy­mak­ers have been work­ing to launch what Abe calls the third “ar­row” of his agenda: ar­du­ous re­forms of key in­dus­tries and the de­mo­li­tion of struc­tural bar­ri­ers to growth.

But the fo­cus on public pol­icy has left a “fourth ar­row” – the pri­vate sec­tor – un­touched and seem­ingly ig­nored. This is un­for­tu­nate, be­cause the gov­ern­ment can­not fix Ja­pan’s ills on its own. An­nual pro­duc­tiv­ity growth has been stub­bornly slug­gish, rarely ris­ing above 2% for much of the past two decades, re­flect­ing both missed op­por­tu­ni­ties and de­clin­ing cost com­pet­i­tive­ness.

Ja­pan’s pro­duc­tiv­ity slump per­me­ates the en­tire econ­omy; la­bor and cap­i­tal pro­duc­tiv­ity gains have nearly stalled in al­most ev­ery sec­tor – even in Ja­pan’s sig­na­ture ad­vanced man­u­fac­tur­ing in­dus­tries. La­bor pro­duc­tiv­ity in the trans­port-equip­ment sec­tor, for ex­am­ple, is barely half that of Ger­many.

This trend puts an­nual GDP growth on course to av­er­age only 1.3% through 2025, im­ply­ing a third con­sec­u­tive decade of stag­na­tion. Such an out­come would co­in­cide with – and ex­ac­er­bate the ef­fects of – an ad­verse de­mo­graphic shift that will con­strain fis­cal rev­enues and drive up costs for uni­ver­sal health care and pen­sion benefits.

Ja­pan’s abil­ity to al­ter its tra­jec­tory de­pends on in­di­vid­ual com­pa­nies mak­ing de­ci­sions to in­vest, change work­place poli­cies, deploy new tech­nolo­gies, and test un­tried busi­ness mod­els. Abe’s struc­tural re­forms will take time and po­lit­i­cal will to en­act, but Ja­panese com­pa­nies can­not af­ford to sit still. They can and must act, with­out wait­ing for the gov­ern­ment to change its poli­cies. In many cases, the econ­omy’s bot­tle­necks are not reg­u­la­tory in na­ture, but stem from en­trenched ways of do­ing busi­ness.

New re­search by the McKin­sey Global In­sti­tute ex­am­ines Ja­pan’s ad­vanced man­u­fac­tur­ing, re­tail, fi­nan­cial ser­vices, and health-care in­dus­tries in de­tail – and finds sub­stan­tial un­tapped pro­duc­tiv­ity po­ten­tial in ev­ery area.

For starters, Ja­panese firms must be­come more glob­ally in­te­grated. Ex­port­ing to the fastest-grow­ing over­seas mar­kets is one ob­vi­ous route to over­com­ing slug­gish de­mand growth at home. But, rather than just sell­ing prod­ucts abroad, Ja­panese en­ter­prises need to ex­pand op­er­a­tions be­yond their bor­ders and cast a wider net for in­ter­na­tional tal­ent.

Ja­panese com­pa­nies have for­mi­da­ble R&D op­er­a­tions, but most will need to re­con­fig­ure them to ob­tain bet­ter re­turns and im­pact. The process must start with an un­der­stand­ing of what the cus­tomer wants and a de­ter­mi­na­tion to de­liver so­lu­tions ac­cord­ingly. Closed and tightly man­aged R&D op­er­a­tions pro­cesses sup­pli­ers.

Ja­panese com­pa­nies will also need to im­prove their ca­pa­bil­i­ties in ar­eas such as mar­ket­ing, pric­ing, and tal­ent devel­op­ment. While there are some pock­ets of ex­cel­lence, most Ja­panese firms are se­verely lack­ing in th­ese ar­eas. To com­pete in global mar­kets, they will need to achieve the same con­sis­tency in th­ese ar­eas that they have in their tra­di­tional ar­eas of strength.

Many Ja­panese com­pa­nies have yet to dig­i­tize pa­per-based pro­cesses and re­place out­dated in­for­ma­tion-tech­nol­ogy sys­tems. Oth­ers would ben­e­fit from mov­ing be­yond ba­sic digi­ti­sa­tion to next-gen­er­a­tion tech­nolo­gies, such as big-data an­a­lyt­ics. Com­pa­nies can also head off loom­ing la­bor short­ages with in­tel­li­gent soft­ware sys­tems and ro­bot­ics. Man­u­fac­tur­ers can aug­ment or re­place their as­sem­bly lines with tech­nolo­gies such as the In­ter­net of Things and 3D print­ing. More broadly, Ja­panese com­pa­nies have to or­gan­ise for per­for­mance and dis­ci­pline. As pol­icy changes un­leash mar­ket forces, busi­nesses will face greater com­pe­ti­tion. Some may need to re­or­gan­ise or exit un­prof­itable mar­kets; oth­ers may have to un­der­take merg­ers and ac­qui­si­tions to achieve economies of scale.

Fi­nally, share­hold­ers and se­nior ex­ec­u­tives should tie per­for­mance goals to in­cen­tives. Some of Ja­pan’s cor­po­rate gi­ants have al­ready be­gun shift­ing from tra­di­tional se­nior­i­ty­based ad­vance­ment to­ward merit-based pay struc­tures. Oth­ers should fol­low their lead. Pro­mot­ing younger and more di­verse tal­ent can cre­ate ag­ile or­gan­i­sa­tions with fresh ideas.

If Ja­pan’s pri­vate sec­tor rises to the chal­lenge, it can move the econ­omy onto a path of faster growth. In­no­va­tions in one com­pany would cas­cade across its en­tire in­dus­try by forc­ing com­peti­tors to raise their game. In the 1950s and 1960s, for ex­am­ple, Toy­ota in­tro­duced more ef­fi­cient pro­duc­tion must be in­volv­ing trans­formed into more fluid, col­lab­o­ra­tion with cus­tomers open and pro­cesses that were au­to­mo­bile in­dus­try.

In­stead of set­tling for a fu­ture of 1.3% an­nual GDP growth, Ja­pan could at­tain roughly 3% an­nual growth through 2025. Do­ing so would re­quire the growth rate of labour pro­duc­tiv­ity to more than dou­ble, but this is an at­tain­able goal. More than half of this growth in­cre­ment can be met by adopt­ing best prac­tices that com­pa­nies around the world al­ready use, while tech­nol­ogy can close much of the re­main­ing gap.

Ja­panese busi­ness lead­ers need to com­bine big think­ing with a fo­cused at­ten­tion to de­tail. They will need to cre­ate in­no­va­tive prod­ucts, pen­e­trate new mar­kets, and make bold in­vest­ments in equip­ment, tech­nol­ogy, and tal­ent, while si­mul­ta­ne­ously scru­ti­niz­ing ev­ery as­pect of their op­er­a­tions for in­ef­fi­ciency and waste.

Tra­di­tional ways of do­ing busi­ness may have to be aban­doned. But there is am­ple scope to make progress and spur faster eco­nomic growth. Im­mense trade flows, the rise of bil­lions of new con­sumers in the emerg­ing world, and tech­nol­ogy break­throughs are rapidly trans­form­ing the global econ­omy. Ja­pan can shift its cur­rent tra­jec­tory by turn­ing this wave of dis­rup­tion into op­por­tu­nity.

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