Once a leader in innovation, Japan is now averse to risks
For emerging economies, like the UAE, there are plenty of lessons to be learnt from the Japanese model
It is hard to believe that less than 30 years ago there was a seemingly unstoppable economic powerhouse called Japan. The 1980s saw Japan routinely post record annual trade surpluses with the OECD, creating considerable angst in the developed world, and outrage, in the case of the US.
During this period, the Nippon Telegraph and Telephone (NTT) was partially privatised to become the world’s most valuable company; a square foot of property in Tokyo’s Ginza district was priced at $38,000; and Sony’s Walkman transformed the way people listened to music. It was not a case of flooding markets with cheap manufactured goods as China did a decade later. Japan had experienced stellar economic growth in the three decades following the end of WWII, Japanese companies had mastered the science of quality control and their goods were prized for innovation, quality and reliability. The Asian ‘Tigers’ replicated this export-based growth model successfully, and at least one pupil — South Korea — has now surpassed the master in certain areas.
And then around 1990 the bubble burst and Japan has been stuck in a recessionary rut ever since, unable to move forward despite using every type of macroeconomic tool and remedy known to mankind. Meanwhile, the world has not stood still. The Internet has become ubiquitous, the ascendancy of software over hardware is now more pronounced and the rise of the South Korean chaebols — imitators at first but innovators, of late — has seen Japan’s leadership in consumer electronics, memory chips, and even automobiles severely eroded. The attrition continues unabated with aggressive, risktaking Chinese firms now stepping into South Korea’s shoes. Japan finds itself seriously disadvantaged and pushed into an ‘also-ran’ status in fields it once dominated with ease.
The causes of Japan’s two-decadeold recession — probably the longest such period of economic stagnation since the Great Depression — are well known. Economists generally point to a lack of effective demand caused, in part, by a fall in consumption spending. Reasons given are a rapidly aging population with the highest life expectancy in the world and a relatively young retirement age, both of which result in a lower propensity to consume. Coupled with age-old habits of thrift, this leads to a fall in aggregate demand in the economy. Some economists have identified a ‘liquidity trap’ situation, where monetary policy ceases to be effective, causing people to hold their funds in savings. Then, the paradox of thrift kicks in, where increased savings during a recession causes further, even greater decreases in output via what is known as the reverse multiplier effect. The ADB Institute, in a December 2015 paper, has shown that in Japan’s case, it is not so much a liquidity trap that has led to stagnation, but the inability of private investment to respond to low interest rates. Without new investment and capital formation economic growth falters. It would be difficult to see this sort of situation arising in the UAE, where many, if not all, of the conditions that led to Japan’s stagnation simply do not apply.
But, while all these are sound macroeconomic reasons for Japan’s current malaise, a couple of other reasons are often overlooked —reasons that could apply to the UAE and some other countries as well.
The first of these is the aversion to risk taking that is an unfortunate hallmark of the Japanese private sector’s culture. This risk aversion runs all the way up and down the management hierarchy at medium and large companies in Japan.
Many of these (once invincible) corporations were forced in the 1990s to shift manufacturing out of Japan due to cost considerations and the need to stay competitive in the face of a Korean onslaught. But since moving factories to places such as China, Thailand, Indonesia and Malaysia, caused by necessity and survival rather than risktaking, Japanese companies have turned off the risk ‘switch’ almost completely, both inside and outside Japan.
In my business dealings with Japanese firms, including some with very well-known household names and brands, I noticed that senior managers at these companies were not empowered to take even the smallest decisions involving the ‘risk’ of a few thousand dollars without going all the way to the top, where the decision was almost invariably vetoed. It took Toyota decades to decide to finally enter the Indian automobile market even as maverick outlier Suzuki entered when the market first opened up in the 1980s. And even when it did enter more than a decade after Suzuki, it debuted with an outdated model to ‘test’ the market because it was afraid that newer models might not take off.
This over-cautious, hesitant, fearful, risk-averse approach has been the norm with Japanese companies trying to enter emerging markets and has hurt them and been detrimental to overall growth. I believe that this antipathy to risk has caused Japanese manufacturers to yield the competitive high ground and market share to nimbler and bolder rivals from Korea and China.
The second factor is a marked slowdown in innovation, particularly in the area of software. One only has to look at Sony to see how this once formidable consumer electronics innovator has been supplanted by nimbler Korean companies. Today, Sony, the only Japanese manufacturer of smartphones with any significant presence outside Japan, has a worldwide market share of less than 1 per cent, according to IDC, a global intelligence firm. More importantly, it is the 3.8 million or so SMEs in Japan that have failed to innovate, mostly due to a lack of funding in the form of bank lending.
This is where the UAE should take notice—lending to SMEs in the UAE is less than 5 per cent of total bank lending. The contribution of the SME sector to GDP in both Japan and the UAE is huge. Even with the upcoming bankruptcy law in the UAE — undoubtedly a step in the right direction — encouraging risk-taking among start-ups and small businesses must continue in order to sustain innovation and economic growth.
Faced with demographic challenges that will be difficult to overcome, and an economy that refuses to respond to macroeconomic stimuli, perhaps the time has come for Japan to look within itself and unshackle the innovative potential of its small businesses. Its zaibatsus - large business groups— now looking increasingly like dinosaurs in an age of risk-taking and instant decision-making—need to shed their old habits and customs and delegate responsibility down the management chain. As the UAE has shown, it is quick decision-making rather than size that matters. If macroeconomics does not work then maybe the time has come to turn to microeconomics.
Dr Sanjay Modak is Visiting Professor of Economics at the Rochester Institute of Technology, Dubai. The views contained in this article are solely his.
The contribution of the SME sector to GDP in both Japan and the UAE is huge. Even with the upcoming bankruptcy law in the UAE — undoubtedly a step in the right direction — encouraging risk-taking among start-ups and small businesses must continue in order to sustain innovation and economic growth.