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What went wrong?

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This is Japan’s eternal question.  How did we stumble so badly?

Our recovery after World War 2 was simply stunning.  Sure, we benefited the American security umbrella, aid and open markets.  The democratic politics and market economics they imposed on us helped too.  But our GDP per capita had already recovered to pre-war levels by the early 1950s. Amazing! 

Our rapid economic growth would continue through the 1960s, surpassing West Germany to become the world second largest economy by 1968.  In 1964 we hosted the Olympic Games (a first for Asia), and witnessed the first bullet train. 

There is a lot of debate about whether we developed thanks to or in spite of our famous bureaucrats.  But what is certain is that we developed first class enterprises which conquered world markets, and when the walls of protectionism were erected, they sneaked behind through foreign investment.  These were enterprises which taught the world much through our just-in-time management, lean production and continuous improvement.

But it was not just business, our culture was vibrant with writers like Kawabata Yasunari, Oe Kenzaburo and Yukio Mishima (the first two won Nobel prizes), music composers such as Tōru Takemitsu and flim makers like Akira Kurosawa.

Our society was also vibrant with an activist student movement.  Remember the 1968 student protests against the American military in Japan at the height of the Vietnam War.  Could you imagine today’s students protesting about anything?  Not likely!  These boys dressed up like girls and girls dressed up like dolls have no passion or commitment for anything.  But we are to blame, we made them like that.

How did all come to an end?  One clear reason was hubris in the 1980s.  It went to our heads.  We thought that we were better than the Americans.  We made lots of crazy investments in the US.  Lending based on business relationships rather than credit and risk assessment does not work.

In many ways our great economy hid weak politics.  When the economy is humming along, we don’t have much need for politics.  But when we need to change course, politics is necessary to deal with the vested interests blocking reform.  And block reform they did after the bubble burst.  This is when you need leadership.

More fundamentally, Japan needed a new national goal.  It was always driven to catch-up with the West, but once this was achieved, what to do? 

This was exacerbated by the end of the Cold War.  As we needed the US to lead us in a new direction, the US was now less interested in us.

We stumbled through the 1990s, as tepid recoveries either petered out or were killed off by policy errors.  A mini-boom under Prime Minister Koizumi can us a false sense of hope.  But when the global financial crisis struck, we seemed to be best prepared, but we were worst hit.

But throughout the whole two decades of crisis, the world was changing, but we did not move with it.  In the 1990s, Japanese enterprises were caught with an excess of debt, people and capacity.  But they were too slow to work them off, especially the excess of staff.

The slow cost-cutting led to the spiritual death of life time employment especially with the concurrent rise of shareholder capitalism.  Company loyalty began evaporating.  Once the corporate restructuring was through, management mentality had changed.  They became cautious and conservative.  They stopped borrowing and accumulated vast sums of savings.  All they look to do now is outsource.  Even R&D is increasingly outsourced in advanced industries like pharmaceuticals.

Japan was initially a star of globalization through its export-driven and then foreign investment driven growth.  It grew with the US and EU.

But the world has now changed, with emerging Asia being the global growth pole.  Japan must now grow with Asia.  But to some extent, Japan is being bypassed by Asian-led globalization.  Japanese corporate technology is still ahead of Korean companies like Samsung, but when it comes to managing and using this technology, Samsung is way ahead. 

We need to be responsive to local markets, adapt products and do R&D locally.  This means hiring local staff, and taking talent management seriously.  But talented local managers do not want to work in Japanese companies with our unique and insular work practices.

The government and Keidanren, the Japanese Business Federation, know that we desperately need highly-skilled migrants -- although we are still very closed to migration, skilled migrants are very welcome.  But the highly-skilled only account for about 10 per cent of our total immigrants, the lowest of the OECD countries.    

Non-Japanese are not keen on working in Japanese companies.  Our global companies do not offer a global environment.  Communication is difficult.  No-one speaks English.  Japanese business practices are so quirky that they are irrelevant to the rest of the world.  Our crazy lack of work-life balance makes life difficult for families. 

And with our low salaries, seniority-based promotion, inflexible labor market (it is difficult to change jobs), Japan is not an attractive place for the highly skilled.  Japan is also not an attractive place for our own youth who feel repressed by the older generation with its age- and seniority-based hierarchy system.  Our youth seem to have lost spirit.  Without meritocracy, we will get nowhere.

All this is limiting our capacity to participate in global knowledge networks – as does our weak levels of inward foreign direct investment which mean that Japan’s own skilled workers suffer from a lack of global exposure.  The government would now like to increase the number of foreign students to 300,000 by 2020 and promote the globalization of Japanese universities (“Global 30” program), but the response of foreign students has been lukewarm. 

Not surprising, as our universities rank low on international scales, and few of our professors travel overseas.  Foreign students even complain that they cannot understand the English of Japanese professors when they teach international courses.

We need a political system where politicians can think and make policy with a long term perspective.  The election of the Democratic Party of Japan over a year ago was promising.  Although they have made a mess of things, Japan is going through a period of political creative destruction.  The old system has to be fully dismantled before a new system is rebuilt.  It will take time.  Naoto Kan will be last Prime Minister from the old guard.

It is difficult however to be optimistic.  Japan has a consensus-based society and consensus-based politics.  But fundamentally, we need some consensus-breaking.  Otherwise, we will continue racking up debt, as democracies are wont to do, and be broken by the weight of it all.

Just recently, two Japanese chemists – Akira Suzuki and Ei-ichi Negishi -- won the Nobel prize.  Is that a good sign?  Not yet, they did their major work decades ago!