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Japan lives at the bleeding edge of good enough

Japan lives at the bleeding edge of good enough

Friday, November 11, 2022, 14:39 GMT+7
Japan lives at the bleeding edge of good enough
A staff member of Telexistence uses virtual reality technology as he prepares to control the company's shelf-stacking avatar robot, designed to resemble a kangaroo and developed to work in a convenience store, during a photo opportunity ahead of its unveiling in Tokyo, Japan July 3, 2020. Photo: Reuters

With growth slowing, demographics depressed and the trade balance in deep deficit, Tokyo wants to incubate startups and put more state money into cutting-edge sectors like semiconductors and next-generation telecommunications. Prime Minister Fumio Kishida says he will put innovation and scientific research at the “centre” of his policy push. Perhaps it shouldn’t be.

There’s no question that flagging innovation is a problem in Japan. In solving it, the government hopes to find an alternative to the ultra-low interest rates Kishida’s predecessor Shinzo Abe rolled out to push growth, a strategy that is losing traction as global inflation rises.

"We believe that instead of interfering in monetary policy, the government should focus on ways to spur innovation that create wealth," said then-Economy Minister Daishiro Yamagiwa in January. That has meant pushing the $1.3 trillion Government Pension Investment Fund to get involved funding startups while removing policy bottlenecks.

In the United States nearly a third of venture capital came from pensions whereas in Japan it is only 3%, according to a Nikkei report.

Another factor is anxiety about the competitive threat from China. The People’s Republic overtook Japan in terms of intellectual property exports over a decade ago.

Japanese patent output has flattened out even as Chinese champions like Huawei file manically away.

The result has been the erosion of Japanese competitiveness in industries it once dominated: shipping, semiconductors, and electric vehicles.

Industrial robotics champions like Fanuc may be next to feel Chinese pressure.

Tokyo has also rolled out incentives for local companies in strategic sectors to re-shore China-based manufacturing operations.

The initiatives are well-intended. However, the blunting of Japan is due more to its failure to deploy existing tools and best practices than invent new ones.

Decades of economic stagnation have trained the private sector to avoid investing inside Japan.

Even now, after the yen has lost a brutal 30% against the dollar since January 2021, Tokyo-based finance executives told Breakingviews on a recent visit that the currency discount is still not attractive enough to convince local companies to put their extra cash to work at home.

Reform dividend

An IMF study shows Japan’s labour productivity, at roughly $40 of GDP per hour worked in 2019, has been the lowest of the G7 countries since 1989. 

The reasons are mostly social: the cult of workaholism that leads Japanese employees to stay in the office even when they have nothing to do, for example.

The corporate tradition of promoting seniority over competence has led to absurdities – like the deputy cyber-security minister who admitted in 2018 to having never used a computer.

“Japanese workers are some of the best in the world,” quipped one private equity executive to Breakingviews, “Their bosses are useless.”

Mediocre middle managers have resisted upgrading clunky legacy software and stuck with obsolete hardware like floppy disks, fax machines and ink stamps for contracts.

Technical glitches, including the failure of the backup system, caused the stock exchange to close for an entire day in 2020.

Mizuho Financial Group’s software and hardware logged 11 system failures in the twelve months ending in February 2021, freezing ATMs and stalling massive transactions even after the lender plowed $2.6 billion into upgrades.

Closing the gap with American labour productivity, at roughly $70 of GDP per hour worked per the IMF paper, could nearly double the Japanese economy in size in theory.

Alternatively, employees could cut pointless office hours in half and spend more time shopping and procreating. Either outcome would be a lot more impressive than the 0.3% Nomura analysts predicted cryptocurrency adoption could add to Japanese GDP.

The world’s third largest economy does have an innovation problem, but it is not a crisis.

It enjoys a standard of living envied by its neighbours; stagnation has persisted in part because complacency is so comfortable. And many domestic products are still superlative.

Nidec claims 80% of the world market for the brushless motors inside hard-disk drives; little-known firms like $43 billion Shin-Etsu Chemical have a stranglehold over profitable niches in silicon wafers and key chipmaking chemicals. Manufacturing process designer Keyence is one of the world’s most profitable industrial consultancies.

Rhetorically, Tokyo aspires to spur innovation and bin obsolete practices simultaneously. Yet politicians naturally prefer distributing tax largesse among capitalists to prying floppy disks out of bureaucrats’ cold, dead hands.

This may explain why the country, which in some ways resembles a robot-powered wonderland, still uses obsolete technology like fax machines. Investing in the future makes for riveting speeches, but Japan Inc will get more from reinventing itself than inventing new things.

Context news

In June 2022 the government of Prime Minister Fumio Kishida unveiled plans to push the Government Pension Investment Fund to increase support for startup companies, as part of Kishida’s “new capitalism” agenda that includes promises to improve human capital, accelerate decarbonisation and upgrade technology.

With growth slowing, demographics depressed and the trade balance in deep deficit, Tokyo wants to incubate startups and put more state money into cutting-edge sectors like semiconductors and next-generation telecommunications. Prime Minister Fumio Kishida says he will put innovation and scientific research at the “centre” of his policy push. Perhaps it shouldn’t be.

There’s no question that flagging innovation is a problem in Japan. In solving it, the government hopes to find an alternative to the ultra-low interest rates Kishida’s predecessor Shinzo Abe rolled out to push growth, a strategy that is losing traction as global inflation rises.

"We believe that instead of interfering in monetary policy, the government should focus on ways to spur innovation that create wealth," said then-Economy Minister Daishiro Yamagiwa in January. That has meant pushing the $1.3 trillion Government Pension Investment Fund to get involved funding startups while removing policy bottlenecks.

In the United States nearly a third of venture capital came from pensions whereas in Japan it is only 3%, according to a Nikkei report.

Another factor is anxiety about the competitive threat from China. The People’s Republic overtook Japan in terms of intellectual property exports over a decade ago.

Japanese patent output has flattened out even as Chinese champions like Huawei file manically away.

The result has been the erosion of Japanese competitiveness in industries it once dominated: shipping, semiconductors, and electric vehicles.

Industrial robotics champions like Fanuc may be next to feel Chinese pressure.

Tokyo has also rolled out incentives for local companies in strategic sectors to re-shore China-based manufacturing operations.

The initiatives are well-intended. However, the blunting of Japan is due more to its failure to deploy existing tools and best practices than invent new ones.

Decades of economic stagnation have trained the private sector to avoid investing inside Japan.

Even now, after the yen has lost a brutal 30% against the dollar since January 2021, Tokyo-based finance executives told Breakingviews on a recent visit that the currency discount is still not attractive enough to convince local companies to put their extra cash to work at home.

Reform dividend

An IMF study shows Japan’s labour productivity, at roughly $40 of GDP per hour worked in 2019, has been the lowest of the G7 countries since 1989. 

The reasons are mostly social: the cult of workaholism that leads Japanese employees to stay in the office even when they have nothing to do, for example.

The corporate tradition of promoting seniority over competence has led to absurdities – like the deputy cyber-security minister who admitted in 2018 to having never used a computer.

“Japanese workers are some of the best in the world,” quipped one private equity executive to Breakingviews, “Their bosses are useless.”

Mediocre middle managers have resisted upgrading clunky legacy software and stuck with obsolete hardware like floppy disks, fax machines and ink stamps for contracts.

Technical glitches, including the failure of the backup system, caused the stock exchange to close for an entire day in 2020.

Mizuho Financial Group’s software and hardware logged 11 system failures in the twelve months ending in February 2021, freezing ATMs and stalling massive transactions even after the lender plowed $2.6 billion into upgrades.

Closing the gap with American labour productivity, at roughly $70 of GDP per hour worked per the IMF paper, could nearly double the Japanese economy in size in theory.

Alternatively, employees could cut pointless office hours in half and spend more time shopping and procreating. Either outcome would be a lot more impressive than the 0.3% Nomura analysts predicted cryptocurrency adoption could add to Japanese GDP.

The world’s third largest economy does have an innovation problem, but it is not a crisis.

It enjoys a standard of living envied by its neighbours; stagnation has persisted in part because complacency is so comfortable. And many domestic products are still superlative.

Nidec claims 80% of the world market for the brushless motors inside hard-disk drives; little-known firms like $43 billion Shin-Etsu Chemical have a stranglehold over profitable niches in silicon wafers and key chipmaking chemicals. Manufacturing process designer Keyence is one of the world’s most profitable industrial consultancies.

Rhetorically, Tokyo aspires to spur innovation and bin obsolete practices simultaneously. Yet politicians naturally prefer distributing tax largesse among capitalists to prying floppy disks out of bureaucrats’ cold, dead hands.

This may explain why the country, which in some ways resembles a robot-powered wonderland, still uses obsolete technology like fax machines. Investing in the future makes for riveting speeches, but Japan Inc will get more from reinventing itself than inventing new things.

Context news

In June 2022 the government of Prime Minister Fumio Kishida unveiled plans to push the Government Pension Investment Fund to increase support for startup companies, as part of Kishida’s “new capitalism” agenda that includes promises to improve human capital, accelerate decarbonisation and upgrade technology.

Reuters

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