[Opinion] Is Japan a Dying Economy?

After three decades of stagnation, there are signs that some Japanese companies are re-emerging to their former glory, but that's not the full story...

This is a part 1 of a 2-part series. Here I will focus on the glimmers of hope in the Japanese economy. Part 2 will focus on the darker side of the Japanese economy and society as a whole.

If you’ve heard about Japan in the past decades, it’s likely in the narrative of a once great economic giant that is slowly falling into disarray.

The usual story is that Japan suffers from economic stagnation, deflation, enormous government debt, weak entrepreneurship, an aging population, low birth rates, dying regions, an overly male-dominated society, just to name a few ills…

The Japanese products that once filled our living rooms and kitchens seem to all have been replaced by upgrades from companies like Korea’s Samsung and China’s Haier.

There is, of course, truth in these claims, but where we are not looking the Japanese economy has been quietly reinventing itself.

Ever heard of the smile curve?

It is a diagram proposed by Stan Shih of Acer that depicts the relationship between value added and different stages of production.

At both ends of this value chain there are high-value-added activities:

First, the product conception and advanced materials, parts and components; and on the other top the branding and marketing.

In between are the lower-value-added activities of manufacturing and assembly.

As you can see in the graph below, it used to be quite profitable for companies to engage in assembling and manufacturing in the 1960 and 70s, but due to the fierce competition from China and South Asian countries, this segment’s profit margins have been decimated.

Japanese companies, once masters of assembly, have slowly realized that it is impossible to stay profitable in this space. The pivot these massive companies have had to make has been excruciatingly painful. Especially considering they are bound by a culture that values order and stability above all else.

Hence, Japan’s reinvention strategy has been long and slow. It has taken a whole generation to get some corporate structures and processes on board.

However, just because change is slow doesn’t mean Japan is stagnating. COVID-19 has triggered an acceleration in digitalization in Japan that is fast even for global standards.

Online education, once a rarity, is now sweeping through its education sector. Conferences are now frequently held by Zoom, which is exposing Japan’s traditionally insular academic sector to the world. Consumers are buying more online than ever before, and even older generations are finally latching on to the trend. Digital payments are finally taking of, and cashless stores, a completely foreign concept to most Japanese, are beginning to proliferate.

Also, many more Japanese “salarymen” are working part of the week from home, which could signal the beginning of a performance-based work culture. This would spell an end for millions of Japanese “madogiwa-salarymen” or hideout workers that have been able to hide their uselessness by just being present at their offices as much as possible…

COVID-19 may in fact be one of the greatest factors in history for Japan’s re-invention.

So how are Japanese companies reinventing themselves?

Slimming down sprawling conglomerates and focusing on core competencies has been one factor, as highlighted by the case of the mega-conglomerate Hitachi.

This company used to have over 1,000 subsidiaries and did everything from nuclear power plants to toaster ovens and blow dryers. Today, they are in the works to halve that number. The new strategy has also pushed Hitachi to open their massive cash reserves to invest seriously in new R&D capabilities.

Japanese companies, thanks to their risk averseness, have horded cash for decades. This cash is finally being used, not only internally, but also to “buy innovation” by acquiring startups, notably in Silicon Valley.

The reinvention extends beyond the electronic sector.

Take CEO Tadashi Yanai. He has taken Uniqlo from a simple store in Hiroshima in the 1980s to a leading global clothing brand thanks to its innovative combination of quality and low price in the fast-fashion segment. Muiji is giving IKEA a run for its money by bringing world renowned Japanese style and quality items into millions of households. Kinokuniya, a once dying bookstore company, is now proving that big paperback bookstores still have a future, with around 100 stores worldwide.

In the creative economy, Japan continues to deliver. Sony, Nintendo, Sega and Bandai Namco are still world leaders in video games.

In architecture, the same story goes. Eight Japanese architects have won the Pritzker Prize (the Nobel Prize for architecture), more than from any other country.

However, all is not rainbows and sunshine

If you have ever lived in Japan, you’d know just how archaic most of the country still is. How people still use fax machines daily, and how most of Japanese websites look like they stopped developing in the early 2000s.

A lot of Japanese companies are still stuck in their archaic ways of doing business and are unlikely to change any time soon. This problem is especially prominent in Japan’s massive SMB segment, which consist of some 80-90% of overall Japanese companies.

I will explore why this is in part 2 of this series, but in short, one of the main reasons is the Japanese government’s inability to enact any meaningful change.

Compared to China pushes its companies to constantly re-invent themselves and become leaders in tech through its “Made in China 2025” strategy, Japan’s government is so inept its former minister of digitalization did not have an email address…

So yes, the country faces a number of significant economic challenges; it is burdened with an aging population, high government debt and weak productivity. But, below the surface, today’s Japan is much more creative, innovative and agile than it is often given credit for.