Richard Katz sees light at the end of the tunnel for the perpetually low-growth Japanese economy. In his new book, “The Contest for Japan’s Economic Future: Entrepreneurs vs. Corporate Giants“, Katz declares that:
“For the first time in a generation, Japan has the potential to rewrite its story. On the surface, the economy seems intractably stagnant and politics disappointingly unresponsive. Beneath the surface, reason for hope arises from six megatrends that add up to a tectonic shift in civil society. These include generational shifts in all sorts of attitudes, technological changes that alter the power balance between incumbents and newcomers, shifts in gender relations, the ramifications of the demographic crunch, the stimulative effects of globalization, and the political stresses induced by low economic growth.”
Katz is an experienced economic analyst and writer well-known to those of us who follow the Japanese economy. For two decades, he published “The Oriental Economist Report” monthly newsletter. Now his free “Japan Economy Watch” blog can be read on Substack.
He has contributed articles to the Financial Times, The Wall Street Journal and other prominent publications. The titles of his two previous books – “Japan: The System That Soured: The Rise and Fall of the Japanese Economic Miracle” (1998) and “Japanese Phoenix: The Long Road to Economic Revival” (2003) – reveal the focus of his research.
Japan was once a high-growth economic miracle with its gross domestic product (GDP) rising by about 9% per year from 1953 to 1973. That growth was fueled by a surge in entrepreneurship that saw Akio Morita, the son of a sake brewer, create electronics giant Sony and the son of a blacksmith, Soichiro Honda, build a motorcycle and automaker that grew up to challenge Toyota.
The country enjoyed full employment, a relatively equal distribution of income and social mobility that was a textbook case of the “creative destruction” made famous by Austrian economist Joseph Schumpeter. “The birth rate of new companies,” writes Katz, “was a high 12% [of existing companies], while the death rate was 5%.”
But when the economic growth rate dropped by half following the 1973 oil shock and then to only 1% after the bursting of the stock market and real estate bubble in 1989, Japan’s leaders “slowed down creative destruction in the name of social stability,” entrenching a problem that they are still trying to solve today.
Katz writes:
The private-sector safety net that had made Japan politically safe for economic selection was no longer sufficient. Yet, the perennial ruling party, the Liberal Democratic Party (LDP), refused to launch a large overt government-funded safety net.
Instead, they made a worker’s current job at his current company the prime backup. That led to voter pressure on politicians to prop up even the most moribund firms. The government even subsidized wages to maintain redundant workers, while making it harder for new challengers to replace even inferior incumbents.
Consequently, the birth and death rate of companies has plunged and is now one of the lowest among 27 rich countries. Too few exits mean too few entrants…
Among all rich countries, it is Japan where new companies find it hardest to get the external funding necessary for growth.
So what can be done? Katz analyzes the problem and identifies changes that would help break the logjam. Some of these are straightforward: make it easier for smaller companies to obtain financing, reduce the risk of joining a new venture or changing jobs mid-career, increase productivity by fully utilizing the digital technologies that were not appreciated (or even understood) by the old analog Japan.
This is already happening, hurried along by a new generation of entrepreneurs. Katz notes that:
Out of Japan’s 55 billionaires in 2021, 11 had founded a company within the previous 25 years. This is the biggest infusion of new high-growth companies in decades. What makes these new billionaires different? They’re young, cosmopolitan, and unconventional in their thinking. On average, they started their companies at age 30 and were billionaires by age 42. Many have lived abroad, studied at an overseas university, and/or worked for a foreign company. Most importantly, they had the independence of mind to see gaps in the market—and ways to fill them—to which executives at incumbent firms were blind.
Rather than creating exotic inventions in areas like fintech or artificial intelligence (AI), most of these new billionaires simply use the latest technology to revolutionize existing prosaic businesses: from e-commerce that gives SMEs [small and medium-size enterprises] access to customers that they never had before, to online provision of medical information to doctors, or accounting services to SMEs.
Katz likes “gazelles” – the rapidly growing companies only a few years old that typically account for only about 5% of all firms in rich countries but can account for a third of new job creation and half of productivity gains. But gazelles are rare in Japan and on average the country’s SMEs have the lowest growth rate in the OECD.
Entrepreneurs need more support from the government and the financial system, but they are not getting it. Katz takes former prime minister Shinzo Abe to task for talking up reform but failing to deliver. He faults current Prime Minister Fumio Kishida for promising bold action to promote start-ups but not doing much to turn rhetoric into reality.
One of the most serious problems facing Japan is the division of the labor force into regular full-time employees and non-regular part-time and temporary workers. So-called temporary workers are better described as “non-regular” because they often work as many hours as full-time employees at similar jobs but for less money and fewer benefits.
As a result of corporate cost-cutting, the non-regular share of Japan’s workforce has risen to almost 40%, up from 15% in the 1980s. While regular workers earn 2,500 yen (US$17.36) per hour, non-regulars receive 1,660 yen and part-timers only 1,050 yen.
In addition to creating a class system, this contributes to demographic decline. “Not surprisingly,” writes Katz, “59% of Japanese men 30–34 with regular jobs are married or have been and by age 39, the share rises to 70%. Among non-regulars aged 30–34, it’s just 22%.”
Reversing this trend won’t be easy but it must be done. Fortunately, the pressure on government and corporations to lead a revolution in productivity is inexorably rising as competition from China and elsewhere rises and the working population declines. “There are about a half-dozen governmental measures regarding taxes and procurement that would make a huge difference,” Katz asserts.
There are also many new companies taking advantage of digital technologies to make work more efficient – many more than Katz mentions. These new companies are generally not stratified or bureaucratic and use mid-career hires. A growing number of them are listed on the stock market. For several years now, foreign investors have been chasing them down.
There is a great deal more economic and political analysis in Katz’s 300-page book, including international comparisons and a review of the history of Japan’s political economy that tackles stereotypes including the notion Japanese are inherently risk averse, preferring a lifetime of frustration at an aging corporate elephant to the challenge and excitement of riding a gazelle.
If the book has a failing, it is that even the newer data Katz references is falling behind the curve due to the rapid change in circumstances following the pandemic and the outbreak of the Ukraine and Gaza wars. But that goes with the territory of book writing.
“Imagine what it would mean for entrepreneurship,” Katz concludes, “if Japan’s labor market became far less rigid, mid-career hiring became even more widespread than now, and hourly wages between regular and non-regular workers were equalized. In that case, anyone leaving a regular job to start a new firm, or to work for one, would have a reliable fallback option in case the venture failed, as so many do.”
There is no need to imagine it – you can go see it for yourself.
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