How Japan Can Grow

Japan’s economy has been in the doldrums for so long that many Japanese seem to have adopted a resigned attitude ofSho ga nai (“That’s life”) toward it. But Japan, of course, can become competitive again, provided its political and corporate leaders take on four difficult but essential tasks.

The first task is to instill a commitment to growth. Since Japan’s economy grew on average by only 1% in the 10 years from 1992 to 2002, many Japanese have come to see “no growth” as the norm. This self-defeating view must be overcome, and specific reforms can help. For example, Japan’s corporate tax rate is simply too high to induce firms from other countries to invest in the country. Given the unique abilities of Japanese workers in such industries as microelectronics and robotics, the government should create an investment climate and offer tax incentives that encourage corporations to set up shop in Japan.

In addition to foreign direct investment, another crucial element of growth is consumer spending. Younger Japanese in particular are in need of help. A reform of inheritance taxes —which have a top rate of 70% — would put more spending money in the pockets of younger consumers. Similarly, housing policy should be revised so that younger people can buy their own homes more easily. Such changes would stimulate the economy and begin to reverse the no-growth attitude.

A second task of Japan’s leadership is to push for more and faster change. Many Japanese still believe in the value of the present system, which for decades generated great economic power and strong social cohesion — as can be seen, for example, in low unemployment, crime and divorce rates. But several aspects of that system are not serving the Japanese people well. Deregulation has helped make some parts of the economy more dynamic, but much more is needed in sectors that have been highly protected by politicians and bureaucrats —agriculture, finance, banking, transportation and construction. Civil servants who strongly resist change should be replaced, and the media should push firmly for the dismantling of needless bureaucracy. In the private sector, Japanese CEOs should spend less time on external activities and more time acting as change agents in their own organizations.

The third task is to rethink Japan’s relationship with the rest of the world. Consider that only 0.15% of the labor force consists of foreigners, compared with 3% in Taiwan, 7% in Malaysia, 8.8% in Germany and 11.4% in the United States. The government must reform immigration laws and make it more feasible for foreign talent to work in Japan; in the private sector, more Japanese managers should be acquiring international experience. And because English is the lingua franca of business, more Japanese should be encouraged to achieve fluency in that language. Japan should also make better use of its proximity to China. Some inefficient Japanese manufacturing plants have been relocated there; more should follow. In addition, China’s strong consumer growth makes it an ideal extended “home” market for Japanese companies.

The final task facing Japan’s leaders is to stimulate human capital development in companies and universities. Although many Japanese executives today talk about moving away from a seniority-based system toward a meritocracy, implementation is slow. The viability of lifetime employment in a slow-growing economy and a graying society is highly questionable. It is critical for companies to develop the next generation of executives on the basis of performance. Similarly, academic culture must be changed. Cross-functional teaching and research should be emphasized, and students should be taught to think more creatively. As is true in the workplace, foreign talents need to be attracted to the universities and the English language should receive greater emphasis.

The changes outlined here will not be easy to bring about — old beliefs and ways die hard. But changing demographics and selective, but growing, public concern are bringing pressure to bear on the old formula for competitiveness. What is needed now is the mobilization of a broad base and a commitment to change. It’s time for political and business leaders to step up to the challenge.