JAPAN
06 December 2022
The Japanese Economy
The Japanese economic model, which proved so successful during the postwar recovery phase, seems to have lost its luster, according to a recent book by Takatoshi Ito and Takeo Hoshi.
This coming January 2023, I will be teaching Japanese Business and Economy at Tokyo’s Sophia University. So to freshen up my knowledge, I recently read The Japanese Economy by distinguished Japanese professors Takatoshi Ito and Takeo Hoshi.
It is a simply splendid book covering Japan’s economic history and modern trends, along with a solid dose of relevant economic theory. Some of the many issues covered include the Japanese banking crisis of 1997–1998, the global financial crisis of 2008–2009, financial regulation, monetary policy, and fiscal policy.
The book goes on to examine saving, demography, and social security in light of Japan's ongoing demographic transition; industrial organization; labor markets; international trade and international finance; and the Japan–U.S. relationship. It closes out with a chapter on Japan’s two lost decades. Being published in 2020, the book does not deal with the impact of COVID-19 or the Ukraine war.
This book is essentially a textbook, aimed at advanced undergraduate or postgraduate students. But it is written in a very accessible style, and would make good reading for people from business and civil society who have an interest in Japan, and the many lessons that it has for other countries. To give readers of this review a taste of the book’s often fascinating content, I share this section on Japan and Silicon Valley.
“Why did Japan fail to develop its own version of Silicon Valley? This is an often-asked question during the Lost Two Decades and beyond. The lack of a vibrant ecosystem for innovation in Japan like Silicon Valley in California has a lot to do with the Japanese model of economic growth, characterized by its main bank system, lifetime employment, industrial policy, and other seemingly unique institutions, which have been discussed in various chapters of this book. The model worked very well during the catch-up phase of economic growth, but it was not suitable for encouraging cutting-edge innovation…
“Examining the literature on the Silicon Valley ecosystem, Dasher, Harada, Hoshi, Kushida, and Okazaki (2015) identify six institutional foundations for an innovation-led economic growth: (1) a financial system that provides funding for risky ventures; (2) a labor market that provides high-quality, diverse, and mobile human resources; (3) interactions among industry, universities, and government to generate a constant stream of innovative ideas, products, and businesses; (4) an industrial organization where large, established established firms and small start-ups grow together; (5) a social system that encourages entrepreneurship; and (6) professionals that assist in the establishment and growth of start-ups. The Japanese model, which was celebrated for its success in the rapid economic growth period, was the antithesis of the Silicon Valley model in many institutional aspects…
“In IT-related businesses, which are quickly expanding as well as deepening, innovations often come from start-ups. Japanese companies, which are bound by seniority wage and promotion and lifetime employment, are disadvantaged in the industries of fast-moving technology. The steady work well in traditional manufacturing is no longer effective for achieving innovation in the IT and advanced manufacturing sectors…
“Financing risky but potentially high-return projects is another obstacle. As explained in chapter 5, Japanese banks have been strong, and capital markets weak. There is little power or human capital among private equity firms and mutual funds that could channel pension fund allocation to risk capital. The main bank system, which worked fine for supporting the manufacturing sector, which has collaterals, does not work to promote IT companies…
“As mentioned previously, there is a view that innovation and the use of new technology do not occur in incumbent firms, but it does in new start-up firms that can disrupt the incumbents (Klepper 1996; Christensen et al. 2005). Clearly, lifetime employment would be a hindrance to innovation. Productivity increases through promoting IT-related industries are possible only when the labor market is flexible, so workers can move from the labor surplus sector to the labor shortage sector without much financial sacrifice…
“Japan had its own start-ups in the 1940s and 1950s—Sony (established in 1946) and Honda (established in 1948), for instance—that grew into globally known companies. However, we failed to see such an influx of start-ups in Japan in the 1990s and 2000s. Universities, where one expects to see technological innovation that can be developed into vibrant businesses, have not spawned many successful start-ups. Strict rules on professors at Japanese national universities that prohibit them from starting their own companies, the shortage of venture capital firms and angel investors that invest in risky start-ups, and lack of entrepreneurship in universities have all been reasons behind this phenomenon…
“To sum up, the Japanese model of economic development that contributed to high growth and allowed Japan to catch up quickly to the US after World War II had become a drag on Japanese economic growth by the 1980s. As the catch-up phase of economic growth came to an end, and as the engine of growth moved from traditional manufacturing to various software and IT industries, the Japanese model seems to have lost its luster.
It is a simply splendid book covering Japan’s economic history and modern trends, along with a solid dose of relevant economic theory. Some of the many issues covered include the Japanese banking crisis of 1997–1998, the global financial crisis of 2008–2009, financial regulation, monetary policy, and fiscal policy.
The book goes on to examine saving, demography, and social security in light of Japan's ongoing demographic transition; industrial organization; labor markets; international trade and international finance; and the Japan–U.S. relationship. It closes out with a chapter on Japan’s two lost decades. Being published in 2020, the book does not deal with the impact of COVID-19 or the Ukraine war.
This book is essentially a textbook, aimed at advanced undergraduate or postgraduate students. But it is written in a very accessible style, and would make good reading for people from business and civil society who have an interest in Japan, and the many lessons that it has for other countries. To give readers of this review a taste of the book’s often fascinating content, I share this section on Japan and Silicon Valley.
“Why did Japan fail to develop its own version of Silicon Valley? This is an often-asked question during the Lost Two Decades and beyond. The lack of a vibrant ecosystem for innovation in Japan like Silicon Valley in California has a lot to do with the Japanese model of economic growth, characterized by its main bank system, lifetime employment, industrial policy, and other seemingly unique institutions, which have been discussed in various chapters of this book. The model worked very well during the catch-up phase of economic growth, but it was not suitable for encouraging cutting-edge innovation…
“Examining the literature on the Silicon Valley ecosystem, Dasher, Harada, Hoshi, Kushida, and Okazaki (2015) identify six institutional foundations for an innovation-led economic growth: (1) a financial system that provides funding for risky ventures; (2) a labor market that provides high-quality, diverse, and mobile human resources; (3) interactions among industry, universities, and government to generate a constant stream of innovative ideas, products, and businesses; (4) an industrial organization where large, established established firms and small start-ups grow together; (5) a social system that encourages entrepreneurship; and (6) professionals that assist in the establishment and growth of start-ups. The Japanese model, which was celebrated for its success in the rapid economic growth period, was the antithesis of the Silicon Valley model in many institutional aspects…
“In IT-related businesses, which are quickly expanding as well as deepening, innovations often come from start-ups. Japanese companies, which are bound by seniority wage and promotion and lifetime employment, are disadvantaged in the industries of fast-moving technology. The steady work well in traditional manufacturing is no longer effective for achieving innovation in the IT and advanced manufacturing sectors…
“Financing risky but potentially high-return projects is another obstacle. As explained in chapter 5, Japanese banks have been strong, and capital markets weak. There is little power or human capital among private equity firms and mutual funds that could channel pension fund allocation to risk capital. The main bank system, which worked fine for supporting the manufacturing sector, which has collaterals, does not work to promote IT companies…
“As mentioned previously, there is a view that innovation and the use of new technology do not occur in incumbent firms, but it does in new start-up firms that can disrupt the incumbents (Klepper 1996; Christensen et al. 2005). Clearly, lifetime employment would be a hindrance to innovation. Productivity increases through promoting IT-related industries are possible only when the labor market is flexible, so workers can move from the labor surplus sector to the labor shortage sector without much financial sacrifice…
“Japan had its own start-ups in the 1940s and 1950s—Sony (established in 1946) and Honda (established in 1948), for instance—that grew into globally known companies. However, we failed to see such an influx of start-ups in Japan in the 1990s and 2000s. Universities, where one expects to see technological innovation that can be developed into vibrant businesses, have not spawned many successful start-ups. Strict rules on professors at Japanese national universities that prohibit them from starting their own companies, the shortage of venture capital firms and angel investors that invest in risky start-ups, and lack of entrepreneurship in universities have all been reasons behind this phenomenon…
“To sum up, the Japanese model of economic development that contributed to high growth and allowed Japan to catch up quickly to the US after World War II had become a drag on Japanese economic growth by the 1980s. As the catch-up phase of economic growth came to an end, and as the engine of growth moved from traditional manufacturing to various software and IT industries, the Japanese model seems to have lost its luster.