THE POWER TO COMPETE THE POWER TO COMPETE An Economist and an Entrepreneur on Revitalizing Japan in the Global Economy Hiroshi Mikitani Ryoichi Mikitani Cover image: Hiroshi Noguchi Cover design: Seiichi Suzuki Copyright © 2014 by Hiroshi Mikitani. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. 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ISBN 978-1-119-00060-0 (cloth); ISBN 978-1-119-00114-0 (ebk); ISBN 978-1-119-00115-7 (ebk) Printed in the United States of America 10987654321 Contents Introduction Japan Again ix Chapter 1 The Power to Innovate 1 Japan Again 1 The Keys to Revitalizing Japan 4 Keidanren’s Raison D’etrê 7 The Nature of Innovation 11 Schumpeter’s Contribution 15 Building Infrastructure 19 Business Innovation 23 Summary 27 Chapter 2 The Power to Operate 29 Workforce Fluidity 29 Privatization 33 Lifetime Employment 37 Escaping Lifetime Employment 40 Immigration Problems 43 Why English Needs to Be a Common Language in Japan 45 Growing the Population 50 Summary 53 v vi Contents Chapter 3 The Power in Questioning Abenomics 55 History of Abenomics 55 Independence in Finance 59 The Optimal Inflation Rate 62 Halting the Rise of Interest Rates 65 What to Do About Our 1-Quadrillion-Yen Debt 67 The Pros and Cons of Abenomics 70 Summary 75 Chapter 4 The Power of the Low-Cost State 77 The High Cost of Governance 77 How to Reform the High-Cost Structure 83 Addressing the Japanese Disease 87 The United States and Individualism 92 The Impotent Bureaucracy 95 Internationalizing the Bureaucracy 99 Creating Think Tanks 103 Political Appointees 106 What It Will Take to Improve the Bureaucracy 109 Summary 111 Chapter 5 The Power to Succeed Overseas 113 The Decline in the Number of Students Studying Abroad 113 Escaping from the Galapagos Effect 118 The Future of Journalism 121 Media in the Internet Era 125 The Importance of Liberal Arts 131 Ryoichi Mikitani’s Experiences Abroad 134 Summary 137 Contents vii Chapter 6 The Power to Educate 139 Uniform Japanese Education 139 The Education of the Mikitani Family 141 What the Education System Needs 146 Higher Education 151 What People Study in University 154 The Founding of Rakuten 157 The Evaluation System for Teachers 160 The Need for Strategy in the Japanese Education System 162 Summary 168 Chapter 7 The Power to Build Brand Japan 169 Brand Power 169 The Demonstration Effect 174 Brand Value at the National Level 178 Foreign Nationals Working in Japan 183 Making Japan Attractive to Foreign Nationals 186 Japan and the Trans-Pacific Partnership 189 Summary 195 Conclusion What Is the Power to Compete? 197 Japan Uniquely Incorporates and Interprets Cultures 197 Competitiveness as a Platform 200 The Global Logistics Revolution 202 Summary 205 Epilogue 207 Acknowledgments 211 Index 213 Introduction Japan Again We are in a worldwide period of tremendous change, driven by the global information technology (IT) revolution. But not all of Japan has embraced the transformation. The sad truth is that few Japanese political, business, or governmental leaders understand where we are and where we are going. In many important ways, Japan today is the same as it was in the Edo period, when our country was closed off to the world and the leaders of the shogunate1 paid no mind to the changes happening abroad. Even though we are seeing massive global changes in the IT industry, Japan as a whole seems unable to participate in the process. We drift aimlessly. The IT revolution has cre- ated structural shifts that are bringing the world together as if it were one continent. And yet, in Japan, people continue to prefer conventional frameworks, believing that we should enjoy a separate, isolated kind of Galapagos island. People here 1This was the Japanese feudal government headed by a shogun in the Edo period (1603–1868). ix x Introduction do not even try to consider the current global reality. This is as true for cell phones as it is for corporate governance and inter- national accounting standards. I believe that the old guard’s refusal to allow society to change only results in lowered pro- ductivity and weaker competitiveness for Japan. Nowhere is this problem more obvious than in our gov- ernment bureaucracy, which has become so bloated and rigid that it should really be called state capitalism. The continuation of the bureaucracy-led economy can only create a situation in which innovation is stifled; it will not inspire economicgrowth. And as the Japanese economy decelerates, the national debt continues to swell. It is difficult to imagine that this country has a future if we maintain the current spiral of loss in which the public is forced to swallow tax increases just so the government can somehow get by. Japan is a country of rich traditions, culture, and philoso- phies cultivated over a 2,000-year history. We also excel in advanced technology and creativity. We need to share this intellectual and technical wealth. We must not limit our ambi- tions to our own small national borders and become a country of exclusion. Japan should instead become a country of greater openness, one that accepts a variety of people and cultures, and is attractive to people everywhere. This calls for two inter- twined goals: (1) We must work to become the wealthiest country in the world; and (2) we must also strive to become a safe and peaceful country with highly advanced science, technology, and culture. My work with the Japan Association of New Economy is aimed at achieving those goals. First, we must eliminate anachronistic regulations. At the same time, we must develop innovative businesses and services through the use of the Internet and other IT, and connect that innovation to the economic growth of Japan. Introduction xi The second Abe2 administration, inaugurated in Decem- ber 2012, created three councils—the Council on Economic and Fiscal Policy, the Industrial Competitiveness Council, and the Regulatory Reform Council—to act as the “control towers” for the economic revitalization plan popularly called Abenomics.3 As a member of the Industrial Competitiveness Council, I have had the opportunity to debate a growth strat- egy, the third arrow of Abenomics. I combined my thoughts as a business leader on that debate into a proposal entitled “Japan Again.” While working on these issues of government and growth strategies, it occurred to me that I wanted to write a book about the topic. And I knew early on whom I would ask to be my coauthor: my father. My dad, an economist and a pro- fessor emeritus at Kobe University, had often been my debate partner and sounding board as I explored issues around the Japanese economy. He passed away in late 2013, but before that happened, we engaged in a series of discussions about the future of Japan and the global economy. The result of those debates is this book. My father was instrumental in helping me to understand where we are now, what has led us to this place, and what we must do going forward for Japan and for the larger global economy. It is my honor to share that think- ing with you here, in the hopes of continuing the important global conversation he and I started. Allow me to take a moment to introduce my dad: Ryoichi Mikitani was born at the start of the global economic crisis of 1929 in Nada-ku, Kobe. After graduating from the Graduate School of Economics at Kobe University, then called Kobe 2Abe is Shinzo¯ Abe, the 57th (2006–2007) and current Prime Minister of Japan, serving as the second Abe cabinet since December 2012.