Going hybrid A special report on business in Japan December 1st 2007 Republication, copying or redistribution by any means is expressly prohibited without the prior written permission of The Economist The Economist December 1st 2007 A special report on business in Japan 1 Going hybrid Also in this section Message in a bottle of sauce Japan’s corporate governance is changing, but it’s risky to rush things. Page 3 Still work to be done Japan’s labour market is becoming more ex- ible, but also more unequal. Page 6 Not invented here Entrepreneurs have had a hard time, but things are slowly improving. Page 8 No country is an island Japan is reluctantly embracing globalisation. Page 10 JapAnglo-Saxon capitalism Have Japanese business practices changed After 15 years of gloom, Japan’s companies have emerged with a new, enough? Page 13 hybrid model a bit closer to America’s, says Tom Standage NCE it was the Walkman. Then it was omy as a whole (see chart 1, next page). Jap- Othe PlayStation. Today it is the Toyota anese rms have restructured, paid down Prius that epitomises Japan’s technologi- their debts and are now posting record pro- cal and industrial prowess. Built by Japan’s ts. The banking system has been cleaned largest company, which is now on the up. Yet despite this progress, Japan still verge of becoming the world’s largest car- faces huge problems. maker, the Prius is a hybrid car propelled Government debt, at around 180% of by the combination of a petrol engine (for GDP in the current scal year, is the highest range) and an electric motor (for energy- for any developed economy (see chart 2, eciency). The Prius was the rst commer- next page). The government will soon cial hybrid car and has become by far the have to raise consumption taxes just to most successful, with sales of over 1m stop the debt from growing. Japan also since its launch in 1997. Although that is a faces a painful demographic squeeze as its modest gure compared with Toyota’s an- population ages and the workforce starts nual output of around 8m vehicles, it has to shrink. This will put a premium on in- transformed the company’s image. Toyota creasing labour-productivity growth, is now known for greenery and innova- which at 1.2% is only half the OECD aver- tion as well as manufacturing eciency. age, largely thanks to the hugely inecient But the Prius also symbolises another service sector, which accounts for 70% of transformation: that of Japan itself. Just as GDP and two-thirds of employment. Ja- a hybrid car combines the distinct advan- pan’s average labour productivity in ser- tages of petrol and electric propulsion sys- vices fell from 88% of the American level in tems, Japan has been developing a new 1993 to 84% in 2003. This highlights an- hybrid model of capitalism that brings to- other of Japan’s problems: its two-tier Acknowledgments gether aspects of the old Japanese model, economy, made up of an ecient, global- In addition to the people named in this report, the author would like to thank Bill Emmott, Chikatomo Hodo, Graham which ran into trouble in the early 1990s, ised manufacturing sector and an inef- Davis, Harold Meij and Endymion Wilkinson. with carefully chosen elements of the cient, inward-looking services sector. more dynamic American or Anglo-Saxon Japan also risks losing its edge in inno- A list of sources is at variety of capitalism. The resulting hybrid vation. Although it spends far above the www.economist.com/specialreports model has been adopted by many rms OECD average on research and develop- and has already helped to transform Ja- ment (R&D) as a share of GDP, this money An audio interview with the author is at pan’s fortunes. After wrenching political is not always put to good use. The Science www.economist.com/audio and corporate reforms, the country in 2002 Council of Japan estimates that Japan’s emerged from over a decade of economic R&D is only about half as ecient as Eu- A country brieng on Japan is at stagnation. Since then the recovery, origi- rope’s and America’s. Entrepreneurial www.economist.com/japan nally export-led, has spread to the econ- start-ups account for only around 4% of1 2 A special report on business in Japan The Economist December 1st 2007 2 rms in Japan, compared with 10% in Eu- ders consolidation among Japanese rms, rope and over 14% in America, and Japan which is necessary if they are to become Weighed down 2 comes bottom in several rankings of entre- more globally competitive. It prevents the Government debt as % of GDP, 2007 estimate preneurship. Despite the might of its big ecient redeployment of labour and a exporters, Japan is also a laggard in global- proper use of women and elderly workers, 0 50 100 150 200 isation, with the lowest levels of foreign di- which will be vital if Japan is to cope with Japan rect investment, imports and foreign work- its ageing population and shrinking work- Italy OECD ers in the . With a domestic market force. The old model hampers entrepre- France that oers little scope for growth, Japan is neurship and innovation in small compa- missing out on opportunities overseas. nies, an important component of a Germany dynamic and responsive economy. All of Canada Time for a new model this acts as a brake on growth. At the same United States Its old industrial model, which formed the time, Japan needs to become more closely Britain basis of the Japanese miracle in the sec- integrated into the global economy, both Spain ond half of the 20th century, was devised to gain access to fast-growing foreign mar- Source: OECD under very dierent circumstances: high kets and to enable competition from for- growth and a pyramidal population struc- eign rms to spur improvements in the ture, with far more young people than old, stodgy services sector. That is why a new, of doing things, at least in some areas and notes Atsushi Seike, a labour economist at more exible model is needed. in some companies. You pick and choose Keio University in Tokyo. This old model In the late 1990s, when Japan had en- which bits you adopt, says Hirotaka Ta- was founded on three main elements: rst, dured almost a decade of stagnation, the keuchi, dean of the school of corporate lifetime employment, in which workers American model seemed to have all the strategy at Hitotsubashi University. Japan spend their entire career at the same rm, answersa reversal from the 1980s, when has tilted more towards the Anglo-Saxon slowly working their way up the ranks; American rms were trying to emulate the model, but wants to go its own way. The second, seniority-based pay, which links seemingly unstoppable Japanese model. debate is about how far to tilt. wages to length of tenure rather than abil- America’s economy was booming, fuelled Sir Howard Stringer, the rst non-Japa- ity; and third, company-specic unions, by a ourishing technology industry. Its nese boss of Sony, the Japanese electronics which promoted close co-operation be- approach seemed more successful at pro- giant, embodies the attempt to combine tween unions and management. moting innovation and growth in the in- Japanese and Anglo-Saxon approaches. Another typically Japanese practice ternet era, and its vibrant start-up scene In our company, as in others, there was a was a close relationship with a main was a far cry from Japan’s staid big-com- lurch towards the Western model, he bank and other companies organised into pany capitalism. says. My job is to manage that without corporate groups known as keiretsu, So policymakers rewrote corporate law alienating Japanese sensibilities. Some of bound together by a web of reciprocal to allow Japanese companies to adopt an the virtues of the Japanese model have to cross-shareholdings. The old model was American-style model of corporate gover- be retained. It is a balancing act, some- well suited to the times: it delivered social nance, and some companies began to times stimulating, sometimes frustrating, stability and cohesion as Japanese work- adopt Anglo-Saxon practices such as per- but there is merit on both sides. It helps ers pulled together to catch up with West- formance-based pay, share options, out- that he is a foreigner but not an American, ern nations, and helped Japan to become side directors, promotion based on ability, admits Welsh-born Sir Howard. the world’s second-biggest economy. pursuit of shareholder value and hiring But the population structure has new employees in mid-career. The bank- Finding the right balance changed beyond recognition and Japan is ing system was recapitalised, cross-share- But now that the economy is growing no longer a developing country, so the old holdings were unwound and companies again, there is much debate about whether model no longer ts and many of its embarked on a programme of restructur- Japan has found the right balance or strengths have become weaknesses. It hin- ing. But a funny thing happened on Ja- whether more reform is neededor even pan’s way to the American modelit never whether it is time to reinstate some of the got there, observes Steven Vogel, a politi- old ways. After the departure of Junichiro A modest recovery 1 cal scientist at the University of California, Koizumi, the charismatic and reformist Japan’s GDP, % change on previous year Berkeley. Many of the reforms met with prime minister who held oce between opposition and were scaled back.