When the most powerful earthquake in Japan’s history devastated northern Honshu in March, it rocked buildings in Tokyo, and the tsunami that came after touched the shores of Oregon and Chile. Countries from South America to Canada went on the alert.
The event was, first and foremost, a national tragedy of historic scale; Prime Minister Naoto Kan was right to call it Japan’s most difficult crisis since World War II. But the reckoning will be global. In the most terrible way, the earthquake was a reminder of just how much Japan matters.
Author
Heang Chhor
Heang Chhor is a senior partner at McKinsey & Company, and the former head of McKinsey Japan.
For a start, dealing with the wreckage will place terrific strains on the country’s finances, already burdened by the rich world’s highest level of debt. A generous donor, Japan may cut back on its assistance to poorer countries. Supply chains in a variety of industries were disrupted. Shipments of goods stalled. Commodity prices for everything from oil to rare earths were affected. The long-term effect on the nuclear industry is sure to be profound, with consequences for the Japanese and the global energy supply as well as for continuing efforts on climate change.
But let us remember, too, what the earthquake revealed about the strengths of Japan. The country’s strict and rigidly enforced construction codes meant that the death toll, albeit awful, was orders of magnitude less than it would have been almost anywhere else. The government responded with greater speed, precision, and effectiveness than it did after the 1995 Kobe earthquake; the country’s massive investments in prevention and preparedness clearly paid off. And the citizens of Japan, even in their grief, were models of civility and calm.
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Although we began work on Reimagining Japan long before the earthquake hit, the issues the book addresses are no less relevant in its aftermath. When it comes to the forces of nature, all any country can do is try to anticipate and then to react intelligently. The same is true of man-made forces, and it is these that are at the heart of this volume. Among them: the rise of China; Japan’s aging, shrinking population; a stagnating economy; an increasingly inward-looking orientation; and a turbulent, ineffectual political order. These are among the factors that have led many observers to predict an era of inevitable decline and second-tier status for Japan.
Japan’s long-term decline is a sobering thought—and one that would not have occurred to anyone only a generation ago. Yet this destiny is not the only one available to Japan. The country’s business, government, and social leaders can take practical steps that would allow Japan to forge a very different future. That will be a daunting task, as the essays in this volume make clear. Still, it is far from an impossible one.
In this essay, I offer a 20-year road map that suggests the direction the country should take. Why 20 years? Because Japan must make fundamental changes. The nation will need time to assess the implications of these proposals, to win acceptance for them, and to implement them on a large scale. Reimagining Japan cannot be done otherwise.
Among the priorities: restructuring and globalizing Japanese companies, changing the educational system, adapting to troubling demographic trends, attracting foreigners, and building closer ties with Asia. One consistent element running through this list—and indeed throughout Reimagining Japan—is the need for more openness and collaboration with the rest of the world.
To move in this direction, Japan’s leaders will have to take a number of difficult, unpopular actions—and that’s a problem. I cannot count the number of times I have heard from Japanese leaders, “I agree that we need radical changes but I would never say that.” Such fear of change and, in a larger sense, fearfulness about the future, are forms of anxiety the country can no longer afford. To stay in the global game, Japan needs leaders who will speak frankly, set goals, and inspire their fellow citizens to revitalize the country.
A divided society?
To begin with the problems: Japan’s public debt could reach 300 percent of GDP before long, and the deficits of the pension and health systems are also growing. The population, already the world’s oldest, is beginning to shrink—meaning that there are fewer citizens to buy government bonds or produce the wealth that can finance the country’s debts. The economy is in a third “lost decade” with declining consumption and weakening competitiveness in major industries. Not surprisingly, Japan’s influence on the world is likewise fading.
These facts alone justify full mobilization. But the most urgent reason to act is for the sake of the young. Persistently slow economic growth has produced millions of young Japanese who feel left out or unwanted. Although unemployment is not as high in Japan as in many other places—10 percent among 15- to 24-year-olds and 6 percent among those 25 to 34—the reality is still troubling. The unemployment figure fails to take into account the many women dropping out of the workforce or the huge number of temporary employees, who tend to have lower, less stable incomes. In 2009, they accounted for 34 percent of the labor force, up from 20 percent in 1990.
What happens if these millions of un- and underemployed workers fail to find their footing? Lacking confidence in their ability to contribute, they may hesitate to marry, with social and demographic consequences that cannot be benign. Then consider the increase in rural poverty, the rising number of lonely and struggling elderly, and the uncountable number of alienated people.
Add this all together, and Japan begins to look like something new to itself: a society of “haves” and “have-nots.” For a society that has long prided itself on its cohesive and egalitarian values, the prospect of such a divided society is horrifying.
A 20-year road map for change
Transforming Japanese companies
No country can prosper without a dynamic private sector. Japanese executives, working with the government, should focus on the following issues.
Reducing overcapacity. In industries such as consumer electronics, retailing, banking, and beverages, companies must restructure their domestic operations by selling or swapping underperforming businesses. Japanese companies are often so busy fighting and investing resources in a shrinking domestic market that they overlook other opportunities—for both innovation or internationalization.
Take Japan’s mobile-phone industry. The companies in this sector compete fiercely on price within the domestic market, but none managed to launch a compelling smartphone. That left the field wide open for Apple’s wildly popular iPhone. In other words, Japanese companies have chosen to fight local competitors and preserve overcapacity rather than adapt to fast-changing consumer needs.
Japanese managers avoid reducing capacity in part because doing so might imply a defeat or an acknowledgement that a predecessor made a poor choice and in part because closing or selling businesses and factories costs jobs. These reasons speak to Japan’s enduring social values. In an ever more competitive world, though, these values must evolve. The government could help force the pace by doing more to retrain those who lose their jobs, helping them relocate, and offering additional unemployment benefits. Such measures are costly but essential; several European countries have models worth looking at.
Creating global champions. Global champions are profitable, powerful job creators and innovators boasting leadership positions and the ability to attract the most talented employees. Canon, Komatsu, and Toyota are members of this club; Shiseido and Uniqlo might join it one day. Japan needs many more, particularly in consumer electronics, to compete against Apple, HP, Nokia, and Samsung; in retailing against Wal-Mart, Tesco, and Carrefour; and in banking against Citibank and HSBC.
Mergers and acquisitions could speed up the pace. In recent years, Japanese companies have made a number of bold deals, including Takeda’s acquisition of Millennium, a US pharma; Canon’s purchase of Oce and Suntory’s acquisition of Orangina-Schweppes, both European targets; and Nomura’s absorption of Lehman Brothers Holdings in Europe and Asia. Still, Japan’s record remains relatively modest compared with the scale of M&A among major Chinese, Indian, and Western enterprises. One result: Japanese companies lack top-level foreign talent and global experience in their executive ranks.
Refining the performance culture. In the 1980s and ’90s, Japan’s distinctive corporate structure was widely lauded as a permanent competitive advantage. Now, however, parts of it have clearly become an impediment.
Performance management, for example, has a bad name in Japan, where it is often associated with a narrow, Western, bottom-line mentality. Instead, many companies would rather just gambaru—essentially, “hang in there and try your best.” Too often, Japanese executives measure employees on the basis of input and effort rather than output and effectiveness.
The world’s most successful companies go beyond either of these approaches. They see performance in broader terms, taking into account innovation, quality, talent, and growth. These factors can be difficult to fit into the Japanese context. Pursuing innovation, for example, invites failure. But Japanese executives typically have detailed action plans to guarantee a 100-percent success rate. Unfortunately, the world doesn’t work that way.
Another barrier to innovation and growth is the “we are unique” mentality. Too many Japanese executives resist the idea that they can learn from other companies’ experiences. Many Japanese firms have an “inside-out” orientation: a company creates a product, then presents it to the world. But there should also be a place for “outside-in” thinking: adopting global best practices regardless of their country of origin. Beginning in the 1980s, remember, that is what many US and European car companies did, imitating Japanese practices in detail and improving the quality of their products significantly.
The opportunities of an outside-in approach are almost limitless, particularly given fast growth in emerging markets. General Electric, for example, is developing more than 25 percent of its new health care products in India, with explicit plans to sell them in developed countries as well. Japanese companies should open themselves to such innovative models.
Finally, maximizing performance requires having the right people, with the right incentives, in the right jobs and locations. Japan’s tradition of lifetime employment for managers, for all its virtues, has become a handicap because it prevents, or at least slows, the renewal of talent and fresh thinking. More flexible policies are necessary. Along those lines, Japanese companies must develop more effective career paths, internal training, and personnel systems. In many large corporations, younger employees can spend their first five to ten years in roles that barely tap their potential. They need more stimulating assignments, to learn by doing, to take risks, and to interact with foreign cultures. Recruiting mid- to senior-level managers from other Japanese and foreign companies must also become more routine.
Unleashing entrepreneurship. After World War II, an exceptional group of entrepreneurs, including the founders of Toyota, Honda, Sony, and Matsushita, led the country’s march to prosperity. As Japan became more successful, however, later generations became less interested in taking risks. Instead, Japan’s best and brightest opted for the security of lifetime employment in big companies or for the prestige of government ministries.
That career model is limiting; Japan should actively encourage young people to dare to be entrepreneurs. Creating a vibrant culture of entrepreneurship requires a big change in educational philosophy (see below) and concerted efforts to take advantage of the country’s excellent engineering and technology resources. Government and the private sector could, for example, start a venture capital fund aimed at promoting next-generation businesses through open innovation. Encouraged widely, the spirit of entrepreneurship might in turn fuel risk and initiative taking inside bigger organizations. The country’s leaders should encourage a Silicon Valley mentality so that more young people follow the path of the high-energy Japanese entrepreneurs who have created success stories like DeNA, Nitori, Rakuten, and SoftBank.
The case for radical educational reform
Japan’s future prosperity depends in large part on transforming education. The system produces too many graduates who are not especially useful to Japanese companies struggling to compete globally. The scale of the challenge requires mobilizing the country’s political and business leaders. Incremental efforts—or, worse, inertia—will stunt Japan’s long-term competitiveness.
Developing more independent-minded students. A reformed education system should seek to develop graduates who are mature, independent thinkers willing to lead. Japan should reduce the emphasis on rote learning in favor of a curriculum that encourages students to think critically, express their views, challenge conventional beliefs, and talk openly.
Creating global citizens. Comparatively few Japanese study abroad—and the number is falling. Meanwhile, there are more overseas students than ever from China, India, and South Korea. Japan should seek to reverse this troubling trend by, for example, making it compulsory for university students to spend a year outside Japan. Educators should also encourage more exchanges between Japanese high-school students and their counterparts in other countries.
Here is a specific idea: Japan should create a national program to send 100,000 students or employees overseas each year, for at least one year, with, say, a $25,000 to $50,000 government subsidy. One could also envision giving 100,000 young foreigners the same subsidy to encourage them to study in Japan for a year or two. These two programs would cost $5 billion to $10 billion a year, a trifling addition to the country’s trillion-dollar annual budget. And think of the payoff: in ten years, Japan could have a pool of one million workers with international experience and one million foreigners familiar with Japan.
Another bold but challenging move would be to make English a second national language, with schools teaching it from a young age. Taking drastic action to promote a wider role for English could be transforming. If Japan were to do so, by 2030 millions of young Japanese would have the language skills to work abroad. Japanese companies would be better equipped to sustain their global presence. And more tourists might be attracted to Japan if they could communicate more readily.
Reconnecting with business. Japan must produce more students with skills that match the needs of its companies. University students should have more work experience before graduating; for example, internships should be a compulsory part of the curriculum. (One-year corporate internships have become the norm in the leading graduate schools in countries such as France and Germany.) Getting more business leaders to sit on the boards of Japanese universities would also help; executives could help to make academic programs more business friendly.
Making leading Japanese universities regional academic centers. Universities could merge their best research assets, human and physical, to turn themselves into regional research centers that attract the best students and teachers from around Asia and the world. English should be the language of instruction. This approach could inject into Japan an element of diversity and creativity that it needs. The country should build on the disciplines in which it excels or would like to excel—clean technology and health care, for example—making it more attractive for top talent in those disciplines to relocate.
Turning demographic change into opportunity
Japan’s population is getting older and smaller. By 2030, people over 65 years of age could account for one-third of the population, compared with 20 percent in 2005. This dramatic demographic change contains the seeds of opportunity.
Developing businesses related to seniors. Savers 55 years old and above hold 70 percent of Japan’s $16 trillion in financial assets. In the cosmetics sector, some companies are producing brands specifically for women aged 50 and older. Retailers could invest in home delivery for consumers who can’t or don’t want to go to a store. Older consumers may need electronic devices with simple touch screens that make ordering straightforward. Travel and entertainment companies, which currently focus on younger consumers, could greatly expand offerings for older people. These models, fine-tuned at home, could help Japanese companies in their globalization efforts as the population ages in many parts of the world.
Becoming a world center of excellence on aging. Other countries will eventually face similar demographic challenges, including how to deal with a large elderly population and what to do about the depopulation of rural areas. Japan, however, will be dealing with all of this first. It should seek to become the place others look to for expert advice on caring for seniors, providing them with health care, managing pensions, and related issues.
Taking advantage of a highly educated female workforce. Japan is wasting the talent of its women. The country no longer has the luxury of holding back so many of its highly educated and most productive citizens. Cultural issues notwithstanding, as Japan’s population shrinks, there’s no getting around the need to make women a more important part of the formal workforce. Just 70 percent of women remain in it following marriage; that percentage drops to about 50 percent after the birth of the first (and often only) child.
In Japan, retaining women in the workforce after they start families will require improving the country’s child care infrastructure. While about 50,000 children are on the official waiting list for nurseries, the true figure is more like several hundred thousand. Companies must speak out forcefully—their long-term interests will be served by maximizing the number of qualified workers.
Demographic trends also suggest that Japan should provide incentives for young couples to have more children. It could learn from countries that have reconciled a higher fertility rate—the average number of children born to a woman in her lifetime—with a higher workforce participation rate for women. Sweden, for example, has increased its fertility rate from 1.5 in the late 1990s to 1.9, and 80 percent of Swedish women 25 to 49 years old are employed. Both figures are substantially higher than those in Japan.
Seeing immigration as a source of possibility. The Japanese government obviously has the right to decide whether to open the country’s doors wider and, if so, how. Less than 2 percent of Japan’s population is of foreign origin—the lowest percentage in the Organisation for Economic Co-operation and Development (OECD). Immigration is a controversial issue in Japan, as it is in many countries. But there’s a difference between mass and selective immigration. The government and business must develop a plan to attract the right talent.
One could imagine at least three entrant profiles: students, service workers, and corporate managers. As mentioned, foreign students would arrive in the context of a Japanese program offering education and experience in regional research centers. They might later stay on to work for Japanese organizations.
As the population ages and more women enter and remain in the workforce, demand for nurses, babysitters, retail clerks, and construction workers will rise. For this population, the biggest obstacle is the Japanese language; there is no easy solution here. Intensive courses in Japanese will be necessary but so will increasing the number of English-speaking Japanese supervisors and co-workers.
Companies desperately need the outside perspective that foreign managers could bring, and thousands of young US and European managers are looking for opportunities in Asia. Japan should try to capture its share of these talented workers and not let most of them go to China, where jobs are easier to find.
Ingesting such an influx, even if it is well regulated, will not be easy. But it is important to consider the possibility that a virtuous cycle could begin to form. That is, as Japan becomes more diverse and more global—accepting more foreign-born workers and becoming more comfortable with the outside world—the idea of immigration could be less daunting and perhaps even routine.
Looking to an Asian future
The United States and Europe will remain important markets and partners. But Asia will be an even more formidable source of opportunities: the region’s markets are growing faster than those of the United States and Europe; they are also an increasing source of demand for Japanese companies. Japan needs the growth that comes from exports to Asia. (China is already Japan’s leading trading partner.) In fact, Japan can leverage its technologies to foster integration with Asia and benefit from its vitality.
As the region’s most advanced and second-biggest economy, Japan can capture significant business opportunities in sectors from telecommunications to health care. It can also use its technology and know-how to help Asia grow. India, for example, could benefit from Japan’s expertise in infrastructure and China from its experience in combating pollution. Japan’s government says it wants to increase infrastructure exports such as high-speed rail and water-related projects. South East Asia is fertile ground for Japanese investment, and Japan is determined to help Association of South East Asian Nations (ASEAN) in its connectivity infrastructure initiative.
The country must also continue to pursue free-trade agreements. In October 2010, Japan and India concluded such a deal; there’s huge potential in the relationship. In 2009, bilateral trade between India and Japan came to only $10 billion, compared with more than $250 billion between China and Japan. In general, Japanese farmers oppose free-trade pacts, fearing competition from lower-cost producers. But the rest of Japanese business—not to mention consumers—stands to gain considerably from reduced tariffs.
Japan could benefit from allowing more Asians to study, work, and settle in the country. In return, Japan could use its retired and older unemployed managers to train workers, teach, run factories, and build schools and hospitals in the region. Such projects would help redundant Japanese workers contribute to society and promote closer relationships with Asia. When those economies grow, they become bigger markets for Japanese products.
Leadership for a new era
How can Japan carry out these challenging reforms? The answer is clear: leadership. This was true before the natural disasters of March 11; it is even more true in their wake. Japanese leaders will have to restore confidence and act boldly to get Japan back on track. In the 1970s and 1980s, US and European companies were caught resting on their laurels, and Japanese executives took advantage of the West’s sluggish innovation, poor product quality, and ineffective manufacturing practices to build market share around the world. Japanese managers then exhibited exactly the right leadership qualities: high aspirations, creativity, risk taking, open-mindedness, and the ability to change. These were coupled with detailed planning for large-scale execution, discipline in implementation, and a standardized approach to internationalization.
Japan’s success woke up the competition, which worked hard during the 1980s and 1990s to improve efficiency and quality. As a result, many companies in China, India, South Korea, and the West have learned to execute as well as the Japanese did—and sometimes faster. Execution in Japan has become a source of weakness. Decision making is much too slow at a time when anticipation, rapid adaptation, and the ability to make radical changes are the keys to success.
Moreover, the leadership skills that made Japanese companies so successful in the 1970s and 1980s have not been transmitted to the present generation of managers. There is a lack of independent thinking for bold strategies—especially internationally driven ones—and for radical change. Risk aversion is the rule. In sum, Japan and its companies do not have enough leaders to address all the challenges.
Making leadership and performance a priority
Japanese companies are led by well-meaning and committed people who want to do the right thing. The problem is that they don’t always know how. They are brilliant at running the trains on time but much less so at 21st-century skills such as evaluating risks, appointing the right people, and developing a long-term vision. Executives urgently require coaching and incentives to become more performance oriented. The emphasis should be on taking initiative, focusing on results, and confronting difficulties—not on how hard executives try or how adept they are at building consensus. Risk taking should be encouraged, and failure should not cost executives their chances for promotion. Companies such as Recruit, SoftBank, and Takeda exemplify such an approach, but they are outliers.
Today, a typical Japanese company brings managers along very deliberately. In their first years on the job, their skills develop at an achingly slow pace and they have limited responsibilities. This model is out of step with modern corporate challenges. The leadership qualities required of today’s executives must be taught and allowed to flourish among people at younger ages—in universities, when students join companies, and when they become managers.
Globalizing corporate management
Hundreds of capable foreign executives could fill jobs in Japanese companies, injecting new ideas and energy. The counterargument, too often heard, is that Japan’s unique management style must be preserved because it is embedded in the country’s unique culture. This notion is an excuse for stasis; moreover, it is no longer persuasive, given the glaring competitiveness issues in too many Japanese industries.
Of course Japan is unique. So is Germany, for that matter, or Canada; the difference is that in these countries, corporate management is also much more internationalized. Japan’s corporate leaders need to think through and courageously implement the operational changes, ranging from language to work practices to incentives, required to attract more foreign talent. The evidence is clear that even in Japan, a more global leadership can expand a company’s options and help to make it stronger. In a number of cases, for example, foreigners have helped to lead turnaround efforts; these are often more difficult for Japanese to manage because they feel more culturally constrained when it comes to painful restructuring.
The idea of bringing in more foreigners is not to make Japan more like someplace else; it is to make it easier to bring the best of global thinking and best practices (including, of course, those from Japan) to the nation’s companies. And this should not be a one-way ticket. Enterprises could also send young Japanese managers to work and train abroad and then return to take leadership positions. Companies like Komatsu, Sony, and Toshiba have moved in this direction. Government could facilitate the process by granting tax breaks for the cost of sending young managers to foreign countries.
Promote leadership development
Japan should make leadership development a priority—like the successful national efforts on energy efficiency or product quality. In the last few years, some nonprofit organizations have developed programs to teach leadership skills to young people. Japanese executives and government leaders should support these efforts, whose popularity suggests that there’s growing public interest in the topic.
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Japan is a rich society where most people live comfortable lives. At the same time, long-term economic factors have undermined the country’s confidence and called into question the system that fostered these benefits. Over the last 20 years, Japan has suffered from slow growth, deflation, political scandals, a revolving door in the prime minister’s office, and intense competition with Asian rivals. Confidence is so damaged that it appears to be difficult for Japan’s business and political leaders to make game-changing moves.
Still, Japan has many unexploited assets, including the world’s support of and affinity for Japan. A 2010 poll by the BBC World Service found that the global general public put Japan number two, after Germany, as a country with a mainly positive image. Japan must have been heartened by the overwhelming support and sympathy from the rest of the world in the aftermath of the Tohoku disasters.
But something has to give. Many Japanese recognize that the changes described above—and these are by no means comprehensive—are necessary. Corporate Japan must demonstrate exceptional daring to change the tenets of business as usual. Government must support these tough decisions and invest in an educational system that suits future needs. And the public and private sectors must collaborate closely to support the nation’s long-term interests, not to protect vested ones. Japan’s leaders must, in short, reimagine their country. The destiny of future generations is at stake. The tragedies of March 2011 make the case for faster, more radical action with even greater urgency.
This 20-year road map is not intended to imply that Japan has only one way to get where it wants to go, any more than a map sets out only one route to reach a destination. Change will come in many ways—from the micro choices of individual men and women to the macroeconomic policies decided by the nation’s famed bureaucrats to the day-to-day actions of line managers in thousands of companies.
A map, after all, is only a map. It is the driver—Japan and its people—who will make the journey.