Ulrike Schaede’s book demonstrates how Japan, far from stagnating, spent decades charting a new course
Until the early 1990s, Japan was an economic force to be reckoned with. In the decades after World War II, as Japan introduced Sony TVs, Brothers fax machines, Canon and Nikon cameras and Panasonic Camcorders into homes across the world, it was on such a roll that many in the U.S. began to worry about their country’s status as the leading global economy.
But in the early 1990s, Japan’s “bubble economy” — fueled by inflated stock and real estate prices — popped. A deep recession and banking crisis followed; it wasn’t until April of last year that the stock market climbed its way back up to the lofty heights it had occupied in 1989.
This period from the early 1990s is typically referred to as Japan’s 30-year slump, or, put even more bleakly, “the three lost decades”: years during which the country’s GDP showed almost no growth.
However, this narrative doesn’t tell the full story, according to Ulrike Schaede, professor of Japanese business at UC San Diego’s School of Global Policy and Strategy (GPS) and director of the school’s Japan Forum for Innovation and Technology.
In her most recent book — which was just released in English, under the title of “Japan Re-emerges,” after having first become a bestseller in Japan (under the title “Shin Nihon no keiei”) — Schaede looks at these grim statistics from a new, more optimistic angle and sees something else: an economy that has been quietly rebuilding itself for the 21st century.
GPS News talked with Schaede to learn more about the context of her book, and what her findings could mean even beyond Japan.
What got you interested in this topic?
The macro-economic narrative of Japan as a stagnant place did not seem to explain everything that was going on in Japan during that period. Certainly, GDP was not growing, prices did not rise, interest rates were super low, and young Japanese were increasingly nervous over a growing debt burden, a rapidly aging society and a seeming lack of future opportunities.
But if that was the only story, we could not explain Japan today. Not only is Japan a cool place to visit, with a cultural production — from ramen and sushi to manga and anime — that has attracted fans around the world. What’s more, according to the Harvard Growth Lab, Japan is ranked No. 1 in the world for the complexity of its export products.
So, I wanted to know what was going on at the company level. Which companies were doing well in spite of the overall macro-economic malaise, why and how were they profitable, and what technologies did they possess that made them world leaders? My research revealed that those “frontrunners” shared a set of characteristics that made them very successful even in an overall stagnant economy: They had a clear strategy, great leadership, motivated employees and innovative products.
The macro-economic narrative of Japan portrays it as a stagnant place. But if that was the only story, we could not explain Japan today.
Specifically, what they were early to see is that the rise of South Korea, Taiwan and then, of course, China had wiped out their previous core competence: namely, the assembly of high-quality commodities and consumer end products. Japan’s followers in Northeast Asia had begun to copy its manufacturing recipes while enjoying a lower-cost advantage. The era when Japan could earn profits by making hair dryers and oven toasters was over.
For many companies, including Sony and Panasonic, this was a tough pill to swallow. The frontrunners that I study, however, saw this early and began a deliberate process of pivoting away from commodities and moving upstream, to sell advanced materials and components that the Northeast Asia competitors needed but could not yet make. These are difficult-to-make and difficult-to-copy inputs that have afforded Japan a competitive advantage at the upstream portion of many global supply chains.
You note in the book that part of the reason companies were slow to act was because they felt a responsibility to maintain stability in terms of employment, business partners and society as a whole. Is this “slowness” unique to Japanese conditions, or could it work in other places in the world?
Japan has long had a system called “lifetime employment,” whereby a salaried employee would spend their entire career with one company. That’s great for many things, such as motivation, morale and tacit knowledge, but it also ties the employees and their training to one company. If that company were to go bankrupt, all the employees would be unemployable elsewhere – not because they were not capable but because all large firms had their predetermined pool of employees at each level.
With the “ice age” (when companies stopped hiring young workers during the recession at the turn of the century), it became clear that this system had outlived its usefulness. But how do you change such a system without huge societal upheaval? The path Japan chose was to slow down the transition and have it last about 30 years — one full generation of workers. Changes were allowed at the margin, and a mid-career job-changing market slowly developed. There was also a piecemeal, six-year, revision of the Commerical Code to allow companies to make necessary organizational changes This slow deregulation was not just politics, but matched societal expectations of the role of companies. Senior management had to be careful about the reputation costs of layoffs throughout this process.
“Japan traded in three decades of GDP growth for social stability.”
In the end, my interpretation is that Japan traded in three decades of GDP growth for social stability. Of course, that was very expensive. But arguably, the reckless reorganizations that we experience in the U.S., and the dislocations they inevitably imply for people, are much, much more expensive in the long term.
How difficult has it been for Japanese people and culture to see their businesses shift upstream? Transitioning from something like semiconductor manufacturing and moving toward manufacturing the equipment that other countries use to make semiconductors seems like it might feel a bit demoralizing.
I have labeled the result of this business reinvention the move to “Japan Inside,” like the stickers on Windows laptops signalling that they run on an Intel processor — except that in the case of Japan’s manufacturers, there is no such label. Yet not a day goes by where you don’t use a product that would not function, or not function nearly as well, without the upstream frontier materials from Japan.
But because there is no sticker, it’s hard to see. As a result, many Japanese are unaware and have fallen into a slump of despondence — which is why the subtitle of the Japanese edition of my book is “Overcoming the Pessimism Bias.”
Growth has already caused serious environmental and humanitarian effects. Is what Japan has been doing “de-growth,” or is it something different?
U.S.-trained economists define a “good” economy as one that has strong GDP growth. In the U.S., presidents may win or lose elections based on GDP and employment growth data. My macro-economics colleagues tell me it’s because it is the only thing they can measure; measuring the stock value of, say, a great subway system is too difficult.
But it’s really crazy if you think about it. First, a lot of companies manufacture outside their home countries. Trade statistics don’t begin to measure the total economic activity, in particular for Japan.
“We need a better system that can balance the economy with ecology, technological progress with human well-being, and economic growth with social stability. And I think Japan has figured out one version of that.”
Ulrike Schaede
And we live in a crazy world now. Global warming, too many people producing too much waste, and so on. I appreciate that economic growth is a good thing, but is that really the be-all and end-all of our goals? Going forward, I think we need a better system that can balance the economy with ecology, technological progress with human well-being, and economic growth with social stability. And I think Japan has figured out one version of that. That system, too, is not perfect. But it offers an alternative that is very important for us to consider.
Does your analysis have any implications for how countries and corporations should act in this age of tariffs and trade wars?
Japan’s frontrunners moved upstream to supply difficult-to-make frontier materials into increasingly global value chains. Data show that Japanese companies combine to have a 100% global market share, or close to it, for certain important product categories. Those global value chains are now in danger of decoupling. But other countries, including the U.S., need Japanese inputs to make their products. These dependencies afford Japan a power position. And perhaps more importantly, it has created a fairly steady business situation within Northeast Asia. One hopes that these mutual dependencies help stabilize the region.
As for the U.S., one concern is that we will be left outside of those trade patterns, which could be quite detrimental to the U.S. economy. That’s because when it comes to the upstream, indispensable frontier materials it will not be about trade volume or even price, but who gets access at all.
