Japan lives at the bleeding edge of good enough

Keyence

11/11/2022 12:24

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Pete Sweeney
       HONG KONG, Nov 11 (Reuters Breakingviews) - With growth
slowing, demographics depressed and the trade balance in deep
deficit, Tokyo wants to incubate startups and put more state
money into cutting-edge sectors like semiconductors and
next-generation telecommunications. Prime Minister Fumio Kishida
says he will put innovation and scientific research at the
“centre” of his policy push. Perhaps it shouldn’t be.  
    There’s no question that flagging innovation is a problem in
Japan. In solving it, the government hopes to find an
alternative to the ultra-low interest rates Kishida’s
predecessor Shinzo Abe rolled out to push growth, a strategy
that is losing traction as global inflation rises. "We believe
that instead of interfering in monetary policy, the government
should focus on ways to spur innovation that create wealth,"
said then-Economy Minister Daishiro Yamagiwa in January. That
has meant pushing the $1.3 trillion Government Pension
Investment Fund to get involved funding startups while removing
policy bottlenecks. In the United States nearly a third of
venture capital came from pensions whereas in Japan it is only
3%, according to a Nikkei report.  
    Another factor is anxiety about the competitive threat from
China. The People’s Republic overtook Japan in terms of
intellectual property exports over a decade ago. Japanese patent
output has flattened out even as Chinese champions like Huawei
file manically away. The result has been the erosion of Japanese
competitiveness in industries it once dominated: shipping,
semiconductors, and electric vehicles. Industrial robotics
champions like Fanuc  6954.T  may be next to feel Chinese
pressure. Tokyo has also rolled out incentives for local
companies in strategic sectors to re-shore China-based
manufacturing operations. 
    The initiatives are well-intended. However, the blunting of
Japan is due more to its failure to deploy existing tools and
best practices than invent new ones. Decades of economic
stagnation have trained the private sector to avoid investing
inside Japan. Even now, after the yen has lost a brutal 30%
against the dollar since January 2021, Tokyo-based finance
executives told Breakingviews on a recent visit that the
currency discount is still not attractive enough to convince
local companies to put their extra cash to work at home.     
    
    REFORM DIVIDEND  
    An IMF study shows Japan’s labour productivity, at roughly
$40 of GDP per hour worked in 2019, has been the lowest of the
G7 countries since 1989. The reasons are mostly social: the cult
of workaholism that leads Japanese employees to stay in the
office even when they have nothing to do, for example. The
corporate tradition of promoting seniority over competence has
led to absurdities – like the deputy cyber-security minister who
admitted in 2018 to having never used a computer.  
    “Japanese workers are some of the best in the world,”
quipped one private equity executive to Breakingviews, “Their
bosses are useless.” Mediocre middle managers have resisted
upgrading clunky legacy software and stuck with obsolete
hardware like floppy disks, fax machines and ink stamps for
contracts. Technical glitches, including the failure of the
backup system, caused the stock exchange to close for an entire
day in 2020. Mizuho Financial Group’s  8411.T  software and
hardware logged 11 system failures in the twelve months ending
in February 2021, freezing ATMs and stalling massive
transactions even after the lender plowed $2.6 billion into
upgrades.  
    Closing the gap with American labour productivity, at
roughly $70 of GDP per hour worked per the IMF paper, could
nearly double the Japanese economy in size in theory.
Alternatively, employees could cut pointless office hours in
half and spend more time shopping and procreating. Either
outcome would be a lot more impressive than the 0.3% Nomura
analysts predicted cryptocurrency adoption could add to Japanese
GDP.  
    The world’s third largest economy does have an innovation
problem, but it is not a crisis. It enjoys a standard of living
envied by its neighbours; stagnation has persisted in part
because complacency is so comfortable. And many domestic
products are still superlative. Nidec  6594.T  claims 80% of the
world market for the brushless motors inside hard-disk drives;
little-known firms like $43 billion Shin-Etsu Chemical  4063.T 
have a stranglehold over profitable niches in silicon wafers and
key chipmaking chemicals. Manufacturing process designer Keyence
 6861.T  is one of the world’s most profitable industrial
consultancies. 
    Rhetorically, Tokyo aspires to spur innovation and bin
obsolete practices simultaneously. Yet politicians naturally
prefer distributing tax largesse among capitalists to prying
floppy disks out of bureaucrats’ cold, dead hands. This may
explain why the country, which in some ways resembles a
robot-powered wonderland, still uses obsolete technology like
fax machines. Investing in the future makes for riveting
speeches, but Japan Inc will get more from reinventing itself
than inventing new things. 
    Follow @petesweeneypro on Twitter
    CONTEXT NEWS
    In June 2022 the government of Prime Minister Fumio Kishida
unveiled plans to push the Government Pension Investment Fund to
increase support for startup companies, as part of Kishida’s
“new capitalism” agenda that includes promises to improve human
capital, accelerate decarbonisation and upgrade technology.
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Graphic: China's revenues from intellectual property overtook
Japan's in 2013    https://tmsnrt.rs/3Ur1lQm
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Robyn Mak, Katrina Hamlin, Thomas Shum and Pranav
Kiran)
 ((For previous columns by the author, Reuters customers can
click on  SWEENEY/ 
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS https://bit.ly/BVsubscribe
 | pete.sweeney@thomsonreuters.com; Reuters Messaging:
pete.sweeney.thomsonreuters.com@reuters.net))