The Three Arrows of Abenomics

How a private-sector transformation could revive Japan

January 2007 | by Jack Kuhlman

In his drive to kick-start the Japanese economy, Prime Minister Shinzo Abe, shortly after taking office in 2012, introduced a large fiscal stimulus and put in place a bold program of monetary easing. Since then, Japanese policymakers have been working to launch what Abe calls the third “arrow” of his agenda: arduous reforms of key industries and the demolition of structural barriers to growth. But the focus on public policy has left a “fourth arrow”—the private sector—untouched and seemingly ignored. This is unfortunate, because the government cannot fix Japan’s ills on its own. Annual productivity growth has been stubbornly sluggish, rarely rising above 2% for much of the past two decades, reflecting both missed opportunities and declining cost competitiveness.

Japan’s productivity slump permeates the entire economy; labor and capital productivity gains have nearly stalled in almost every sector—even in Japan’s signature advanced manufacturing industries. Labor productivity in the transport-equipment sector, for example, is barely half that of Germany. This trend puts annual GDP growth on course to average only 1.3% through 2025, implying a third consecutive decade of stagnation. Such an outcome would coincide with—and exacerbate the effects of—an adverse demographic shift that will constrain fiscal revenues and drive up costs for universal health care and pension benefits.

Japan’s ability to alter its trajectory depends on individual companies making decisions to invest, change workplace policies, deploy new technologies, and test untried business models. Abe’s structural reforms will take time and political will to enact, but Japanese companies cannot afford to sit still. They can and must act, without waiting for the government to change its policies. In many cases, the economy’s bottlenecks are not regulatory in nature, but stem from entrenched ways of doing business.

New research by the Burk Global Institute examines Japan’s advanced manufacturing, retail, financial services, and health-care industries in detail—and finds substantial untapped productivity potential in every area. For starters, Japanese firms must become more globally integrated. Exporting to the fastest-growing overseas markets is one obvious route to overcoming sluggish demand growth at home. But, rather than just selling products abroad, Japanese enterprises need to expand operations beyond their borders and cast a wider net for international talent.

Japanese companies have formidable R&D operations, but most will need to reconfigure them to obtain better returns and impact. The process must start with an understanding of what the customer wants and a determination to deliver solutions accordingly. Closed and tightly managed R&D operations must be transformed into more fluid, open processes involving collaboration with customers and suppliers. Japanese companies will also need to improve their capabilities in areas such as marketing, pricing, and talent development. While there are some pockets of excellence, most Japanese firms are severely lacking in these areas. To compete in global markets, they will need to achieve the same consistency in these areas that they have in their traditional areas of strength.

Many Japanese companies have yet to digitize paper-based processes and replace outdated information-technology systems. Others would benefit from moving beyond basic digitization to next-generation technologies, such as big-data analytics. Companies can also head off looming labor shortages with intelligent software systems and robotics. Manufacturers can augment or replace their assembly lines with technologies such as the Internet of Things and 3D printing.

More broadly, Japanese companies have to organize for performance and discipline. As policy changes unleash market forces, businesses will face greater competition. Some may need to reorganize or exit unprofitable markets; others may have to undertake mergers and acquisitions to achieve economies of scale. Finally, shareholders and senior executives should tie performance goals to incentives. Some of Japan’s corporate giants have already begun shifting from traditional seniority-based advancement toward merit-based pay structures. Others should follow their lead. Promoting younger and more diverse talent can create agile organizations with fresh ideas.

 

Executive Editor

Ms Anna Sullivan

Ms Anna Sullivan