Industrial Structure Vision: The Way Forward for Japanese Industry

July 20, 2010

Tadao Yanase
, Director, Industrial Revitalization Division, Ministry of Economy, Trade and Industry

Motoatsu Sakurai
, President, Japan Society

Tadao Yanase, Director of the Industrial Revitalization Division at the Ministry of Economy, Trade and Industry, visited Japan Society to discuss the newly unveiled "Industrial Structure Vision 2010," a roadmap of the way forward for Japanese industry.

At the end of 2009, METI Minister Naoshima directed the formation of a special task force to develop a new economic growth policy for the industrial sector. An Industrial Competitiveness Committee, composed of representatives from industry, academia and labor unions, began its work early in 2010. The result is the Industrial Structure Vision 2010, most elements of which were incorporated in a new growth strategy approved by the cabinet after Prime Minister Naoto Kan took office in June.

Three main factors underlie the problems and challenges that confront Japan's industries, Mr. Yanase said.

The first is the overall industrial structure, which depends too much on the automobile sector--almost half of Japan's GDP growth since 2000 comes from the automobile and related industries--and tolerates too many companies in a given industry, leading in turn to "the extraordinarily low profitability of Japanese industries." Thus in nuclear power, Japan has three big firms, Toshiba, Hitachi and Mitsubishi Heavy Industries, whereas the U.S., France and Korea have only one each.

The second factor is an obsolete business model whereby Japanese industries have been winners in technology development, only to lose out in the competition for global business. "In many high-tech products, in the beginning stage, Japanese companies enjoyed 90 to 100 percent global market share. But as the global market grows, then Japanese industries always have lost their market share very dramatically--DRAM memory, liquid crystal panel, DVD players, car navigation systems. So, this should be attributed to a business model problem rather than to specific technology or to specific companies," Mr. Yanase said.

"Due to the margins of digital technology, the key to global competitiveness has shifted to the scale and speed of investment," he said. Before the Asian financial crisis, Samsung was smaller than the Japanese electronics companies. When the IMF and the Korean government forced industries to reorganize, "Samsung was forced to focus on the electronics industry and to give up the automobile industry. Since then the scale of investment of Samsung has dramatically increased."

The third factor is defects in the business infrastructure, Mr. Yanase continued. Japan's corporate tax rate is 41 percent, versus an OECD average of 26 percent. Seaport and airport distribution facilities are deteriorated. "And above all, human resources are very, very problematic." There's only a very small inflow of highly trained workers into the country; foreigners represent only 0.7 percent of those who have finished higher education in Japan, versus over 10 percent in many developed countries.

To meet these challenges, the Industrial Structure Vision contemplates changes in three broad areas, Mr. Yanase said. The first is industrial structure: as proposed, Japan would move away from a reliance on the automobile and electronics industries to a more stable structure founded on five strategic industrial fields: infrastructure-related system sales, such as nuclear power, water and railroads; environmental and energy problem-solving industries, such as next-generation autos and smart communities; creative industries, including fashion, foods and tourism; medicine, nursing and childcare; and "the frontier fields, such as robots or space."

The second broad area of change is the business model. Here, the Industrial Structure Vision calls for the private sector to move away from a high-level vertically integrated model, which emphasizes in-house development, and toward a "modularization model" that combines elements of black-box policy with an open policy based on international standardization.

The third area of change addresses globalization vis-à-vis domestic employment. Globalization is essential, but "without improvement of the business environment or business infrastructure, the source of that added value, or the source of highly qualified jobs, will escape from Japan to foreign countries." Therefore, Japanese corporations must be made more competitive internationally. Corporate tax reform, logistic infrastructure enhancement and other measures will bring high added-value activities of foreign enterprises, such as Asian headquarters or European R&D headquarters, to Japan. Added support for small and medium-sized enterprises in Japan will aid their entry into the overseas market.

The new growth strategy adopted by the Kan cabinet expresses "a commitment to end deflation," Mr. Yanase continued. The target nominal growth rate is set at 3 percent, with real growth at 2 percent, and a return of consumer prices to positive territory in fiscal year 2011. The strategy emphasizes green innovation, health care innovation and enhanced business with other countries in Asia, as well as tourism, science and technology, human resources and financial services.

Green innovation will expand renewable energy from 5 to 10 percent, adopt "stringent energy conservation regulation regarding automobiles, houses and buildings," and speed up the development of environmental technologies such as carbon capture and storage.

Health care innovation will involve deregulation, IT tools, faster licensing of new drugs and medical devices, and the development of robots to assist in nursing care and expanding medical tourism.

A renewed focus on business with Asia will include the promotion of FTAs, agricultural reform, creative exports such as fashion and music, and expanded export of high-speed railway, nuclear power and water systems. Haneda Airport will become a 24-hour international airport; open-sky policies will draw in more flights and cargo; and special economic zones, tax incentives, and expedited visas and green cards will attract foreign businesses to Japan.

To improve the quality of human resources, the cabinet's new growth strategy makes a commitment "to drastically reform the child care system" in order to raise the labor participation of women. A National Vocational Qualification system, or NVQ, will be introduced as a "key to the liquidity of the labor market." The number of foreign students studying in Japan will be doubled, to 300,000, while the number of Japanese studying abroad will be quadrupled, again to 300,000.

Gains in financial services will be achieved through new disclosure rules that allow broader use of English by foreign companies; corporate law changes to facilitate M&A transactions and strengthen corporate governance; and reduced corporate tax rates that by 2013 will bring Japanese rates to a level comparable with other major countries.

In sum, the new growth strategy includes a commitment to end deflation, lower the corporate tax rate, reform childcare to bring more women into the workforce, and maintain an "open Japan" through agricultural reforms, relaxed immigration policies and incentives for foreign business. Above all, Mr. Yanase concluded, the Kan cabinet will issue "a formal decision on road maps, with concrete measures and definite timetables."

Q&A from the audience followed:

How will the government shift from deflation to a kind of inflation target, which is really challenging to accomplish?

"The Bank of Japan has taken a very aggressive financial policy recently, but is still short of the inflation target," Mr. Yanase responded. On the economic policy side, the Kan administration is committed to using deregulation and budget reallocation to strengthen the economy and build up "promising and emerging sectors."

Like Germany, Japan has a dominant commercial banking system. In Germany, it's been hard for venture capital to really work. What are you going to do differently so that you don't run into the German problem?

The problem in Japan is "not too strong main banks, but rather the problem is too weak main banks," Mr. Yanase said. Banks became risk averse in recent years because of their bad loan problems, and so for the present the Japanese government has set up a venture fund that's operated by private sector fund managers, which, it is hoped, will promote renewed risk-taking on the part of the banks.

From a corporate governance point of view, how are you going to improve the situation where companies that are not doing well and are trading below their values are still allowed to keep going?

"Corporate governance is a very big headache for Japan," and the country has recently tried to strengthen the pressure that stakeholders can exert, with more independent directors and eased rules on squeeze-outs and acquisitions, Mr. Yanase said.

"In Europe and in the United States the CEO or the executives are too strong, so that’s why the stakeholders' checking mechanism was necessary. My understanding is the problem of the Japanese company is not too strong CEOs, but too weak CEOs. The CEO doesn’t have the real centralized power."

What has been the reaction to the Industrial Structure Vision 2010 on the part of Japanese business? Isn't the idea of having the government launch a vision and then try to get industry to follow a little outdated?

"I completely agree that the name of the Industrial Vision is obsolete and old-fashioned," Mr. Yanase answered. But the contents are very different; unlike previous visions, "there are no expectations and no goals for the specific industries." It's also "based on the very concrete, intimate discussions with industries."

For Japan, globalization means to get out and to learn something, and then bring it to Japan. But we never open the door to foreigners, especially human resources. May I ask your opinion about globalization in Japan?

"Historically the globalization of Japanese industry is just one way, [moving] production to foreign areas to pursue cheap wages," Mr. Yanase said. But currently, the goal of globalization as an economic strategy "is to double both outward and inward [movement] of human resources and technologies and investment."

How soon will we see programs to create global human resources in Japan?

"Maybe one of the biggest problems of Japan is the Japanese younger generation has become inward looking," which is "very different from the Korean or European and American younger generation," Mr. Yanase reflected. Samsung and IBM, for example, both have programs that grant three months' or a year's leave to employees to volunteer in foreign countries and learn to understand distant cultures. There is strong support among some Japanese executives for the idea of setting up similar programs for Japanese employees, but concrete policies have yet to be introduced.

To an outsider, this program appears moderate, and not a major paradigm shift. What in your view is the most radical shift in this program in the thinking of the Japanese industrial society?

"From the viewpoint of the media and academics... catchy, dramatic change is desirable, but my understanding is the problem of Japanese reform in industry is not so catchy, or a serious point, but rather nothing has been achieved... Comprehensive but gradual steps have been discussed for 20 years, but nothing has been achieved," Mr. Yanase said. The DPJ is "a new ruling party relatively free from vested interests. Once they place a priority on economic reform, then they have some flexibility to do something."

--Katherine Hyde
Topics:  Business, Policy

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