Japan, Not Quite 'Back', Has A New Fighting Chance

At this point, building chips in Japan is almost an arbitrage.

I also added government support and entrepreneurs' hunger and ambition as the fifth and sixth advantages. But these are, of course, highly contingent.

The Japanese government is
spending a lot of money
on the industry, but it needs to make a conscious choice to do whatever is necessary to court FDI, including building new infrastructure and providing specialized education and training as necessary.

Japanese businesses, meanwhile, have to be determined to win back their traditional place in the global electronics supply chain. That success will require humility - an admission that South Korean and Taiwanese companies have become the industry leaders, and a willingness to learn from them.

Beyond chips, there are other important industries Japan should try to promote. The first of these is software. Like Europe, Japan has fallen behind the US and China in terms of creating new highly productive software businesses. Japan doesn't overregulate software like Europe does, but there is still no Japanese equivalent to Microsoft, Amazon, Meta, OpenAI and so on.

There are a number of reasons for this, but a big one is that Japanese companies tend to create their software in-house instead of purchasing it from specialized third parties. Japanese software startups are
ambitious and talented , but they have a hard time finding Japanese business clients, so they can't scale up.

Meanwhile, companies that keep software in-house end up with crappy software, since it isn't their core competency as firms. This ends up hurting Japanese hardware manufacturing as well.

The solution here is for the Japanese government to incentivize hardware companies to purchase software from third-party vendors. That will give Japanese software companies a huge business opportunity, and allow them to build up the scale they need to go out and challenge overseas rivals in world markets. On top of that, Japan should try to improve software education.

Another industry Japan needs is EVs. Autos, even more than electronics, have been Japan's greatest success, but, like Germany, the country's industry is in grave danger from a technological shift.

Japanese companies like Toyota and Nissan are way behind when it comes to EVs, and their sales are starting to suffer as a result. The Japanese carmakers have invested some money in battery EVs, but at the same time, they've continued to insist that dead-end technologies like hydrogen are a viable alternative.

Japanese companies need to wake up and realize that batteries are just
going to defeat everything else on the market . The government can facilitate this realization by increasing Japanese consumers' demand for EVs. And the way to do that is to build lots and lots and lots of battery charging stations throughout the country.

Right now, Japan
has very few charging stations , meaning that Japanese people don't want to drive battery-powered cars, meaning that Japanese car companies can't sell EVs in their own domestic market. If the Japanese government builds a ton of charging stations, this vicious cycle will reverse itself, and Japanese car companies will be scrambling to switch to batteries.

Finally, Japan's increased defense spending gives it the opportunity to create a military-industrial complex. Defense-related research has been an incredible industrial boon to the US, creating tons of
cutting-edge technologies
that US companies have then capitalized on.

Japan needs to study the DARPA model and create something similar on its own shores. And defense spending can revitalize Japan's lagging universities, including by hiring researchers from overseas.

So far I've been talking about industrial policies that Japan can use to boost key industries and regain technological leadership.

But I fear that most of that will come to naught unless Japan addresses the root cause of its long decades of economic underperformance. That root cause is Japan's broken corporate culture.

In a post back in 2022, I tried to lay out exactly what I thought was wrong with Japan's corporate culture, and how to fix it. My suggestions were:

First, it will enhance idea diffusion and recombination across firms. Technologies and business models spread from company to company via human beings who go to work for one company and then work for a different company. Japan's traditional lifetime employment system keeps good ideas siloed within individual firms, preventing them from benefitting Japan Inc at large.

Second, mid-career hiring will help to combat the problems of an aging society. Research shows that aging is moderately bad for productivity growth. One likely reason is that elderly managers are less capable of understanding the importance of new technologies, new markets, and new business models.

When most of the people in a society are old, as in Japan, old guys clog the ranks of upper management at companies. Corporate Japan, with its traditional focus on promoting managers up through the ranks as they age, has become a gerontocracy. Mid-career hiring can shake up that gerontocracy because management hires will tend to be selected for talent rather than tenure.

Hybrid work will be another big productivity booster for Japanese companies. Traditionally, Japanese companies prize hours of work input over actual results, and this needs to change. Right now, Japanese offices are open-plan affairs where everyone sits there trying to look busy.

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It's no coincidence that Japan's white-collar productivity is some of the lowest in the developed world. Cubicles would help, but letting workers take some of their work home with them would do far more. At home, the goal of work is not to look busy, but to accomplish a specific task in order to please your boss on the following day.

Thus, hybrid work will help Japanese companies shift their attitudes toward the fundamental goal of work. It would also help parents balance work and family more effectively, which would probably help raise the fertility rate.

Finally, the Japanese government needs to stop using a bunch of so-called“stimulus”
slush funds
to
bail out
failed companies. Instead, its industrial policy should be focused on boosting new, more productive companies.

Japanese business leaders should see the wisdom of mid-career management hiring and hybrid work, and implement these changes on their own. But the Japanese government, with its strong and capable bureaucracy, can also do quite a lot in this regard.

In the 2010s, Japan's Ministry of Finance introduced a new
Corporate Governance Code
that
probably helped push
Japanese companies to become much more profitable. Now, either the Ministry of Finance, or the Ministry of Economy, Trade, and Industry, or both of them acting in concert need to intervene to push Japanese companies to become more efficient.

To sum up, I think that what Japan really needs in order for its economy to be fully“back” is to rediscover the zeal for industrial policy and cultural transformation that it had during its catch-up years in the 1960s and 1970s. The specific policies just need updates for the modern age.

Instead of shutting out FDI, Japan now needs to draw it in. Instead of building a corporate culture based on lifetime employment and seniority promotion, it needs to build one based on flexibility in hiring and in work hours.

And instead of clinging to fading dominance in the industries of the 1970s, it needs to muscle in on the industries of the 2020s. Japan can do it but it's not going to be easy or quick.

This article was first published on Noah Smith's Noahpinion Substack and is republished with kind permission. Read the original and become a Noahopinion subscriber here.

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