Entrepreneurship can power Japan’s economic revival

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Amid all the negative economic news about Japan — with its GDP in late 2023 no higher than in 2018 — there is good news. Powerful societal and technological changes are giving Japan its greatest opportunity in a generation for revival by resurrecting the entrepreneurial effervescence seen in Japan’s postwar economic miracle.

All healthy economies need a continual influx of tens of thousands of high-growth companies with fresh ideas — a few of which go to the stock market — but Japan suffers a dearth of such firms. Admittedly, remedying this flaw is still an uphill climb and in the past, observers have often prematurely proclaimed an entrepreneurial spring. But today’s changes go far beyond things seen as recently as a decade ago.

One of the most important shifts involves generational attitudes toward ‘lifetime employment’ and gender relations. This has greatly weakened one of the biggest obstacles to new high-growth companies — the difficulty of recruiting talented and experienced staff.

Under Japan’s lifetime employment system, someone leaving a big company to create or work for a new venture that failed — as many new businesses do — would not be able to regain such a lucrative job again. Today, talented younger adults are increasingly willing to risk working for a new firm and good firms are more willing to make mid-career hires, creating a fallback option. The US-educated Soichiro Minami has become one of Japan’s newest billionaires by creating a business called Visional that matches potential job-switchers with employers.

On the technology front, e-commerce enables newcomers to bypass traditional distribution systems controlled by the big incumbents, which has often restricted market entry, thereby giving tens of thousands of new companies access to millions of customers. Some traditional companies — which have caused Japan to rank last among 64 countries in how much benefit companies get from every dollar they invest in digital technology — feel compelled to work with independent startups that have mastered such technology, giving the latter a source of income. In the past, big companies disdained such collaboration.

Another development is that graduates from Japan’s most elite universities are emerging as founders. An inordinate number have studied or worked overseas or for a foreign company operating in Japan. One such individual is Yasukane Matsumoto, a Keio University graduate who previously worked for US consulting firm AT Kearney. In 2015, at the age of 29, he established Raksul, an Uber-like company for parcel delivery. By 2023, revenues reached 41 billion yen (US$278 million). Through increasing the number of packages per trip, Raksul not only increased driver income and lowered costs per package but also lowered carbon emissions per package.

A final impetus for change stems from three decades of low growth and stagnant — even falling — real incomes, convincing many within both the elite and the general public of the need for change.

The bad news is that these positive trends will never reach critical mass unless a shift in government policy amplifies them. Unfortunately, the needed support is not yet coming. Despite promises by Japanese Prime Minister Fumio Kishida of ‘bold’ actions to increase the number of startups to 100,000 by 2027, he took almost no measures to translate rhetoric into reality. 

There is too much resistance from those with vested interests. Big companies want just enough startups to provide necessary partners, but not so many as to disrupt the giants’ dominance. The ‘zombie’ and mediocre small and medium firms protected by politicians and banks fear a plethora of new and dynamic entrants that might drive them out of business.

The biggest obstacle is the difficulty newcomers face to get initial financing due to a dearth of business ‘angels’ — early investors who provide ‘seed money’. Banks also hesitate to lend to ‘newcomers’ as old as ten years and charge them higher interest rates than a less creditworthy 50-year-old small or medium-sized enterprise. While parts of the government try to promote more startups, others resist. Larger companies get 92 per cent of the financial aid allocated for research and development, the worst record in the OECD.

Many experts know what needs to be done. An advisory committee to the Council for Science, Technology and Innovation prepared an excellent report for Kishida. But he did not heed their advice. All he implemented was a badly designed tax break for angel investors that is likely to have little impact.

The contrast with France shows what Kishida could have done. Two decades ago, France was also considered anti-entrepreneurial. To cure this, France’s leaders initiated a tax incentive that greatly increased private funding for high-growth start-ups. Since 2000, France has created almost 38,000 new startups, valued at US$276 billion in 2023, up from US$11 billion in 2010. The difference was France’s program had a better design.

Pro-entrepreneurship trends are gaining both economic and political heft. Entrepreneurial firms and experts on the issue now meet with officials and National Diet members. This contest between pro- and anti-entrepreneurship forces will determine Japan’s economic future.

Richard Katz is Senior Fellow at the Carnegie Council for Ethics in International Affairs.

This article is adapted from Richard Katz’s new book, ‘The Contest For Japan’s Economic Future: Entrepreneurs Vs. Corporate Giants’.

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