Fail First – Japanese businesses must shed conservative character

Last year’s general election in Japan led to a deluge of coverage by Reuters, Bloomberg, and other foreign news agencies.

Since December, I’ve received many inquiries, and gave numerous interviews during the World Economic Forum annual meeting in Davos, Switzerland. It is clear that foreign spectators are brimming with interest in Japan, specifically regarding what can be learned in their own countries from the successes and shortcomings of the Abenomics policies for economic growth.

Various TV networks in Europe have shown strong interest in the issues directly confronting Japan, such as how to halt deflation and manage the national debt.

This probably stems from the fact that many EU nations, like Japan, are also facing rising debt levels and forecasts for prolonged deflation.
I frequently encounter the phrase “Japanization,” which is used to describe those European countries whose political and economic situations are becoming increasingly dysfunctional—much as in Japan.

While foreign media may portray this country as an example of failure from which one can learn, we can also take a different perspective: that Japan, just like other nations across the globe, is grappling with issues familiar to any mature economy.

Thus, the world is watching with anticipation to see how Tokyo responds to the present economic challenges.

BOJ model to become the paradigm?
Many people may not realize that the term “quantitative easing” (QE)—which aims to eliminate deflation—originated in Japan.

The Bank of Japan announced its first QE policies in 2001. At the time, the policy was denounced by leading economists such as Paul Krugman.

Fast-forward seven years, however, and the United States decides to implement its own QE program. Just last year, Europe also began its version of QE. Now, Professor Krugman openly approves of the Bank of Japan’s quantitative and qualitative easing measures.

In a column from The New York Times in October, he voiced strong support for the bank’s recent easing measures.

Some pundits have expressed misgivings about Bank of Japan policies, but as more countries approach an economic precipice, the bank’s QE measures may very well become the new paradigm.

I’m often asked how I would assess the three arrows of Abenomics.

I would evaluate the first arrow (bold fiscal strategy) quite favorably, since quantitative and qualitative easing have enabled share prices to rise and have also helped correct the previously inflated value of the Japanese yen.

The second arrow, monetary easing, has also been reasonably effective.

However, at this time it is difficult to give a high assessment to the third arrow: growth strategies intended to spur private-sector investment. Only time will tell whether this arrow yields tangible results.

The biggest hindrance to the growth strategy has been a lack of investment by businesses in Japan, which instead have retained their cash reserves. Though the Abenomics policies have been positive for business, general wages have not gone up; as a result, the anticipated trickle-down economic effect has not been realized.

What we need now is for companies and the public to maintain confidence.

Since the collapse of the bubble economy two decades ago, the Japanese people have become hyper-conservative. If ways are not found to reconcile this, it will be difficult to emerge from deflation.

According to the US third-quarter economic data released on December 24, covering the period from July to September 2014, actual GDP grew 5 percent over the previous quarter, representing the highest rate of growth in 11 years.

Although the level of borrowing in the United States has not changed, when the economy improves, people’s mentality changes, and they tend to spend and consume more. This is one major difference between Japan and the United States.

When Japanese companies lose confidence, they cut back on hiring, new R&D, and investments such as acquisitions of competitors.

As a result, only a small number of Japanese corporations have been rated world-class. In a listing recently published in MIT Technology Review, of the “50 Smartest Companies” in 2014, not a single Japanese corporation was acknowledged. However, South Korea’s Samsung and LG, as well as China’s Baidu, were on the list.

Leaders must fail now to succeed later
The main reason for Japan’s conservatism is a culture that does not tolerate failure.

While giving a lecture the other day, someone in the audience asked, “Major [Japanese] corporations won’t tolerate failures; what can a person do to challenge such a mindset?”

I responded, “Though you say you don’t want to fail, aren’t you failing at the macro level? To repeat failures because the reasons for a lack of success were never clearly understood is a worse situation, if you consider the time lost [in repeating the failure].”

Consider the roster of executives in leading US corporations. I may be exaggerating, but nearly all of them have overcome failure at least once in their careers. A common characteristic among them is that they know their own strengths and weaknesses, which makes them more comfortable taking risks.
Meanwhile, if you look at the top leaders of Japanese corporations, you’ll find they are among the people with fewest failures in their career trajectories.

An expression currently popular in the United States is “fail first.” This means that, by failing at an early stage, a person is exposed to and learns to deal with challenges head on, and their experience and knowhow accumulate over time.

I wonder if Japanese companies can wean themselves from their conservative tendencies. Given that so many businesses here have now accumulated surplus funds instead of reinvesting their profits, I believe the test of survival in the market will hinge on which of those companies succeed in putting that money to good use.

A prime example of this resource waste is reflected in the current state of Japan’s job market. Despite the country’s low unemployment rate, wages haven’t risen. People outside Japan regard this conundrum as odd, and don’t understand the market forces at play.

In a similar vein, observers from abroad fail to comprehend how people making mid-career job changes typically earn lower salaries in their new companies.

In the United States, the greatest reason for a person to switch jobs is the expectation that their salary will increase.

Furthermore, since it is nearly impossible to dismiss regular, full-time staff in Japan, the practice of employing non-regular staff or outsourcing workers keeps growing, which is not productive.

In Japan, non-regular workers, such as staff outsourced from dispatch firms, now account for about 40 percent of total workers at companies. From a long-term perspective, this arrangement benefits neither employers nor workers. If companies seriously examine and plan efficient investment in human resources, this situation should naturally self-correct.

Given the current circumstances, and the continuously changing economic environment, now, more than ever, management and staff must initiate bold actions, or they won’t survive. A bright future is not feasible for Japan without harnessing the willpower to cast off conservative restraints.

Posted by whsaito

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