From a Growth Strategy to a Vision for Reconstruction

Faculty Fellow, RIETI

To begin with, I wish to offer my prayers for the repose of the souls of those lost in the Great Eastern Japan Earthquake. I would also like to offer my sincerest sympathy to those that suffered in the disaster, and my deepest gratitude to those that are working so hard to rebuild the affected areas.

This disaster came as a shock to this writer, who had been studying the reasons for Japan's poor economic performance since the collapse of the bubble economy and looking for ways of getting the country on a new growth trajectory. This disaster means that the debate on the Japanese economy over the last decade or so will need to be radically revised. In addition, the disaster has brought existing problems with the Japanese economy into sharp focus. Here, I would like to consider which aspects of the debate can be maintained and which need to be reevaluated during the process of reconstruction following the disaster.

Reviewing the growth strategy

What this disaster has made clear is that it is no longer possible to think about the Japanese economy in the same way as before it occurred. In other words, even if a dedicated reconstruction effort leads to a recovery in private-sector investment and the restoration of social infrastructure, there is no guarantee that overall economic activity will return to the path it was on prior to the disaster. This unprecedented disaster has put the economy on a new path, a phenomenon which is described in the field of economics as hysteresis, a term borrowed from the natural sciences that refers to the effects of prior history.

In the case of this disaster, hysteresis will probably occur in three areas. The first will be the impact on the automotive and electronic component industries of those companies that are largely based in the Tohoku region. Demand in these sectors will shift to places such as China, South Korea, and Taiwan, and may not return even when production facilities in Tohoku have been restored.

There is a danger that the first problem will be amplified by a loss of confidence in Japan's technological prowess, which is the second problem. The crisis at the Fukushima nuclear power plant is predicted to have a serious impact on the technological abilities that Japanese industries have hitherto depended on, even though large numbers of people are battling to bring the crisis to a conclusion despite the dangers to them.

Personally, I feel that individual Japanese industrial technologies are of a sufficiently high standard, but I have had doubts, since before the disaster, about the systems, organizations, and human resources used to put them together. Under the "new growth strategy" put in place last year, the government has made the sale to other countries of infrastructure such as nuclear power stations and expressways one of its objectives. Such infrastructure depends not only on the quality of individual technologies, but also on the ability to put them together. The recent problems at Fukushima, however, mean that it will probably take some time to restore confidence in Japan's ability to manage large-scale projects.

The third will be the negative view from overseas concerning the spread of radioactive material. Although a lot of it will be based on rumors, it will take some time before it is completely eradicated. As a result, the impact on tourism, which has been positioned as a key industry under the new growth strategy, will be immense. In addition, the high-caliber personnel that Japan has been aggressively trying to attract may no longer opt to come here.

Establishing a vision for reconstruction

What I remember most about the national crises that have occurred in Japan since World War II is the role played by Dr. Osamu Shimomura, who was well known for his belief in the abilities of the Japanese people and as the originator of the "income-doubling plan," which served as a compass from post-war reconstruction until the high-growth period. What is needed now as a replacement for the growth strategy employed up to now is a vision like the income-doubling plan. Having said that, when the oil crisis occurred, Dr. Shimomura used it as an opportunity to change direction and developed his "zero-growth theory." Although I don't know Dr. Shimomura's true reasons for switching course, according to Ekonomisutotachi no eikou to zasetsu [The Glory and the Setbacks of Economists] (Toyo Keizai, 2008) by Hiroshi Takeuchi, at around the end of the high-growth period he felt that the Japanese economy had reached maturity, and that limited energy supplies would constrain Japan's growth. If a vision for reconstruction is going to be formulated now, it will be necessary, even with a belief in the latent potential of the Japanese people, to take into account limited energy supplies during oil crises and the hysteresis described earlier.

Innovation the decisive factor

Although Japan recovered from World War II and survived the oil crises, it will probably be harder for it to bounce back from this crisis because competitors with similar industrial structures, such as China and South Korea, are on the rise. As the hysteresis described earlier makes clear, the recent disaster has ushered in a difficult period for Japanese industries that were competitive and expected to continue growing. It will therefore be necessary to be prepared for this and lay foundations for real innovation on a scale similar to that of the IT revolution.

RIETI has conducted a great deal of analysis on why innovations like the IT revolution have occurred. Research we have conducted since FY 2007 indicates that it is not enough to just boost spending on R&D. The wider environment, e.g. human resources (HR) development and the organization of the company, which we describe as intangible assets, has also been having a big impact on recent innovations. The Japanese economy has lagged behind with recent innovations such as the IT revolution and been in poor shape for many years, which suggests that there are limits to Japanese-style HR development and corporate organization. Innovation is basically about making possible what has been thought to be impossible. Since the collapse of the bubble, people have described all sorts of things as "impossible," and this is a symbol of the way that Japanese society has fallen into a pattern of emulating precedent and not been aggressive in pursuing innovation. However, there is no longer any room for debate on this. This disaster must be seized as an opportunity to reorganize companies, revamp HR development methods and employment systems, recognize the value of intangible assets (technologies), and be proactive in transforming the workings of the financial system that supplies the money for investment in these assets.

One of the events prior to the disaster that gave Japanese people much encouragement was the Japanese soccer team's victory in the final of Asian Cup. But this triumph was not achieved in a day. In the 1990s club teams with roots in their communities were established, and they employed their own development systems to create players with individual qualities. These players then learned tactics by competing with teams from overseas and in the end proved victorious. Each of these approaches was revolutionary given the historical framework for professional sports in Japan, so nothing should be impossible in the world of business. To achieve a real recovery, a grand design for generating innovation for the next generation will be required.

April 8, 2011

April 8, 2011

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