Issues Facing the Japanese Economy in 2012 (January 2012)

Promoting Globalization Will Open the Way to the Future for the Japanese Economy

Faculty Fellow, RIETI

The 4th Science and Technology Basic Plan

2011 was a challenging year for the Japanese manufacturing industries. A pair of natural disasters, namely, the Great East Japan Earthquake and the floods in Thailand, left supply networks in pieces. The resulting shocks affected a wide range of industries. Additionally, the yen appreciated to its highest level on record. For its fiscal year ending March 31, 2012, Toyota Motor announced that its consolidated operating income is likely to be 200 billion yen, a year-on-year decline of 57%. This was conveyed with a strong sense of impending crisis to the effect of "the collapse of Japan's manufacturing base has begun." What is the best way to prevent this collapse and open the way to the future for Japanese manufacturing industries? The answer to that question lies in global business growth.

It goes without saying that manufacturing industries are not the only ones being asked to heed the call of global business growth. Given the lack of significant growth in the domestic market, global business growth is a must for the retail and service industries as well. In fact, with the new challenges of a hyper-aging society punctuated by a rapidly-declining domestic population, a sharply-appreciating yen, and, above all, the rapid growth of newly-developing overseas markets looming before them, nearly every company in Japan, regardless of its industry or size, has established "the expansion of business overseas" as its growth strategy. But to what extent have companies actually initiated genuine efforts towards that end? More than anything else, companies are being required to undergo a major transformation that includes their head office in Japan, since promoting globalization goes beyond simply a change in departments overseeing overseas business. It is not an exaggeration to say that the future of the Japanese economy in 2012 rests on whether or not Japanese companies are able to take the step toward a major transformation in the name of globalization.

Japanese companies are easily 10 years behind in globalization efforts

Efforts by leading companies in Europe and the United States to transform themselves in the name of globalization began around 2000. For Proctor & Gamble (P&G), the market leader in shampoo and other consumer goods and a classic example of a multinational corporation, those efforts began in 1999. Nestle, the world's leading food products manufacturer, began standardizing its operations in each overseas market in 2000 while also continuing to place importance on its handling of individual markets. Compared to these corporations, Japanese companies are easily 10 years behind in addressing globalization. To begin with, not only are the majority of Japanese companies not multinational, but also, for all intents and purposes, are focused on the domestic market. At best, they end up as international companies that expand a portion of their operations (processes between manufacturing and sales, etc.) overseas.

What leading companies in Europe and the United States illustrate to us as a precedent is that global business growth requires companies to undergo a "painful" transformation as a whole. The confusion that awaited P&G upon electing to globalize itself in 1999 was truly no easy matter to overcome. For P&G, which, until then, had endeavored to optimize its business on a per-region basis for over 100 years, the extent of the company's transformation was such that its CEO had no option but to resign. However, the succeeding CEO, A.G. Lafley, pushed forward corporate reforms that established globalization as a path from which P&G would not stray.

Spare no effort in aiming to globalize on one's own terms

It will not be easy for Japanese companies to overcome the challenges that they face. At the same time, they cannot stand by and wait for someone else to address the so-called "sextuple whammy" as represented by the likes of corporate tax. Moreover, there is no cure-all for these issues. And yet, it is also evident that there is no future without global business growth. The key to success in this regard lies in leadership to push forward globalization staunchly on a companywide level. Looking at corporations such as Ajinomoto, Kao, Komatsu, Japan Tobacco (JT), Nissan Motor, and Shiseido, all of which represent Japanese companies that have initiated dynamic changes in globalizing their respective businesses, what these companies also have in common is that their top management go beyond simply talking about the need to globalize and instead demonstrate leadership in executing major transformation that involves required courses of action and, in particular, required changes in head office functions. This fact shows us that the Japanese corporate world as a whole is by no means suffering at the hands of global business growth; rather, it suggests to us that the bottom line is the success or failure of global business that depends on the degree to which each corporation is equipped with transformational leadership.

Where optimum globalization is concerned, no corporation possesses a single, absolute correct answer that promises effectiveness. Corporate leaders, after taking into consideration their organization's mission, philosophy, and competitive advantages, must produce that organization's own right answer. In a nutshell, this means capitalizing on prevailing trends such as the offensive stance of Chinese and South Korean businesses, the growth of newly-developing markets, and IT as core technologies for innovation as enablers for pursuing a fundamental corporate transformation. However, one must also not lose sight of the importance of what is to be changed and what is to remain the same when engaging in such a transformation. Even more important is ensuring proper priority in the distribution of business resources upon that transformation. What the stagnancy of Japanese companies in the last 20 or so years has taught us is that the basis of transformation lies in "thoroughly building up one's strengths and humbly studying one's weaknesses." Moreover, business resources must be allocated in greater proportion to the former.

Whatever the best answer to addressing globalization may be, no business growth is achievable without a companywide transformation that includes head office functions. Executive management in Japan must arm itself with considerable readiness and make all employees break away from their safe refuge limited only to the Japanese language and people. No one said that escaping this "safe refuge" is an easy change to make. This is precisely why strong leadership is essential. Everything is a corollary to the resolve of leaders who embark on major transformational efforts with the mentality that globalization is the only means of survival. The key to opening the way to the future of the Japanese economy in 2012 lies in getting past blaming the "sextuple whammy" for sluggish business performance and instead capitalizing on the situation as an opportunity for self-evolution in the name of global business growth.

January 5, 2012

January 5, 2013

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