Priorities for the Japanese Economy in 2017 (January 2017)

Is Uncertainty Really a Problem?

Senior Fellow, RIETI

There's been a small boom in the debate on uncertainty at RIETI. Our fellows recently have written several discussion papers and a column on this topic [1-4]. Overall, their conclusions suggest that uncertainty is a problem because production and investment decline when uncertainty is high. The conclusion that greater uncertainty leads to lower production and investment seems reasonable, but I am not convinced that we can then state that uncertainty itself is a problem.

The world is an uncertain place

Uncertainty is unavoidable in the real world. We never know when the next big earthquake or tsunami will strike, and many financial and economic crises happen suddenly. Globalization also comes with uncertainty. In a globalized society, changes occurring in one part of the world can soon affect other parts, and it is hard to predict what kind of changes will happen in advance. Perhaps one good way to avoid uncertainty is to shut ourselves off from the rest of the world, as Japan did in the Edo Period, but few people would likely agree to that. The Trans-Pacific Partnership is a good example of how there will always be uncertainty when a government tries something new. If we disavow uncertainty, we disavow change.

Is Japan as a country unable to tolerate uncertainty?

Perhaps the real problem is not uncertainty itself, but the inability to tolerate uncertainty. There is research suggesting as much. Geert Hofstede created an Uncertainty Avoidance Index (UAI) and calculated each country's degree of uncertainty avoidance [5]. Of the 53 countries and regions surveyed, Greece was the most uncertainty-avoidant, followed by Portugal, Guatemala, Uruguay, Belgium, El Salvador, and Japan, in that order. In other words, Japan was one of the most uncertainty-avoidant countries. Hofstede's UAI has been used in many examples of research, which have indicated the following trends. It is hard for a new industry (namely, an industry for which there is little information) to develop in a highly uncertainty-avoidant country [6]. In highly uncertainty-avoidant countries, private investment falls sharply during an economic crisis [7]. In Asian countries, venture capital investing activities are weaker in countries that avoid uncertainty [8]. Investors in countries that avoid uncertainty are unlikely to invest in countries with which they are unfamiliar [9]. A high degree of uncertainty avoidance in a country has a negative impact on innovation there [10]. Countries that avoid uncertainty have a high savings rate [11].

Hofstede's UAI also has appeared in a RIETI discussion paper, which concluded that companies in countries where the business culture avoids uncertainty react more negatively to acquisitions that are of greater uncertainty than investing in themselves. This is especially true of cross-border acquisitions [12].

A tendency to be uncertainty-avoidant is not always a bad thing, but I think we can understand intuitively that in contemporary Japan, it is often more of a negative than a positive. In times such as these, where there is no clear path forward (unlike Japan's period of high economic growth, when there was a definite model), I believe that countries where many citizens want to avoid uncertainty are at a disadvantage.

A mentality that is unable to tolerate uncertainty

Up to this point, we have considered uncertainty avoidance at the national level, but a similar dynamic is at work at the individual level. Some people can tolerate uncertainty while others cannot. There have been research efforts in the field of psychology on people who cannot tolerate uncertainty. They indicate that an intolerance for uncertainty is a feature common to many mental health problems [13, 14]. For example, people with a low tolerance for uncertainty are more likely to feel depressed or anxious. So uncertainty avoidance is also a mental health problem. Moreover, recent research indicates that people with a strong tendency to avoid uncertainty also tend to hoard things [15].

Although not scientifically proven yet, Japanese companies with many uncertainty-avoidant personnel may tend to hoard money excessively. In addition, such companies may not see their uncertainty-avoidant behaviors as a problem because they have too many people who want to avoid uncertainty. For such companies, uncertainty may be to blame instead of their uncertainty-avoidant tendency.

Can people be trained to tolerate uncertainty?

If the inability to tolerate uncertainty is a mental problem, perhaps an effort to improve mental health would be useful to some extent. Cognitive-behavioral therapy is known as a treatment for depression and anxiety disorder. Research suggests that cognitive-behavioral therapy can be used to lessen uncertainty-avoidance tendencies [14]. Other research on people with panic disorder or generalized anxiety disorder, though small in scale, shows that a program centered on a type of meditation called mindfulness was effective for helping people break free from uncertainty avoidance [16, 17]. Many Japanese people may be hesitant and resistant to the practice of meditation, but resistance to it may be falling. Google Inc., for example, incorporates meditation into its training [18], and the subject has been even covered on Tameshite Gatten, a popular program on NHK. One approach may be to create coaching programs built on cognitive-behavioral therapy or mindfulness and ask business executives to work with them.

On the other hand, just working to improve mental health may not be enough if it turns out that the uncertainty avoidance of the Japanese is not a mental problem but instead a cultural one. We cannot know unless we verify by experimentation. Here, too, there is uncertainty.

December 28, 2016
  1. ITO, Arata, "Policy Uncertainty and Economic Activity," RIETI Discussion Paper Series 16-J-016.
  2. Morikawa, Masayuki, "Policy Uncertainty: Evidence from survey data," RIETI Policy Discussion Paper Series 16-P-005.
  3. Morikawa, Masayuki, "Business Uncertainty and Investment: Evidence from Japanese companies," RIETI Discussion Paper Series 16-E-014.
  4. Zhang Hongyong, "Resolving Trade Policy Uncertainty to Promote Trade and Innovation," RIETI website, 2015.
  5. Hofstede, G.H., Culture's consequences: Comparing values, behaviors, institutions and organizations across nations. 2001, Thousand Oaks, CA: Sage.
  6. Huang, R.R., "Tolerance for uncertainty and the growth of informationally opaque industries." Journal of Development Economics, 2008. 87(2): p. 333-353.
  7. Inklaar, R. and J. Yang, "The impact of financial crises and tolerance for uncertainty." Journal of Development Economics, 2012. 97(2): p. 466-480.
  8. Tran, T.X., T.L. Nguyen, and T.H. Nguyen, "Affect of uncertainty avoidance on venture capital investing activities in Asian countries." Asian Social Science, 2016. 12(12): p. 152-172.
  9. Erdogan, B., The role of uncertainty avoidance in foreign investment bias. 2014, University of Trier, Department of Economics. Retrieved from
  10. Efrat, K., "The direct and indirect impact of culture on innovation." Technovation, 2014. 34(1): p. 12-20.
  11. Shoham, A. and M. Malul, "The role of cultural attributes in savings rates." Cross Cultural Management: An International Journal, 2012. 19(3): p. 304-314.
  12. Bremer, M., et al., "Uncertainty avoiding behavior and cross-border acquisitions," RIETI Discussion Paper Series 15-E-033.
  13. Carleton, R.N., "Into the Unknown: A review and synthesis of contemporary models involving uncertainty." Journal of anxiety disorders, 2016. 39: p. 30-43.
  14. Shihata, S., et al., "Intolerance of uncertainty in emotional disorders: What uncertainties remain?" Journal of Anxiety Disorders, 2016. 41: p. 115-124.
  15. Oglesby, M.E., et al., "Intolerance of uncertainty as a vulnerability factor for hoarding behaviors." Journal of Affective Disorders, 2013. 145(2): p. 227-231.
  16. Alimehdi, M., et al., "The effectiveness of Mindfulness-Based Stress Reduction on Intolerance of Uncertainty and Anxiety Sensitivity among Individuals with Generalized Anxiety Disorder." Asian Social Science, 2016. 12(4): p. 179.
  17. Kim, M.K., et al., "Impact of mindfulness-based cognitive therapy on intolerance of uncertainty in patients with panic disorder." Psychiatry Investigation, 2016. 13(2): p. 196-202.
  18. Tan, Chade-Meng, Search Inside Yourself: The Unexpected Path to Achieving Success, Happiness (and World Peace). 2012, HarperOne

January 17, 2017

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