Overhaul industrial policy to bolster the economy

by Shinji Fukukawa

Japan’s industrial power is so stagnant that it seems a crisis is in store for our economy. Even as it lags far behind the United States in creating intelligent information systems, Japan is finding that South Korea, Taiwan and China are catching up with it in manufacturing.

For example, in the global flat-panel television market, South Korea’s Samsung Electronics has gained the largest share for four consecutive years. Japan, which had taken the lead in LED technology, has since failed to make much use of it in developing LED TVs.

As for 3D TV, a promising product with prospects for explosive market growth, South Korean manufacturers have started sales ahead of Japanese makers. In 3D personal computers, Taiwan is running in front. In the production of iPads, which is likely to see a worldwide boom, there are few Japanese parts and components being used. Top positions that Japan previously held in the production of industrial products such as steel and personal computers have gone to China.

From the 1980s the interests that the Japanese government and society had in the nation’s industrial competitive power have waned; market-first thinking has added to that trend. Japanese industries were in good shape in those days. Over time Japan has advocated knowledge intensification in its industrial structure but lagged in efforts to industrialize sophisticated products with capabilities matching those of the iPhone and the iPod.

In the current age of global mega-competition, South Korea and China are competing favorably in the world market under joint initiatives of their governments and private sectors, while Japan has left initiatives to the private sector. Also in the production of animated movies and videos, South Korea and China are catching up with Japan.

The myth about Japanese manufacturing skills has become a thing of the past. Japan badly needs to take serious steps to rebuild its industrial policy; otherwise, the Japanese economy will sink deeper. To cope with this situation, the following four measures should be implemented:

• It is necessary to improve the environment surrounding the nation’s enterprises. The corporate tax rate in Western countries is about 30 percent on average and ranges from 20 percent to 25 percent in emerging economies, but Japan’s corporate tax rate is an unfavorable 40 percent.

Regulatory reforms in this country remain stagnant. The government has vowed to develop medical welfare services into a growing industry, but the way has not been paved yet for these services to stand on their own as an industrial sector. Foreign demand for regulatory reforms in other services is strong, but the government is apparently dragging its feet about addressing the matter.

The government clings to a policy of reducing greenhouse-gas emissions 25 percent by 2020 from 1990 levels, but the severity of this policy has prompted many Japanese and foreign enterprises to plan moving their operations to other countries.

South Korea has concluded free-trade agreements with the U.S. and the European Union and as a result Japanese enterprises are now at a disadvantage. China is also strengthening cooperative ties with other nations in Asia, Africa and the Middle East.

• Clear-cut road maps for growth should be worked out and presented. The government plans to draw up by June its growth strategy aimed at achieving annual national economic growth of 3 percent in nominal terms and over 2 percent in real terms through 2020.

In this connection, it intends to generate demand in the environment and energy sectors, where Japan has an edge over other countries, as well as in health-related sectors including medical services and nursing care, and develop new fronts by promoting ties with other Asian nations and vitalizing tourism and regional development.

The government should come out with a grand growth vision and, at the same time, announce road maps and policies for sectors that can expect high growth. Without promotion of exports, the gap between demand and supply amounting to as much as 7 percent of gross domestic product cannot be filled.

Should medical services, nursing care and health care be developed into growing industries, a considerably long time and major policy reforms would be needed for them to gain sufficient industrial power capable of leading the nation’s economic growth. If environment-related industries are to be called on to play a major role in economic growth, the government must opt for a method of presenting development targets as well as incentives instead of relying on the regulatory method.

• Effective measures should be taken to revise corporate models. It is regrettable that Japanese enterprises’ international earning power is going down. Since the Asian currency crisis of 1997, South Korea has stepped up the consolidation of industries under government initiative. As a result, South Korean enterprises in the automobile, steel and mobile phone industries are 1 1/2 to two times larger than their Japanese counterparts.

In the expanding world markets for lithium-ion batteries, car navigation systems and liquid-crystal display panels, Japanese makers’ shares have been declining. That’s because Japanese companies have continued passive investment strategies, sticking to their traditional vertical-type management model that emphasizes cost reduction and failing to switch to the transverse-type corporate model, which is better for innovations in technology and marketing.

• It is necessary to improve social infrastructure to encourage innovation. Sources of growth are technological development capacity, management power and human resources. The government’s basic policy on growth strategy calls for raising the ratio of spending on research and development to 4 percent of GDP. But it needs to show policy priorities and specific measures.

Japan needs to invite foreign researchers and managers as the U.S. does. With Japanese investment in venture enterprises slowing, it is essential for the government to enhance policy steps aimed at providing powerful assistance to such enterprises.

Japan’s way to economic recovery lies in its efforts to intensify cooperation between the government and the private sector while rebuilding its industrial policy.

Shinji Fukukawa, a former minister of the Ministry of International Trade and Industry and president of Dentsu Research Institute, is chairman of the Machine Industry Memorial Foundation.