Commentary / Japan

Two winds are blowing through Japan

The gale-force Fourth Industrial Revolution and external turbulence are buffeting the economy

by Heizo Takenaka

There are strong winds blowing in Japan. People might think this refers to the developing political situation as the nation braces for the Oct. 22 Lower House election. True, it is extremely important to assess the movements — to see what kind of government will emerge as a result. However, Japan’s economy is now awash in two more important winds of a global scale.

One is perhaps best characterized as turbulence. A series of unexpected events last year — ranging from the Brexit decision by the United Kingdom to leave the European Union to the surprise election of Donald Trump as president of the United States — had a major impact on the economy.

Symbolic of this impact were the rumblings on the stock market. The Tokyo Stock Exchange’s Nikkei 225 average, which began 2016 at around 18,400 points, fell below 15,000 in the wake of the Brexit vote in late June. Then Trump’s upset win in November — and his announcement of a massive fiscal stimulus plan, featuring $8 trillion in tax cuts and infrastructure investments over 10 years — triggered the “Trump rally” in stock markets, with the Nikkei closing the year above 19,100. The Tokyo market had dropped 20 percent in the first six months of 2016 — only to surge 28 percent in the rest of the year.

The unexpected turbulence that originated abroad caused sharp ups and downs in share prices in Japan. Added to this is the destabilizing situation surrounding North Korea, which threatens to cause further turbulence going forward.

At the same time, another wind is blowing in Japan. Unlike turbulence, this wind blows constantly like the westerlies and reaches everywhere. It’s called the Fourth Industrial Revolution and is blowing in growing intensity in recent years. Various elements — as symbolized by artificial intelligence and robotics — combined are creating a new socio-economic trend.

The root of the Fourth Industrial Revolution is said to go back to “Industry 4.0” — a theme the German government started using in 2011. In Germany at the time, it was considered a measure to improve productivity in manufacturing, such as the “internet of things.” Today, it is viewed as a broader concept that encompasses five elements — artificial intelligence, robots, internet of things, big data and the sharing economy.

In 2012, policy discussions were launched in the U.S. and Britain for developing a scheme for greater utilization of big data. According to Yutaka Matsuo, an AI expert at the University of Tokyo, 2012 was the year that witnessed the landmark technological breakthrough — deep learning, in which AI programs, without the help of humans, acquired the process to learn by themselves and get wiser. What happened as a result of this development was quite impressive — AI programs have come to win nearly 100 percent of their matches against master players of the board game go.

In Japan, it was only in 2016 that the term Fourth Industrial Revolution was used for the first time in the government’s economic growth strategy. Japan’s policy recognition of the issue came four to five years later than in Germany, the U.S. and Britain, and in that sense we should have a sense of crisis. But, as Matsuo suggests, Japan, even though it may have lagged behind in the development of artificial intelligence technology, is still in a position to excel in incorporating AI into robots to connect the technology with machinery.

One good example here is the “smart construction” service offered by major construction machinery firm Komatsu Ltd. In building the foundation at a construction site by creating a layer of earth over a flat surface, a drone is flown to survey the land, which is linked to the calculation of the most rational ways of mounting the earth, creation of the design, computing the hours of bulldozer operation, as well as reservation of the machinery through the internet of things. Work that previously needed a full-day of bulldozing by a skilled worker can now be completed by clerical staff in just three hours. The service has already been put to practical use at more than 1,000 construction sites.

Japan is indeed at an extremely important juncture as it seeks to ride the wave of the Fourth Industrial Revolution while bracing for unexpected turbulence. In this respect, the government’s growth strategy, adopted by the Cabinet in June, featured two major policy decisions.

One is the scheme to facilitate greater utilization of big data. Last December, a basic law proposed by a group of lawmakers for utilizing big data in both the public and private sectors was approved by the Diet. Based on that, the growth strategy called for the launch of a command-control organization to promote the use of big data. It was decided that private-sector experts, not the government bureaucracy, will take the lead in this effort.

The other important decision was the creation of a so-called regulatory sandbox. In attempting to launch new products such as self-driving cars and financial technology, a system will be needed to relax existing regulations to enable free experimentation under certain rules. That is called a regulatory sandbox. Singapore has already established a regulatory sandbox system. There, Bank of Tokyo-Mitsubishi UFJ and Hitachi Ltd. have started testing the use of blockchain technology in the digitization of checks. Introduction of the sandbox system was decided at the strong urging of Prime Minister Shinzo Abe.

A whole variety of issues are being discussed in the campaign for the Oct. 22 election, ranging from the necessity of amending the Constitution to whether to proceed with the planned consumption tax hike. I hope the discussions will also cover a future-oriented agenda, such as how Japan should ride the westerly wind of the Fourth Industrial Revolution while averting turbulence.

Heizo Takenaka, a professor emeritus of Keio University, served as economic and fiscal policy minister in the Cabinet of Prime Minister Junichiro Koizumi from 2001 to 2005. He is a member of the government’s Industrial Competitiveness Council.