Commentary / Japan

Making Japan a major force in the Fourth Industrial Revolution

by Heizo Takenaka

There was one major common feature in the speeches given by top-class government leaders from 70 countries and regions who attended the World Economic Forum in Davos, Switzerland, this year. The leaders devoted a large portion of their speeches on their policy responses to the Fourth Industrial Revolution. An economic growth mechanism radically different from the old model is emerging through a greater use of artificial intelligence, robots and big data, and countries around the world are competing with one another to respond proactively to such radical changes in the economic environment. What possibilities exist for Japan under these circumstances? Japan needs to overcome two major challenges, but the nation also has two advantages.

The first challenge that needs to be overcome concerns the government’s slow response. Japan is gradually awakening to the need to cope with the major wave of the Fourth Industrial Revolution. The government’s response, however, lagged a bit behind other major industrialized countries. Germany is said to have used the term “Industry 4.0” at the 2011 Hannover Messe. Looking back, discussion about measures to facilitate the use of big data became active in the United States around 2012. That was the time, experts say, when there was a major breakthrough in artificial intelligence technology. The so-called deep learning technology was put to practical use, which accelerated the subsequent evolution in the economy’s environment.

It was only in 2016 onward that comprehensive discussion about response to the Fourth Industrial Revolution began as the government updated its growth strategy each year. The growth strategy of 2017 featured concrete policy steps such as: 1) setting up a public-private sector command organization to facilitate the use of big data; 2) creation of a “regulatory sandbox” that beefs up the special district system to speed up regulatory reforms; and 3) launch a government subsidy for recurrent education to strengthen human resources development. A legislation has been submitted to the ongoing Diet session to establish the regulatory sandbox. It is a major task for the government to have the legislation enacted quickly and introduce effective deregulation.

The second challenge confronting Japan is the need to enhance its corporate governance mechanism. For some time now in Japan’s corporate sector, the ratio of new businesses being launched and that of companies exiting the market were both about half the level in the United States — meaning that industrial metabolism is weak in Japan. Under the dynamic economic environment driven by the Fourth Industrial Revolution, it is crucial to boost this metabolism, and what’s needed for that is to beef up the corporate governance mechanism.

Under the reforms introduced since the launch of the administration of Prime Minister Shinzo Abe, the Tokyo Stock Exchange adopted the Corporate Governance Code in 2015. Today, 96 percent of listed companies have outside directors on their board, which consequently raised the firms’ return on equity. But under the current system, the companies are only required to make efforts to appoint outside directors since the rules are nonbinding, and the target set under the rules only tells each firm to have at least two outside directors.

Right now, a review of the corporate governance code is under way by the government. Along with reform of the labor market, it is a major challenge of Japan’s economy amid the wave of the Fourth Industrial Revolution to activate its industrial metabolism through corporate governance reforms.

Meanwhile, the Japanese economy has two advantages over other countries in promoting the Fourth Industrial Revolution. One is that there is an overwhelming demand in society for greater use of AI and robotics. A frequently cited scenario in the discussion over the Fourth Industrial Revolution is that work done by humans today will be replaced by artificial intelligence, leading half of the existing jobs to disappear in a decade or two. In Japan, labor supply shortage is already becoming acute due to its shrinking population, and a strong social need exists to proactively get AI and robots to take over human labor. Concern does exist in Japan that people’s jobs will be eliminated through the Fourth Industrial Revolution. But compared with other countries around the world, Japan is in an environment where such concern may be most unwarranted.

In the Fourth Industrial Revolution, the biggest hopes in the immediate future fall on self-driving vehicle. Particularly in rural areas, where bus and taxi services are scarce, expectations are high that autonomous cars will solve the problem of people lacking access to public transportation. In the distribution sectors such as trucking business, the shortage of drivers is an increasingly serious problem, and the problem is starting to affect people’s daily lives by raising parcel delivery rates and reduced service hours of the delivery companies. It’s hoped that self-driving technology will serve as an effective solution to these problems.

Another advantage that Japan can be expected to enjoy is its technological foundation. Of course, assessment of technologies will be complex and Japan’s technology may not be simply deemed superior to its rivals’ in many areas. But, for example, in the field of self-driving technology, Japan holds major technological advantages in such areas as automobiles, sensors and camera. In other words, Japan has a potential advantage in the components of the future technologies.

Japan has the social needs and the technology that propel the Fourth Industrial Revolution. The nation needs to make sure that the slow policy response and weak corporate governance will not obstruct that process.

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.