BEPPU, OITA PREF. – The Heisei Era is coming to an end. Many readers may not be familiar with the era name system. Numerous East Asian countries adopted the system that originated in ancient China. Japan still uses this system, taking a new era name every time a new emperor ascends the throne. With Emperor Akihito set to abdicate at the end of April, a new era name will come into being on May 1 when his son, Crown Prince Naruhito, takes the throne. Let us look back on the past 30 years of the Heisei Era.
In the first year, or 1989, Japan’s gross domestic product (on a purchasing power parity basis) accounted for just shy of 9 percent of the world economy. Fourteen of the world’s top 20 companies in terms of market value were Japanese, led by NTT Corp. In those days, “Japan as No. 1” was literally true. Japan was at the top in terms of international competitiveness, according to the International Institute for Management Development (IMD).
In 2018, Japan’s share of the world’s GDP has more than halved to 4.3 percent, and Japanese firms have disappeared from the global top 20. Toyota Motor Corp., the top Japanese company, has fallen all the way to 35th place. Japan’s international competitiveness has fallen to 26th.
What has gone wrong? A look at who replaced Japanese firms in the global top 20 gives us an answer. They are from the new service sector, as represented by Google, Apple, Facebook and Amazon, collectively referred to as GAFA. Japan’s past strength was in its manufacturing. The manufacturing plant model was the engine of Japan’s miraculous postwar economic development. But as the industrial structure of developed countries shifted from manufacturing to the service industry, Japan failed to give birth to companies like GAFA or their next-generation followers, the so-called unicorn ventures (startup companies with valuations of $1 billion or more). Clinging to its manufacturing model appears to have caused the stagnation in Japan’s economy.
In fact, the weight of manufacturing in Japan’s GDP is now less than a quarter of the total and heading toward one-fifth. Indeed, Japan’s manufacturing is blessed with high productivity and can be called the nation’s treasure. However, it can no longer serve as a driving engine of our economy and society, given its fallen weight in GDP. Japan has no choice but to create a new industry. The United States is said to have more than 100 unicorns, China more than 70 and the European Union 31. But Japan has very few.
How is manufacturing different from GAFA and unicorns? A general picture of manufacturing workers worldwide is that university graduates account for less than half of them. What is required in manufacturing is human resources who are obedient, persevering, cooperative and able to read the situation and heed the orders of their bosses without question. Long hours of work are suited for manufacturing. Since manufacturing plants or equipment do not get tired, 24-hour work is the most efficient. Such characteristics suit the current situation in Japan surprisingly well.
In Japan, 52 percent of high school graduates go on to universities, much lower than the OECD average of slightly more than 60 percent among 35 advanced economies. The ratio of university graduates who go on to graduate schools is much lower. Students at Japanese universities do not study much at school — since they are seldom asked about their scholastic performance during job interviews. Once they start working, long hours force them to lead a life of just eating, bathing and sleeping, and leave little time to study. For the past quarter century, annual working hours for full-time workers have not decreased at all, remaining at 2,000-plus hours.
In contrast, most workers at GAFA and unicorns are university graduates and come from a variety of countries. Most of those in senior positions have two master’s degrees or two doctorates. Most of these businesses are aggregates of individuals with strong personalities, in other words, eccentric people like Steve Jobs. Silicon Valley is well-known as a place where unicorns are born, and highly competitive universities play a crucial role in the community. In short, unicorns are born out of open discussions among highly educated youths with rich characters from around the world, in an academic environment full of diversity.
If that is the case, giving birth to unicorns in Japan will require nothing but education that values and nurtures extraordinary individuality in order to avoid homogenization of society and creating enchanting places that can attract eccentric people from all over the world — and universities will be the best candidates to play such roles.
Japan needs drastic structural reform that will entirely change a society that has over-adapted to the manufacturing model. To carry this out, investment in education will be essential.
Japan’s investment in education is the lowest among OECD members. The competitiveness of Japanese higher education is so weak that only two institutions are among the world’s top 100 universities. The root cause of the problem lies in Japan’s failure to rebuild its fiscal health, with its efforts to improve the primary budget balance remaining slow. While Japan’s national burden rate — or the tax and social insurance premium burden combined — is below the OECD average, its benefits as represented by social security spending are higher than the average. Japan, a nation with a low public burden and mid-level benefits, has filled the gap by borrowing (through issuing government bonds), but this approach is nearing its limit.
Comparing the fiscal 1989 budget with the current budget shows that while outstanding government debt has increased due to the steep rise in social security spending for the aging population, total investment on policy measures such as education, defense and public works has barely increased. You can’t give what you don’t have. Unless Japan regains the primary balance surplus as quickly as possible and starts actively investing in education, the sun may never rise again on this country.
People have different personalities just as they have different appearances. The most important thing is for all of society to nurture people full of individuality like Jobs by cherishing differences among individuals. More spending on education is crucial to make that happen.
Besides shedding the manufacturing model and improving the primary balance, there is another crucial policy challenge. That is, creating a society in which giving birth and raising children is easy. History shows that no country or region that has experienced a population decline has prospered. Among developed nations, women’s position in Japan is embarrassing — 110th among the 149 nations covered by the United Nations gender inequality index. The difficulty that people face in raising children here has contributed to lowering the fertility rate.
Even if Japan is to start accepting immigrants, the population will not grow as long as child-rearing continues to be difficult. Japan needs to create a society in which child-rearing will be easier than anywhere else in the world — by upgrading the roles of women in society through such steps as introduction of a quota system, and adopting measures to enable women to pursue both a career and having children, as is the case in European countries. If this is done, people with a strong sense of individuality from all over the world will gladly come to Japan — in essence, killing two birds with one stone.
Haruaki Deguchi is the president of Ritsumeikan Asia Pacific University in Beppu, Oita Prefecture. A popular lecturer and author of more than 30 books, he founded Lifenet Insurance in 2008 after a career spanning nearly 35 years at Nippon Life Insurance Co.