Commentary / Japan

Nurture Japan's strength to innovate

Japan’s economy has certainly been revitalized since the Abe administration started taking aggressive measures seven years ago, mainly in monetary policy.

As a symbolic gauge of economic performance, share prices as measured by the Nikkei 225 average on the Tokyo Stock Exchange have risen by more than 2.5 times over the past seven years. In the labor market, the ratio of job openings to job seekers increased from the low point of 0.5 to 1.6, while the jobless rate has dropped to below 2.5 percent, creating nearly full employment.

On the other hand, the reputation of the so-called growth strategy — as a core policy of Abenomics — has not necessarily been good. Deregulation remains slow, and there is criticism that the nation lacks the manpower to take charge of the Fourth Industrial Revolution.

An analysis of the evidence behind such observations reveals interesting points concerning the strength and weakness of the Japanese economy.

In 2013, the administration of Prime Minister Shinzo Abe clarified a key performance indicator (KPI) in its deregulation drive — setting a target of putting Japan in one of the top three slots in the World Bank’s “Doing business” index. This gauge identifies 10 areas of regulation on doing business in each of the 190 countries surveyed, in categories such as launching a new business, tax levels and execution of contracts, and grades each country in terms of the ease of doing business there. However, Japan’s ranking has declined from 15th place in 2013, when the target was set, to 26th in 2017 before seeing a minor improvement to 24th in 2018.

The Index of Economic Freedom by the Heritage Foundation in the United States puts Japan in 30th place around the world while Hong Kong is rated as No. 1 in the world, followed by Singapore and New Zealand. The U.S. is rated as 12th, while China comes in at No. 100. Japan trails behind such other Asian countries and regions as Taiwan (10th), Malaysia (22nd) and South Korea (29th).

Regulations firmly guarded by groups with vested interests protected by the rules — in collusion with bureaucrats and elected officials — are often referred to as bedrock regulations. A typical example is Japan’s rules against ride-sharing services, which remain in place due to opposition from the taxi industry. Collusion among industry sectors, bureaucrats and politicians that resists reform is known as the “iron triangle.” Such phenomena are also observed in other countries to varying degrees, and breaking down the barriers to reform in Japan is deemed particularly difficult because the government bureaucracy is so strong.

In November, the Center for Global Innovation Studies at Toyo University, of which this author serves as head, released the Global Innovation Index assessing each country’s power to innovate. The index is created by choosing and integrating 58 comparable indicators in five major areas — international cooperation, market trends, technological innovation, human power and related policies. It ranks 60 countries for which statistics relevant to the index are available.

The ranking itself is important. But what’s more important is to gain policy implications from the index — to assess the nation’s strength and weakness from the viewpoint of its power to promote innovation, and what can be done to beef up its innovative power. Singapore, Luxemburg and Switzerland occupied the top three rankings, in that order. Japan came in 32nd place among the 60 countries — behind the United States (ninth), China (15th), Germany (20th) and South Korea (29th).

Japan fares poorly in the overall ranking, but its characteristic is that while the nation came in third in technological innovation, it was ranked extremely low — 57th — in terms of human power. This index indeed gives heavy weight to human power — 19 of the 58 indicators, or roughly one-third of the total, concern human power. Among the 19 indicators are ones for which an immediate improvement cannot be expected through quick policy steps, such as the ratio of the working-age population to the national total, in which Japan was ranked 60th.

But there are many indicators on which improvements will be possible through greater efforts by the public and private sectors — such as English ability as gauged by TOEFL scores (for which Japan was ranked 58th), the ratio of women in management positions (53rd), the willingness of students to start up businesses (43rd), the ratio of students from overseas (35th) and ranking of universities in natural science fields (32nd).

Japan’s ranking of 32nd in the Global Innovation Index compares with its rating of 30th in the world competitiveness ranking by IMD of Switzerland and 15th in innovation as determined by Cornell University in the U.S.

Either way, it is of utmost importance that Japan beef up the competitiveness of its higher education institutions such as universities, revamp global education and entrepreneurship education, and improve the diversity of the labor force through work-style reforms. It must be realized that the labor market and education are the very fields where obsolete regulations that do not match the needs of the times remain deeply rooted.

Abe has repeatedly emphasized that deregulation is the top priority of his administration’s growth strategy. Yukichi Fukuzawa, who spearheaded education reform in Japan during the Meiji Era, stated that the foundation of nation-building is people-building. We have to once again face up to the challenges that Japan must overcome on the two fronts of deregulation and human power.

Heizo Takenaka, a professor emeritus at 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.

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