How forward-thinking companies are reviving Japan

A small group of large Japanese corporations are transforming their business practices. Can they catalyse a reversal of Japan’s long-term economic deterioration, boost global growth and transform Japanese society? If so, they may also serve as role models for how the private sector can catalyse growth in other economies struggling with similar issues.

The Japanese economy has been dormant for such a long time, it has come to be largely ignored by the rest of the world. Japan enjoyed brilliant growth after the Second World War to become the first modern economy in Asia and second-largest economy in the world. But it has stagnated since the 1990s. The Nikkei 225 Index remains nearly 60% lower than its December 1989 peak.

One reason for economic stagnation is demographic. Japan is the world’s oldest and most rapidly ageing society. Over 30% of the population is over the age of 60, and the current population of 127 million is likely to shrink to 100 million by 2060.

The declining performance of Japanese companies, with their traditional management practices, has not helped. Stereotypical Japanese firms focus more on sales and market share than profitability and return. Their HR policies are skewed unfairly to favour Japanese male employees who joined the company after graduation, failing to tap the skills of women and outsiders. C-suite executives are not professionally trained business leaders but salarymen who made the fewest mistakes in their career, in a culture where avoiding failure is seen as more important than being entrepreneurial. Executives give shareholders a lower priority than other stakeholders. When they purchase non-Japanese companies, they fail to integrate them to grow corporate value.

Consequently, previously world-beating Japanese companies have been overtaken by rivals from other countries, as for example in the consumer electronics industry. Japanese companies accounted for 35% of Fortune Global 500 revenue in 1995, but only 13% by 2011.

Many leaders have tried and failed to reignite Japanese economic growth. The latest is Prime Minister Shinzo Abe, with his “Abenomics” policies. Unprecedented monetary and fiscal measures have had some success, although constrained by demographics as older people are less likely to respond to low interest rates by expanding purchases. Efforts at structural reform have been slow, with Japan’s older population strongly resisting changing the status quo. Now a new factor is emerging which could drive growth in Japan – forward-thinking Japanese companies are reforming their outdated business practices. The shift is still small and not widely recognized. It involves more dynamic professional management, a revolution in human resource practices, focus on growth and return, better governance with increasing shareholder rights, and better executed mergers and acquisitions.

While none of these companies are executing all these strategies at the same time, the best examples are probably the ones that have completed the most difficult and painful step for traditional Japanese companies – bringing in a complete outsider to lead a company. As this goes squarely against the traditional seniority system, it can be viewed as a highly visible commitment to embarking on meaningful changes. In the past year alone, Takeda (pharmaceutical), Shiseido (cosmetics) and Suntory (beverages) have brought in an outsider as a new leader, with growing expectations for transformation.

Actions taken by large companies are crucial not only because they point to the emergence of a new, more dynamic business model, but also because these institutions are arguably the most important in Japanese society, often more significant than individuals, families and government. If they are mobilized, they could be a powerful change agent in driving growth and opening up Japanese society. This could include, for example, addressing the gender gap – the largest in the world – by giving women more opportunities.

The potential revival of Japan’s business sector could also help drive global growth again. The above-mentioned appointments are dramatic especially because these companies are market leaders in their respective industries. If the market leader successfully transforms itself, it is very likely that other companies will follow, eventually lifting up an entire industry – and if enough industries improve, the overall Japanese economy could be lifted up. Despite its stagnation, Japan remains the world’s third largest economy and a significant player in global economic performance.

And this revival could also serve as a case study for other countries struggling with similar economic issues. As politicians in other advanced countries worry about the possibility of long-lasting economic stagnation, if Japan emerges successfully from its own stagnation driven by its large companies, its experience could offer useful lessons to others. Challenges remain to be overcome if the Japanese business sector is to transform itself. Only a few companies are actively embracing the changes, and traditionalists remain resistant. However, more companies will follow if the early movers are seen to be successful – and placing this shift on the global agenda could increase support and encouragement, thereby helping to create self-perpetuating momentum.

This piece is one of a number of individual perspectives from the Global Strategic Foresight Community of the World Economic Forum for the Annual Meeting 2015. To read more access the full collection.

Daizo Motoyoshi is Executive Director, External Affairs and Secretary, Global Management Committee.