Marsh & McLennan Advantage Insights logo
Conversations and insights from the edge of global business
Menu Search

BRINK News is transitioning to This Moment platform on as of March 31, 2023. Read the update here.

Asia-Pacific Outlook

The Japanese Economy Has Reinvented Itself

A photo of city square at night with neon signs for shops in Shibuya, Japan

Japan’s economy often gets a bad rap from economics commentators. The usual narrative is that Japan suffers from economic stagnation, deflation, enormous government debt, weak entrepreneurship, an aging population, low birth rates, dying regions, male-dominated society and more. And, the country’s products that once filled our living rooms and kitchens have been replaced by new versions from companies like Korea’s Samsung and China’s Haier.       

There is, of course, truth in these claims. But while we were not looking, the Japanese economy has been quietly reinventing itself, as Ulrike Schaede has documented in her recent book.

Losing Out to Korea and China

When South Korean and Chinese companies began dominating products like toasters, blow dryers and washing machines, Japanese companies realized that it did not make sense to try to compete at that level. They had lost their low-cost advantage. So they began jettisoning low-value-added manufacturing activities and concentrating on the high-value-added advanced materials, parts and components that go into Asia’s consumer product supply chains, especially electronics.   

The smile curve, proposed by Stan Shih of Acer, depicts the relationship between value added and different stages of production. At both ends of this value chain there are high-value-added activities: first, the product conception and advanced materials, parts and components; and then the branding and marketing. In between are the lower-value-added activities of manufacturing and assembly, which remain today the reserve of China and South Asian countries. Japan decided it needed to move up the “smile curve” at both ends.    

Japan’s High Tech Pivot

An early sign that Japanese industry was pivoting in a new direction was the 2011 study that revealed that some 34% of the production value of the iPhone came from Japanese companies, Toshiba and Murata, which made high tech parts and components. In contrast, Mainland China’s contribution, through the assembly process, was only 3.5% of the total value (a strip-down of China’s Huawei mobile phones in 2019 revealed a similar story of a high-value Japanese contribution).

Interestingly, there is no mastermind, no government ministry behind this deep tech innovation strategy. This new competitive thrust of successful Japanese companies is a response to market developments.

Schaede reports on a Japanese government study of over 900 product categories, which revealed that Japanese companies have more than 50% of the market for some 500 of the product categories, whose average market size was $5 billion.

In short, Japanese technologies now anchor many Asian supply chains, creating new dependencies in East Asia. There is a new competitive balance in Asia as Korea, Taiwan and China are dependent on Japanese inputs.  

Even though you may not see a Japanese brand name on your electronics or other products, it doesn’t mean these brands are small, hidden champions. Large listed companies are involved like Mitsui, Mitsubishi, Nitto, Fujifilm, JSR, Showa Denko, and DIC Kaneka. Interestingly, there is no mastermind, no government ministry behind this deep tech innovation strategy. This new competitive thrust of successful Japanese companies is a response to market developments.   

How have Japanese companies reinvented themselves? Slimming down sprawling conglomerates and focusing on core competencies has been one factor, as highlighted by the case of Hitachi. This company used to have over 1,000 subsidiaries and did everything from nuclear power plants to toaster ovens and blow dryers. The new strategy has also required massive investments in new R&D capabilities. Japanese companies have also been “buying innovation,” by acquiring startups, notably in Silicon Valley.

Japan’s Tight Society

Japan’s reinvention strategy has been long and slow. It has taken a whole generation to get some corporate structures and processes on board. This is because Japan’s society and companies have “tight cultures,” which means it has stronger social norms (how you are expected to behave) compared to, say, free-wheeling California with its “loose” culture.  

This means that change takes time and is often misunderstood by American and European observers. According to Professor Michele Gelfand, “Tight cultures have more order — they are more coordinated, uniform and have people who have more self-control.”  

We have seen the strong influence of tight and loose cultures in the differing national responses to COVID-19. In Japan, there has been a reluctance to lay people off and close companies.  

But just because change is slow doesn’t mean Japan is stagnating. COVID-19 has triggered an acceleration in digitalization in Japan. Online education, once a rarity, is now sweeping through its education sector. Conferences are now frequently held by Zoom, which is exposing Japan’s traditionally insular academic sector to the world. Electronic commerce is up, with consumers buying more online.  

And Japan’s “salarymen” are working part of the week from home, which could signal the beginning of a performance-based work culture and a welcome end to Japan’s hidebound corporate and bureaucratic cultures. In short, COVID-19 may be unexpectedly helping with the reinvention of Japanese business.

Beyond the Electronics Sector

The reinvention extends beyond the electronic sector. Japan’s fuel-efficient and reliable motor vehicles still lead the world, with companies like Toyota, Honda and Nissan regularly ranked among the world’s top automobile companies.

CEO Tadashi Yanai has taken Uniqlo from a simple store in Hiroshima in the1980s to a leading global clothing brand. Muiji is bringing to the world Japanese style in household products. And Kinokuniya is proving that book stores still have a future, with around 100 stores worldwide, including 12 in the U.S.           

Japan’s creative economy continues to impress. Sony, Nintendo, Sega Sammy and Bandai Namco are world leaders in video games. Eight Japanese architects have won the Pritzker Prize (the Nobel Prize for architecture), more than from any other country.  

Not all Japanese companies have risen to the challenge of reinventing themselves. There are still many inefficient companies and parts of the Japanese economy, as in all countries. Reinvention is an ongoing process. As China aspires to technological leadership through its “Made in China 2025” strategy, Japan will need to keep innovating if it is to stay ahead. The country faces a number of significant economic challenges; it is burdened with an aging population, high government debt and weak productivity. But, below the surface, today’s Japan is much more creative, innovative and agile than it is often given credit for.

John West

Executive Director of the Asian Century Institute

John West is author of the recent book, “Asian Century … on a Knife-edge,” and executive director of the Asian Century Institute. He is also adjunct professor at Tokyo’s Sophia University and contributing editor at FDI-Intelligence, a Financial Times magazine. These positions follow a long career in international economics and relations, with major stints at the Australian Treasury where he was director of balance of payments, OECD (head of public affairs and director OECD Forum) and Asian Development Bank Institute (senior consultant for capacity building and training).

Get ahead in a rapidly changing world. Sign up for our daily newsletter. Subscribe