The truth behind Japan's 'lost decades'

29 March 2017

Naohiro Amaya’s job was to think about the future. Having done so, this poet, bureaucrat and visionary set about planning it.

A senior official at Japan’s Ministry of Trade and Industry, Amaya set out to insulate his country against catastrophes – be it a natural disaster or a seismic shift in oil prices. Arguably the most successful industrial strategist of the 20th century, his accomplishments are of particular interest as the British government begins consultation on its own industrial strategy.

In the 1980s, when Japan was portrayed in the Western media as an unstoppable economic machine that would dominate the world, it was regarded as a harbinger of a new kind of capitalism. In reality, the government – and bureaucrats such as Amaya – had as much to do with Japan’s success as the leaders of such companies as Mitsubishi, Sony and Toyota.

The strategy that made Japan’s economy tick was an interventionist, slightly softer version of the state capitalism later deployed by China. As David Halberstam wrote in The Reckoning, his book on the car industry, this worked because transforming Japan’s economy, after a disastrous war, was regarded as a national emergency: “Because its population was too large in a small fertile land, and its desire to be a great industrial power was so strong, Japan had to plan everything.”

That is exactly what Amaya and his colleagues did. They helped decide which sectors – and companies – would benefit from government subsidies and which industries needed protecting from importers. On his watch, for example, it was virtually impossible for foreign car makers to break into the Japanese market. That only changed when companies such as Toyota began to export and MITI recognised that it had to open up the domestic market a bit to avoid a trade war, especially with the US. 

MITI didn’t just pick –and back – winners (which it did with remarkable consistency until the early 1980s), it encouraged mergers (notably between car makers Nissan and Prince) and discouraged companies from going off message: it ordered Honda not to make cars (because it thought Japan had enough capacity already) but was ignored. MITI, Amaya and his colleagues only got away with this because, between 1953 and 1965, GDP grew by 9% a year.

Japan’s industrial strategy was a kind of economic nationalism. Although MITI gets most of the praise for Japan’s economic miracle, Amaya admitted that it was built on the “uchiwa” (“all in the family”) economic system which rested on the guarantee of a job for life, wages determined by seniority and unions that represented staff at one plant or a company rather than across an entire industry. With the state’s blessing, businesses invested heavily: by the 1970s, investment in capital equipment accounted for more than 30% of GDP.

So, given that Japan’s economy has, since the 1990s, stagnated in what economists have called the “lost decades”, what went wrong?

The devastation of Japan’s industrial base forced it to start afresh, ignore legacy mindsets and adopt the latest technology. Competition within its own market was often so fierce that Japanese businesses, when they began exporting, were leaner, fitter and sharper than more established Western rivals. That edge has been eroded as other Asian tigers, especially China, have emulated Japan’s industrial strategy.

In the 1950s, it was much easier for governments to back winners. You didn’t need to be Nostradamus to discern that, in the not too distant future, a lot of money would be made making and selling cars. It is much harder to distinguish future success and failure in the dot.com world.

It is also true that none of the foundations of uchiwa – especially the traditions of seniority and jobs for life – are as strong as they were. The economic nationalism that drove Japan’s rapid growth is not the force it was either. As long ago as the 1970s, MITI bureaucrat Morozumi Yoshihiko modified the department’s strategy, emphasising that growth had to benefit society as a whole.

It must also be said that Japan’s “lost decades” have been slightly overhyped: on a per worker basis, its economy has grown roughly as fast as America’s – it’s just that its working population is shrinking (hence its world-leading investment in robotics).

There are many lessons that can be drawn from Amaya’s success – but few of them seem of much use to Theresa May as the prime minister begins the process of developing a strategy that can increase productivity and cultivate “world beaters”.

It is hard to imagine, for example, the Department for Business, Enterprise and Regulatory Reform brokering a deal between British luxury car marques Morgan and Aston Martin. Nor has it shown any willingness to defend such British “world beaters” as semiconductor and software design group Arm Holdings, acquired for £24.3bn by Japanese tech giant Soft Bank last year.

MITI’s record does suggest that governments can make a difference by injecting capital into promising sectors, although hardcore free marketeers within the Conservative party might argue that these are really subsidies by any other name. The other challenge is that almost every competitive nation is planning to stimulate the same sectors – biotech, nanotech, dot.com to name but three.

This may partly explain why May’s speech outlining an industrial strategy was greeted with such faint praise. In an echo of the prime minister’s famous phrase about trade deals, Carolyn Fairbairn, the CBI director-general, almost went as far as to say that a bad industrial strategy was better than no industrial strategy at all.

The good news for May and her government is that expectations for the UK’s new industrial strategy are set so low it won’t be difficult to surpass them.

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