Adapting to the Rise of China and India

Both inside and outside Japan there appears to be a widely held view that economic decline due to relative lack of competitiveness, hollowing out of manufacturing and demographic change is inevitable. This seems to me an analysis based on the current situation, extrapolated forward on the assumption that nothing will change in Japan. Whether this scenario becomes reality or not depends on choices that have to be made in the near future.

The Japanese economy has adapted to external change successfully in the past (oil shocks, currency shifts) and has consciously directed itself through internal coordination over many years Europeans complained in the 70's and 80's about METI's "laser-beam focus" targeting key industries and before that Japan surprised the world by successfully shifting focus from low cost to reliable quality in manufactured goods.

The capacity for change exists, the difficulty is in identifying how to change and this is a daunting challenge comprising very difficult choices. Encourage "guest workers" as Germany did? Allow immigration to rise? Allow off-shoring to continue, decreasing the size of the domestic workforce required? Continue to compete at all levels in manufacturing or focus on higher value-added activities? Continue to manage capital through the establishment or unlock it for use by small, entrepreneurial companies? Emphasise social discipline and absorption of facts in education or shift the focus towards the skills required to prosper in a world where flexibility and "cloud teams" are the norm.

The odd recent focus on the Galapagos effect (somewhat reveling in Japan's inward-looking economy and celebrating its creation of standards that prevent it from succeeding globally with otherwise good products) is  a step in the wrong direction.

Japan can create a socio-economic model built on existing cultural strengths (consistency, reliability, the ability to refine and innovate, for example) and can add a degree of flexibility to create an edge over emerging manufacturing and service industry competitors. Many businessmen who have worked both in Japan and outside have a similar view - the strengths are clear, but the will to make them the basis for change and growth is lacking. There is an opportunity for Japan to define standards, set benchmarks in quality and design of goods and services and play a leading role in global teams but, currently, the tendency is to turn in the other direction - to globalise manufacturing, but to become more insular culturally. 

Rather than allowing the current opportunity to be lost, Japan should look outwards, make changes within and embrace a role as a gateway to Asia and beacon of order in the region.