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2018.02.16

A World Order Supported by Japan and China, Which Have Long-Term Stable Governments, Instead of the Unstable U.S. and Europe-Roles Expected of Japanese Corporations and Challenges They Must Overcome Amid Multi-polarization in the World-

An article published in January 19, 2018

  • Kiyoyuki SEGUCHI
  • Research Director
    Kiyoyuki SEGUCHI
  • [Expertise]
    Chinese Economy and Relations among Japan/China and the United States
Growing instability in the domestic political situation in the U.S. and Europe

2017 was a year that highlighted the arrival of the era of multi-polarization in the global community and accelerating change. This is symbolically expressed in the contrast between the domestic political situation in the U.S. and key European nations on one hand and that in Japan and China on the other.

In the U.S., Donald Trump was elected as president with the support of ordinary people by tapping the growing opposition by ordinary people against the establishment class due to festering discontent over constantly being left out of economic development for the long term.

However, the domestic policies pushed by the Trump administration, such as social security reform and tax reform, were not in the interests of those supporters. In foreign affairs, Trump withdrew the U.S. from the Paris Agreement and the U.S.-led TPP as the first president who did not think that the U.S. should be the global leader.

On top of all that, the U.S. decided to recognize Jerusalem as the capital of Israel, and the United Nations voted to condemn this decision.

The world was shocked and appalled by this action by the U.S., which until now had displayed its leadership in forming the world order.

This trend is not confined to the U.S. In Europe, the U.K. is in the process of leaving the European Union due to reasons such as the worsening refugee problem.

In Germany, the party led by Chancellor Angela Merkel had its worst result in a general election since 1949. The political situation is becoming unstable there as her party remains unable to conclude talks to form a coalition for maintaining a stable government with a majority of seats.

This is a situation that could shake the very existence of the EU.

As described above, the domestic political situation is becoming unstable in the U.S. and key European nations as discontent over economic and social conditions explodes among the people in those countries. This is starting to affect foreign affairs, causing the countries to increasingly weaken their relative position as leaders in formation of the world order.



Governments in Japan and China secure long-term stable foundations

Meanwhile, in Asia, the government party led by Prime Minister Shinzo Abe won the general election in a landslide in late October in Japan. Around the same time, in China, President Xi Jinping exhibited his strong leadership by closing the 19th National Congress of the Communist Party without incident, entering his second term by solidifying his grip on power.

Unlike in the U.S. and major European nations, the governments in power in Japan and China, the leaders of Asia, have secured long-term stable foundations, and they are making progress in implementing domestic policies.

On the economic side, China, which had led growth in the global economy, has been in its most stable economic state in several years from last year through this year, and its economy is projected to basically remain stable until at least around 2020.

In the Chinese market, since the start of the 2010s, the middle class with a strong appetite for consumption has been growing rapidly, leading to a sharp growth in demand for high-value-added products and services, which are the strength of Japanese companies.

With Japan-China relations gradually improving, Japanese companies enjoying robust earnings in their Chinese businesses have been increasingly aggressive in investing in China since 2017.

Meanwhile, U.S. and European companies are increasingly wary of conducting business in China due to several factors, such as objections over the Chinese government's protectionist measures and growing concerns over the threat posed by Chinese companies that are strengthening competitiveness in the market and are acquiring U.S. and European companies one after another.

So, Japanese companies are going in the opposite direction compared to U.S. and European companies in the huge, rapidly-growing Chinese market.

Looking at social conditions, Japan is the only one of the major developed nations to have maintained stable social conditions, a contrast with the U.S. and key European nations, where an increasingly unstable society with the backdrop of growing anti-establishment movements has become a serious issue. Differences in corporate activities are believed to be a major reason for this.

Most U.S. and European companies pursue as management targets the expansion of short-term profit, a rise in stock prices, and large compensation for executives. On the other hand, many Japanese companies have management principles that make a point of contributing to society, an emphasis on long-term trust, and the safety, happiness and self-fulfillment of employees.

Because these management principles are shared among Japanese companies, the compensation received by executives of Japanese companies is far lower compared to U.S. and European companies, while workers enjoy stable employment.

Executives at U.S. and European companies do not hold these management principles of Japanese companies in high regard, but these management principles are believed to have helped prevent a widening of income disparities and have contributed to maintaining social stability in Japan.

As described above, the stability in domestic politics in Japan and China is a stark contrast to the growing instability in society and politics in the U.S. and key European nations.

These differences in domestic politics are expected to gradually affect foreign affairs policies, so the role that Japan and China play in forming the global order will likely grow relatively larger.



Roles expected of Japanese corporations and challenges they must overcome

Amid the new trends in world affairs described above, there are hopes that Japanese companies will increasingly take on the role of driving the global economy.

However, many Japanese corporations are not currently sufficiently competitive internationally, so they are far from playing that role as hoped for. The following are challenges that need to be overcome and goals for improving the competiveness of Japanese companies.

First, Japanese companies need to further brush up their world-class technological prowess in fields that are their strengths, such as technological development through coordination based on advanced teamwork over a long period, and build a framework for continuously cultivating the necessary human resources.

Second, they need to cooperate with highly capable Chinese leaders, mainly in the Chinese market, to boost the competitiveness of their companies by combining management strategies based on the high marketing prowess of Chinese with the innovation and production management prowess of Japanese acquired through slow and steady efforts.

Through such actions, Japanese companies can try to speed up decision-making considerably, shorten the period for developing products that meet the needs of the market, and improve both management efficiency and profitability.

Third, by using the methods stated above, they need to strengthen competitiveness, expand the scale of investment by increasing market shares in nations around the world, including the U.S. and Europe, and contribute to both securing stable employment and increasing tax payments taking the global community into consideration.

In other words, Japanese companies need to expand the scope of social contributions that until now has covered just Japan, and aim to implement management principles that cover the global community.

Fourth, by implementing management principles that contribute to stability in the global community, Japanese companies can influence the corporate actions of companies in various countries by taking on the role of projecting Japan's soft power, leading efforts to stabilize the global community.



Problems with executives of Japanese corporations

Looking at how Japanese companies are managed based on the perspectives mentioned above, many executives of large Japanese corporations have the following problems.

First, globalization of management has been slow compared to globalization of the market.

Generally speaking, the marketing capabilities of Japanese companies are weak compared to companies in the U.S., Europe, China and South Korea. Not many Japanese companies accurately grasp the needs in overseas markets and conduct such tasks as R&D, design, and reduction of production costs quickly and effectively.

This can be attributed to such factors as a lack of understanding and experience among top executives regarding methods for capturing the global market as well as their insufficient ability to change their organizations into ones that conduct marketing-led management.

Second, a common trend that can be seen among many executives of large companies is that the main goal of presidents and directors is to get through their terms of several years without incident.

For that reason, few executives undertake bold challenges that are necessary for long-term growth of their companies, and few executives make efforts in areas such as innovation through R&D that needs to be continued over the long term and projects that require several years before they produce results. There are fewer executives who are seriously committed to addressing this issue through steps such as cultivating executives and researchers who can selflessly and thoroughly pursue such goals.

Third, it seems that achieving a breakthrough is difficult within the existing framework of large corporations.

We need to think about a system that produces and supports many executives who turn small and midsize enterprises into large companies in one generation, as was the case with Sony, Honda, Panasonic and Ito-Yokado.



Education is the foundation for cultivating human resources

The key to addressing the issues outlined above is the ability of the executives themselves.

Based on the assumption that Japanese companies generally have an organizational structure for management comprised of business departments, I would have to conclude that there is a low probability of a conventional large corporation producing a leader with excellent marketing abilities who can properly build and implement a global business strategy.

Such a leader is unlikely to be found among individuals who become president by rising up through the ranks in a single business department.

Such a leader would have had to experience working in several companies or businesses as an executive, or would have to be a founder with experience leading a company over a long period as it grows from a small and midsize enterprise to a large corporation.

What conditions, then, are necessary to produce personnel who can support the foundation of competitiveness at Japanese companies, including large corporations?

First, a major prerequisite is the existence of a management organization where an executive with strong abilities can put those skills to use. That is, there needs to be a system in which highly skilled personnel with lots of experience working overseas and who can advance globalization of corporate management can be actively hired from the outside and leverage these resources.

This is not just about private-sector companies but applies to central government ministries and agencies as well. We have now entered an era in which the Japanese government should be actively hiring highly skilled external personnel as political appointees for high-ranking positions of director general or higher.

Doing so could lead to radical reform of the vertically segmented administrative system because such appointees would attach more importance to the results of policy management that is in the interest of the nation as a whole, instead of high-ranking bureaucrats who rose up through the ranks fighting each other to protect the vested interests of their ministry and bureau.

Second, the education level at Japanese universities needs to be raised in order to cultivate highly skilled business leaders and researchers.

In recent years, I often hear how university budgets have been sharply reduced and research activities have been severely restricted to an extent never seen before. This will clearly have a serious negative impact on Japan's national strength.

To address this issue, a program should be established to promote endowed courses funded by companies in order to advance the development of university education in Japan. At the same time, companies should be allowed to write off contributions to endowed courses as expenses and measures should be considered to expand university budgets through steps such as offering tax breaks to companies recognized as having contributed to higher education for having donated more than a certain amount.

Furthermore, the government should focus on raising the educational level at universities by expanding budgets in areas such as fundamental academic fields that cannot gather donations because companies are not interested.

Third, the strengthening of elementary and secondary education is essential to cultivate human resources that will support the nation.

In the past, elementary and junior high schools in Japan received priority in budget allocations, and this provided children from poor families equal educational opportunities.

In the future, an extremely important issue will be sharply increasing educational budgets for matters such as substantially expanding ICT facilities at elementary and junior high schools as well as increasing the number of assistant teachers in specialized courses and special support personnel for disabled children.

Fourth, it is also important to strive for educational reform with an eye on cultivating human resources that can lead in the global community. For example, moral education, which is going to become a part of the curriculum in fiscal 2018, should focus more on fostering an attitude of valuing contribution to society, studying historical figures who contributed to Japan's development, placing more emphasis on leadership education, and expanding learning of Eastern thought of respecting lives of all living things.

At present, the government's budget allocation is weighted too heavily toward social welfare for the elderly. While social welfare supports stability in today's society, at this rate the education level of the people who represent the next generation and the level of research will decline, and it will invite a risk that Japan's economy and society will become unstable.

Japan should aim for long-term, sustainable governance of the nation, thoroughly strengthen the cultivation of Japan's human resources, and promote the nurturing of personnel who can lead development of Japan's economy and society as well as formation of the world order.

It is my hope that the Abe administration, as a long-term stable administration, will implement long-term, fundamental policies that look toward Japan's future in the 21st century as the world heads toward multi-polarization.


(This article was translated from the Japanese transcript of Mr. Seguchi's column published by JBpress on January 19, 2018.)

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