Book review: The Contest for Japan’s Economic Future: Entrepreneurs vs Corporate Giants by Richard Katz

This new book by economist Richard Katz presents a comprehensive theory for why the Japanese economy has been in the doldrums for decades, and what Japan can do to revitalize itself. And rather than prescribing that Japan adopt a foreign economic model, Katz proposes that Japan become more like itself, by supporting positive trends that are already occurring in the country and bring back the atmosphere of innovation and entrepreneurship that existed in Japan in the past.

This book pulls together many disparate issues and topics, to give a convincing explanation for Japan’s economic and political woes in recent years, as well as a compelling prescription for what Japan can do about it. As fewer books seem to be written on Japan’s business and economy lately, it’s great to see an author take such a broad approach and do it in a thorough and persuasive way.

Katz’s basic thesis is that for an economy to thrive and have rising living standards, it needs to have what economist Joseph Schumpeter called “creative destruction,” in which older firms give way to innovative new growing firms.

Japan’s economy had that type of dynamism during the high growth years of the late 50s, 60s and early 70s. However, after the oil shocks of the 1970s, Japan’s leaders slowed down creative destruction in favor of social stability. And the lynchpin for that stability was made a worker’s job at his current company, rather than a broader social safety net. This led to pressure to preserve those jobs at all costs, so politicians propped up “zombie” firms past their prime and subsidized wages to prevent firing of redundant workers.

The result is an environment that makes it difficult for new firms to get the labor, financing and real estate they need to grow, as those resources are being monopolized by older established firms. Thus Japan has too few new companies as well as too few older firms closing down to make way for more productive newer ones. In other words, the dominance of older firms, which find it difficult to change and be innovative, is slowing down the entire Japanese economy.

Katz takes heart, however, in the recent wave of Japanese entrepreneurs who have been bucking these challenges. He also notes that a confluence of megatrends are creating an impetus for Japan to do something different, including generational shifts in attitudes, technological changes, evolution of gender norms, the impact of Japan’s demographic crunch, and the political stresses caused by low economic growth.

I found particularly compelling the example Katz shares of France, which in the past was regarded as being an economy unfriendly to entrepreneurship, similar to how many people view the Japanese economy today. Katz shows that rather than having an immutable cultural tendency against entrepreneurship, France was able to quickly change attitudes and foster new startups by instituting some savvy policy measures.

If France can do it, Katz argues, why can’t Japan as well? With a few tax incentives and tweaks to policy, he thinks that Japan can encourage entrepreneurs and restore dynamism to the economy. All that’s needed is for Japan’s politicians to overcome their tendency to inertia and watered-down measures. Which, Katz admits, won’t be easy. He gives a clear, if depressing, explanation for why the three arrows of Abenomics didn’t do much, and why Japan’s political system makes it hard to put new polities in place.

Let’s hope that some people in key positions in the Japanese government will read Katz’s book and be inspired to make the changes needed to unleash the entrepreneurial forces in Japanese society. Unless that happens, Japan’s economy is unlikely to return to its former vitality.