Fixing What Really Ails Japan

Michael E. Porter and Hirotaka Takeuchi

From Foreign Affairs, May/June 1999

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Summary:  Conventional wisdom claims that Japan's "economic miracle" stemmed from its unique model of government guidance and its revolutionary corporate management techniques. An in-depth study proves this seriously wrong. Rampant government intervention has caused more business failures than successes, and a fundamental cautiousness has led Japanese companies to ignore strategic thinking and shun risk. To pull out of its current slump, Japan must embrace competition, innovation, and bold leadership.

Michael E. Porter is C. Roland Christensen Professor of Business Administration at the Harvard University Graduate School of Business. Hirotaka Takeuchi is Dean of the Hitotsubashi University Graduate School of International Corporate Strategy. Mariko Sakakibara, co-author of the book-length version of this article, Lucia Marshall, and Yoshinori Fujikawa provided valuable assistance. This article draws on M. E. Porter, The Competitive Advantage of Nations, and "Clusters and Competition: New Agendas for Companies, Government, and Institutions," in On Competition.

CONVENTIONAL WISDOM

Not so long ago, the entire world stood in awe of Japan's postwar economic miracle. Some Japanese policymakers boasted that they had invented a new and superior form of capitalism. But today, Japan is stuck in the slump that just will not quit. In policy circles there is talk of a defeat, this time at the hands of Anglo-Saxon capitalism. Yet despite the depth and the persistence of the slide, remarkably few question Japan's underlying economic model. Everyone agrees that some reforms are needed but assumes that the economic engine is basically sound, if only the government would jump-start it with a massive kick of credit. Only recently, confronted with company failures and huge losses, have most Japanese begun to realize the magnitude of their problem.

The prevailing consensus over Japan's failings in the 1990s centers around three related explanations. One is the collapse of the so-called bubble economy of overvalued equities and real estate. Imploding asset prices have sent ripples through the banking system, making credit scarce. A second explanation argues that Japan is overregulated by meddlesome government ministries. The third claims that bureaucrats have mismanaged macroeconomic policy by raising taxes, failing to stimulate internal demand, and clinging to export-led growth for too long.

Stimulating the economy and restoring the flow of capital are necessary. But quick fixes and macroeconomic adjustments will not do enough. What ails Japan runs deeper, has been brewing for decades, and is rooted in the microeconomics of how Japan competes. Our research challenges the conventional wisdom about Japan's unparalleled rise in competitiveness. Since the 1980s, this stream of scholarship has offered two related explanations for Japan's meteoric rise: one points to a set of government policies, the second to a set of common corporate management techniques. Both explanations have been widely accepted and have had a profound impact on the rest of the world. Policymakers and business leaders in other countries have tried to clone the Japanese model or to borrow its parts. In Japan and elsewhere, it has been appealing for a variety of political and cultural reasons to believe that Japan had invented a new and intrinsically superior form of capitalism, one more controlled and egalitarian than the Anglo-Saxon version.

This simply is not the case. The much-celebrated government model is wrong; in fact, it explains Japan's failures more than its successes. The model of corporate success has merit but is dangerously incomplete.

There is much that works in Japan, but in order to build on it leaders must understand the real roots of their successes and failures. The problem starts with the government's mistrust of competition, which often makes it intervene in the economy in ways that harm the nation's productivity and prosperity. Companies, for their part, take the wrong approach to competition and thus undermine their own profitability. Fixing what really ails Japan, therefore, will require fundamental changes in both government and corporate practices.

The consensus over Japan's past success has come overwhelmingly from the robust growth ...

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