[Viewpoint] Uniqlo shows Japan how to grow

So this is what it has come to for Japan Inc.: a future in underwear instead of cars, color TVs or industrial robots.

Long before 2010, when China surpassed it to become Asia’s biggest economy and Apple Inc. unleashed the iPad, Japan fancied itself a nation fated for global primacy. Its technology was second to none, its banks dominant, its car assembly lines envied and imitated, its corporate chiefs giving Jack Welch a run for his money.

Deflation and political paralysis have changed that narrative in a manner that was made crystal clear last week. For the first time, corporate Japan was shut out of Forbes magazine’s ranking of the top 50 Asian companies. Claiming many of the spots on the list was always a matter of national pride. Japan’s economy may be weak, its leaders lacking, the population aging, but the country sure has some amazing companies.

Rather than despairing, Japan ought to look beyond the aging industrial mainstays to learn how to thrive in a dynamic world economy: I offer up Uniqlo.

The graybeards who control Japan Inc. have been slow to embrace Fast Retailing Co.’s expanding brand, or to recognize what they might learn from it. Japan liked being a technology powerhouse, not a bargain clothier that relies on cheap Chinese labor. Yet Japan can use all the fresh thinking it can muster these days and, financially, the end justifies the means. On another list, Forbes magazine ranks Fast Retailing’s President Tadashi Yanai as Japan’s second-richest man. The lessons to draw from Yanai and Uniqlo are obvious. The markets of the future are outside Japan, and the provincialism that rules Japanese management perpetuates the forces of deflation.

“Japan has been on a downtrend for 20 years,” Yanai said this week. “We are at a critical moment.” What is he doing about it? Opening 200 to 300 new stores worldwide each year.

What some call the “Galapagos syndrome” seems to have an unshakeable grip on corporate Japan. The nation’s manufacturers make fascinating and status-quo-shattering gadgets in isolation. Domestic mobile-phone producers are the market equivalent of the endemic species that Charles Darwin found on the remote islands off Ecuador’s coast. Their products are highly evolved and distinct from anything found elsewhere, but not particularly suited to thriving beyond the water’s edge.

Japanese have been reluctant to go big overseas since their chastening in the late 1980s. That foray was an exercise driven by hubris. Buying Rockefeller Center and the Pebble Beach golf course had more to do with bragging rights than rational investing. Company presidents didn’t bid on every Van Gogh, Picasso and Monet up for auction to make money. It was to celebrate new wealth.

This time, venturing abroad will take on more strategic significance. And here lies the unappreciated benefit of the yen’s 16 percent surge against the dollar in the past two years. It will drive the international mergers and acquisitions that Japan needs to increase market share and profits, and create new jobs domestically.

There are other things Yanai’s peers can learn from Uniqlo. One is the need for being direct. Few are his equal at framing the debate about what ails Japan.

When I chat to Japanese executives about Uniqlo, many are dismissive. Responses are often some variation of “it’s a Japanese version of Gap Inc., not so impressive.” Or Uniqlo represents a race to the economic bottom, while Japan needs to move steadily upmarket.

Yet Yanai understands that deflation isn’t a cyclical phenomenon, but a secular one. Rather than sit around and hope consumer prices will suddenly rise and growth returns, Yanai is reshaping the retailing world.

Uniqlo has brought more kaizen - the process of continuous improvement - to the apparel industry than meets the eye. Its underwear that helps wick away sweat has been a godsend to those struggling through sticky summers from Tokyo to New York. Call it Japan’s underwear model of economic growth.

The company breaks any number of hidebound Japanese traditions. Meetings are held in English, a very rare practice in Japan. Fast Retailing isn’t hung up on seniority-based hiring; if you’re 26 and smart, the job can be yours. The company has few qualms about poaching talent from competitors, which can run afoul of local etiquette. It is working to increase the ratio of foreign staff and employs edgy advertising campaigns. The company seems more serious than most about corporate social responsibility. This year, Yanai joined hands with Nobel Peace laureate Muhammad Yunus to create a textiles company in Bangladesh to help poor women gain the financial independence society often keeps beyond their reach. It was an early and generous provider of aid after Japan’s devastating earthquake.

All isn’t perfect with Uniqlo, of course. There’s always a risk it will overexpand in this chaotic global environment. And the company’s fortunes are disproportionately linked to the charismatic, 62-year-old Yanai. If he bowed out tomorrow, it’s not clear where Uniqlo would be.

Yet here is an example of how Japan - amid deflation, natural disasters and a shrinking population - can store growth and change the landscape in global markets. The world needs more of it from a country that once thought being on top was its destiny.

*The writer is a Bloomberg View columnist.

By William Pesek