Japan should be more German

Plenty of economists are warning that Europe could soon look like stagnant Japan. In fact, Japan could stand to look a little more European - or, to be more precise, more German.

Why has the “Made in Germany” brand thrived over the last 15 or so years, even as “Made in Japan” grinds toward irrelevance? All the more extraordinary, Germany has flourished in a savagely competitive global environment despite high labor costs, an overvalued euro and any number of regional financial crises. Its secret: adapting and innovating in ways Japan Inc. cannot even seem to contemplate.

“German executives didn’t complain about exchange rates - they figured it out and restructured accordingly,” says Stephen Jen, managing partner at SLJ Macro Partners in London. “In fact, the chaotic state of the global economy seemed to drive this change. Germany didn’t fight it. It went with it.”

The snap election just called by Prime Minister Shinzo Abe isn’t miraculously going to rouse Japan out of its latest recession. Instead, Japanese businesses are going to have to learn the same lessons their German counterparts already have. Here are three:

Innovation is everything. Adjusted for gross domestic product ($3.6 trillion annually) and population (80 million), Germany could still be considered the world’s No. 1 exporter. It trails China and the United States, of course, but more than holds its own in autos, machinery, electronics, pharmaceutical products, optical goods, plastics and other sectors. Its success draws upon a mixture of design prowess, an intense focus on increasing productivity and moving upmarket, aggressive investments in research and development, and old-fashioned risk-taking. In order to exploit its comparative advantages, Germany has skillfully balanced the tensions between upping competitiveness and maximizing employment.

Japan’s products, meanwhile, tend to be price inelastic amid global disinflation. Executives favor incremental improvements to existing goods and processes over the game-changers Internet-age consumers reward. The problem, Jen and fellow SLJ economist Joana Freire argue in a report, is that Japan Inc. has fallen into a “bunt” mentality. “Using a baseball term, the goal is no longer to ‘swing for the fence,’ but to ‘just get on base,’” the economists write. “Abenomics,” they add, “could help remove the macro [deflation expectations] and the micro [structural rigidities] impediments to this breakthrough, but something else is needed.” Japan has to learn to think more ambitiously again.

Small is big. The yen’s 30 percent plunge in two years has tempered the urgency for change at Sony, Toyota, shipping giants like Mitsui OSK and construction equipment goliaths like Komatsu. Instead, Tokyo should support companies like robotics innovator Fanuc, smartphone app creator Colopl, automation equipment maker Keyence and biopharmaceutical company PeptiDream - the kind of businesses that make up Japan’s “Mittelstand.”

Small- and mid-sized businesses form the backbone of Europe’s largest economy. The German government understands that in the age of the app, virtually all job growth comes from smaller companies. Mostly family-owned, they think long-term, compete on quality and inventiveness more than price, have solid balance sheets and high equity ratios, and enjoy strong government support. Japan, too, needs to back the sub-300-employee upstarts that will actually innovate, hire and change mind-sets.

Think regionally. Germany trades plenty with America and China, which Daimler said today may become the biggest market for the Mercedes brand next year. But the evidence, Jen and Freire argue, “suggests that Germany’s rise as a global superpower in exports was due more to regionalization, or having unhindered access to the European Union, than to globalization, which Japan has relied on.” While completing the Trans-Pacific Partnership trade deal with the United States and other nations would help to open up some of Japan’s most ossified sectors, Abe should also be looking to mend fences in Asia and strike all the bilateral free-trade agreements he can, including with China.

He should open the door to people, too, as well as goods. Berlin’s demographics aren’t as dire as Tokyo’s, but with 21 percent of the population over 65 (compared with 26 percent in Japan) the nation has to be nimble. Aside from a more welcoming immigration policy, Germany has wooed highly-skilled retirees back into the labor force and empowered women. Tokyo should follow suit on all three counts. Germany certainly has its problems, not least of which is a 6.7 percent unemployment rate and the omnipresent risk of new euro crisis. And surely, migrant laborers from Turkey and elsewhere have legitimate complaints about the conditions they face there. But Germany has more to teach Japan than how to deal with its World War II past. The country shows how Japan can generate a more vibrant future.

*The author is a Bloomberg View columnist based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region.

by William Pesek