With a GDP of $4.417 trillion in 2007, Japan is the second-largest economic power and the second most important consumer market in the world. Japan was an island country completely closed to all Western influences until the 1850s. But after opening itself to the West in 1853, Japan developed from the status of a medieval country to the top of the economic world by the end of the 20th century. During this period, typical Japanese management practices developed that, along with strong cooperation between government and industry, low expenditures for national defense, and a high interest in technology and innovation, led to unprecedented success for the Japanese economy. During the 1980s, at the height of economic success, Japanese management style was seen as a role model and began to influence Western business practices.
From the beginning of the 1990s, however, Japan went through a major recession that led to numerous changes in traditional Japanese management processes. Only at the beginning of the 21st century did Japan seem to have recovered from its economic crisis; it is now trying to keep its role as a major player in the global economy.
Country And People
Japan consists of 6,852 islands occupying 377,887 sq. km. Honshu, Hokkaido, Kyushu, and Shikoku are the biggest and most populated islands, with Honshu serving as the economic, political, and cultural center of Japan. The capital Tokyo and the major cities Osaka and Nagoya are located on Honshu. Tokyo accounts for only 2 percent of the land but hosts more than 40 percent of the total population (127.5 million people in total). About 18.5 percent of the population are older than 65 years. The average life expectancy, 78.32 years for men and 85.23 years for women, is one of the highest in the world.
Over 80 percent of Japanese observe either the Shinto or Buddhist religion or both. The remainder of the population practice other religions, including Christianity.
Japan is the home of the oldest continuous imperial family in the world, the current emperor being the 125th in an unbroken line. He is the official head of the government but has no governing authority. All his acts require the advice and the approval of the Japanese cabinet. Today the emperor is still considered the spiritual head of the nation and is responsible for performing a variety of Shinto rituals. The current emperor, Akihito, succeeded to the throne in 1989, adopting the formal reign title Heisei (“Establishing Peace”), which is also the imperial reign name.
Today, the Japanese cabinet, headed by a prime minister from the majority party, holds executive power. The Japanese parliament, the highest organ of state power, consists of the House of Representatives (with 500 members) and the House of Councilors (with 252 members). The dominant political party in Japan is the LDP (Liberal Democratic Party), which was formed in 1955 and, because of Japan’s rising prosperity, remained in sole power for 38 years. After a year and a half in opposition, it again became the single ruling party in 1996.
Economic Development
Japan’s economic success and development is a unique phenomenon. Japan was a closed country (Sakoku) until 1853. This was originally initiated by the third Shogun Iemitsu, who—in an attempt to create internal peace and stability—closed the island country to foreign commerce and expelled missionaries in 1635. While the seclusion created internal peace and stability, Japan fell behind in terms of technological development and remained a medieval state for the next 200 years. The turning point in Japanese history came in 1853, when Commodore Matthew C. Perry entered Japan with his “Black Ships” (steam boats), which forced Japan to open up to the West and triggered a chain of events. The Shogunate fell and the Imperial Restoration in 1868 ended Japan’s seclusion.
The new Meiji government set out to transform Japan from a medieval empire into an industrialized state within 30 years, so that Japan could match Western developments and deal with them on equal terms. These attempts were supported by the fact that Japan was already a well-developed market with its own currency and distribution system even before opening up to the West. Industry was promoted, Western culture was encouraged, and a parliament was established. The slogan of the new government was fukoku kyôhei (“Enrich the country, strengthen the military”). Japan also built up sufficient military power to become Asia’s major imperialist power in the early 20th century.
Japan’s economic success did not start directly after World War II. After the defeat in 1945 Japan faced the Allied occupation, which forced the country to demilitarize and put an end to the long-running zaibatsu (the old Japanese combines) control over the economy. They also made changes in the constitution and the educational system, and gave women the right to vote.
At the end of the Allied occupation in 1952, Japan still ranked as a less-developed country. The Korean War was the first impetus to help Japan recover, because the American forces used Japan as a base to fight the North Korean army and received supplies from Japanese suppliers. Japanese companies started to increase their production and had a young and highly motivated workforce to support them.
Japan’s economic development was accompanied by the structural development of Japanese industry. Even before World War II, Japan possessed very impressive light industry, with textiles and food production being the most important. Most notable was the increase of heavy industry, such as machinery manufacturing and the chemical industry. These changes were strongly supported by the Japanese government. The Japanese also had an enormous fascination regarding modern technology and traditionally have shown a great openness toward ideas and concepts introduced from Western countries. This led them to accept Western products and behavior rather quickly compared to other developing countries.
Other factors that influenced the high growth rate of Japan after the war were found in the strong relationships between government and industry. The government promoted long-term investment in future industries and technologies while keeping expenditures on self-defense relatively low compared to other government ministries. More resources were being spent on developing industry.
From 1953 until 1973 the Japanese economy grew at an annual growth rate of 8 to 10 percent, making it the first less-developed country in the postwar period to graduate to developed nation status. During the 1950s the major industries were textiles and light industry. During the 1960s the iron and steel industry and the shipbuilding industry were most dominant. Japan at that time also hosted the Olympic Games, which was the first time it presented itself on an international stage. By the 1970s, the automotive industry rose to prominence. This development was accompanied by strong urbanization that made Tokyo and Osaka the most populated areas in Japan.
Despite the success of its economic rebound, occasionally Japan would suffer from events that would affect its economy. In 1974 the GNP fell 1.4 percent for the first time since 1950 because of the oil crisis. Growth also fell in the 1970s and slowed from 10 percent to 3.6 percent between 1974 and 1979. Despite a weak economy from 1981 to 1983, a strong dollar led to an increase in exports after 1983. By 1985 the surplus in Japan’s balance of payments account reached 3.7 percent of the GNP. Exports had increased in the early 1980s, due to a strong U.S. dollar. Japan’s economic turn-around was complete. It had emerged as an economic powerhouse, boasting trade surpluses with the United States and the European Union (EU). This was the time when Western managers and researchers developed a deeper interest in the Japanese economy and traditional Japanese management styles.
The Bubble Economy And The Lost Decade
Japan’s export-bolstered economic growth first experienced difficulties after the G-5 Plaza Agreement of 1985 and the rapid appreciation of the yen. Interest rates were lowered in order to increase domestic demand, and the expanded supply of domestic capital resulted in an increase of investment in land and stocks. At the same time, land values increased and finance companies increased the number of loans with real estate as security. Capital secured by such loans was used to purchase more real estate; these were later to become “bad debts.” In these years, Japanese companies borrowed massively from Japanese banks, which got their funds from the high amount of household savings. An ongoing inflation allowed them to pay back their debts without any problems until 1990, when the bubble finally burst. Properties purchased at high “bubble era” prices were not able to pay for themselves, putting pressure on the businesses that owned them. Consumers also reacted to these changes and personal consumption decreased. Banks were left with bad loans, with many ending in bankruptcy or needing support from the government.
During the 10 years of recession, the Japanese government invested ¥130 trillion on structural reforms. However, there were no visible effects for a long time due to the inflexibility of Japanese organizations and structures. The 1990s, after the bubble burst, are therefore known as the “lost years” in Japanese economic development. There were difficulties in disposing the bad debts, for which interest payments were late, or which were not recoverable because of bankruptcy. This inevitably forced the Japanese economy into low growth for more than a decade until 2000.
The recession and the lost decade significantly damaged Japan’s image as an economic powerhouse. It added a layer of skepticism to the already existing difficulties of Japanese corporations coping with globalization, the increasing challenge that China presented for the Japanese economy, and the tariff and non-tariff entry barriers as well as cultural and business differences that are faced by foreign firms attempting to enter the Japanese market.
Japan’s internationalization also got a boost in the 1990s. China became its main competition, since Japanese manufacturers realized that they could not compete with their cheap production processes. This led to the internationalization of a high number of Japanese companies, which previously focused mostly on the Japanese market and had not yet exported their manufacturing processes. Today Japan is the most influential foreign investor in China.
Only in 2003 did the Japanese economy start to show subtle signs of recovery. Parts of the economic recovery are based on the weak value of the yen, which boosted export sales, parts of the long expected effects of structural reforms started in the 1990s. By 2007 Japan’s GDP was growing at 1.9 percent, unemployment stood at 4 percent, and inflation was negligible. In the same year, its exports were valued at $665.7 billion, with nearly 23 percent going to the United States.
Japanese Management
Japanese business practices have been strongly influenced by Japan’s seclusion and differ from Western approaches in numerous fields. The extraordinary development of the Japanese economy from a less developed country to a member of the G7-states, as well as the success of Japanese corporations, made Japanese management a focus of Western researchers and managers.
The most notable differences are lifetime employment, seniority-based pay and promotion, and the role of Japanese trade unions. Lifetime employment refers to the preference of Japanese corporations to hire their employees after their graduation from university and then keep them in the company for most of their length of their careers. Lifetime employment is not a legal requirement for Japanese companies, but a custom that developed after World War II. The strict Japanese labor laws, which make it very difficult to lay personnel off, supported the establishment of this system.
Lifetime employment offers great advantages for the economic development of Japanese corporations. Corporations can invest in the training of their employees and support them in building up knowhow over a long period of time. Lifetime employment is further thought to improve employee motivation and loyalty. Next to lifetime employment, seniority based pay and promotion are also well-known features of Japanese management. Traditional Japanese corporations are strongly hierarchical systems in which career opportunities depend on the length of service in the firm. This provides a stable and reliable system for employees, but could decrease motivation for ambitious workers.
The most well-known and influential part of Japanese management is Japanese production management, which is mostly related to the Toyota Production System. This system became a role model for Western car makers and manufacturers of all kinds of products in terms of safety, quality, and cost effectiveness and made Toyota one of the most successful Japanese corporations in the world. Japanese production management incorporated the just-in-time (JIT) style of management. This is a system in which all parts used during the production process are delivered exactly at the right time and used in their proper amounts. Justin-time management reduces waste and costs and uses methods such as the kanbans (small cards that help the coordination of parts used during the manufacturing process) and heijunka (continuous control of quality during the production process as well as after the product is manufactured). Japanese production management is further strongly based on the philosophy of kaizen, which refers to continuous improvement of all management and manufacturing processes with the overall goal of improving quality and customer value. All these concepts allowed Japanese manufacturers not only to take the lead in quality and in cost but also supported the development of the Japanese economy.
Other interesting features of Japanese management are nemawashii or unofficial negotiations and the ringi system, a group decision-making process. Nemawashii refers to communication between negotiators in an environment before an official meeting takes place. This allows all participants of a negotiation to present their ideas and circulate them among all participants. In this way, problems can be solved before a final meeting, and harmony and understanding are secured for all participants. Nemawashii is the reason why Japanese meetings often only have an information exchange function and simply finalize the results of the nemawashii process.
The ringi system, on the other hand, is a bottom-up group decision-making process that includes members of all management levels. In a ringi document a new idea is presented and then improved and revised by all managers involved. The document is often circulated a number of times throughout a company. The whole process is finalized once all participants agree on a solution and sign the document. It sometimes can be signed by up to 30 or more people. The ringi system decreases individual responsibility and informs employees of a new strategy or idea. This allows Japanese teams, departments, or companies to set very ambitious goals, but also leads to time-consuming decision-making processes and indecisiveness in times of crisis.
Japanese management has further become famous for its particular way of managing knowledge. Japanese knowledge management focuses on tacit knowledge or knowledge that is located in people and not documented in the form of reports or data. Lifetime employment supports this practice. Japanese companies do not have to be afraid of their employees leaving their companies and can therefore allow them to gain a high degree of company-related know-how. In many Japanese firms knowledge is therefore communicated from person to person and on-the-job training is preferred. Because of this, knowledge also flows freely within a Japanese firm, a fact that supported Japanese advances in new product development.
The 21st Century
Even against the background of strong economic transformations in countries such as India and China and a strong enthusiasm in dealing with these upcoming economies, it should not be forgotten that Japan is still the world’s second-largest economy in terms of GDP. However, Japan’s economy faces further challenges. Besides the reforms in the 1990s, there are still many unsolved problems such as the tremendous public debt, the fragile banking industry, and the comparatively unproductive domestic sector.
Since 2007 Japan’s baby boomers (Japanese who were born from 1949 until 1951) have been gradually retiring. They account for about 10 percent of the Japanese workforce. For companies, this led to high investments in retirement contributions as well as to a drain in tacit knowledge. However, the retirement of the baby boomers opened the way for a new generation of young Japanese who are entering the corporations. A decreasing Japanese population makes this problem even worse. After years of recession, Japan’s corporations now fear a labor shortage for the first time.
These challenges and the turbulent developments in the Japanese economy and management over the last several years led to the question of whether Japanese management practices will become more Western or shareholder-oriented or keep with their traditions. Only in the field of production management do Japanese firms manage to defend their world leadership. The main challenge of Japanese corporations will be to internationalize their workforce and to develop more flexible organizational structures. Japanese negotiation and decision-making practices are further seen as management styles that kept Japanese firms inflexible and delayed reform processes during the 1990s. Some Japanese firms such as Toshiba have taken up the challenge and developed a balance between a profit and efficiency-oriented management style and their classic management style. However, it remains to be seen whether a large amount of Japanese corporations will change their ways to adapt to the 21st century or continue with their traditional ways.
Bibliography:
- Michael J. Artis and Toshihiro Okubo, The Intranational Business Cycle: Evidence from Japan (Centre for Economic Policy Research, 2008);
- CIA World Factbook, www.cia.gov (cited March 2009);
- Susan Carpenter, Why Japan Can’t Reform: Inside the System (Palgrave Macmillan, 2008);
- James R. Lincoln, Japan’s Network Economy: Structure, Persistence, and Change: Structural Analysis in the Social Sciences (Cambridge University Press, 2007);
- IIkujiro Nonaka, The Knowledge-Creating Company: How Japanese Companies Create the Dynamics of Innovation (Oxford University Press, 1995);
- Kenichi Ohmae, The Mind of the Strategist (McGraw-Hill, 1982);
- Ralph Paprzycki and Kyoji Fukao, Foreign Direct Investment in Japan: Multinationals’ Role in Growth and Globalization (Cambridge University Press, 2008);
- Edwin O. Reischauer, The Japanese Today: Change and Continuity (Harvard University Press, 1988);
- John Tsalikis and Bruce Seaton, “The International Business Ethics Index: Japan,” Journal of Business Ethics (v.80/2, 2008);
- Hiroshi Yoshikawa, Japan’s Lost Decade (IHouse Press, 2008).
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