Initial proposal to national strategy commission (Part 2 of 3)

This is a continuation from Part 1 of the proposal I sent to the national strategy commission of the government of Japan.

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The Symptomatic Issues

Japan’s problems cannot be solved separately from one another. The causes and consequent problems must be approached in their entirety as closely interlinked issues that have been developing prior to 3.11.

With a fertility rate at just 1.35 per person, 40% of the population will be over 65 years old by 2060 and the total population reduced by 30% to 86.75 million people. The difficulties that stem from these demographic issues will only continue to increase for following generations under the present circumstances. As a result, Japan must devise methods that will enable its population to be more efficient with fewer resources. Japan must be willing to venture into new sectors that are knowledge based and that will build on the tools that Japan has available as a first world country. Currently, however, the burdens simply continue to grow.

While foreign investment returns have managed to offset the trade deficit and the current account still supports a surplus, the latter narrowed to a record low by 43.9% to 9.629 trillion yen in 2011. The Japanese deficit has now reached a record 958 trillion yen. This amounts to 7.6 million yen for every man, woman and child, compared to the U.S. 3.8 million yen per capita. In the U.S., this large number fuels heated debates and disruption, but in Japan the issue has barely been raised and the populace seems to be accepting it quite complacently. With projections of the deficit increasing by another 13% over the next year to 1,085 trillion yen – the equivalent to the GDP of Switzerland – the country will soon not be able to maintain the deficit at “local” rates and will have to seek foreign investors at significantly higher global rates. 

The Japanese government also announced its first annual merchandise trade deficit, since 1980, of 2.49 trillion yen this year. Exports have decreased by 2.7% and imports have increased by 12%, particularly of oil and liquefied natural gas, due to the nuclear disaster and the subsequent energy shortage. While this was partially caused by the Great East Earthquake, tsunami, nuclear accident, the floods in Thailand, and Euro crisis, the long term trend has already been showing evident signs of decreasing exports due to the lack of innovation, expansion, and product development.

Nothing is being done to change this. Japan is increasingly becoming a low margin “parts” supplier in juxtaposition to China and Korea. Many also in fact prefer to discourage businesses from moving or expanding overseas in their efforts to prevent the “hollowing out” of corporate Japan. However, when both the supply and demand side of an industry is overseas, it is logical for the more mature industries to locate closer to their suppliers and customers. “Hollowing out” would also cease to be an issue if new industries were created to fill the vacuum. For this to occur, globally relevant innovation, that is not purely domestic and incremental, is paramount.

Many do recognize the importance of innovation. However, the methods to initiate it within Japan are poor. The government here always favours the distribution of subsidies, which in fact foster moral hazards and additional obstacles to the form of innovation that needs to be accomplished. Due to the presence of too many subsidies, growth beyond research is stifled and actual product development never takes place.

Furthermore, while a strong yen may have negative effects on exports, it is also a powerful opportunity that Japan fails to utilize. This is very discouraging, considering the fact that Japanese corporations ought to be utilizing the yen’s purchasing power in global markets. Instead, they continue to behave very timidly and have amassed a cash hoard of approximately 200 trillion yen. While foreign acquisitions have increased, the reality is that in 2011 only 6.3 trillion yen was spent on acquiring foreign businesses. Additionally, due to the lack of real integration, profits and dividend income from these overseas sources that are purchased are relatively low, especially compared to those of the US and UK. The profit margin for US acquisitions averaged 8.9%, 7.5% for the U.K, and a mere 4.6% in Japan.

The lack of corporate spending and integration overseas is a clear example of the Japanese aversion to risk, which is also emulated within Japanese governmental policy. For example, the majority of Japanese government deficit spending is funded by the issuance of Japanese government bonds (JGBs). This is the favoured method over raising taxes, since it is generally cheaper, easier to implement, and politically safer. JGBs, in turn, are purchased by Japanese corporations who prefer risk free investments over other forms of value creation. A stable market for government debt issuance is created, and this internal rate of borrowing creates a “safe haven” compared to other currencies and continues to keep the yen artificially high.

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Your comments are always welcome.

The Bellwether Series 2012: Japan

I was asked by the Economist Group as a guest delegate to an Economist Conference held at the Hotel Okura, Tokyo on May 16th 2012.  I always enjoy both the Economist magazine but their conferences (which I participate in from time-to-time) which are put together very well.


Anyway, I thought I 'd blog some points I found interesting during the conference. Obviously, those who know me, I talk about many of these topics on a continual basis.

• Interesting answer to when JGB holdings become a problem (“clear and present danger”) is when the Japanese economy actually recovers.  Interesting/good point since the capital requirements of a growing economy would increase interest rates. (Ken Takamiya, Nomura Securities)
• 'X-day' would come in about 5 years.  While it won't be as severe as Greece, it will come.  But bigger problem is political deadlock in not being able to do anything. (Toshihiro Ihori, Tokyo University)
• The ratio of national civil servants = 90:1 in France (highest), 30:1 in Japan = low. Interesting point. (Dan Slater, Economist)
• Not a single hand raised in terms of the audience feeling that 'X-day' would occur in the next few years.
• As a growth strategy, Japan should lead to create a platform to increase economic benefit within Asia. Government should help banks and industry to expand into the growing Asian market. We also need to change the 'mindset' in regards to entrepreneurship and how failure is interpreted. In a recent visit to the US, he heard that people tend to get follow-on investments if they failed a few times because of the experience they gained and that they have a higher probability of succeeding the next time. [sounds familiar -ws]  (Motohisa Furukawa, GoJ)

(To be updated throughout the day)

Initial proposal to national strategy commission (Part 1 of 3)

As I have mentioned in an earlier post, I was named to be part of the national strategy commission for the Prime Minister of Japan.  Since then, I have received numerous comments via the "crowd sourcing" SNS method I proposed.  The comments were  both positive and negative, on what Japan should and needs to be done and continue to this day.  Through this process and working/discussing with the other commission members, I made the following proposal (translated from Japanese but otherwise unedited) to the commission as part of the initial feedback process.

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Japan’s most pressing issue is its aging and shrinking population. Coupled with a negative trade balance, growing deficit, strong yen, and the poor performance of Japanese companies – both domestically and overseas – Japan may soon lose its position as the third largest economy in the globe. These interconnected issues must be addressed immediately, and fundamental systemic faults within the government, corporations, industry, and education must be changed. Innovation, diversity, real risk management, and teamwork must be fostered at all these levels. By doing so, my belief is that Japan will be able to facilitate its transition into a vibrant knowledge-based economy by 2050.


Systemic Faults and the Root of the Problem
The government has of course undertaken efforts to address some of these issues. Nevertheless,none of these strategies have been very successful at improving Japan in the past two decades. While some strategies were supposedly implemented, the majority of them failed to understand the true “essence” of the problem and procured zero results, or made matters even worse.

Thus, we ought to focus now on “going back to basics”. We must work to re-create a resilient system that addresses systemic issues of leadership, communication, ownership and, most importantly, the implementation of strategy. The government can begin this process by analysing why previous plans failed to be executed or successful, and by developing a strong, collective understanding of the larger picture. The point here is not to think in absolutes, but to develop the flexibility of thinking in shades of gray and making room forcompromises. It is about taking measured, but decisive risks; it is about being able to respond to and handle the unexpected. Japan is extremely poor at this as it remains constricted by its adherence towards absolutes and bureaucratic guidelines.

Before strategies that target specific industries and sectors are developed, an environment that will support the competent risk takers, effective problem solvers, and reliable leaders needs to be established to successfully address the following symptomatic issues.

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Your comments are always welcome.

The One Year Anniversary of 3/11

As many of you have commented, I have not been blogging very much this past year. Obviously, as the world knows, Japan has suffered tremendously in the last year due to the Great East Japan Earthquake. The triple disaster has changed everyone's lives forever.

In this last year, I have personally gone through many changes. Thankfully and luckily, most have been good. However, as fate would have it, I have also immersed myself into the very heart of Japanese government and am finally understanding what is important and what is not, and try to apply all my experiences and talents to really try to improve this place we call Japan. As I walk to "work" every morning and see buses full of children, full of hope and dreams, getting ready for their tour of the National Diet. This daily scene reinforces why I am trying so hard to fix this place - for them, our future.

For those who passed away or are still suffering from this tragedy, I would like to offer my prayer and deepest condolences.

Solving a country's problem through SNS "Crowd Sourcing"

Last week, I was named to the national strategy commission by Prime Minister Noda of Japan. The commission was empaneled to focus on existing problems in Japan and to find practical solutions by the year 2050. My area of focus is on economic prosperity. I assume they are expecting my background in entrepreneurship, innovation and global perspective to be incorporated.

Therefore, I wanted to be entrepreneurial in framing the problem, innovative in receiving ideas and solutions, and global in implementing them. To do this, I am using my vast social network to "crowd source" from everyone about some problem issues they perceive as well as practical ideas/solutions for them.

Looking forward to hearing from you all!

-William

Getting ready to tape 3-hour NHK special (broadcast 1/1/12) on disparities of Japanese (<40) youth: soliciting opinions.

St. Gallen Symposium

As a speaker at the last two St. Gallen Symposium, I cannot recommend enough how valuable an experience it is to attend this event. If you are a graduate student who understands the importance of interacting in a global community and discussing very current issues with your peers from around the world, this is the event for you.

The St. Gallen Symposium, a conference organised by the International Students’ Committee (ISC), a student initiative of the University of St. Gallen, is the world’s premier conference for intergenerational, interdisciplinary and intercultural debates. The 42nd St. Gallen Symposium will be held under the topic “Facing Risk” from 3 – 4 May 2012 at the University of St. Gallen.

Two hundred Leaders of Tomorrow engage in challenging debates with 600 Leaders of Today from all over the world. In the past, these distinguished personalities contributed to the intergenerational dialogue with the Leaders of Tomorrow and included Dr Josef Ackermann, Deutsche Bank AG; Robert John Aumann, Nobel laureate; Robert Dudley, BP plc; Prof Niall Ferguson, Harvard University; Christine Lagarde, International Monetary Fund (IMF); and Tharman Shanmugaratnam, Minister of Finance of Singapore. Notable past Japanese speakers were Fujio Cho, Toyota Motor Company; Toshiki Kaifu, Former Prime Minister of Japan; Hiroshi Mikitani, Rakuten; and many others.

One hundred graduate and postgraduate students have the opportunity to qualify as “Leader of Tomorrow” for participation in the St. Gallen Symposium by submitting a contribution to the student essay competition. The three most outstanding pieces of work will receive the St. Gallen Wings of Excellence Award, endowed with EUR 20,000, and will be presented to the audience by their authors. Detailed information can be found on www.stgallensymposium.org.

If you have any questions, please feel free to contact Johannes, the ISC Representative for Japan through kre@stgallen-symposium.org.

Venture and Social Capital: A Vision for Japan (Part 3 of 3)

Continued from last week, my essay on "Venture and Social Capital":

3. Break through the glass ceiling
In a future in which business will he under extreme pressure to eliminate waste and increase efficiency, it’s hard to see how Japan can continue to underutilize half its population: women. The higher ranks of corporate Japan, in particular, are astonishingly absent of women.
According to the 2009 report Corporate Women Directors International (CWDI), women accounted for only 17 of roughly 1,200 seats on the boards of Japan’s 100 biggest companies – roughly 1.4 percent. Japan even lagged behind Arab countries such as Oman, Jordan and Kuwait. Some of the most truly international Japanese firms were the worst offenders. Toyota, Nissan, Honda, Panasonic and Toshiba do not have a single woman director.

Japan’s top universities turn out large numbers of exceptionally bright, talented women who then cannot find suitable employment in Japanese companies. In a phenomenon known as “gender arbitrage,” Western firms are hiring these overachieving women, giving them responsible positions and good salaries. It is Japanese companies that are missing out on this talent pool.

The biggest problem Japanese firms have in promoting women to directorships is that there are so few women managers to promote. Even companies whose customers are all women are generally run by men. In other words, a bias in hiring and a quite low glass ceiling after entering a Japanese company create a self-perpetuating situation.

Looked at from any perspective, getting more women into work is the only economically rational choice for Japan. The population is both aging and shrinking; there is substantial resistance to increasing immigration; and the economy desperately needs ways to revitalize growth.

A recent study by Goldman Sachs examined this assertion and concluded that if the rate of female participation in the labor force rate could be raised to that of men (almost 80 percent), it would create over 8 million jobs and add as much as 15% to GDP. Because Japan is the only advanced industrialized nation with such a huge, skilled, untapped resource, it has a golden opportunity to accelerate growth quickly and sustainably.

Conclusion
Changing Japan in these three areas---studying abroad, cultivating volunteerism, and promoting women--would be catalytic for society as a whole. One important area that could benefit is venture capital.

While it is true that Japanese corporations and financial institutions make micro-investments in venture companies, an American-style venture capital industry does not exist. It’s harsh but not entirely unfair that the VC community in Japan is derided as “Very Conservative” or even “Very Cowardly.” There have been many attempts, especially at the Ministry of Economy, Trade and Industry (METI), to kick-start the entrepreneurial process. Several programs give loosely defined grants of between $100,000 and $1 million to exceptional researchers and projects in universities or research labs. Unfortunately, many researchers use this money simply to fund more research, not to build businesses. In the past few years, these investments have returned less than 1% on average, compared to 3.9% for private venture capital, according to a 2009 Japan Venture Research report.

There are also government-backed VC companies that were created to invest both private and public money into entrepreneurial ventures. Unfortunately, they lack the kind of real-world experience that is essential to understanding the challenges facing venture companies. While the ideals underlying these and similar government programs are noble, they have ended up becoming a moral hazard to Japanese entrepreneurs. Simply put, governments are not good at picking winners, nor should they be trying to do so.

In the U.S, the principals of venture capital companies are usually former entrepreneurs themselves, so they understand the problems intimately. American VCs also expect to take an active role in their investees, not merely injecting cash but also hands-on management skills, personal contacts, and more. For every dollar in cash a VC invests, he also invests a dollar of knowhow.

In Japan, venture capitalists typically take only observer seats on a company’s board without voting rights. The ostensible purpose is to protect the VC firm from liability and criticism. The VC provides only small levels of capital and no management advice. This inactive, risk-phobic approach will never support a healthy venture economy.

To be successful, a venture capitalist must understand entrepreneurs’ needs and truly want to help them succeed and must also understand the dynamics of the marketplace. Obviously, this echoes the three priorities I have identified for the Japanese economy.

Like the economy as a whole, the VC industry needs well-educated, insightful, analytical people – male or female. It needs creative problem solvers imbued with a broad, global perspective. And it needs people with the ability to understand multiple perspectives and a genuine desire to help other people to become successful – an empathy that can be sparked through volunteerism at an early age.

I firmly believe that if Japan could harness only a fraction of the power in its disenfranchised female working class and foster a new generation with a broader global outlook and a willingness to help others, it would not only revitalize its economy, but become once again a model for other nations to emulate.

(End of part 3 of 3 - Your comments are always welcome)

Note: This article originally appeared in Reimagining Japan: The Quest for a Future That Works, McKinsey & Company, Shogakukan (Japan), Simon & Schuster (USA), July 2011. Used with permission.

Venture and Social Capital: A Vision for Japan (Part 2 of 3)

Continued from last week, my essay on "Venture and Social Capital":

2. Encourage a culture of empathy through volunteering
At my high school in California, every student had to perform 100 hours of community service in order to advance to the next grade level. The focus was not on impersonal activities like cleaning up a park, but on providing meaningful service to the less privileged people in our community. Volunteering to help people instills the idea in young minds that “giving back” to society is a natural part of life. Young people discover that volunteering pays rich dividends in community appreciation, self-esteem, compassion, humility, and gratitude. Equally important, they learn that asking for help is nothing to be ashamed of.

Japan would benefit from such a program for a number of reasons. First, it would help young people learn empathy for others, and thus grow into compassionate adults. Second, it would lead people of all ages to reflect on their own strengths and weaknesses. And third, it would teach people to ask for help when they need it and both give and receive assistance from others as a matter of course.

A broader, deeper culture of empathy could also help to energize the business environment. One of the main reasons that so few venture businesses appear in Japan and far fewer succeed is that people in established companies, in banks, and so on, feel no sense of responsibility toward or even kinship with individuals who build their own businesses. Reaching out to help others is essential to helping a venture business succeed, just as employees being willing to help each other inside a start-up company is essential to its success. Many Japanese are too concerned with their own department, their own company, their own clients. The empathy response to help others, especially those who are somehow disadvantaged, is just not there. This characteristic is evident not only in the lack of support for venture business but also in the abysmally low level of philanthropy in Japan.

This is important because it applies directly to a nation’s ability to germinate and cultivate new businesses: start-up companies are all disadvantaged. Venture businesses are handicapped by a lack of experienced management, lack of access to capital, and lack of appeal to attract talented employees. Ventures succeed when people in the business community see their potential and offer them different kinds of assistance to help them grow.

While the effects of a wide-scale volunteer program are impossible to estimate, one result would certainly be an increase in personal empathy, a greater feeling of kinship with and responsibility to help others who need help. And that would include businesspeople feeling more inclined to help rather than hinder others, both within their companies and in the business community at large. In this sense, the growth of venture business---which I see as essential to invigorating this economy---will rely at least as much on individual and corporate assistance as on government support. So, as volunteerism promotes empathy, it not only “humanizes” society but indirectly helps to energize the economy.

(End of part 2 of 3 - Your comments are always welcome)

Note: This article originally appeared in Reimagining Japan: The Quest for a Future That Works, McKinsey & Company, Shogakukan (Japan), Simon & Schuster (USA), July 2011. Used with permission.

Venture and Social Capital: A Vision for Japan (Part 1 of 3)

I recently had the honor of providing a chapter for the best-selling book in Japan titled Reimagining Japan: The Quest for a Future That Works, published by McKinsey & Company. You can buy the book in many forms, including two types of electronic format. I am posting my essay as a 3-part series.

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In the 1980s, it was "Japan bashing." In the early 2000s, it was "Japan passing." And now it has become "Japan missing."

In the past two decades, the country’s once-vocal critics have fallen silent, largely because the world is no longer interested in Japan (with the possible exception of manga and anime). The sad truth is that Japan is becoming increasingly irrelevant, even though it is still one of the biggest and strongest economies in the world. It deserves more attention than it receives.

Japan bashing was never useful. But there is value in constructive criticism, especially if it can be offered in the form of a careful examination of the issues or characteristics that may be holding Japan back. I have spent my career in and around venture businesses, as an entrepreneur, an investor and as a judge of venture competitions worldwide. Along the way, I’ve developed some strong views about what works and what doesn’t in growing young companies. Some of the problems that I see in Japan today relate to social capital issues that are necessary precursors to the growth of a vibrant economy.

My recommendations might seem unusual, coming from someone with a technological background. But one thing I have learned from my career is that sometimes an indirect route is the best way to bring about the kind of change that is needed. Here are three paths that I believe Japan might follow in order to invent a more promising, more dynamic future.

1. Build global social capital
My experiences in managing and evaluating many business ventures---from high-tech startups to established global competitors---have convinced me that certain characteristics for success are universal. Among the most important is a sense of perspective.

The broader a person’s outlook and experience, the better the chances that he or she will grasp changes, understand opportunities and challenges, and perceive market relevance. How does one gain such perspective? One way is to read and study about different aspects of the world, and Japanese people are adept at that. From my teaching experiences at universities both in Japan and overseas, I have had a chance to observe hundreds of students. I have found Japanese students to be extremely bright and well-informed. And yet, something important is lacking. There’s a huge difference between accumulating knowledge about the world and experiencing it first-hand.

Japanese students benefit from a far narrower range of experiences than their counterparts in the U.S. or Europe. In the West, when young people go off to university, they often find themselves thrown together with people from vastly different religious, ethnic, cultural and ideological backgrounds. They are exposed to a broad variety of studies and perspectives, both in and out of the classroom. Moreover, the general education courses required at most U.S. universities are designed to broaden students’ perspectives early on so that they might make informed choices about their major field of study and, eventually, their careers.

In contrast, Japanese universities attract few foreign students and few Japanese students study abroad. This in itself is a problem. Secondly, Japanese students generally choose and then focus on their field of specialty early on. The result is that four years at a Japanese university, however prestigious or difficult to enter, does not represent the same kind of stimulating, personally broadening experience common in other developed economies. Even at Japan’s best universities, too many students lack key qualities possessed by their counterparts (and in today’s interconnected world that means their future rivals) from other countries. They have memorized large quantities of raw information without being exposed to the sort of creative problem solving that is further developed, challenged and tempered by numerous encounters with people of different backgrounds.

Japan is certainly not homogenous in the sense that everyone thinks or acts alike. But in important ways, compared to much of the rest of the world, it seems homogeneous. This has many advantages for society, but the development of broad, visionary thinking is not one of them. In my dealings not only with university students, but with Japan’s corporate executives, politicians and government officials, I find, to my frustration, that their lack of cultural interaction has created an intellectual myopia. For example, when I showed a newly released iPhone to the president of a major Japanese electronics maker, he was totally unimpressed: “Our phones have most of the same functions if not more.” The idea that a cellphone was more than the sum of its parts, that it could be a platform for a myriad of independent applications, or that his company should be developing value-added platforms that would attract people from all over the world to create software and services to run on his company’s products simply did not reach him.

Traveling almost constantly, I find great value in immersing myself in foreign cultures and ways of thinking. The goal is not to mimic any particular culture or society, but to learn from them all. The more intellectually (and culturally, philosophically and spiritually) diverse your environment, the greater the potential to grow as an individual and the more value you can bring to any company or organization. In a globalized world, this is essential social capital -- and it is missing in Japan.

In the 1860s and ‘70s, the Meiji oligarchs sent some of their “best and brightest” on overseas missions to learn about the world outside Japan. The famous Iwakura Mission included both government ministers and university students, and many of the students (including several women) stayed on in foreign countries to continue their studies. The government understood that gaining first-hand experience and perspective on the world was essential to Japan’s survival.

To reclaim a global perspective, Japan’s future leaders must expand their comfort zone. The ideal time to start doing so is during their university years. The first step would be for the government to partner with other stakeholders to fund and promote scholarships for study abroad. For this to have the desired effect, private industry has to adapt too by changing traditional hiring practices, such as the strictly defined hiring season and eliminating the stigma of chuto sayo (“in between” hiring into a company). And so does society. For example, many Japanese parents would discourage their children from taking up such opportunities. When I offered two promising students four-year scholarships abroad, both declined the offer at the urging of their parents. This was an eye-opening experience.

The world outside can look frightening to those who have not been there. A more important consideration is that parents fear that anything that separates their child from the peer group creates a competitive disadvantage when it comes to promotions. And the way things work now, they are right. That needs to change. I believe that nothing will produce a higher “return on investment” for Japanese universities, companies, and government organizations than a steady flow of new, globally minded talent.

(End of part 1 of 3 - Your comments are always welcome)

Note: This article originally appeared in Reimagining Japan: The Quest for a Future That Works, McKinsey & Company, Shogakukan (Japan), Simon & Schuster (USA), July 2011. Used with permission.