Can Young Firms Rejuvenate an Aging Japan?
The Japan Society of Northern California was pleased to host an exciting program on March 7 featuring Richard Katz, Senior Fellow at the Carnegie Council, and Naomi Fink, Research Specialist at the Capital Group, in a discussion about whether young Japanese entrepreneurial companies can step up to be the savior of an aging Japan. The answer seemed to be a conditional “yes.”
Rick, a journalist and long-running expert on structural reform in Japan, began by describing the problem – a shrinking labor force, low rate of corporate entry, and a stagnant small and medium size business sector. He saw growing small and medium size businesses the key to solving Japan’s productivity and aging problem, but noted that Japan has typically had great difficulty promoting SME growth. In particular, he pointed out that Japanese SMEs faced a serious succession crisis – weak companies continued to be mismanaged by aging founders while strong companies risk disappearing for lack of a successor. (See his powerpoint here)
Turning to solutions, Richard pushed for policies that would encourage large conglomerates to spin off poorly performing subsidiaries, incentivize elderly owners of SMEs to retire earlier, limit personal liability in business, have government procurement set-asides for startups, promote more Silicon Valley type startup companies, direct government assistance to strong SMEs with good growth potential rather than the weak ones that needed subsidies to survive, and expand the role of independent VCs and PEs (i.e., not affiliated with an industrial group). He urged small and large companies to look for leadership among its cadre of young managers between the ages of 27-43, who in other countries are the source of entrepreneurial spirit, but who in the Japanese system are stuck in mid-management jobs. He rejected the notion that Japan lacks talent or that Japanese are risk-adverse; the problem was instead that the risk-reward ratio was skewed against taking risk. Policy makers need to change that.
Naomi Fink opened by noting that, while she was pessimistic about prospects for Japan investing three years ago, today signs of structural reform make her more confident. One continuing weak point, however, was highly risk adverse private investing. She showed data that household assets consist largely of cash and conservative products, meaning that individuals have missed out on the boom in equities. They are also vulnerable to erosion of the value of their savings should inflation start to rise. The Financial Service Agency, meanwhile has not helped the situation by warning about new innovative financial products.
She offered a number of suggestions to remedy this misallocation of capital, including financial education, tax and regulatory incentives for investment managers and individuals to select long-term savings vehicles with appropriate risk profiles for customers. If successful, encouragement of sustainable “savings to investment” flow could contribute to sustainable recovery in a shrinking Japan.
A lively discussion followed with many interesting questions from the audience. The evening ended with great sushi and talk during the networking session. Many thanks to Orrick for the use of their gorgeous facility, to Rick and Naomi who both traveled to the Bay Area to be with us, and to the Japan Foundation Center for Global Partnership for their financial support for this program.