From developmental state to the ‘New Japan’: the strategic inflection point in Japanese business

Abstract

Between 1998–2006, Japan's political economy underwent a strategic inflection point, anchored on legal changes so profound that they are irreversible. These reforms sought to enable large companies to shift from the post-war priority on sales and market share toward a new focus on profitability. The arrival of powerful low-cost Asian competitors in assembled goods, and a drastic change in the shareholder structure in Japan brought the end of the ‘developmental state’ approach and necessitated repositioning into innovative, high-margin sectors. The congruence model posits that a successful shift in critical tasks requires a realignment of formal organization, people and culture. For Japan's highly diversified companies, to compete as efficient innovators meant making clear choices what businesses to compete in, and then to restructure to focus on winning in those few businesses. For Japan as a country, the shift in formal organization came through a wholesale change in the underlying approach to law-making and regulation, as well as corporate law. The 1990s were not so much a ‘lost decade’ for Japan as one of renewal and repositioning.

Keywords:

• congruence model
• ‘choose and focus’
• Japan
• political economy
• profitability
• strategic inflection point

Notes

1. In mathematics, an inflection point is reached when the first derivative (the slope of the trajectory) becomes zero, and the second trajectory (the rate of change) reverses its sign.

2. The FSA published inspection results on the internet, including the difference with the banks' own claims. Initially, the 15 largest banks understated non-performing loans by 36% (five banks underreported by more than 50%). Yet, by 2002, average underreporting had declined to 5.5%. See FSA Sept 16, 2004, press release, available from: www.fsa.go.jp/news/ newse/e20040916-1.html

3. By 2008, 80% of Japan's listed companies had switched to performance pay and promotion, and perhaps half of these used promotions as outright incentives to attract and retain talent. See Schaede (2008) for an analysis of changing employment practices in the context of Japan's strategic inflection point until 2008.