CATs

What do we make of Japan? Myths and realities

Derek Lehmberg a, Charles Dhanaraj b,*, Akie Funai c

a North Dakota State University, Fargo, ND, U.S.A. b Kelley School of Business, Indiana University, Indianapolis, IN, U.S.A. c Felligence Kabushiki Kaisha

Business Horizons (2013) 56, 219—229

Available online at www.sciencedirect.com

www.elsevier.com/locate/bushor

KEYWORDS Japan; Employment; Consumer markets; Competitive advantage; Business practices

Abstract The disastrous events of 2011–—an earthquake and a nuclear accident, a major accounting scandal at a well-known company, and an unusual current account deficit–—have brought Japan back into the international news. Although China and other countries in Asia have grown faster and gained greater attention in the last decade, Japan continues to be an important business player. Japan has the world’s third-largest economy and is home to many major corporations, leading-edge tech- nology, operational knowhow, and a strong currency. While much about Japan seems familiar, many of our beliefs about the country remain frozen in the early 1990s, when Japanese management was a hot topic and Japanese businesses appeared invincible. Japan has changed much since then, however, and deserves an updated understand- ing. In this article, we identify six commonly held myths about Japan, present corresponding realities, and discuss recent developments and implications for managers. # 2012 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.

1. Our understanding of Japan: In need of updating

Although it is easy to forget now, Japan was once considered an economic miracle. A country with scant natural resources, little financial capital, and few areas of technological expertise, Japan was the first Asian nation to modernize and compete

* Corresponding author E-mail addresses: [email protected] (D. Lehmberg),

[email protected] (C. Dhanaraj), [email protected] (A. Funai)

0007-6813/$ — see front matter # 2012 Kelley School of Business, I http://dx.doi.org/10.1016/j.bushor.2012.11.006

with the West. In the 1970s and 1980s, Japanese firms went head to head with and often defeated American firms in many markets they had tradition- ally dominated. Feeling unnerved, Americans began to view Japan as a threat to our businesses and–— more broadly–—to the American way of life.

Not surprisingly, Japanese business was a hot topic studied by practitioners and management scholars alike. Generally, we were interested in two ques- tions: why was Japan so successful, and what could our companies learn from Japanese management? To address these questions, a sizeable literature on Japanese business developed over time. Much of the work on Japan stressed the differences in culture

ndiana University. Published by Elsevier Inc. All rights reserved.

220 D. Lehmberg et al.

and environment and highlighted managerial techni- ques that were effective in that context, such as total quality management and the Toyota production sys- tem. American firms adopted some of these techni- ques with varying results, and those that were implemented in the United States eventually stopped being ‘Japanese’ any more.

The Japanese real estate and financial bubble burst in 1990, and the country entered a protracted period of deflation and an economic downturn from which it has yet to fully emerge. Over this period, much attention shifted away from Japan to newly developing countries, such as South Korea, China, and India. Although recently surpassed by China in terms of total gross domestic product, Japan re- mains a significant player in global business. It is a powerhouse for manufacturing and technological knowhow in key areas, including battery power, transportation equipment, and cutting-edge mate- rials, such as carbon-fiber. Further, it is home to one- third of the top 100 companies by number of patent applications, ahead of the United States. The yen remains strong as a currency, and the world con- tinues to consider Japan as a country upon which it can rely.

We believe this is an opportune moment to revisit Japan. The devastating earthquake and the tsunami of March 11, 2011, in the Tohoku region and the Fukushima Daiichi nuclear plant accident attracted the attention of the general public around the world. On the economic front, Olympus Corpora- tion’s accounting fraud scandal and Japan’s 2011 trade deficit–—the first annual deficit in almost 50 years–—made headlines. Back in the limelight, there is renewed interest in Japan. Unfortunately, many of the views of Japan held by the Western business community are based on observations over two decades old and do not reflect current reality. Herein, we aim to provide an up-to-date view of Japanese business and some insight regarding where Japan is headed in the future.

Myth #1: Japanese employees devote their entire life to a single company

New reality: A lot of those people who look like company employees are not

One of the most frequently cited hallmarks of Japanese management is lifetime employment. Un- der the traditional lifetime employment system, firms hired new employees straight out of school, rotated them through different positions and locations, and kept them until the mandatory

retirement age. Employees were expected to have strong lifelong loyalty to the firm, putting in many hours and sacrificing family and personal time for the sake of the company. In return, they received seniority-based compensation; a variety of different allowances, including housing and transportation; and a generous retirement pension. While this sys- tem still exists, the notion that everyone in Japan has this kind of employment is inaccurate.

First, even when the economy was at its peak, this long-term employment commitment along with its related compensation and assignment schemes was only possible for relatively large and successful companies. Small and mid-sized firms may have promoted long-term employment, but they faced resource limitations and were less stable than the larger firms. Turnover at these firms has always been much higher than at the bigger firms.

Second, long-term employment has shrunk as a percentage of total employment in Japan. Figure 1 depicts the decrease in the percent of regular (i.e., full-time, long-term employees) and the increase in non-standard (i.e., part-time, short-term, and con- tract) employment that has resulted. Japanese firms have had to deal with a contracting domestic market along with greater competition from abroad. For many firms, the combination of these forces has resulted in shrinking labor requirements. Firms with lifetime employment systems cannot easily fire employees, so restricting new hiring was an important way to limit the growth of their workforces (Rebick, 2005). When companies need more or different kinds of labor than they have among their long-term employees, they now hire–—either directly or through contracting companies–—short- term or part-time workers. For the company, these workers are low-cost labor and do not require a long- term commitment. Indeed, many firms do not see these workers as suitable candidates for long-term employment. As a group, these workers are predomi- nantly comprised of women and younger men (Broad- bent, 2001). The trend is behind rising income inequality among young age groups in the working population. Meanwhile, the increased number of young people who do not have good career prospects has alarmed the public and is a topic of constant debate among policy makers.

While these employment trends may have some unappealing impacts on society as a whole, the picture at the business entity level is less clear. In the past, management scholars argued for many of the benefits, including motivation due to loyalty and the ability to develop and apply knowledge. How- ever, others have pointed out that while the system may develop good generalists, it does not develop specialists needed to be competitive in certain

What do we make of Japan? Myths and realities 221

Figure 1. Changing trends in employment

Source: Japan Institute for Labour Policy and Training, 2010

industries. Furthermore, recent research suggests there are other downsides to long-term employ- ment, such as an increased number of free riders, which leads to organizational deadweight and de- creases firm effectiveness (Numagami, Karube, & Kato, 2010).

The new reality is that there are a lot of positions held by short-term and part-time employees. These individuals have low incomes, and in many cases, they have lower living standards than prior gener- ations did when they were of a similar age. In fact, many rely on parents for housing or financial assis- tance. As the Japanese age, there is great concern about their ability to maintain and contribute to society. Some have described the Japanese society as one that does not offer second chances. Those individuals who did not obtain a full-time, long-term position to start off with are given few chances to try again. Although more firms hire experienced em- ployees on the labor market than was the case in the past, opportunities are very limited for more attrac- tive full-time positions. Overall, short-term and part-time employees face few opportunities to im- prove their career prospects.

Given the negative consequences of this grow- ing group of individuals without long-term employ- ment, politicians and regulators are interested in improving things. In the not-so-distant future, laws and regulations may be changed in an at- tempt to promote long-term employment. For managers of foreign firms operating in Japan, a changing labor market may open opportunities to

hire more qualified people than was possible in the past although these changes do not remove the liability of being foreign.

Myth #2: Japanese consumers are rich, big spenders

New reality: Average incomes are down, and purses are snapped shut

Japan has developed a reputation as a country that consumes large quantities of luxury goods. Japan has been a very large market for high-end brands of apparel, handbags, and watches. Luxury boutiques and department stores are prominent features of affluent shopping areas, such as Tokyo’s Ginza. The Japanese market for high-end foods and beverages is also substantial. According to Michelin, Tokyo now boasts more three-star restaurants than any other city on the planet.

If Japanese consumers are buying all these ex- pensive things, they must be rich, right? Well, not so fast. It is true that Japan has a high savings rate and that the average Japanese household has more money in the bank than those of other countries. According to Japanese government statistics, the average household of two or more people has 16.5 million yen in savings, and the median household had 10 million yen. At the exchange rate of 80 yen to the U.S. dollar (current at the time of writing), 10 million yen translates to about U.S. $125,000.

222 D. Lehmberg et al.

The typical Japanese consumer’s high level of uncertainty aversion is a major reason for this saving (Hofstede, 2001). Japanese people build savings because they do not feel confident about the econ- omy in the future. It is instructive to look at statis- tics of where these savings are invested. In 2010, company shares made up only 8% of total household financial assets. Less risky investments were more popular with the three of the most popular invest- ments being certificates of deposit (43% of assets), bank savings accounts (29% of assets), and life in- surance (23% of assets).

There are some good reasons Japanese should want to have a lot of savings. The cost of living is high, employment opportunities are limited, and average incomes have been declining. The fact that the interest rate is essentially zero exacerbates the situation. While the Japanese as a group do not ‘feel’ rich at this point, they did in the past, which may explain how they bought so many luxuries.

Consumer preferences have also changed. Japanese consumers have very high expectations related to quality, design, and ease of use. However, they are moving away from high-priced branded products to lower-priced items that still manage

Figure 2. Average household income is falling*

to offer high quality. The change does not mean that Ginza’s luxury boutiques are all about to close. A large majority of Japanese consumers see value in prestigious brands, and high-income individuals con- tinue to purchase these in sizeable quantities. How- ever, more average people are spending less on luxury items than in the past.

In many areas, Japanese consumers have become more practical and less concerned with brand sta- tus. One place where this is evident is the growth in private label store brands. One of Japan’s largest retailers, AEON group, recorded sales of 369 billion yen (U.S. $4.6 billion at an exchange rate of 80 yen to the dollar) of products in its private brand ‘‘Top Valu’’ in 2009. This brand was only started in 2000. Less dramatic but fundamentally similar trends in private brands may be seen at the convenience store operator Lawson as well as at Seven & I Hold- ings, owner of Ito Yokado and 7-Eleven. ‘‘100 Yen’’ stores–—a Japanese version of dollar stores–—have emerged and become commonplace. Meanwhile, sales have decreased at high-end retailers, such as traditional department stores, that sell luxury items at high margins. Figure 2 shows average household income, total department store sales,

What do we make of Japan? Myths and realities 223

and total sales at supermarkets over the1995—2010 period. To allow for easy trend comparisons, these statistics are shown as indices with 1990 being equal to one. While the growth in supermarket sales is due to a variety of factors, the shift away from depart- ment stores is clear.

The auto market is another area in which the shift to practicality is evident. In the days of the bubble economy, families that never used cars for basic transportation would still buy a new car every sev- eral years. These days, the auto market has shrunk, and people who live in places where public trans- portation is limited have largely shifted to kei- jidōsha, or light cars, which have lower prices and are charged lower taxes and tolls.

Clearly, these changes in consumer priorities has negative consequences for many firms selling high- end consumer goods, but this is not the only area in which foreign managers should take note. In the broader consumer market, changes in consumer preferences have fueled the growth of Japanese companies offering high-quality, reasonably priced products in a range of consumer areas. Uniqlo and Muji are two examples. Having grown large market shares in Japan, these companies are now expanding aggressively in foreign markets.

Myth #3: Japanese companies do not care about profits

New reality: Sustainable profitability is key

In the past, Japanese firms were often characterized as pursuing market share and having little interest in profit maximization. A system of long-term cross shareholdings between firms reduced pressure to perform and offered a safety net. Firms often diver- sified into areas in which they had no competitive advantage. Despite laws that state the supremacy of shareholders as owners of the firm, Japan’s gover- nance practices have been described as putting the highest priority on employees, and employees and management valued stability over profitability. How- ever, we do not think this view is fair or up to date. In some electronics industries, Japanese firms have proactively exited product segments in which com- moditization is underway to focus on higher value- added niches. Further, Japanese firms do have very pronounced differentiation; however, it may be less noticeable to non-Japanese observers. Overall, there is evidence that Japanese firms are focusing more on areas of competitive advantage and exiting areas no longer in their scope of business (often through joint venture or merger and acquisition (M&A)).

In our experience, Japanese firms are often more concerned about creating value than capturing it. With many of our clients, there has been an implicit assumption that if you create and deliver value–—in other words, if you develop and provide an attrac- tive value proposition to your customers–—profits will come naturally over time. This may be naı̈ve, but on the other hand, we find it a refreshing change from the constant focus on value capture seen at so many U.S.-based firms. It is true that Japanese firms, on average, do not enjoy the profit levels of their American counterparts. We feel the causes of this are numerous and cannot be attributed simply to a lack of interest in profitability or lack of strategy. Japanese managers are more concerned with creating long-term value and less with captur- ing it over the short-term although capture is be- coming more important.

Some aspects of Japanese culture discourage profit maximization as a management goal. There is an ingrained cultural resistance to business ap- proaches that attempt to generate high profits through high margins. Additionally, there is a gen- eral view that service and support are a part of the product purchased and cannot be unbundled or charged separately as is so often the case in the U.S. market. Providing service that is up to Japanese-level expectations can be time consuming and expensive. Furthermore, the idea of segmenting existing customers by profitability and discouraging customers who are not currently profitable, while common practice in many Western firms, is one that Japanese find repugnant.

The Japanese focus on long-term value creation has a number of implications for foreign managers, particularly in cooperative arrangements, such as joint ventures. Although lack of agreement on the importance of profitability has historically been a sore spot between Japanese and American partners, we believe there may be room for more thoughtful integration of the appeal of value creation Japanese firms pursue with efforts to capture a reasonable amount of the value created, a typical American focus.

Myth #4: Japanese companies are international

Reality: Things have not changed as much as you would think

Japan is a country built on trade with the outside world. Japanese brands have been prominent com- petitors in most major international markets for decades. Japanese firms have facilities responsible

224 D. Lehmberg et al.

for manufacturing, distributing, and other opera- tions in many countries across the globe. Surely, Japanese business must be very internationalized? Well, it all depends on what you mean by ‘interna- tional.’

Although Japanese firms often have operations in many countries, they tend to operate these in an ethnocentric manner. Typically, Japanese firms rely on Japanese expatriates to operate in key roles of their overseas subsidiaries. Visiting Japanese facil- ities overseas, we have often seen Japanese expats from supplier companies coming to talk with their fellow Japanese expats at the firm. Just because they are pursuing local procurement does not mean their suppliers are actually managed by locals.

Frequently, Japanese overseas subsidiaries oper- ate in an invisible Japanese bubble. Why is that? There are several things that make it difficult for Japanese firms to internationalize effectively, in- cluding language issues, cultural issues, and incom- patible business practices.

Although English is required in Japanese middle school and high school, few Japanese actually speak it well. There are a number of reasons for this, including the way the language is taught and the complete lack of similarities or common an- cestry between Japanese and English. The need for perfection in Japanese society also makes it diffi- cult for individuals to try speaking when they know their skills are not good. Given the level of English speaking abilities in Japan, it should not be sur- prising that important discussions are conducted completely in Japanese in many firms, even over- seas. Recently, several Japanese firms, including Rakuten and Fast Retailing (owners of the Uniqlo brand), made headlines in Japan when they an- nounced plans to adopt English as their official company-wide language. This has stirred public debate as many Japanese are concerned that an increasing focus on English will be detrimental to their career prospects.

Japan’s culture puts an emphasis on long-term relationships, the foundation of which is trust. However, building this trust requires building famil- iarity over a long period of time. It is more difficult for Japanese to develop strong long-term relation- ships with foreigners because the cultural differ- ence makes it harder to become familiar. This familiarity can develop if more time is available, but it frequently is not. The result can be the appearance of a unified consensus among Japanese managers on one side while the foreign employees feel excluded from decision making and left out of the loop in general.

Japanese attitudes regarding foreign workers do not help matters either. We have always been struck

by the high quality of Japanese workers. As a group, they pay strong attention to quality and details, sometimes to the point of over delivering in terms of quality in areas in which it matters little. Each day, Japanese workers are motivated to become better at the jobs they do–—a work ethic that exists through different businesses and occupations from restau- rants to retail–—and they seek perfection and pro- ductivity at the same time. When Japanese managers look at foreign workers, they often see a lack of these qualities. They tend to complain that foreign workers are less competent and dedicated than Japanese counterparts, which means it is diffi- cult to achieve the same levels of performance overseas as in Japan and that different management approaches are required.

The traditional Japanese approach to human re- source management is not compatible with employ- ment systems in many countries. Long-term employment is shrinking in the Japanese economy, but it is still prominent in the kinds of firms that are likely to be overseas. Seniority-based compensa- tion–—sometimes framed as ability based pay–—in the Japanese system means that new, younger em- ployees have low salaries although they will have good lifetime earnings if they stay. This does not work so easily overseas as it means the firm would have to try to hire new employees substantially below the going market rate. Combined with the cultural and linguistic differences, there is a ten- dency to have two distinct groups of employees at overseas facilities: Japanese expats receiving good pay, benefits, and positions and a group of host- country employees who have lower pay, limited job security, and little prospect of being promoted to prominent management positions. In turn, this leads to difficulty in attracting and retaining high-quality host-country employees. While this situation is not new, evidence from China suggests that Japanese firms have yet to address it. To the extent Japanese firms do not find a way to better integrate their Japanese and non-Japanese employees, they cannot be considered to be truly international.

There are several strong incentives for Japanese firms to become more international in the future, including a shrinking market at home in the long term and the strong Japanese yen in the short term. Although the yen has declined somewhat from its all-time record, it remains very strong, putting pressure on exporters. Some Japanese firms are indeed taking steps to be more international and less Japanese through adopting English, attempting to harmonize employment practices, and moving important functions to overseas locations. Armed with the strong yen, Japanese firms have been in- creasing acquisitions of foreign companies. Overall,

What do we make of Japan? Myths and realities 225

the high level of outbound foreign direct investment since 2008 reflects the increased emphasis on overseas markets and the cost savings possible through producing in lower-cost countries. However, the majority of the largest Japanese firms active in international markets have been following a regional (rather than global) focus. As a group, Japanese firms may be characterized as reluctantly increasing their international focus. The current Japanese emphasis on gaining access to growing markets may bring them into more contact with other firms in perhaps unex- pected places. That being said, American managers should be aware that Japanese firms are likely to continue to operate in Japanese ways even when overseas.

Myth #5: Japan’s future lies with its famous consumer products

Reality: Specialized technology niches and cultural software are growth areas

When most people think of Japanese companies, a series of familiar consumer brand names come to mind: Toyota, Honda, Nissan, Panasonic, Sony, Nin- tendo, etc. While these are all well-known names that have been successful in many markets, many of these firms are losing share in the global market to firms from other countries (Iwatani, Orr, & Salsberg, 2011). It is not clear that they will make a comeback.

Consider this: Japanese consumer electronics firms can have a commanding rule in the domestic market while simultaneously having few, if any, sales in international markets (von Morgenstern, Kenevan, & Naeher, 2001). Sharp Corporation, for example, had the leading market share in the Japanese cellphone handset market for more than five years and has almost no overseas handset sales. This phenomenon has led some to describe the Japanese market as the ‘‘Galapagos’’–— islands dis- connected from evolution in the rest of the world.

The uniqueness of Japan’s markets and customer needs have not disappeared. While competition can be fierce, Japanese consumers are generally more willing to pay extra for better quality and features than most consumers in other countries. They may offer higher margins but, at the same time, demand different feature sets.

Also, the nature of technological innovation seems to have changed. In the past, Japanese firms used the domestic market to perfect technologies and increase production scale before aggressively introducing a new product category overseas. The

fax machine and VCR are two examples. However, more recently, there are few products amenable to this kind of approach, and competitors from other, often lower-cost countries are developed enough that Japanese firms cannot afford to delay entry into a new product space anyway.

While this discussion may seem discouraging for the large well-known brands, it is not necessarily all bad for Japanese companies. What we are seeing is a shift in relevance and profitability of different in- dustries and sub-industries as well as increased overseas market entry by Japanese business sectors that had been relatively more domestically focused.

There is a shift in competitive advantage and profitability from large brand names to the firms that supply them with technologically sophisticated inputs. For example, Japanese firms may have lower share in the global TV market, but they enjoy a strong market share in the inputs, such as special- ized films and chemicals going into set production, and in the machine tools and manufacturing lines needed. As a result, the more important Japanese firms of tomorrow may deal less in consumer-branded items than in specialized inputs.

One strength of Japanese firms is their ability to coordinate between different organizations and areas of expertise to create finely tuned products and solutions. In products for which this is key, we will likely see Japanese firms’ continued dominance in the global market. Optimizing digital photograph- ic equipment requires strong coordination between those responsible for designing and producing lenses with people developing sensors, image processing hardware and software, and other systems in the camera. High-speed rail represents another exam- ple for which this coordination is key.

While Japan used to focus almost exclusively on exporting manufactured goods, there is an increas- ing shift to exporting Japanese pop culture and services, including education. Japanese pop cul- ture, especially videos and music, has been popular in East Asia for many years. More recently, Japanese culture has been gathering greater acceptance in other geographical areas. Manga and anime have become popular in North America, and some U.S. television shows are even based upon Japanese TV. Other service industry companies, including restau- rant chains and even a quick haircut provider, are increasingly engaging in Asian markets.

Arguably, the ‘‘Galapagos’’ nature of the Japa- nese market is a two-edged sword. For Japanese firms, it means that some hit products in Japan are duds overseas. At the same time, for foreigners, it can increase the difficulty or decrease the attrac- tiveness of entry. On the more positive side, it fosters uniqueness and culturally related product

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categories, which can lead to greater appeal over- seas. At the very least, we think we can gain many hints for new products and services by observing the Japanese market.

Myth #6: China is the new Japan

Reality: Not so fast

Many people we know have observed that the prod- ucts they purchase that used to be made in Japan are now made in China. It is true that China has increasingly become the location for the final as- sembly of many consumer products. Chinese manufacturing grew though producing low value- added products with low labor costs. However, China is developing, costs are increasing, and Chi- nese firms are improving their technologies and learning to make more advanced products. Many of these products are made with Japanese inputs and use Japanese-made production equipment. Comparing the item trades, between the two coun- tries, China exports consumer products, including apparel, consumer electronics, and food to Japan, whereas a sizeable amount of Japanese exports to China are made up of capital goods and specialized inputs.

Some fundamental differences between the two countries underlie these observable tendencies to trade. The general workforce’s education level and employees’ tendency to exhibit high loyalty to their employers are much higher in Japan than China. This facilitates the development and implementation of far superior operations. Historically, the approach to managing in China involved throwing a lot of low- cost labor at problems, but in Japan, it has focused more on finding root causes and improving while limiting resources. As one of our former consulting colleagues noted after a recent visit to a major Chinese TV set manufacturer, the Chinese plants may have the latest equipment, but they frequently have low productivity, and quality problems are rampant.

As discussed in Myth 5, Japanese companies con- tinue to show their ability to bring together different technological disciplines (often through cooperation between multiple firms) to solve specific complex problems. This allows Japanese firms to excel at complex products for which many subsystems have to be specifically calibrated to obtain optimal per- formance. This capability to cooperate has a great deal to do with the social fabric of Japanese culture, and for that reason, it is not easily copied.

In addition, Japan and China got where they are through very different development pathways. Japan

needed to export in order to import natural resources and other necessities, so it adopted a development approach that limited inbound trade as well as in- vestment in Japan by foreigners. China wanted to develop and used a development approach that encouraged foreign investment, attracting it with access to low-cost labor in China’s large market. In return for this access, China often required firms to enter into joint ventures and transfer technology to their Chinese partners. China had a large number of state-owned enterprises while Japan had few, but Japan’s government did have significant involvement with firms through administrative guidance and other mechanisms.

Companies from the two countries will compete more in the future. Japanese companies have ceded ground in some areas, such as computers, and are likely to continue to lose in other industries. How- ever, the competencies, knowledge bases, and so- cietal systems are very different between Japan and China. Therefore, China does not simply follow in Japan’s footsteps.

While it is human nature to simplify by looking for similarities, we need to be careful in lumping to- gether China and Japan in some ‘‘East Asian’’ group- ing. Firms from the two countries are likely to follow different managerial philosophies and operating practices. As a result, the threats they offer as competitors and the opportunities they provide as partners are very different. Knowing the ropes in one does not necessarily provide much advantage in the other.

2. Looking to the future

In this article, we identified a number of old and outdated beliefs about Japan and discussed the reality relating to each. Many Japan watchers note how strongly Japan resists change, but as we can see, Japan has embraced change in some ways, albeit reluctantly at times. Building an accurate understanding of Japanese business and where it is headed requires understanding the tensions be- tween new and old and between the familiarity and security of being a closed society with the need to become more open.

The new Japan is more easily navigated by foreign individuals and businesses than was the old Japan. Indeed, foreign managers play a much larger role than they did in the past. The 2000s saw the emer- gence of foreign chief executive officers (CEOs) at several major Japanese firms, including Sony and Nissan. Carlos Ghosn, CEO of the Japanese automak- er Nissan, has become something of a star after turning the company around.

What do we make of Japan? Myths and realities 227

On the other hand, Japan remains complicated, nuanced, and sometimes opaque (Ford & Honeycutt, 1992). Michael Woodford, ousted CEO of the camera maker Olympus Corporation, found this when he discovered a massive accounting scandal at the firm. The firm had been hiding losses made back around the time the asset bubble burst in the early 1990s, and this only came to light in 2011 after an investigative magazine called into question some M&A activity in which Olympus had recently been involved.

It is hard to say how Japan will change in the future, but there are some clear trends that will drive change. Japanese demographic projections forecast continuing increases in the retirement- aged population and continuation of the low birth rate, resulting in a major decrease in the working-age population (See Figure 3). According to projections from the National Institute of Population and Social Security Research, the working-age population is predicted to represent 58% of the total Japanese population in 2030, down from 64% in 2010. One implication often drawn from this is that Japan is likely to become more reliant on immigrant labor. On a practical note, we have observed a significant increase in the foreign workers we encounter in

Figure 3. Population of Japan by age group

Japan. Although there was a sudden decrease in their numbers after the Tohoku earthquake, many of these workers are returning.

Many Japanese managers believe future domestic consumption levels will drop as Japan’s population ages and declines. This, combined with the strong Japanese yen, has enticed many Japanese compa- nies to look for overseas opportunities more active- ly, both through organic growth and M&A. How they will integrate these opportunities with their exist- ing Japanese operations (whether inside or outside the Japanese culture bubble) remains to be seen. It is also worth noting that while Japanese firms may be looking abroad, individuals are doing less of that than they did in the past. International tourism and studying overseas are less popular than they used to be.

It has also been suggested that with the aging Japanese population, exports are likely to continue to sag while Japan remains a heavy importer of natural resources and food. Will Japan develop a chronic tendency for trade deficits? The 2011 deficit was exacerbated by reduction in exports due to damage to Tohoku production facilities as well as plants taken offline by flooding in Thailand. Mean- while, with most of its nuclear power infrastructure

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offline, Japan was forced to import much larger quantities of coal and liquefied natural gas than usual to meet electricity-production needs. So, while 2011 may have been a fluke, the fact that many Japanese firms have moved manufacturing facilities to lower- wage countries does suggest a trend of Japan import- ing more and exporting less.

Is Japan becoming more similar to other coun- tries or not? On the surface, there are ways it is becoming more similar; however, this should not be construed as meaning that the Japanese culture is converging with a global culture. Long-standing business practices and attitudes do not change easily or in predictable ways. The veneer of Japan can be misleading, and understanding what is going on behind the surface is difficult and requires effort.

3. Convergence is not imminent

Reflecting on the above discussion, we want to reiterate one basic observation: Japan is likely to remain different from other countries for the fore- seeable future. Time after time, we have seen the West mistakenly conclude that Japan was now ‘‘like us.’’ While we do not deny there are forces at work to make Japan more similar, it is important to remember that Japan maintains a strong inertia of its own. This is not necessarily a bad thing; Japan’s uniqueness needs to be considered an op- portunity for learning and not just a barrier to its market. Managers and policy makers can learn from operating in and observing Japan. At the same time, foreign firms often find the Japanese market chal- lenging, and the lack of a thorough understanding of Japan remains a major barrier to success. The nuanced and sometimes opaque nature of Japanese society can make it very difficult for foreign man- agers to correctly interpret what is going on in Japan.

Both on the level of the individual manager and the company, obtaining and maintaining sufficient understanding requires making a substantial com- mitment. Time and effort is required to build the kinds of relationships that can foster deep under- standing of the Japanese situation. Sending expats to Japanese language classes will not solve the problem. Clearly, managers who have very high levels of Japanese language skills will be at a major advantage because they can easily gather and dis- seminate information inside and outside of their organizations. Managers with limited Japanese skills, on the other hand, often find it better to stick with English as did Sir Howard Stringer, the former CEO of Sony.

4. Searching for opportunities Japanese uniqueness avails

Understanding what makes Japanese processes and products different can open up opportunities to apply these differences in other markets, including in the United States. Some attractive innovations arising in Japan have been ignored outside Japan, particularly when they occur outside the boundary of traditional export-oriented manufacturing industries.

For example, Japan’s operational focus in health care appears to offer opportunities from which practitioners and policy makers can learn. When one of us was going for a routine physical in Tokyo years ago, we noticed how patients were routed through different operations located in different parts of the hospital. Because the health care providers, including doctors, stayed at their stations and did not waste time walking from room to room, the operation could process a remarkable number of routine physical examinations with a small staff. This is not the only example of Japanese medical efficiency. It may seem hard to believe from an American point of view, but in Japan, you get your final bill for a hospital stay–— and make final payment–—as you are checking out on your last day. The whole process only takes a few minutes. These are but two examples where we think Americans can learn. We are not saying the Japanese system is perfect by any means; rather, Japanese practitioners have adopted some interesting solutions worthy of our study and consideration. Certainly, given the traditional Japanese attention to detail and dislike of waste–— or muda–—there remain many other areas from which we can learn.

5. Conclusion

In this article, we revisited Japan to provide an updated understanding of Japan, Japanese business, and managerial implications of develop- ments relating to Japan. The damage caused by the Tohoku earthquake and tsunami as well as the nu- clear disaster at the Fukushima Daiichi plant will take many years to completely repair. However, Japan has managed to get back to something close to normalcy despite tight electricity supplies and other resource shortages. Japan faces an uncertain future in a number of ways, but it remains an important country worthy of our attention. Al- though it can be difficult for outsiders to completely grasp the Japanese situation, the opportunities it offers makes up for the effort required.

What do we make of Japan? Myths and realities 229

Appendix. Useful references on Japan

Yoshio Sugimoto’s An Introduction to Japanese Society covers a wide variety of topics on Japanese society. 2010, Cambridge University Press.

For a recent set of essays covering a variety of areas relating to Japanese culture and business, see Reimagining Japan: The quest for a future that works. C. Chandler, H. Chhor, & B. Salsberg (Eds.). 2011, VIZ Media.

The Japanese government makes a variety of statistics publicly available on the Internet, which can be accessed at http://www.stat.go.jp/english/index.htm

The Japan External Trade Organization (JETRO) offers information about Japanese trade and opportunities for foreign businesses in Japan (see http://www.jetro.go.jp)

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