Tuesday, December 24, 2013

How Kenichi Ohmae Would Fix Japan

For some 30 years, Ohmae Kenichi (known abroad in the Westernized surname-given name inversion) has been among the most important—and most authoritative—thinkers and commentators on Japanese business and political economy.

Ohmae, now 70, is best known for having led McKinsey's Japanese and Asian management consulting business from 1972 to 1995 (before that, graduating from Waseda University, and earning a Ph.D. in nuclear engineering from MIT). In 1995, he ran unsuccessfully for mayor of Tokyo. Since then, he has pursued a number of academic ventures while writing books and serving on Japanese government advisory panels.

In 2011, Ohmae led a panel that produced for the government a report entitled "What Should We Learn from the Severe Accident at the Fukushima Dai-Ichi Nuclear Power Plant." (His view is that there can be no blanket decision to restart the shutdown plants. Each plant must be cleared for restart individually through strict verification of 'failsafe' systems, requiring both redundancy and alternative sources for cooling the reactors upon any accident, malfunction, or disaster.  He also thinks for largely technical reasons the whole nuclear sector must be nationalized.)

Ohmae's latest book (in Japanese) is entitled "Japan's Key Points" (nihon no ronten) but bears a strange English subtitle "Global Perspective and Strategic Thinking." In it, he distills thinking on the many problems bedeviling Japan, narrowing these to 20, and—like a good consultant—offering a strategy for addressing each.  Below is a synopsis of several of Ohmae's "key points."

1. The failure of Keynesian macroeconomics. The most profound lesson from Japan's "lost two decades" is the bankruptcy of Keynesian macroeconomic initiatives.  In the 20 years after the 1989 bursting of Japan's economic "bubble," the Japanese government has disgorged some JPY 300 trillion ($3.1 trillion) in public works spending and monetary stimulus (zero interest rate quantitative easing). The result:  nothing except massive waste and stratospheric debt.

The Keynesian model focusing on "aggregate demand" in a closed system cannot work in the current "borderless" world. "Abenomics" is largely more of the same failed macro policies and will also not work.

Rather than macro approaches, Ohmae prescribes "micro" approaches—like deregulation—that create opportunities for entrepreneurship and are palpable to consumers, especially persons with accumulated wealth.  In Japan, most financial wealth is held by the elderly and is mainly in bank deposits.  To these savers, zero interest rates are dispiriting and suppress, rather than increase, spending, especially on recreation and other enjoyments that could become major growth industries.  Effective policies would focus on inculcating in these seniors a sense of optimism and a desire to enjoy life.

2.  Over-centralized bureaucratic control by Tokyo ministries has sapped local local initiative.  Support for Osaka mayor Hashimoto's "Regional State" Model. The malaise and decline in Japan, particularly evident outside the three or four metropolises, prevailing for much of the past two decades can be attributed to the over-centralization of administrative and financial power in Tokyo's central government ministries, and the disempowerment of local governments and communities.

The disempowerment is as much psychological and practical. Local politicians and governments seem to have lost even the desire to formulate local development initiatives. Their entire approach is appealing to Tokyo for money with which to implement centrally mandates policies and programs.

Ohmae contrasts this situation with China, where local develop initiatives and city-city, province-province competition have been the main driver of development over the past 30 years.  Japan needs to emulate Deng Xiaoping's "one country, two (or many) systems" approach.

Ohmae endorses the model for local autonomy and creation of "regional states" promoted by Osaka mayor Hashimoto Toru. To revive Japan, localities need to acquire and exercise much greater local autonomy and compete with each other (as in China) to attract and nurture competitive new businesses.

3.  Japan's youth have become "herbivores." What has happened to ambition among Japan's youth? Ohmae cites research in which high school and college students are asked their hopes and goals. Compared with American, Chinese and, especially, Korean students, Japanese students seem only to want to join a big company, and then to remain until retirement in a position without great responsibility. Ohmae blames the "noncompetitive" ethos prevailing in Japan's schools and urges reform.

4. Revive Japan's cartelized and "zombified" agriculture through deregulation.  Here Ohmae's views are in line with those of other free market advocates (see my previous post on the views of Canon Canon Institute for Global Studies' Yamashita Kazuhiro.

5. Control hospitalization and other costs of old age health care. In FY 2009 Japan's national health care spending topped JPY 36 trillion, a YoY rise of 3.4%. This for a country where total central tax revenues are some JPY 40 trillion. The most rapid rise has been in costs for persons over 70 years old. Against FY 1997, costs for persons under 65 increased by JPY 700 billion.  For 70-74 year olds, the increase was JPY 3.2 trillion. For those 75 and older it was JPY 4.5 trillion.

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