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The changing of the guard in corporate Japan

26 September 2022

How younger executives are addressing corporate Japan’s failures.

By Tatsuya Suzuki,

SuMi TRUST Asset Management

Japan’s reputation among international investors is still mixed. The late prime minister Shinzo Abe did a lot to make Japan attractive to foreign investors but one man could only do so much. Fears about corporate governance practices, a slow adoption of digital technologies compared to other Western nations and sluggish conglomerates remain.

Really addressing these issues will take more than a dynamic prime minister; it needs a generational-shift. We need to see a change in corporate culture and in the mind-set of senior executives. Here there are promising signs. What we’re seeing currently is a changing of the guard in corporate Japan, which could pave the way for a transformation of Japanese companies.

The ‘baby boomer’ generation contributed to Japan’s high economic growth from the 1960s to the 1980s. Their fairly consistent success meant that they were ‘married’ to their principles, making them ill-prepared to deal with the economic slowdown in the 1990s and beyond, as well as the drastic changes initiated by IT in the 2000s. Many of these ‘boomers’ are rapidly approaching (or have already surpassed) the retirement age of 65; their younger counterparts are acceding to corporate dominance, bringing with them a willingness to change.

The new generation are more aggressive in terms of investment, and more willing to accept that failures are hard to avoid on the path to ultimate success. This, combined with a population that is now ready for digital innovation because of the pandemic, during which many companies were forced to find innovative, tech-led solutions to survive, means the transformation of Japanese companies can finally happen.

One change is the increasing number of companies incorporating digital platforms into their business models. This has made it possible for SMEs with innovative services and products to develop their business. For example, M3 Inc., a medical-technology company, has pioneered the shift from face-to-face meetings between doctors and medical representatives to virtual consultations, a service now used by 90% of doctors in Japan.

Digitisation is likely to reshape the manufacturing market too, where companies such as MISUMI GROUP Inc. are abandoning analogue processes to bring their operations online. A willingness to invest in these processes typifies the attitude needed for sustained growth. These changes are, of course, driven in part by Covid-19, but they would not exist without the increased IT literacy of the new generation of executives and their willingness to take risks.

Further change is being led by the globalisation of non-manufacturing companies in Japan. Historically, the Japanese export market has been dominated by manufacturers, who capitalised on the cheap labour available to them on the Asian mainland to offer competitive prices in the global market. However, retail and luxury companies are increasingly taking more risks to expand their operations overseas as they are being led by younger, bolder executives.

Leading the charge here are companies such as the retail conglomerate Ryohin Keikaku, who made the unorthodox decision to hire a CEO from outside the company, Nobuo Domae, in 2021. This is not common practice in Japan yet it epitomises the new way of thinking led by executives from generation ‘X’, in contrast to the intransigent ‘boomers’ of yesteryear.

Typically, Japanese companies appointed a CEO from within. This executive was usually in their sixties; during their tenure, they were expected to steer the course but not to rock the boat, and for only a short number of years before retirement. Because of this, there was little to incentivise expansionary strategies that carry risk. Younger CEOs are tasked with growth, rather than consistency. Coupled with increased IT literacy and a less parochial attitude towards change, the new generation are ready to alter the course of Japanese businesses.

While there are numerous bold and positive steps being taken, the picture in corporate Japan is not all positive. Corporations remain largely resistant to adopting new IT protocols for fear of system failures; this caution dampens the drive towards digitisation. Many retail companies have not yet embraced the change. Often,they still rely too heavily on Japan’s ageing population for demand, which is inherently unsustainable. Short of a reversal in the ageing population, these companies need to be aggressive internationally if they are to see growth rather than contraction. The current slide of the Yen to historic lows ought to be seen as an opportunity by Japanese retailers with aspirations of increasing global market share.Japan also lags behind its Asian neighbours with its proclivity to keep processes in-house. While this is a good thing for operational resilience, the refusal to outsource damages efficiency, as firms are not taking advantage of the numerous innovations made by other companies. As the next generation takes the reigns, will this unwillingness to outsource will be forgotten in favour of flexibility?

Japan finds itself at a crossroads. As the old generation moves aside and the new arrives, Japan can only hope this change is not too little or too late in the face of global economic crises, an ageing population and continued resistance to change in many Japanese businesses.

Tatsuya Suzuki, chief portfolio manager of the Japan Quality Growth strategy. The views expressed above should not be taken as investment advice.

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