Political Pulse

With Tech Breakthroughs on the Horizon, Startups Can Revitalize Japan

The Yomiuri Shimbun
MUFG Bank and a university hold an event to help match startups with large companies on Oct.31, 2023, in Kyoto.

By Shingo Sugime

8:00 JST, April 13, 2024

The Nikkei Stock Average has reached its highest level in 34 years, and the Bank of Japan has begun to raise interest rates for the first time in 17 years. With financial markets at a significant turning point, can the Japanese economy at last escape the “lost three decades” that followed the bursting of the bubble economy? One promising driving force is startups, which create innovative businesses. Startups are booming across the country and are attracting attention as the government has announced a policy to increase the amount of investment in them to the ¥10 trillion level in four years.

“Despite the efforts of generations of economists, the mechanisms that stimulate economic growth still need to be better understood. In particular, it is a mystery whether and how growth can pick up again in wealthy countries. It is also difficult to measure economic growth, and even more challenging to identify the factors driving growth,” said Prof. Abhijit Banerjee of the Massachusetts Institute of Technology, who won the Nobel Prize in Economics in 2019.

Japan’s population is on track to decrease by about 40 million and the working-age population by about 30 million in the next 50 years. A grand design is essential to overcoming this difficult situation.

Looking at the companies that have dramatically improved our lives in the past 30 years makes it clear that startups offer some of the best ways to solve social problems and generate innovation.

Of course, startups also include cases of bankruptcy due to business failure. However, in the United States, which has the world’s largest gross domestic product, Google, Tesla and Meta, which began as startups, have significantly impacted society. Today, the global economy is led by countries such as India and China, which have harnessed the energy of entrepreneurs and created many successful startups.

Meanwhile, Japan has been overtaken by Germany in nominal GDP and is now only the fourth largest economy in the world. Even though prices and exchange rates have an impact, it should also be considered that Germany has only about 60% as many workers as Japan, and their average working hours are only about 80% of the level in Japan. For the Japanese economy, which is marked by low productivity, startups have the potential to restore dynamism and serve as a catalyst for innovation.

After World War II, entrepreneurs changed the image of “made in Japan” from cheap goods to high-quality products. The founders of Matsu¬shita Electric Industrial Co. and Sony Corporation saw imitation as the culprit behind their second-rate status and low profit margins. They inspired their engineers to create entirely new products that people would desire. Sony’s Walkman, selling more than 385 million units worldwide, became one of history’s most popular consumer electronics products.

In 1979, Prof. Ezra Vogel of Harvard University published “Japan as Number One: Lessons for America,” a book that traces the path of postwar Japan. However, Japan lost out in the IT industry after winning in the electronics industry. The shape of the competitive environment has also changed dramatically.

Emerging economies, which have provided labor and production functions in large numbers, are making the world increasingly multipolar as they transform into consumption-oriented economies and these once local players’ power increases worldwide. Governments are increasing competitiveness in strategically important business sectors through industrial policies that leverage incentives and support investment through taxation and regulation. Whether Japan can remain a developed country that grows based on technology in the face of competitors with different attributes from the past will be significantly affected by the success or failure of startup development. Of course, international competition is fierce because startup development is an area that will determine future competitiveness in various industries.

It is essential to find the frontier, a field that will lead the next 30 years and where explosive growth is expected.

The answer may lie in “deep tech,” which refers to advanced technologies based on some form of substantial scientific or engineering innovation. The innovations are “deep” because they are sophisticated, offering very advanced answers to complex challenges or issues. Areas ripe for deep-tech breakthroughs include genomics, robotics, nanotechnology and clean energy initiatives from research labs and academia. These industries require long research and development time and large amounts of money, and they also involve high uncertainty. It is challenging to adopt the Silicon Valley strategy of developing products at high speed, backed by abundant funds, and sweeping the global market in a single stroke.

On the other hand, Japan has a combination of favorable conditions, including high R&D capacity at universities, superior “optimizing” technology in manufacturing, and a broad range of collaborating companies of different sizes and industries, which can respond to different situations. Furthermore, the number of university-launched startups, which form the foundation for growth, has also grown significantly: The establishment of 3,782 companies was recorded in fiscal 2022, the highest ever. This was 477 more than the previous fiscal year, marking the largest increase ever.

“Professors are the ones who should be building startups.”

Satoshi Kawata, a professor emeritus at Osaka University and founder of the Osaka University startup Nanophoton, emphasizes the need to write papers on cutting-edge research, put the findings into practice, and give back to society. In his own words, “Nanophoton has brought into the world ‘bizarre’ microscopes and ‘far-fetched’ optical components that other companies have not.” In February, the company became a subsidiary of Bruker, a major U.S. analytical instruments company, after receiving an investment from Bruker. This is a bold move to spread its products worldwide, unencumbered by unknown shareholders or short-term profit-seeking moves.

A startup needs “people and money” — more specifically an entrepreneur and venture capital. Only when these two are combined can a company be born and grow through competition and cooperation with other companies.

Regarding human resources, the expected income in Japan is slightly higher for employed people, and the risk is significantly higher for entrepreneurs. Nevertheless, interest in startups among young people is growing like never before. At universities across the country, clubs for learning about entrepreneurship are reportedly springing up one after another and attracting many students.

“I want to try new things while I am young, make money, and work how I want.” Many young people speak of such hopes.

The negative aspects of rigid organizations have become conspicuous in light of incidents such the quality fraud issues uncovered at the Toyota Group’s Daihatsu Motor Co. A corporate culture that avoids failure and stifles innovation is not attractive to young people. Although students’ motivations vary, it is increasingly noticeable that they are not choosing to work for large traditional Japanese companies, but are instead going on to startups.

Barrett Comiskey, who invented electronic ink for e-books used in the Amazon Kindle and other products while a student at MIT, has made various achievements, including growing his startup to reach a market capitalization of $8 billion (about ¥1 trillion). In February, he joined Hirotsu Bio Science, a Japanese startup. The company developed the world’s first nematode cancer testing service, which harnesses the ability of certain worms to “sniff out” cancer.

“I want to work with a team that enjoys working to better society and spend time on projects that have social impact,” Comiskey said.

Utilizing the talent of international personnel like Comiskey will be another step toward breakthroughs.

It has been difficult to raise funds for high-risk startups because banks, which hold the bulk of Japanese households’ financial assets as deposits, have been reluctant to make loans other than to established companies.

However, banks’ views of loss-making companies are changing. Deficits were seen as wrong, and companies that posted losses used to be turned away at the door, but megabank officials say that they are now looking at details of why companies are in the red. Rather than avoiding risk, there is a noticeable movement to share risk with venture capitalists and others with a view to nurturing talented entrepreneurs together.

Next year, an international contest will be held in Osaka, where startups from Japan and abroad compete in medical services and products. The event will be the largest in the medical field in the Asia-Pacific region. It is expected to serve as an opportunity for Osaka, with its concentration of entities in the health and medical industries, to showcase its strengths to the world.

The world of Japanese R&D has lagged in practical application despite being ahead in research, but startups may be changing that. The power of entrepreneurship to make the most of a significant change that occurs only once every few decades is being tested.

Political Pulse appears every Saturday.