World Views | Japan may be too scared of failure to succeed

Of all of the scary economic data that routinely streams out of Japan, this statistic should terrify you: USD800 million. That’s the total value of venture capital deals completed in Japan in 2015, according to accounting firm Ernst & Young. Compare that to $72 billion in the U.S. and $49 billion in China. Even tiny Israel managed $2.6 billion in deals.
It’s a staggeringly small figure, and one that explains a great deal about why the world’s third-largest economy continues to struggle, no matter how much cash the central bank pours into it. Too few Japanese are starting new companies.
The reasons for their reluctance are many and complex. For one thing, Japanese seem to be more risk-
averse than their peers in other countries. In a 2014 report from the Global Entrepreneurship Monitor, less than one in three working-age adults in Japan considered starting a company a smart career choice – the second-lowest proportion in the study. That sentiment grows out of a conformist culture that puts a premium on stability and success. Fifty-five percent of potential Japanese entrepreneurs admitted in the same survey that they were afraid of failure, the second-highest rate among the countries studied.
Nor do Japanese youngsters get enough experience outside the Japanese system, which could stir their entrepreneurial instincts. According to the Institute of International Education, Japanese account for a measly 2% of all foreign students enrolled in U.S. universities, behind not only China and South Korea, but Brazil, Saudi Arabia and Taiwan. Worse, the ratio has been falling.
Outdated business practices pose additional hurdles. Banks remain overly fixated on receiving collateral for loans – something most start-ups don’t have. Japan’s fussy bureaucrats make life particularly difficult for entrepreneurs. According to the World Bank’s Doing Business study, Japan ranks a dismal 89th in the ease of starting a company, behind such paragons of efficiency as Afghanistan and Burkina Faso.
The government and financial sector tend to protect established firms. Japan has a long and sad history of keeping inefficient “zombie” companies alive with continued financial support and other measures, diverting resources from potentially more productive investments. Research firm Capital Economics figures that the level of government debt guarantees, relative to the size of the economy, is far higher in Japan than in other advanced economies.
What all this means is that Japan doesn’t undergo the “creative destruction” necessary to infuse fresh blood into the economy. The Global Entrepreneurship Monitor reveals that a mere 3.8% of Japan’s working-age population is starting a new enterprise or running a company no more than three-and-a-half years old – the lowest ratio among the countries studied, except for Suriname. By comparison, the rate in the U.S. is 13.8%. The vast majority of Japanese work in older firms.
Unfortunately, unlike wine, companies don’t necessarily get better with age. A 2014 study by the OECD figured that young firms contribute more to job creation than older ones. Examining all these factors in an August report, Capital Economics concluded that Japan’s “productivity growth is unlikely to be strong enough in coming years to close the gap with the world’s most productive economies.”
Japanese policymakers can start fixing this problem by streamlining regulation to make it easier to start companies and opening coddled sectors to more competition to spur entrepreneurs. In that regard, the (now troubled) Trans-Pacific Partnership could help.
An overhaul of Japan’s archaic schools would also be a good idea. William Saito, an entrepreneur who encourages young Japanese to follow in his footsteps, has made the case that an exam-obsessed, competition-inducing education system renders Japanese less able to cooperate collegially in teams, a critical factor in any thriving start-up culture.
Japan’s entrepreneur gap gets at a much larger problem. The BOJ can try its utmost to stimulate growth and inflation, but unless inventive, aggressive companies are around to pick up that cheap cash and do something productive with it, policymakers will never be able to jumpstart the economy. The lesson is simple. Before embarking on wild experiments in economic management, get the basics of business right first. Michael Schuman, Bloomberg