Meeting the Challenge of the IT Revolution in Japan

From Industrial-Financial Capitalism to Cyber-capitalism
Before I go into the structural change and the immediate prospect for the Japanese economy, let me expand on some general sort of trends of the world economy. I think the world economy is now undergoing a major transformation, a great transformation, from industrial and financial capitalism to information and cyber-capitalism. Alan Greenspan yesterday again reiterated that the U.S. economy is healthy—growth of productivity is continuing and inflation is well-contained. And he seems to base, although cautiously, his argument that technological innovations that we have been experiencing will probably change our economic and social structure in some fundamental way, as I just stated. The advent of the microprocessor, computer, satellite, and joining of laser and fiber optic technology and others have made it possible to transfer vast amounts of information in real time across the globe. This is fundamentally changing the pattern of interaction among organizations, between consumers and producers, and among individuals. The real-time interactive process in transmitting and processing information reduces uncertainty and economizes on inventory. Potential improvements in efficiency by utilizing real-time information will exist in almost every aspect of the economic activities of individuals, corporations, and other organizations.

In this respect, technological innovations in information and telecommunications differ from those of other areas. The general nature of the IT revolution also implies that the impact will eventually be felt not only in the United States, but throughout the world. Indeed, Asia—including Japan—and Europe seem to have started to catch up with the front-runner, the United States.

Some analysts regard such movement as the victory of Anglo-American style capitalism over Asian or German models. There is some element of truth in this. It is true that the United States has had some advantage in this process of adaptation, as the U.S. economy and culture seems to have a real openness to change. But rather than looking at the situation in the old paradigm of the Anglo-American versus the Asian or German model, I feel it is more accurate to view the transformation as a paradigm shift from traditional industrial-financial capitalism to information or cyber-capitalism. The current changes in Asian and continental European economies can be better understood as the process of catching up with the United States in adapting to the IT revolution. What has happened in the United States during the past decade or so is a revolution that has transformed traditional America quite dramatically. The U.S. society and business community today is not the U.S. of ten or twenty years ago. Bill Gates, Jim Clark, and other IT entrepreneurs are totally different from traditional financiers and tycoons that have dominated the U.S. economy for decades. Jim Clark, the founder of Netscape who started the Internet Revolution, once made a remark that the day is over when those who have money and capital rule the economy. He says it is now those who have knowledge and technology that drive the American and world economy. Yes, this is a great transformation of the economic system that we are observing today.

The IT Revolution that started in the U.S. during the early mid 90s seems to have now come to its second stage. First, the process that evolved with personal computers has now entered the era of the internet, connected not only to PCs but to cellular phones, gameware, and digital TVs. It was reported recently that the market capitalization of the value of Cisco Systems, the largest maker of equipment that empowers the internet, overtook that of Microsoft, the PC software giant. This is quite symbolic of the transition to the second stage. During the first stage word-processing and office-documentation functions of the PC were widely used, while e-mail had been the major communication mechanism. In the second stage, internet induced e-commerce, business-to-business, and business-to-consumer markets have come to occupy the center stage. It also needs to be recognized that the mergers or joint operations of internet or cyber-companies with traditional and real companies has become more prevalent. In the first stage, new cyber-companies like Microsoft, Cisco Systems, or America Online—or Softbank—have been formed, and these new companies utilizing new technology and the new business model challenged traditional real companies and led the great transformation of industrial-financial capitalism toward information and cyber-capitalism.

In the second stage the traditional real companies, like IBM, General Electric, and, in Japan, SONY, dramatically changed their business operations to adapt to the new cyber environment. The merger of America Online and Time Warner and joint operation of Microsoft with Ericsson indicate that traditional real companies are now entering the field and absorbing the new technology and new business models, often merging with cyber-companies in one way or the other.

In the IT race, countries in Asia and Europe are now actively entering the field, trying to catch up with the front-runner, the United States. What needs to be watched carefully in this catch-up process is the fact that in an environment where technological progress is very fast it is often possible to leap-frog the front runner, although the front-runner has the advantage of setting the standard and potentially monopolizing the field.

Japanese technology around cellular phones, or gameware or digital TV—which is quite advanced compared to the United States—may make it possible to leap-frog PCs for many new internet users in Asia, for example. In the cellular phone field, this has already happened. Digital cellular phones connected to the internet—the so-called i-mode—swept through the market, overtaking the U.S. cellular phones, many of which are still analog. It is not, of course, certain at this moment that Japan and Europe could leap-frog or even catch up with the United States. But one thing is very clear: The game is not yet over; it has only started.

Investment-led Growth, New Business Models, and Structural Change in Japan
With this hopeful note, I have given a very rosy picture of Japanese structural change. It has begun to really move during the course of the last six months or so, and big companies, like SONY, Fujitsu, and others have started to adopt the new model and have started to change their operations. And they have started joint operations with various cyber- and internet companies. The move has started and the Japanese economy on the macro-level is now showing some signs of that. Plant and equipment investment during October and December of last year has increased quite dramatically. In the first quarter of this year, we will probably have a slight increase in plant and equipment investment. This plant and equipment investment is led by the IT area and will probably continue through 2000 and 2001.

So the recovery of the Japanese economy will be investment-led, which is what has happened in the United States during the course of the last five or ten years. Of course, consumption is still very weak, but the Nikkei Dow is now rising, and it will probably rise toward 21,000 or 22,000. Analysts have not really accounted for the wealth effect that might have on the consumption, but I think if the Nikkei Dow reaches 21–22,000 within the next three to six months, the wealth effect will have an amazing impact on Japanese consumption. Japanese individuals have started to buy stocks through investment funds. Nomura recently set up a ¥1 trillion investment fund. They have sold all of them already. This new participation of individuals through the investment funds would probably have a major impact on consumption, so investment-led and market-led recovery of Japan could happen in the next year or two.

In the first quarter of 2000, GDP growth rate will probably be around an annual rate of 10 percent, which will probably compensate for the loss that we had in October and December. And we will probably achieve something around 0.5 or 0.6 percent for fiscal 1999, achieving the government objective. What will happen in fiscal 2000 is really crucial. And I’m hoping that in fiscal 2000–2001, we will have V-shaped recovery led by plant and equipment centering on the IT industries. Again, I would repeat, this really depends upon the activities of large Japanese corporations, traditional real-sector corporations, how they transform their operations, how they adopt the new business models. Japanese organization of big corporations is obsolete. This hierarchical pattern is not well-fit to this new cyber-capitalism. It needs to be slimmer, it needs to be decentralized; at the same time you need to have a very strategic center. So you need to do two things: One is to create a very strategic center at the core of the management in allocation of resources, but at the same time to delegate lots of powers to the decentralized units. Many of these units may be companies which are spun off the mother company, like the new venture businesses. This kind of revolution has to happen in the next year or two.

The government has been criticized for having had a very negative impact on the Japanese economy by sticking to regulations. But I think the days of criticizing the government are over, though regulations still exist and there are lots of deregulations needed, particularly in the postal-telecommunication areas. But now the key is management of the big corporations, it’s not the government, particularly in the financial areas—where I was personally involved in the Japanese financial “big bang.” I think most of the crucial regulations have now been lifted. So it is up to people like those here who will decide whether the Japanese financial revolution will really succeed or not. It is up to you, up to the managers of the private companies whether Japanese structural change will succeed or not.