BrazilMcKinsey: Unlocking the next era of growth for corporate Japan
Japanese companies need to grow domestically and expand internationally to fulfil their obligations to a more sustainable and inclusive society, write Gautam Kumra and Naoyuki Iwatani from McKinsey & Company.
On the surface, something remarkable has happened to corporate Japan in the last 30 years. Since 1990, there has been a fourfold increase in the number of Japanese companies that make 10% to 50% of their annual sales outside of Japan.
In 1990, almost 90% of Japanese companies listed on the Tokyo exchange made less than one tenth of their annual sales abroad. By 2020, that had reduced to 57% of the listed companies.
This internationalization of Japanese business is well-attested, but it masks another reality: Japanese companies have lost the scale and presence they used to have in the world, and which is necessary to compete globally. In 2000, 17 of the 50 largest companies in the world were Japanese. In 2020, there were only three.
Much of the reason for this is the moribund state of domestic growth, and particularly the growth of existing Japanese businesses. Globally, between 2008 and 2022, the average rate of revenue growth of companies around the world was 2% a year, with 82% of this coming from existing businesses.
In Japan, the story is very different. Firstly, the revenue growth rate was 40% less than the global average at only 1.2% a year. Secondly, the percentage of growth that came from existing businesses was 58%, with the rest coming from new businesses.
This suggests that while Japanese companies have done well moving into new businesses, they have done less well in maximizing the value of their existing businesses. For Japanese companies to succeed globally, it is essential that they innovate existing businesses at home, as well as expand into new businesses abroad.
What is preventing Japanese companies from maximizing the value of their domestic businesses? In long-lived Japanese companies, there is a strong attachment to the founding business on which the company was built. These “ancestral businesses” are seen as the core business of the conglomerate. Japanese companies are reluctant to sell these core businesses or merge with different companies, which is imperative for portfolio renewal.
The question that Japanese business leaders should be asking themselves is: “Should we really own this business, and can we say with pride that we are the best owners for the employees and stakeholders of this business?”
Companies have always played a role as public instruments of society in Japan, which is one of the reasons they have such longevity. Indeed, Japanese companies account for half of the world’s companies that have been in business for over 100 years. The irony here is that without seeking a greater pace of dynamism and renewal, these businesses are not fulfilling the role that Japanese society has historically expected of them.
Japan’s working-age population has been decreasing since 2007, and it is predicted that its economic growth will slow significantly over the next 30 years. This is already impacting Japanese society – using the empowerment gap as an indicator for the overall inclusiveness and safety of a country, we found that around 20 million people in Japan (just under one-fifth of the population) now fall below the empowerment line.
The path for Japan
If Japan continues with business as usual, its economy will continue to stagnate with adverse consequences on society. This is an urgent issue for Japan’s economy, especially in its current super-aging state, where productivity will only decline. According to a survey by McKinsey, Japan needs to increase productivity 2.5-fold for it to break out of zero growth and maintain its current GDP growth rate.
Japan therefore needs growth, but growth that is both sustainable and inclusive. Due to significant changes in social conditions and market environments worldwide, Japanese companies now need to support and provide opportunities for people with diverse backgrounds, regardless of their differences. This aligns with the concept of ‘sanpo yoshi’ (the three-way satisfaction principle) to which Japanese global companies have long adhered.
Japan’s soft power could play a pivotal role in its pursuit of sustainable and inclusive growth. This soft power is epitomized in a wide range of Japanese innovations, and spans pop culture elements such as anime, food and cutting-edge technologies. The Japanese concept of mottanai (expressing regret over wastefulness), paired with the country’s positive international reputation, could also be additional keys to unlocking the global potential of Japanese corporations.
If coupled with Japan’s commitment to long-term innovation, these elements of soft power can strategically fuel global business endeavors.
It will only be through realizing the growth potential of companies that Japan can become a more inclusive and sustainable society. In addition to individual company efforts, it is important for companies to collaborate with the government to achieve this aspiration. If private companies can fully use existing collaboration frameworks and start co-creating with public institutions, they will be able to build new frameworks that would allow larger investments in shifting domestic markets.
In this environment, innovative companies can change the sectors they operate in and improve the standards of their supply chains – a win-win for Japanese companies and Japanese society as a whole.
About the authors: Gautam Kumra is Chairman of McKinsey & Company’s offices in Asia, Naoyuki Iwatani is Senior Partner in McKinsey & Company’s Tokyo office.
