Japan has experienced three decades of economic stagnation, but now it has a rare chance to revive its economy through entrepreneurship and technological innovation. A favourable opportunity for revolutionary change exists due to the combination of a tight labour market, less severe economic challenges from the “lost decades,” and growing international interest in Japan’s stability.
Key Factors Driving Change
Young Japanese workers are encouraged to take entrepreneurial risks and have been empowered to break out from the traditional salaryman mould by the competitive labour market. Talent from around the world is also being drawn to Japan by its soft power and cultural influence. Japan is viewed as a stable alternative by investors who are leery of China’s unpredictable tech scene due to its stronger geopolitical links to the US.
Government Initiatives and Challenges
The Japanese government has been encouraging startup growth, albeit in a distinctly bureaucratic manner, realising this pivotal moment. By 2027, Prime Minister Fumio Kishida wants to boost the number of unicorns to 100 and establish 100,000 companies. But the going has been sluggish. Based on data from Pitchbook, as of July 2024, Japan had 10 unicorns, whereas the US had 714, China had 316, and India had 62.
Given its smaller market size than the US or China, Japan’s strategy of supporting tens of thousands of startups in the hopes that some will become global hits may not be appropriate. Because of pressure from the home market, Japanese tech businesses have a history of going public quickly—often after only a few fundraising rounds.
Policy Recommendations for Boosting Startups
- R&D Funding for SMEs: The Japanese government should increase its research and development (R&D) funding for small and medium-sized enterprises (SMEs). Currently, most R&D support comes in the form of tax credits, which only profitable companies can utilize. Consequently, 92% of R&D support goes to large corporations. Allowing startups to claim tax credits once they become profitable, as suggested by Richard Katz in “The Contest for Japan’s Economic Future: Entrepreneurs vs Corporate Giants,” could level the playing field.
- Angel Investment Reforms: Kishida’s administration has introduced an angel tax break for individual investments in startups, but it mandates that investments go toward a single company, increasing risk. Japan could adopt France’s model, which allows taxpayers to invest in diversified angel funds, thereby spreading risk and unlocking more funding for startups.
- Focusing on Ambitious Projects: Policymakers should allocate resources to support ambitious ideas. Takaaki Umada from the University of Tokyo warns that Japan’s startup boom may be faltering. Instead of merely imitating successful American startups, Japan should support ventures that aim to be global leaders from inception. This approach, though riskier, aligns with Japan’s historical successes like Sony, which revolutionized global industries with pioneering technologies.
The Sony Model
Founded as a modest 20-person corporation following World War II, Sony Group Corp. is a prime example of Japanese innovation’s potential. Sony set the benchmark for personal audio by focusing on developing innovative technologies and releasing products like the Walkman, which became iconic. This innovative heritage shows that Japanese startups can have a significant worldwide impact with the correct assistance.
Encouraging Deep Tech and Competition
Single-firm protectionist policies are rarely successful, but properly distributed R&D subsidies can promote innovation provided they are overseen by professionals independent of political influence. Japan should give top priority to deep tech projects that create innovative technology. Encouraging competition among companies is more important for sustaining a thriving entrepreneurial ecosystem than government supervision.
Final Thoughts
The government and corporate sectors must take bold, immediate action if Japan is to fulfil its potential as a worldwide leader in the technology sector. Japan has the potential to revolutionise its economy and reclaim its leadership position in global innovation by implementing policies that encourage competition, backing bold ventures, and teaching lessons from past achievements. It takes a shift from traditional tactics and a dedication to giving entrepreneurs more power than bureaucrats to seize this opportunity.
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