Ichiro Suzuki The Japanese flag is casually called Hinomaru. As is almost always the case with a national flag, it symbolizes the country and represents what she does. In the case of Hinomaru, the Japanese media tends to give it a meaning of national policy efforts to do something big, which fully employs both the public and private sector resources. Since the late 19th century, Japan has a strong tradition of promoting industry and developing the economy under strong leadership of the government. After the collapse of two and a half-century rule by Tokugawa Shoguns who essentially closed the country from foreign trades, the new government led by technocrats, who were former samurai, went on a torrid drive to modernize Japan, in an attempt to narrow the gap with the great powers that were closing in onto the Far East. They were well aware the plight of China’s Qing Dynasty that lost in the Opium War. A handful of enlightened former samurai scrambled to form a government, collect taxes, open schools, educate people, build railways, promote industries, build armed forces, etc. All these things were done within 25 years from the birth of a newly modernized country in 1868. If the records of armed forces were measures of the government efforts’ success, results were decisively positive. Japan defeated China in 1895 and Russia in 1905. The government took leadership and all the resources in the country was mobilized into a single purpose. These were considered as Hinomaru or All Japan efforts. Mobilization of national resources was repeated after WWII in reconstruction and re-industrialization. The government laid out a top-down industrial policy based on blueprints drawn by bureaucrats, allocating scarce financial resources, foreign exchanges to be specific, to the industries that were designated as strategic priorities. Such an industrial policy generated superb results, driving the economy to an era of super normal growth. Beginning with textiles, Japan’s steel, electronics and cars stormed the global markets, bringing in a vast amount of foreign exchanges. Japan’s success in industrial policy was taught at business schools in the U.S. as a part of Japanese management’s marvel. Then, the infamous Japan Bubble had popped at the outset of the 1990s, sending the economy into a tailspin. Fall of communism totally discredited central planning, taking Japanese management with it. Neo liberalism that emerged in the 1990s made it trendy to leave everything to market forces. The Washington consensus ruled the global economy and markets. Japanese management was never heard again in business school classrooms. For Japan, however, old habits die hard. Success in the post-war era sticks deeply in the hearts and minds of the Japanese people. With carefully planned policies backed by sufficient financing, they could bring back the glory in the face of market forces that are against them, politicians and bureaucrats often thought. This is how Elpida Memories was created at the end of the 20th century, after Japan’s once dominat memory chip industry became also-ran, falling behind South Korean competitors and others in the 1990s. Two leading DRAM chip makers, Hitachi and NEC, combined their memory chip operations to form a national champion in the hope of halting a decline that persisted throughout the 1990s. Elpida had some success, selling their shares in an IPO in 2004, and their market share rose. Then, the memory chip maker sank in the 2007-09 global financial crisis. The yen’s surge amid the crisis hit Elpida especially hard. The Japanese government stepped in. Under the newly created Industrial Revitalization Act, the government tried to rescue the chipmaker that was on the brink of collapse. Later, Development Bank of Japan, a quasi government institution, was heavily involved in upholding Elpida. Despite these efforts, the Hinomaru chipmaker eventually filed for bankruptcy. Headwinds from the market were simply stronger than the will of the government. Remnants of Elpida were bought by Micron Technology. Along with Elpida’s struggle, Japan Airlines filed for bankruptcy in the middle of the deepest global recession since the 1930s. On top of a sharp decline in demand, JAL’s bloated cost structure didn’t help, either. Literally the flag carrier of Japan, the government intervened to rescue the airline without hesitation. Kyocera Corp founder Kazuo Inamori, then 80, was recruited out of retirement to lead restructuring efforts. Mr. Inamori, who worked with no salary, got the job done in three years. The leaner JAL once again became profitable and was brought back into the stock market. This was a success story. After Elpida and JAL, a few industrial projects were blueprinted by bureaucrats to create national champions injecting tax payers money, to be run by private sector management. Despite the success of JAL this is a dangerous mindset. It assumes that a handful of bureaucrats in the Kasumigaseki section of Tokyo are capable of foreseeing what industry, or segment of the economy, is going to thrive. In the 20th century, the Soviet Union already suffered a spectacular failure in this attempt. Then in November 2022, a project of another Hinomaru chipmaker was announced. A newly launched company is going to be called Rapidus, to be invested by eight Japanese companies including Toyota, Sony, Softbank, etc. The Japanese government pledges to provide over 300 billion yen in capital as well. As the world’s leading industrial powers are waging a chip war, divided between China and the West headed by the U.S. and Taiwan. The Japanese government have decided not to fall further behind in semiconductors that keep evolving. While hopes of the government are flying high, financial market participants have received the news with not so much enthusiasm. With eight companies participating in Rapidus, who is going to take leadership, to be responsible for all the bad things, as well as good things hopefully, that could lie ahead? In addition to that management issue, their goal of producing 2 nano millimeter logic ICs seems like a fantasy, given Japanese chipmakers’ capability. In 2023, in a sudden boom of generative AI, there are voices that call for launching a national project on it. Then, Akihisa Shiozaki, former M&A lawyer and an up and coming member of the House of Representative, has flatly denied a chance of such a project, as head of a variety of technology-related subcommittees. He thinks that a Hinomaru AI project would be a waste of tax payers’ money and that Japan should be more focused on integrating what comes up from the U.S. into Japan’s system. Some people have a cooler head.
About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.
