Economic reform in Japan needs impetus

Date: 20/03/03

JAPAN can learn from the European political and economic model, but there is little appetite for the massive reforms required to overhaul the system.

So says Joichi Itoh, the 36-year-old president of high-profile venture capital firm Neotony and the businessman that Japan's 'establishment' probably most loves to hate.

That said, Nippon Keidanren, the federation of economic and employers' associations, did invite Itoh to lead a debate on how Japan can escape from its present economic malaise at January's World Economic Forum in Davos.

"Global companies are very supportive of my views; it's middle management, the media and bureaucracy that aren't," he shrugs.

"Very few people disagree about the problem or that something needs to change, but change is difficult in Japan."

Itoh predicts two doomsday scenarios: that Japan endures another economic crisis worse than the one now in 2007-08; or that the existing political system will be unable to function properly and will have to be rebuilt from scratch.

At the root of the problem, he claims, is the all-pervasive power of the country's dominant Liberal Democrat Party. "There's no serious opposition and the result is a massive averaging machine, incapable of taking risks.

"European countries have checks and balances. But here the courts are weak and voting ratios are unconstitutional.

"Central bureaucracy has too much power, but the prefectures [local government] depend on central government for funding. It's like a drug addiction," he explains, drawing a diagram on a board to underline his point. "If it were a public company, on the balance sheet the government is bankrupt."

Itoh believes the country needs a value-added tax rate closer to a simple EU-15 average (19.5). In Japan, it stands at just 5. "There's a lot of tax evasion in Japan, but it's harder to cheat on VAT," he claims.

He also admires how the EU - and to a larger extent the US - is trying to provide a more encouraging environment for new business. "Entrepreneurship doesn't really exist in Japan," he adds.

But lest anyone is fooled into thinking that Europe is his idea of a business wonderland, Itoh is quick to acknowledge that, as yet, his firm (which specialises in "early-stage technology companies") is not currently investing in either Japan or the EU. "Right now, we're targeting Silicon Valley, Israel and China," he admits.

Japan can learn from the European political and economic model, but there is little appetite for the massive reforms required to overhaul the system, says Joichi Itoh, president of high-profile venture capital firm Neotony.