Japan’s Technological Decline: How the Country Went From Industry Pioneer to Stagnation

Until a few decades ago, Japan was the world’s second-largest economy in terms of GDP. The nation was recognized as a leader in technology and became the epicenter of several innovations that were unmatched globally. While color screen phones were just starting to emerge in the U.S. and Europe, users in Asia were already using advanced devices to watch television, make payments, and connect to the Internet through a system called i-mode.

Brands like Panasonic, Sony, and Sharp enjoyed an esteemed reputation that extended beyond the Japanese borders. If you wanted to buy a quality television, you would likely choose one of these brands, even if it meant spending a bit more. In the realm of video game consoles, PlayStation and Nintendo set the standard. However, the landscape has changed. While the Japanese brands remain disciplined, talented, and innovative, their presence in the global consumer electronics market is in decline.

To understand the present, it’s helpful to analyze the past. When Japan surrendered in 1945 at the end of World War II, it not only lost its colonies and millions of lives but also faced a completely devastated economy. However, in the aftermath of the conflict, authorities implemented a series of gradual reforms that stimulated the domestic market, boosted industrial development, and opened the country to the world. As a result, Japan became a leading exporter.

Japan’s Economic Resurgence

In the early post-war period, Japan imported a significant amount of machinery to support industries, particularly the automotive sector. The country’s pursuit of excellence, combined with a favorable economic environment, enabled Japan to develop its own improved machinery. This ultimately solidified its position as a leader. For instance, Toyota established itself as a dominant player in the automotive industry. Other important sectors, such as steel and consumer electronics, also gained traction.

One notable company that emerged after the war was Sony, although it wasn’t originally called Sony. The company’s founding prospectus beautifully captures the commitment to progress and innovation among many Japanese individuals. It refers to technicians and engineers from Japan Precision Instrument Co. who developed military equipment during the war, saying, “We worked so hard that we literally forgot to sleep or eat.”

When World War II ended, Japan Precision Instrument Co. dissolved. About 20 of its members joined Masaru Ibuka, who later co-founded Sony, to establish the electronics company Tokyo Tsushin Kenkyujo (Tokyo Telecommunications Laboratory). “The first and primary motive for setting up this company was to create a stable work environment where engineers who had a deep and profound appreciation for technology could realize their societal mission and work to their heart’s content,” Sony’s founding prospectus explains.

Throughout the country’s history, Japanese companies like Sony have achieved important technological and commercial milestones:

• 1957: The world’s smallest transistor radio (Sony TR-63).
• 1979: The first generation of personal cassette stereos (Sony Walkman TPS-L2).
• 1982: The compact disc, developed jointly by Sony and Philips.
• 1988: The first digital camera that stored images on a memory card (FUJIX DS-1P).
• 1992: Shuji Nakamura’s blue LED, a key component in producing images on electronic device screens.
• 1994: The PlayStation, a console that transformed the video game industry and elevated Sony to the top of the gaming sector.

This remarkable turnaround, which revitalized the country’s economy, is often referred to as the “Japanese economic miracle.” A crucial element of this phenomenon was the corporate structure known as keiretsu. In a keiretsu, manufacturers, suppliers, and distributors collaborate to enhance efficiency and, primarily, minimize costs. Despite their collaboration, each entity within these groups remains independent. Before the rise of keiretsu, large family-owned companies that monopolized the market, known as zaibatsus, were predominant.

Japan also emerged as a significant player in the semiconductor industry. The combination of new economic vigor and Japanese expertise allowed this sector to expand significantly between 1960 and 1980. According to the Center for Strategic and International Studies, funding for research and development in semiconductor manufacturing equipment surged from 2% in the early 1970s to 26% in 1977. This increase helped Japan strengthen its position in the industry.

In 1988, companies including NEC, Toshiba, Hitachi, Fujitsu, Mitsubishi, and Matsushita controlled 50% of the global semiconductor market. However, by 2019, Japan’s share of the market had declined to just 10%. In response, the Japanese government is now undertaking a substantial investment of $325 billion to help national companies improve their competitiveness against firms from the U.S., Taiwan, and South Korea.

The Lost Decades

Japan’s current economic state is the result of several factors, but two particularly stand out. The extraordinary growth period that followed World War II was succeeded by an era of economic stagnation that began in the 1990s. During this time, Japan experienced low GDP growth rates compared to other industrialized nations. However, it’s important to note that not all experts agree on the reasons for or the extent of this situation.

An International Monetary Fund report identifies the bursting of the Japanese stock bubble in the early 1990s as a key trigger for the crisis. Between 1990 and mid-1992, stock prices plummeted by about 60%. This decline weakened corporate strength and began to undermine the banking system as creditors started to default on their payments. While some believe that the crisis has been resolved, others argue that its effects persist to this day.

Japan’s slow growth over the following decades, which likely continues today, can partially be attributed to demographic shifts. The country is facing a rapidly aging population, which has led to the closure of thousands of schools. Some of these schools are being repurposed as aquariums and sake breweries. However, these solutions do little to address the shrinking workforce and labor shortages that are hindering the nation’s economic growth.

The lost decades are further exacerbated by the geopolitical rise of China and South Korea. In the technological sector, brands that once held unmatched prestige, like Sony, have been overshadowed by the emergence of companies such as Samsung and LG. The dominance of South Korean companies in the global television market is a clear example of this decline, which is also noticeable in the mobile market.

In fact, according to CounterPoint, the leading phone manufacturers in global shipments are Samsung, Apple, and Xiaomi–one South Korean, one American, and one Chinese company. Unfortunately, Japanese companies are notably absent from this report. Sony remains the only significant mobile manufacturer in Japan, and its prospects are bleak. Sales of Sony’s mobile phones fell by 40% in 2023.

Japan has also lost ground in the telecommunications sector. China now leads the world in intellectual property for 5G technology, holding around 40% of the essential patents. China’s Huawei competes with Japan’s NEC and is a major player in the 5G infrastructure market.

The Galapagos Syndrome

Despite the challenges stemming from the lost decades, Japan made remarkable advancements in consumer electronics. However, many of these innovations weren’t compatible with the rest of the world. This phenomenon is often referred to as the “Galapagos syndrome,” drawing a comparison to the unique ecosystem of the Galapagos Islands in the Eastern Pacific, where species evolved in isolation.

A prime example is the development of smartphones prior to SoftBank’s introduction of the iPhone in 2008. Because Japanese telecom operators didn’t need to invest in acquiring network spectrum, they were able to channel a portion of this investment into improving their networks. However, this was done under very specific parameters. i-mode became the world’s first Internet connection service for phones, but it was exclusively available in Japan.

Japan was experiencing an advanced technological future that was difficult for other nations to replicate. In the early 2000s, Japanese users could connect their phones to PlayStation consoles to access the Internet. This capability was made possible by i-mode, which allowed web browsing similar to the WAP concept that later gained popularity in Western countries. Meanwhile, users could also purchase the Sharp J-SH04. It featured a fully integrated camera and allowed users to send images via text.

A Country Reluctant to Abandon Obsolete Technologies

The vibrant modernity of cities like Tokyo sharply contrasts with a strong inclination toward tradition and, interestingly, outdated technologies. This isn’t just about the iconic temples, gardens, and teahouses that showcase the nation’s millennia-old culture. It extends to everyday office equipment like fax machines, which many organizations still use today.

Japan is known for its rapid technological advancements. However, it’s faced challenges in fully embracing new technologies. Antiquated procedures and legislation have largely driven the country’s continued reliance on faxing documents and using outdated storage media like floppy disks. Until recently, the Japanese government mandated the use of floppy disks for specific transactions.

Japan in the Age of Artificial Intelligence

Amid a competitive race for AI dominance, companies worldwide are investing significant resources to develop their own large language models and excel in this industry. Key players include U.S. companies such as OpenAI, Microsoft, Google, Anthropic, and Runway. In Europe, Mistral AI has emerged as a leading contender, while Chinese entities appear to be focusing more on their domestic market.

Several experts agree that Japan is lagging behind other regions in AI development. Noriyuki Kojima, co-founder of Japanese startup LLM Kotoba Technology, told CNBC, “Japan’s trailing position in the field of generative AI largely stems from its comparative shortcomings in deep learning and more extensive software development.” One major challenge Japan is facing in this field is a significant and worsening shortage of skilled labor.

Japan’s Ministry of Economy, Trade and Industry estimates that by 2030, the country will lack 789,000 software engineers. Additionally, the nation lacks the technological infrastructure needed to train AI models. The Japanese private sector doesn’t have an equivalent to Google Cloud and Microsoft’s Azure computing centers, which support OpenAI products. Fugaku, the world’s fourth most powerful supercomputer, is under government control.

The Japanese government seems focused on regaining leadership in supercomputing. It’s announced plans to build a machine 1,000 times more powerful than today’s most advanced supercomputers. The project, tentatively named “Fugaku Next,” faces several challenges. One challenge is achieving zetaFLOPS performance, which no company has done before. However, attaining this level of performance with current hardware would lead to exorbitant energy consumption.

The Fugaku Next project requires the development of new methods to enhance the supercomputer’s capabilities while using energy efficiently. Japan’s Natural Science Research Institute will manage the equipment. Moreover, the AI models emerging in the country have limited global appeal. Once again, the Galapagos effect is evident. Products are heavily specialized in the Japanese language and culture, which restricts their international expansion.

Image | Alex Knight | Wikimedia | すしぱく | Jonathan Kemper | Sony | Behnam Norouzi

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