It came as a shock to much of the world when a Japanese competitor eclipsed longtime number-one automaker General Motors’ American production in 2021. While General Motors sold 2.2 million vehicles in the United States that year, Toyota retailed 2.3 million. The news was especially surprising because Japanese companies had hit a wall in the 1990s, in what became known as the “lost decade.” Prices deflated, shares flattened, and companies contracted — from great growth to the great retreat.
That Japanese expansion fell well behind that of other nations at that point was doubly surprising, since Japan had until then been so far ahead. Six of the world’s 20 largest banks were headquartered in Tokyo, Japanese investors owned Rockefeller Center, and Sony owned consumer electronics. Harvard sociologist Ezra Vogel’s Japan as Number One, published in 1979, became a best-seller, and UCLA business academic William Ouchi explained why: In stark contrast to the American way of cost-cutting and profit-taking, Japanese managers placed their faith in consensus building, quality manufacturing, and forward thinking — and it worked.
Though the Japanese way had come to be seen as a global standard for modern capitalism in the 1980s, it caved dramatically and enduringly during the 1990s. The Tokyo stock market shifted into reverse for two decades, Sony devices gave way to Apple, Japan’s number-one moniker vanished, and thought leaders turned elsewhere for exemplars. General Motors’ Mary Barra, Apple’s Steve Jobs, and Alibaba’s Jack Ma — and not the CEOs of Fuji, Sony, or even Toyota — came to grace magazine covers. From 2004 to 2021, Google searches for “Japanese management” plummeted fivefold. Of the world’s 50 largest banks by assets in 2023, just four were still headquartered in Japan (topped by Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, and Mizuho Financial Group).
That was then, however, and in consonance with Toyota’s triumph in the United States, we have now found that many Japanese firms have been staging comebacks. Investors in Tokyo’s traded shares have signified well Japan’s reversal of fortune. After flatlining for nearly two decades, the Nikkei 225 Index quadrupled in value from 2009 to 2024, from ¥9,346 to ¥40,061. On March 22, 2024, the Nikkei Stock Average reached its highest level ever. The “winds are blowing Japan’s way,” wrote the Wall Street Journal. One might “think” that Tokyo “was the capital of a fast-growing Asian tiger economy the way American CEOs are flocking” there, said the Journal, including the leaders of Apple, Berkshire Hathaway, Google, Intel, and OpenAI. Bloomberg piled on: “Japan overcomes long-term stagnation and becomes the envy of G7 countries.”
By way of a more short-term comparison, America’s S&P 500 index rose 10.1 percent during the first six months of 2023 — but Japan’s Nikkei 225 Index rose 43.4 percent. The New York Times reported that the Nikkei 225’s “far outstripping” of the gains of the S&P 500 could be attributed to “a significant shift in how the country’s corporations are run.” It should be noted that Japan’s GDP slipped behind that of Germany near the end of 2023. But many large companies and their valuations and earnings continued their comeback. By 2024, the Nikkei Index had topped its peak of 34 years earlier on the eve of the deluge.
Two economists wrote in mid-2023 that akin to Japan’s post-war economic miracle, over the “past decade, and with little international attention,” Japan had “achieved a second economic miracle.” The same for operating profits of Japanese companies in the Tokyo Stock Price Index, based on some 2,000 of the largest companies listed on the Tokyo Stock Exchange. Their total operating profits more than doubled, from ¥21 trillion in 2012 to ¥43.6 trillion in 2022. The Economist concluded in 2023 that Japan “is awakening from its decades-long torpor,” and global “investors are giddy about Japan again.” The Wall Street Journal declared that “Japan is the most exciting market in the world” because “the shift toward market capitalism ought to lead to better-run companies that are worth more.” Its revival came with “the new shareholder-friendly approach of government, stock exchange, and corporate boards.” Japan’s prime minister, Shinzo Abe, baldly declared: “Japan is back.”
Academic observers have reached much the same conclusion. Ulrike Schaede, professor of Japanese business at the University of California San Diego, wrote in 2020 that Japanese firms have reinvented “their strategies, operations, and financial markets” while preserving “an alternative, more balanced model of capitalism.” Investment bank Morgan Stanley reported that Japan has been undergoing “a great process of reinvention” that is “the most interesting and underrecognized turnaround story in global equity markets.”
What Is Driving This Resurgence?
To understand what has created this turnaround, we interviewed more than 100 Japanese business leaders from 2019 to 2023. Japan — home of the world’s fourth-largest economy after the United States, China, and Germany — boasts more than four million companies. While most are modest in scale, we focused our interviews and research on the very largest. These companies employ tens of thousands, and their market values reach tens of billions of dollars. Japan’s largest enterprises, the top 12,000, are home to about a third of Japan’s workforce, and large manufacturing firms alone account for nearly half of the country’s added value.
To learn more about these companies’ success, we approached those most directly engaged in building and leading them: their designers and their chiefs. We identified the 150 largest Japanese corporations by market capitalization and annual sales. We interviewed the top executives, mostly CEOs, at 102 of the top-ranked enterprises. Among the companies are celebrity firms known the world over, including Hitachi, Honda, JAL, Mitsubishi, Nissan, NTT, and Panasonic, but also others that are familiar to few outside Japan, including Cainz Co., MonotaRO Co., Secoma, and TSI Holdings Company. We visited some of the companies for direct contact with those at the top, but for most, we conducted interviews via virtual meetings, since the coronavirus pandemic of 2020–22 limited international travel and personal contact.
In doing so, we questioned company presidents, board chairs, and top executives in industries ranging from automobiles, finance, and food to materials, media, pharmaceuticals, property, retail, technology, telecommunications, and trading. The firms varied widely in their focus: 30 are corporate-oriented manufacturing firms, 27 are consumer-oriented manufacturing firms, and 49 are service firms. Our executives ranged from the president of a fast-growing newcomer to chief executives of dozens of Japan’s long-established enterprises.
We asked what capabilities were most critical for their leadership, how they allocated their time among their stakeholders, what their boards contributed to the firm’s leadership, when they expected their subordinates to step up, and which legacies would be of greatest value after their own stepping-down. We conducted most of the interviews in Japanese (one of us is a native speaker) with simultaneous translation, and we transcribed the interviews into both Japanese and English.
We asked the business leaders to detail their strategic, management, and governance agendas in their own words from their own experiences, and we did so on the premise that the heart of the resurgence in corporate Japan cannot be fully appreciated or understood through outside observation or secondary data alone.
What we discovered is that business practices at some Japanese firms are morphing into what can be deemed a new model, retaining what has long been conventional and at the same time adopting what had once seemed heretical. We share here what we have learned about this new model — a new leadership model we call Resolute Japan, or Model RJ.
Resolute Japan has come as a quiet, even hidden revolution among Japanese enterprises, and one that is sure to both challenge and inform the West after decades of corporate retreat in Japan and neglect abroad. Japan’s resolute leaders, we have found, have a longer-term focus on enterprise agendas than in the West, combined with a nearer-term discipline in their execution. At the same time, they are riveted on a host of beneficiaries, not just the institutional investors that have so dominated the United States. They are doubling down on fresh talent and nimbleness in deployment. They are remixing their portfolios to better advantage. And they are more ambidextrous, simultaneously serving diverse constituencies and varied agendas: shareholders and stakeholders, short-term gains and long-run goals, and stability and agility.
Model RJ is exemplified by these leaders’ ability to: (1) combine traditional Japanese management methods with more innovative agendas; (2) redirect their governing boards from passive overseers to active partners; (3) move away from seniority in their work ranks in favor of more active talent development and deployment; and (4) strengthen their personal impact as enterprise executives.
And in so doing, they are transforming their enterprises and driving a corporate comeback. At the same time, business executives and directors outside of Japan would be advised to learn from Japan’s emergent resolute model — not to copy it, but to draw from and adapt its leadership concepts that may prove invaluable in one’s own nation.
Published as “Eastern Ingenuity” in the Fall/Winter 2024 issue of Wharton Magazine.
