If Japanese prime minister Fumio Kishida is to succeed in his aim of awakening the “animal spirits” of capitalism in his country, then the local start-up scene will be one place to look for evidence.
The scene is so under-developed that even Masayoshi Son, SoftBank’s Tokyo-based founder and the world’s largest tech investor, has largely shunned it.
Unicorns — unlisted companies valued at $1bn or more — are rare beasts. They number just five in country compared with 470 in the US at the end of last year and 169 in China, according to research house CB Insights.
Son has sometimes complained about the government’s cautious stance in areas such as ride-hailing and home-sharing apps. But Kishida wants things to change and his government is taking a more proactive stance to foster innovation.
One sign of that has come with Japan’s launch of its first national endowment fund for universities to provide support for research. It eventually aims to expand in size to about ¥10tn ($82bn) in assets and be one of the largest of its type in the world.
And Japan is also providing more direct support for start-ups. Last week the venture capital arm of the government-backed Japan Investment Corporation supported a $120mn round of financing for Opn, a payment processing start-up founded in Thailand in 2013 but which has since moved to Tokyo. That added a new member to Japan’s modest unicorn pool.
Opn’s chief executive Jun Hasegawa plans to use the funds raised to expand its footprint of operations and roster of products while building on relationships with partners such as Toyota Financial Services, Thai Airways and McDonald’s.
Kishida has also recently said he wants some of the money from the country’s gigantic ¥200tn government pension fund to flow into start-ups. Such backing will help, but the challenges facing Kishida are not just financial — they also include the deep-seated cultural forces behind Japan’s risk aversion.
The sheer scale of the task was underlined by a recent survey of students graduating in 2022. It shows that the most important factor they considered when choosing jobs was not satisfaction or a high salary — but stability. That trend has been exacerbated by the pandemic, with 43 per cent pointing to stability, a 5 per cent jump from the previous year. “High salaries” came a distant third at 18 per cent.
The bruising job recruitment system, during which students already in their third year of college apply and interview at dozens of companies over months, does not promote risk-taking. Instead, graduates are steered into employment out of fear of falling behind their cohort. Starting a company, in this context, seems like a daunting gamble.
Partly to blame is the labour market, where three decades of stagnation have meant the proportion of part-time workers has doubled from the early 1990s to about 40 per cent of the workforce. Participating in a shrinking pool of full-time white-collar jobs is, on its own, for most, a huge success.
Sceptics point out that Kishida will need to work hard to convince the public that this time around funds will not be rerouted to rescue stodgy conglomerates with ties to the government, as has happened in the past.
Kishida will also have to pull into his effort well-connected allies from local governments. Examples include Fukuoka in the south, which has pitched itself as a “Gateway to Asia” and a tech hub, supporting start-ups with tax breaks and looser regulations. In Tokyo, deputy mayor Manabu Miyasaka has been overhauling the city’s numerous start-up support schemes into a coherent strategy. “It would be better if we could discuss the city’s start-up strategy with the government’s. It has been an issue,” says Miyasaka.
Tapping private equity participants active in Japan through tax breaks, better co-ordination and less red tape might also be a faster way to unlock capital than Kishida’s stated goal of luring overseas venture capital, where his predecessors mostly failed.
The start-up environment is not completely moribund. Investment in Japanese venture companies in 2020 stood at nearly $4.5bn, about seven times the amount in 2011. Even Son’s Vision Fund has been putting more money into local start-ups this year. But it is still a fledgling scene compared with other countries. Without reforming the rigid job recruitment system and its sclerotic labour market, Japan will continue to suffer from a lack of risk-taking, innovative founders.