Japan must slay its start-up zombies | The country needs to confront what it actually means to have a working capitalist metabolism

> After decades of resource misallocation, risk-aversion and stagnancy, Japan’s job market looks more liquid. Critically, it feels like an environment where start-ups can aspire to recruiting the nation’s best people, say managers at venture capital funds.

> All this provides a strong tailwind for the Japanese government, which has invested a great deal of hope and funding into transforming the country’s once anaemic start-up scene. It is, on one viewing, a grasp for panacea. The ambitions are charged with the faith that start-ups can drive GDP growth and productivity, rescue the country from a long-term innovative tailspin and channel its talent in the right — or at least less wrong — direction. It has a belated, even desperate feel to it, but start-ups now seem to be Japan’s core industrial policy.

> By many metrics, all this is working. In 2013, said the Ministry of Economy, Trade and Industry in a recent paper, the total investment into start-ups in Japan was a minuscule $600mn; a decade later, that had risen to over $6bn. Between 2014 and 2023, the number of university start-ups more than doubled to 4,288, with METI research showing that roughly half of university students would prefer to start their careers at one.

> Looming over all this achievement, though, is a coming moment when, if it wants the private sector to come in as a big investor in its start-up market, Japan must confront what it actually means to have a working capitalist metabolism. After decades of holding the cost of money as low as it can go, the country has shown a high tolerance for zombies and a low tolerance for carnage. If private money is to flow, that won’t work this time.

> A start-up-driven economy, with lots of private investment, only works if participants and overseers accept that failure is as necessary a function of this metabolism as success. Investment in start-ups is driven by a promise of extraordinary returns, but that promise can only be kept if everyone is tested against a pressing threat of demise… The problem with an industrial policy, for all the good intentions, is that it draws legitimacy from the pledge of long-term nurture. Japan will soon see if it has a taste for state-backed destruction.

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