6
Japan

For the past two decades Japan has struggled to return to the robust levels of economic growth it enjoyed after World War II. It remains a world leader in high technology and views science and technology (S&T) as critical to economic revitalization and national security. Japan has increased research and development (R&D) funding levels and has undertaken a series of major reforms in its S&T infrastructure that are designed to improve industry-university-government collaboration and to spur innovation. However, these reforms have been implemented slowly and have not addressed longstanding fundamental weaknesses in Japan’s S&T system, which include immobility of personnel, inadequate entrepreneurialism, insufficient opportunity for younger researchers, and abiding problems with industry-university-government collaboration. With respect to national security, Japan’s leaders are prioritizing missile defense and the prospect of competition over resources in nearby waters. Major S&T efforts are underway to address concerns over raw materials (particularly rare-earth elements), energy and food availability, and prospective epidemics. Japan’s aging population, low rates of birth and immigration, and low participation of women in the workforce will act as a drag on its future S&T efforts. The United States should strengthen its existing relationship with Japan and should support Japanese R&D efforts.

INTRODUCTION

In spite of its small land mass and limited resources, Japan surprised the world with its use of S&T to propel itself from a relatively undeveloped country (prior to World War II) to a major manufacturer, a global innovator, and currently the world’s second-largest economy. The 1991 burst of the market bubble that fueled much of Japan’s sensational growth in the 1980s began a trend of deterioration in the national economy. Although still prosperous, the nation is engaged in steady reform intended to preserve the gains it has already achieved while laying the foundation for a secure future. The ultra-competitive and rapidly changing nature of the East Asian marketplace will pose challenges for a country used to regional dominance.

Since the early 1990s, Japan has been overhauling its science establishment with the objectives of restoring the economic growth that it enjoyed throughout the 1980s and of promoting innovation. Nevertheless, these reforms have been implemented at a very slow pace, meaning they will take a number of years to begin to have observable effects, and they may be impeded by numerous structural aspects of Japan’s economy and society that create obstacles to innovation and limit Japan’s participation in the global R&D community. In the realm of national security-related R&D, Japan places high priority on developing specific technologies and production processes to



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6 Japan For the past two decades Japan has struggled to return to the robust levels of economic growth it enjoyed after World War II. It remains a world leader in high technology and views science and technology (S&T) as critical to economic revitalization and national security. Japan has increased research and development (R&D) funding levels and has undertaken a series of major reforms in its S&T infrastructure that are designed to improve industry- university-government collaboration and to spur innovation. However, these reforms have been implemented slowly and have not addressed longstanding fundamental weaknesses in Japan’s S&T system, which include immobility of personnel, inadequate entrepreneurialism, insufficient opportunity for younger researchers, and abiding problems with industry-university-government collaboration. With respect to national security, Japan’s leaders are priori - tizing missile defense and the prospect of competition over resources in nearby waters. Major S&T efforts are underway to address concerns over raw materials (particularly rare-earth elements), energy and food availability, and prospective epidemics. Japan’s aging population, low rates of birth and immigration, and low participation of women in the workforce will act as a drag on its future S&T efforts. The United States should strengthen its existing relationship with Japan and should support Japanese R&D efforts. INTRODUCTION In spite of its small land mass and limited resources, Japan surprised the world with its use of S&T to propel itself from a relatively undeveloped country (prior to World War II) to a major manufacturer, a global innovator, and currently the world’s second-largest economy. The 1991 burst of the market bubble that fueled much of Japan’s sensational growth in the 1980s began a trend of deterioration in the national economy. Although still prosperous, the nation is engaged in steady reform intended to preserve the gains it has already achieved while laying the foundation for a secure future. The ultra-competitive and rapidly changing nature of the East Asian marketplace will pose challenges for a country used to regional dominance. Since the early 1990s, Japan has been overhauling its science establishment with the objectives of restoring the economic growth that it enjoyed throughout the 1980s and of promoting innovation. Nevertheless, these reforms have been implemented at a very slow pace, meaning they will take a number of years to begin to have observ - able effects, and they may be impeded by numerous structural aspects of Japan’s economy and society that create obstacles to innovation and limit Japan’s participation in the global R&D community. In the realm of national security-related R&D, Japan places high priority on developing specific technologies and production processes to 

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 JAPAN address perceived military and nonmilitary security threats, including satellite warning and monitoring systems, rockets, nuclear reactors, scanners, advances in fertility with respect to crops and marine life, alternative energy technologies, and alternatives to rare-earth metals needed in industrial processes. Although growth in Japan’s GDP averaged 4 percent per year between 1975 and 1990, it declined to an average of 1.3 percent per year in the following decade (Motohashi, 2005). Alarmed by its stagnating economy, Japan introduced new innovation policies in 1995, which were aimed at revitalizing its innovation capability and energizing its economic growth. The new policies, modeled in part after similar policies in the United States, included major reforms to improve S&T partnerships between universities and industry, and the enactment of a new intellectual property (IP) policy allowing universities, small businesses, and nonprofits to claim ownership of innovations developed with federal funds (akin to the Bayh-Dole Act of 1980 in the United States). In addition, the budget for funding S&T research was increased significantly; in 2007, Japan’s total R&D expenditures equaled 3.67 percent of its gross domestic product (GDP), the highest among industrialized nations (compared to 2.68 percent in the United States), with a 5 to 1 ratio of private-sector to public-sector spending. NET ASSESSMENT OF S&T INvESTMENT STRATEGY In Japan, several ministries are involved in S&T policy, but coordination is managed by a cabinet office called the Council for Science and Technology Policy (CSTP), which reports directly to the Prime Minister. Attention to S&T policy at the executive level gives Japan a potential advantage relative to other industrialized nations in terms of enacting transformational policies with long-term impact on research, education, and technology innovation. Japan’s S&T planning is closely linked to perceived threats to security, each of which is the subject of one or more national-level R&D projects. The most urgent concern, a ballistic missile attack from North Korea, is the subject of a high-priority R&D effort to improve early warning capability through the development of a new generation of high-performance satellites and launch vehicles. The threat of terrorism originating abroad is being addressed through the development of satellite surveillance capabilities for all of Japan’s territories and the devel - opment of portable scanners for inspection of luggage. Japan’s concerns over energy and resource security are the subjects of R&D projects to enhance its ability to access seabed resources, drastically curtail energy consumption, produce energy from biomass, and develop technological alternatives to rare-earth elements. The latter initiative is of particular importance because China currently accounts for 97 percent of global rare-earth-element production and is restricting export quotas in response to growing domestic demand. Japan is also engaged in efforts to secure its future rare-earth-element supply through stockpiling and acquiring foreign mines (Hurst, 2010). Threats to food security are being addressed through R&D programs to improve crop yields in poor environments and to replen - ish the dwindling population of fish in nearby waters. Although the close linkage of Japan’s security concerns to specific threats is impressive, the country’s ability to contain these threats through S&T is questionable, reflecting weaknesses in Japan’s S&T infrastructure.1 Institutional Reforms Japan changed its funding model for research by increasing the fraction allocated to competitive funding; between 1991 and 2005, that fraction increased sixfold. Equally significant was Japan’s move (starting in 2004) to separate its national universities and research institutes from the government’s civil service system, thereby giving them more autonomy to define their roles and allocate their resources, and more freedom to work coopera - tively with industry. This policy will likely pay great future dividends to Japan in the form of enhanced research productivity and an environment that is more conducive to technological innovation. 1Many of these weaknesses are acknowledged in Japan’s Science and Technology Basic Plan (2006) in the form of objectives for “Reforming the S&T System.” They include “creating an environment where individuals thrive,” “supporting the independence of young researchers,” “improving the mobility of human resources,” “suppressing the rate of inbreeding in faculties,” “promoting the activities of fe - male researchers,” “drastic enhancement of graduate education,” “promoting the activities of foreign researchers,” “resolving the institutional and operational bottleneck that acts against S&T activities,” “reforming the research fund system beyond office and ministries,” “developing industry-government-university trust,” and “promoting the entrepreneurial activities of R&D ventures” (CSTP, 2006).

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 S&T STrATEgiES Of Six COuNTriES . . FIGURE 6-1 Expansion of research funding in Japan, 2001-2009. SOURCE: Inutsuka (2009). Increased Government Funding for R&D The Japanese government prescribes its budget for supporting R&D in five-year periods. Despite the fiscal Figure 6-1 Bitmapped woes caused by its weak economy in the 1990s, Japan increased its ratio of government-funded research to GDP from 0.6 percent in the early 1990s to 0.69 percent in 2000. For comparison, the corresponding figures in 2004 are 0.83 percent in the United States and 0.76 percent in Germany. These figures include military R&D, which repre - sent a larger fraction for the United States than for Japan. R&D spending increased by about 30 percent in 2005 (see Figure 6-1), and this new level has been maintained since then. The infusion of new funds allowed Japanese national universities and institutes to modernize their research facilities and to expand research activities in four specific areas, namely life sciences, information and communication, environment, and nanotechnology. The combination of institutional reforms and increased funding for research has led to significant increases in the number and citations of papers published in major scientific journals. Between 1991 and 2004, Japan’s share among highly cited papers increased by about 50 percent, from 7 percent in 1991 to 9 percent in 2001, and then to 10 percent in 2004. University-Industry Partnerships In the late 1960s and early 1970s, the strong research collaboration that had existed between Japan’s national universities and its industry started to weaken, primarily due to the buildup of R&D capability in Japanese com - panies. Currently, Japan’s universities account for just 46.5 percent of basic research. Recognizing the important role that research universities can and should play in the development of technological innovation, Japan enacted in 1999 The Law on the Special measures for revitalizing industrial Activities to encourage the transfer of tech- nology from universities to industry, particularly in the arena of science-based technologies. The 1999 law allows grantees of government-supported research to retain ownership of intellectual property and associated patents derived from the research. Also, legislation was enacted to encourage and support universi -

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 JAPAN ties to establish technology licensing organizations. Furthermore, to encourage research collaboration between and among its national universities, national research institutes, and industry, the Japanese government provided special funds for establishing Collaborative Research Centers at its national universities. It also supported the creation of startup research laboratories (technology incubators) to accelerate the technology transfer process. All of these new policies have had a very significant impact on how universities now regard intellectual property. A particularly demonstrative metric is the number of annual domestic patent applications submitted by universities, which rose from 641 in 2001 to 8,527 by 2005. Reform of the Patent System Since the mid-1990s, Japanese policymakers have placed strong emphasis on reform of the patent system, reflecting their assessment that the stronger protection of intellectual property (IP) rights in the United States since the early 1980s fueled the emergence of world-leading industries in biotechnology and information technology and ultimately contributed to higher levels of U.S. productivity and GDP growth. Japan has taken major steps to strengthen IP protection, including the enactment of the basic Law on intellectual Property (2003), creation of an Intellectual Property High Court (2005), and promulgation of a series of action plans coordinated by the Prime Minister’s Intellectual Property Policy Headquarters (beginning in 2002). However a 2009 report by the Office of U.S. Trade Representative was critical of Japan’s patent application process and of the copyright protection afforded e-commerce and content-related industries (USTR, 2009). Green Innovation The ruling coalition headed by the Democratic Party of Japan (DPJ) has made “green growth” a cornerstone of its public policy agenda. The DPJ has committed to slash Japan’s greenhouse gas emissions by 25 percent rela - tive to 1990 levels by 2010, a major break from prior policies. The government has indicated that it will achieve its ambitious objectives in part through “green innovation,” the application of R&D technological breakthrough, and development of new “green” energy and environmental industries. Key policy measures include: • Promotion of renewable energy by expansion of electric power feed-in tariffs and other measures. (In November 2009, Japan introduced a feed-in tariff system to promote use of renewable energy in the elec - trical grid.) • Conversion of buildings into “zero emission structures” through adoption of heat pumps, eco-housing technologies, thermotrophic glass windows, and other measures. • Development of innovative technologies including next-generation automobiles, storage batteries, and improved thermal power plant efficiency. • Promotion of investments aimed at realizing a “low carbon society” through “greening of the tax system, regulatory overhaul, and other measures” (Nakao, 2010). These policies will reduce Japan’s exposure to energy dependency and will help Japan become and remain a global leader in green science and technology. japan’s National Security Concerns Japan’s most important national security concerns arise out of the threat of military confrontation in northeast Asia. North Korea, a hostile neighbor, has developed nuclear weapons and possesses ballistic missiles capable of hitting Japan within a few minutes from launch. Japan is periodically shaken by North Korean missiles, which overfly its territory or territorial waters. China is modernizing its military and asserting claims to nearby waters and seabed resources that conflict with those of Japan. In addition, Japan recognizes a range of quasi-military or nonmilitary national security concerns, reflecting the nation’s historical experience and recent world events (MOD, 2009). Earthquakes inflicted enormous destruction

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0 S&T STrATEgiES Of Six COuNTriES and loss of life in the 20th century. Japan experienced conditions of near-starvation in the years immediately after World War II and cannot produce enough food domestically to support its population. Japanese policymakers are highly sensitive to environmental degradation, which gave rise to a massive public backlash against government and industry in the 1960s. The energy shocks of the 1970s affected Japan more severely than other developed countries, reflecting Japan’s complete dependency on imported oil. The attacks on the United States on September 11, 2001, deeply affected the Japanese public (many of whom refused to fly anywhere months after the attacks). The Ministry of Defense has indicated concerns over potential activity by individuals or small groups of terrorists operating in Japan’s territory. Recent epidemics (SARS, avian flu, swine flu) have raised questions about preparedness of the nation’s health infrastructure for a lethal pandemic or bio-terror attack. Piracy threatens maritime communications upon which Japan’s economic survival depends. Access to raw materials, particularly in competition with China, is a chronic and growing challenge for Japanese industry. Japanese leaders are so concerned about the country’s growing dependency on Chinese-produced rare-earth elements that some are reportedly discussing a rapproche - ment with mineral-rich North Korea, notwithstanding the political differences between the two countries. Climate change may be fostering destructive natural events to which Japan, as an island nation, is uniquely vulnerable, such as typhoons and tsunamis. Role of Science and Technology in Addressing Security Concerns A review of Japan’s current S&T projects with regard to national security indicates that the government is not, by and large, seeking to address these concerns through the development of breakthrough or disruptive technolo - gies. Its R&D projects overwhelmingly involve the development of defined pieces of equipment and systems with applications meeting performance parameters capable of addressing very specific security concerns—reconnais - sance satellites, scanners, underwater exploration vessels, efficient manufacturing systems, synthetic alternatives to various raw materials, and similar items. Military R&D Japan relies heavily on the security relationship with the United States to address traditional military threats in northeast Asia. Japan cooperates closely with the United States on ballistic missile defense (BMD), and its cur- rent multilayered BMD incorporates U.S.-developed Patriot and Aegis interceptor missile systems. This special relationship has enabled Japan to access U.S. defense-related technologies through licensing and collaborations on defense R&D and production in which Japanese companies (the principal source of Japan’s defense-related R&D) have emerged as world leaders in the design and manufacture of materials, components, and electronic subsystems, which are critical to advanced weapons systems. Despite Japan’s comparatively limited defense-related procure - ment, Japanese firms’ successful production of commercial technologies with potential defense applications (e.g., semiconductors, graphite fiber, optoelectronics, data processing, and telecommunications) has enabled them to meet military specifications for sophisticated defense systems with respect to performance, cost, reliability, and quality. Japan reportedly hopes to be able to produce its own BMD equipment. Japan currently licenses more U.S. defense technologies than any other country. In 2008, Japan enacted a new Basic Law of Space, ending Japan’s nominal embrace of the principle of the nonmilitary use of space. In the spring of 2009, Japan’s Strategic Headquarters for Space Development, headed by the Prime Minister, released a five-year plan for space development, emphasizing that the space program would focus on R&D for defense as well as commercial and scientific purposes. The plan was supported by the Demo - cratic Party of Japan, which was then in opposition but has subsequently come to power and head of a coalition government. The plan calls for the development of a “Satellite System for National Security,” which is designed to improve Japan’s early warning and information gathering capabilities. In 2009, the budget for space research was increased by about 10 percent over 2008 levels, with most of the increase being directed to projects with military or potential military applications such as IGS (information gathering satellites, the space-related com - ponent of BMD consisting of new-generation optical and radar-based satellites) and the so-called Quasi-Zenith Satellite System (which will provide highly accurate satellite positioning services covering 100 percent of Japan’s

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 JAPAN territory). According to some observers the new Japanese satellite development effort is intended to give Japan an independent early warning capability with respect to ballistic missile launches that is not necessarily integrated with or dependent upon U.S. BMD systems. PROjECTED ADvANCES IN S&T PROFICIENCY Japan has demonstrated the ability to excel in innovation across a broad spectrum. Professor Shinya Yamanaka’s research team at Kyoto University pioneered the cultivation of human-induced pluripotent stem cells, demonstrat - ing the nation’s ability to become a leader in biotechnology. Robotics and factory automation is an area in which Japan is and will remain a leader. The government has committed $100 million to the development of mobile personal care robots for eldercare, seen as a necessity given the aging population and the looming shortage of eldercare workers. Japan also leads the world in the deployment of systems of infrared and microwave sensors and radio transmitters along highways to alert vehicles of traffic hazards. In nanotechnology, a research team at Nagoya University reported in 2009 that it had created an “optical driven nano machine,” a microbe-sized robot capable of moving individual human cells in response to commands (Sankei Shimbun, 2009). Yet another arena in which Japan is a leader, if not the world leader, is the development of microgrids, or localized groupings of electricity sources that can operate in connection with centralized grids but can also disconnect and operate autonomously. Most of Japan’s S&T plans for the future consist of short-term goals to be completed in five years or less. Goals aimed at specific tasks, such as refinement of a particular manufacturing process or development of a new generation of equipment, are generally met. Goals are not met as often in projects involving systems and systems integration (e.g., high-performance computing, operating systems, or aviation). This may reflect the fact that Japan has traditionally accorded higher prestige to hardware than to intangibles (software and systems). But most of Japan’s security threats are complex, multifaceted concerns that cannot be met with simple technological fixes such as new kinds of robots and memory devices. Because a number of the security threats that Japan confronts are arguably best countered by complex systems (e.g., missile defense) it is unclear that the country’s S&T efforts are equal to the challenges it faces. Japan will meet most of the goals it has defined for national R&D projects within three to five years, but many of these are directed at achieving refinements on existing technologies (e.g., three-dimensional semiconductors, spectroscopy, refinements of rice genomes) rather than at transformational breakthroughs.2 Longer-term objectives tend to emphasize reform of Japan’s science infrastructure (increasing internationalization, upgrading life sciences infrastructure), and if the past is a guide Japan is less likely to suc - ceed here. S&T INvESTMENTS OF INTEREST In its third S&T Basic Plan (2006-2010), Japan defined four priority areas in S&T research, and another four “promotion areas” in which the research conducted by universities and national institutes is required to have close coordination with government agencies. The eight areas are described in Figure 6-2. Funding for the four priority areas has increased from 28 percent of the total R&D budget in 1991, to 42 percent in 2004, and to close to 50 percent in 2009. Included in and in addition to the priority areas set forth in the third Basic Plan, three research areas stand out with regard to their potential impact on Japan’s national security and future success as an S&T leader. They are (1) improvement in food security, (2) development of alternatives to rare-earth elements, and (3) satellite technologies. Reacting to the memory of famine in 1945-1947, Japan is heavily invested in measures to improve food security. It may achieve significant breakthroughs in areas not researched as intensively in other countries, such as breeding of marine life, application of rice genome information to crop breeding, and use of microbes in fer- mentation processes supporting food production. 2Breakthroughs have, however, occurred recently in Japan. One notable example is the identification of the four necessary ingredients to generate stem cells from adult cells (Okita et al., 2008).

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 S&T STrATEgiES Of Six COuNTriES FIGURE 6-2 Priority and promotion areas. SOURCE: Inutsuka (2009). Japan is addressing the challenge posed by China’s looming rare-earth-element monopoly by developing technological alternatives (such as productionF I G U R E 6-2 of electrodes without use of indium), which could avert a crisis in its manufacturing industries in the event that China withholds supply. Bitmapped Improvements in Japan’s satellite capabilities will have multiple effects on its security. In addition to counter- ing the missile threat from North Korea, high-performance satellites could prove crucial in a military confronta - tion with China in which submarines threaten the sea lanes (Earth Observation and Ocean Exploration System). Satellites are instrumental to Japan’s plans for developing seabed energy and mineral resources. Satellites and global positioning systems (GPS) will enable Japan to monitor all of its territory, although, as the U.S. experience in Afghanistan demonstrates, even very sophisticated systems of aerial surveillance cannot completely prevent infiltration by small groups of terrorists. Japan’s civilian research establishment is making substantial commitments to addressing unconventional threats to national security. The highest visibility efforts involve five “national critical technologies that concern consistence [sic] of Japan,” listed in the Council for Science and Technology Policy’s Strategy for Innovative Technology (CSTP, 2008). The five critical technologies as described in this document are as follows: • Faster Observation and Ocean Exploration System. This system will use satellites and underwater vehicles to monitor the sea bottom’s seismogenic zone and “submarine resources,” which are believed to include hydrocarbons and rare-earth elements. • X-Ray Free Electron Laser. This project will establish a facility for the development of “an ultra high- speed dynamic state oscillating x-ray laser with as bright as 1 billion times those existing and the alternation of chemical reactions are being aimed at for common use in 2012” (CSTP, 2008). • Fast Breeder Reactor Cycle Technology. This project will seek to develop a reactor that produces more fuel than it consumes, “contributing to long-term energy security.” (No cautions were provided about the increased security risks from this technology.)

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 JAPAN • Next-Generation Super Computer. This project will seek to develop a “pioneering best global per- formance supercomputer.” This goal follows earlier government-sponsored efforts to develop advanced computers that have fallen short of achieving their objectives. • Space Transportation System. This project will focus on the development of rockets that are needed to pre- serve a domestic capability to launch “necessary artificial satellites into space independently when needed.” In addition to these five efforts, a recent report by Japan’s Cabinet Office identifies a number of “innovative technologies” that have national security as well as economic and social dimensions. With respect to these innova - tive technologies, the government states, “It is very important for us to make some seeds of innovative technologies, to develop them rapidly, and to lead to society-wide innovation in the long term. This will necessitate a strategic program for research and development” (CSTP, 2008). The following R&D objectives have been identified: • Food Security and Health —Development of inexpensive, portable “non-contact visualizing analysis devices” for food contamina - tion checks, airport security checks, monitoring of environmental pollution, and quality checks on the manufacturing of medicines —Development of strains of rice, wheat, and soybeans that can thrive in poor environments and double current yields —Development of egg-laying control technology and surrogate womb technology to promote the breed - ing of eels and tuna, reversing the decline of seafood protein resources and “enriching Japanese food culture” —Development and production of an effective anti-malaria vaccine derived from plants • Resource Development —Energy independence —Development of alternatives to rare-earth elements such as indium, dysprosium, and neodymium to reduce current vulnerability to Chinese monopolization —Development of renewable biomass materials as energy resources that do not compete with food production • Environment —Development of a “new catalyst chemical manufacturing process technology,” an underwater production process that would eliminate many chemical production byproducts, thereby reducing by 25 percent the waste byproducts of the chemical industry —Development of “global warming countermeasure technology” by establishing (a) hydrogen production technology that does not emit greenhouse gases and (b) high-efficiency photovoltaic power generation technology —Energy conservation —Development of superconducting materials technology with high current/magnetic field tolerance for application in magnetic levitation (such as high speed mass transportation) Japan is the most energy-efficient country in the world, consuming less than half the energy per unit of GDP of the United States. Given its lack of petroleum resources, Japan has been forced to confront the need for energy conservation continuously since the onset of the first crisis in the early 1970s. It has developed a vast array of “green,” energy-efficient technologies such as hybrid/electric vehicles, highly efficient water heaters and batteries, photovoltaic solar panels, highly efficient lighting, hydrogen fuel cells, thermotrophic glass, and “green” appliances such as waterless washing machines. With the world turning increasingly to alternatives to oil, vast infrastructural changes will be necessary in which Japan’s green technologies and existing manufacturing capability with respect to green products are likely to be of critical importance.

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 S&T STrATEgiES Of Six COuNTriES NATION-SPECIFIC INDICATORS OF S&T ADvANCEMENT When looking at possible indicators of S&T growth in Japan, it is perhaps most beneficial to focus on those related to the structural problems that have long acted as a drag on innovation, that is, the level of partnerships between universities and industry, amount of foreign investment, number of new businesses and startups, size of the domestic workforce, and women in the workforce. University-Industry Partnerships An examination of the number of university-industry joint research projects and the number of startup compa - nies launched each year from universities reveals the extent to which Japan is overcoming the critical problem of isolation of universities from industry. National policies introduced over the past two decades to increase collabora - tion between universities and industry are starting to pay high dividends. The number of joint university-industry research centers at Japanese universities has increased from 3 in 1987 to 62 in 2002. The number of university- industry joint research projects has increased from about 1,400 in 1995 to more than 6,000 in 2003 (Figure 6-3) . The percentage of published papers that originated in Japan and were co-authored by individuals from industry and universities rose from 38 percent in 1991 to 54 percent in 2001. The number of startup companies spun off from universities increased from 14 in 1995 to 179 in 2003 (Figure 6-4). FIGURE 6-3 University-industry joint research. SOURCE: NISTEP (2005). F i gure 6-3 Bitmapped

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 JAPAN FIGURE 6-4 Academic spin-offs in Japan. SOURCE: NISTEP (2005). F i gure 6-4 Bitmapped

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 S&T STrATEgiES Of Six COuNTriES TABLE 6-1 Foreign Direct Investment Levels Country FDI as a Percentage of Nominal GDP (2003) Japan 2.1 United States 37.5 United Kingdom 37.5 Germany 27.4 France 42.6 Canada 31.9 Australia 36.9 SOURCE: Adapted from MAC (2005), using IMF International Financial Statistics. Foreign Direct Investment Many of the most important technological breakthroughs of the past generation are attributable to the research efforts of multinational corporations. It is therefore significant that Japan has by far the lowest level of foreign direct investment (FDI) of any major developed country (MAC, 2005). See Table 6-1 for related statistics from the International Monetary Fund. With some exceptions, technology-intensive multinationals do not undertake substantial levels of investment in Japan or conduct major collaborative research with Japanese firms. Although Japanese companies devote sub - stantial resources of their own to developmental R&D, their comparative isolation from global commercial research efforts will continue to limit Japan’s ability to emerge as a leading innovator. Japan’s leaders have recognized this dynamic since the mid 1990s and have deployed an array of incentives to attract foreign investment, but with limited success (Koizumi, 2003). A significant increase in the level of FDI relative to other developed countries would be an indicator that this problem is being overcome. Start-ups Japan has not yet succeeded in creating an environment that encourages risk-taking by entrepreneurs and venture capitalists, a deficiency that continue to act as a drag on innovation. The Japanese government recognized in the 1990s that Japan’s market entry rate for new businesses had been declining since the 1970s, “indicating stagnant entrepreneurship in Japan” (NRC, 2009). In 2009, Naoto Kan, Japan’s current Prime Minister, who was then serving as Minister of State for Science and Technology, commented, “Unfortunately we do not yet have an environment in Japan that is suitable for venture companies” (Kato, 2009). Indeed, in 2007, U.S. venture capital investments were over 23 times the level of venture capital investments in Japan (METI, 2009). The government’s response has been a series of measures to encourage entrepreneurship. Indicators that such policies are encourag - ing innovation would be an increase in the number of small- and medium-sized businesses holding proprietary self-developed IP and an increase in net revenue generated by companies that started out as small businesses with proprietary IP. A third indicator that has already been noted is the number of start-ups spun off from universities, which are increasing. Social and Demographic Indicators Japan has the highest proportion of citizens over the age of 65 and the lowest proportion of children under the age of 15 of any developed country in the world, raising the prospect that if present demographic trends continue, Japan’s population could drop from 130 million in 2005 to under 50 million by the end of this century. The coun - try already faces a shortage of skilled workers, exacerbated by low rates of immigration and a comparatively low participation in the workforce by women, who tend to enter the workforce when young but drop out thereafter. The working-age population of Japan is projected to drop from 81.64 million in 2009 to 73.63 million by 2020, and to fall below 50 million after 2050 (METI, 2010).

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 JAPAN Increased reliance on robots and offshore manufacturing can partially offset the decline in the size of the workforce, but scientific research and innovation will inevitably suffer from growing shortages of personnel. It is unlikely that Japan’s lack of receptivity to immigration will change over the near or medium term, and the country’s ability to attract researchers from abroad is unimpressive. Japan’s current government, a coalition headed by the DPJ is reportedly considering changes in the tax system that currently deter women from remaining in the work force (creating incentives for nonworking housewives). Indicators that Japan is succeeding in partially reversing adverse demographic trends would be an increase in the birth rate, a sharp increase in the number of women over 30 years of age with advanced degrees in the workforce, an increase in levels of immigration, and growth in the number of women and immigrants holding S&T-related jobs. Patents Japan is a leader in terms of the sheer number of patents issued; of the top 10 companies awarded patents in the United States, 6 are Japanese. However, this metric may not be a useful tool for benchmarking Japan’s progress in innovation. The extent to which these patents are defensive in nature and not obtained for the purpose of appropriating returns from inventions is unclear. A proliferation of defensive patents could actually work as a deterrent to innovation—the so-called “patent thicket” problem. FINDINGS AND RECOMMENDATIONS Shaken by the economic stagnation that began after 1990, Japan’s policymakers implemented a series of policy reforms designed to enhance innovation, drawing heavily on the example offered by the United States in areas such as IP protection, industry-university collaboration, start-ups, and industry-government R&D. However, it is too soon to assess whether these gradual reforms will bear fruit. Impediments to the attainment of innovation leadership include Japan’s conservative business establishment, industry’s relatively low level of participation in transnational R&D efforts, the inflexible career trajectories of Japanese researchers, and top-down innovation poli - cies overemphasizing mega R&D projects by large domestic companies and government laboratories. Finding 6-1. Japan has experienced an erosion of market position relative to other countries in a number of high-technology sectors. Japan is unlikely to reverse this relative decline in 5 years, and even 10 years may be optimistic. Japan’s S&T initiatives are likely to have a comparatively modest and incremental impact on the United States. It is unlikely that Japan will evolve into an adversary or direct security threat to the United States in the next generation. If the past is any guide Japan’s defense-related S&T research will be of limited utility to the United States, and the coordination of bilateral R&D efforts will remain inadequate. Japan may develop specific national-security-related technologies that prove useful to the United States (such as vaccines, “clean” manufactur- ing processes, or synthetic alternatives to rare-earth elements). Japanese R&D projects may also enable Japanese companies to achieve competitive gains relative to U.S. firms in some industries, including strategic industries, as has occurred during the past 40 years. However, such developments will not destabilize the bilateral relationship or dramatically affect U.S. national security. Finding 6-2. Reflecting its national experience, Japan has focused its S&T to address specific nonmilitary threats that could very well confront the United States in the future in areas such as energy, food security, natural resource availability, and environmental degradation. Recommendation 6-1. The United States should position itself to capture value from Japan’s R&D efforts in niche areas involving energy, food and resource security, and environmental protection. Finding 6-3. Japanese industry, like U.S. industry, is experiencing pressure from China to transfer proprietary technologies.

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 S&T STrATEgiES Of Six COuNTriES Recommendation 6-2. Countries creating S&T innovation enterprises should collectively address China’s pres - sure to transfer proprietary technology. Finding 6-4. Japan’s ability to achieve its S&T goals may be impaired by demographics and weaknesses in its S&T infrastructure. However, it is in the interest of the United States that Japan’s reform efforts prove successful. Recommendation 6-3. The United States should work to build and deepen relations with Japan across the entire policy spectrum. In S&T this would include joint R&D, university exchanges, and technology-sharing arrangements. REFERENCES Published CSTP (Council for Science and Technology Policy), Cabinet Office Government of Japan. 2008 (May 19). Strategy for innovative Technology. Available at http://www8.cao.go.jp/cstp/english/doc/innovative_technology/innovative_technology.pdf. Last accessed March 28, 2010. CSTP, Cabinet Office Government of Japan. 2006 (March 28). Science and Technology basic Plan. Available at http://www8.cao.go.jp/cstp/ english/basic/3rd-BasicPlan_06-10.pdf. Last accessed June 2, 2010. Hurst, Cindy. 2010. China’s rare Earth Elements industry: What Can the West Learn? Washington, DC: Institute for the Analysis of Global Security. Kato, M. 2009 (November 27). Entrepreneurs lack serious support. The Japan Times. Available at http://search.japantimes.co.jp/cgi-bin/ nn20091127f1.html. Last accessed June 8, 2010. Koizumi, J. 2003. General Policy Speech by Prime Minister Junichiro Koizumi to the 156th Session of the Diet. Speech at the 156th Session of the Diet, Chiyoda, Tokyo, Japan, January 31, 2003. MAC (Market Access and Compliance), Office of Japan, International Trade Administration, U.S. Department of Commerce. 2005 (July 7). IMF international financial statistics. In u.S.-Japan Economic Partnership for growth: u.S.-Japan investment initiative 00 report. Available at http://www.mac.doc.gov/japan/sector-specific/Investment%20Initiative%202005%20Report.htm. Last accessed March 29, 2010. METI (Japan Ministry of Economy, Trade, and Industry). 2009. White Paper on Small and medium Enterprises in Japan. Available at http:// www.chusho.meti.go.jp/pamflet/hakusyo/h21/h21_1/2009hakusho_eng.pdf. Last accessed June 9, 2009. METI. 2010. Current Status and issues facing Japanese industry. Available at http://www.meti.go.jp/english/policy/economy/pdf/ 2010jindustries.pdf. Last accessed June 8, 2010. MOD (Japan Ministry of Defense). 2009. defense of Japan 00: Annual White Paper. Available at http://www.mod.go.jp/e/publ/w_ paper/2009.html. Last accessed February 26, 2010. Motohashi, Kazuyuki. 2005 (March). Empirical Analysis of iT innovation: Has iT Changed Long-Term Japanese Economic Performance? Toyo Keizai Inc. Nakao, Y. 2010. Japan’s “green innovation” Policy. Available at http://www.oecd.org/dataoecd/4/17/45010305.pdf. Last accessed June 10, 2010. NISTEP (National Institute of Science and Technology Policy). 2005. Study for Evaluating the Achievements of the S&T basic Plans in Ja- pan—Highlights, (Japanese). NISTEP Report No. 83. NRC (National Research Council). 2009. st Century innovation Systems for Japan and the united States: Lessons from a decade of Change: report of a Symposium. Washington, DC: The National Academies Press. Pp. 95-106. Available at http://www.nap.edu/catalog. php?record_id=12194. Last accessed April 18, 2010. Okita, Keisuke, Masato Nakagawa, Hong Hyenjong, Tomoko Ichisaka, and Shinya Yamanaka. 2008. Generation of mouse induced pluripotent stem cells without viral vectors. Science 322:949-953. Sankei Shimbun. 2009 (August 13). Optically-driven bacteria-sized robot uses Light to move. Available at http://www.iza.ne.jp/news/news article/natnews/science/285457/. Last accessed June 11, 2010. USTR (Office of the United States Trade Representative). 2009 (July 6). Eighth report to the Leaders on the u.S.-Japan regulatory reform and Competition Policy initiative. Available at http://www.ustr.gov/webfm_send/1186. Last accessed on August 4, 2010. Unpublished Inutsuka, Takashi, Science Counselor, Embassy of Japan. 2009. Science and Technology in Japan. Presentation to the committee on December 7, 2009.