While headlines proclaimed stagnation, Japan’s leading companies were deliberately pivoting upstream into specialized technologies. UC San Diego professor Ulrike Schaede reveals how this shift made Japan the invisible foundation of global supply chains
Did Japan truly experience 30 lost years, also known as the “lost decades”? Professor Ulrike Schaede posed this question to participants at GLOBIS Hall in Tokyo on October 14, 2025.
The answer was given through an unexpected sumo wrestling analogy that reframes the narrative of what has happened in Japan since the early 2000s.
In the 1980s and 1990s, Japanese companies dominated through sheer scale—like sumo giants Konishiki and Akebono who won matches through overwhelming size and power. But after the bubble burst, this approach no longer worked. Enter Mainoumi, the diminutive wrestler who legend says inserted silicone under his scalp just to meet the sumo association's minimum height requirement. Despite being half the size of some of his opponents, Mainoumi secured victories against these heavyweights by relying on superior technique. He became known as the “department store of technique” (waza no depāto).
For Schaede—a UC San Diego professor of Japanese Business and author of Japan Re-Emerges—the department store of technique metaphor captures something fundamental about Japan's economic evolution that the prevailing narrative of stagnation misses entirely.
"Looking at GDP, Japan remains the world's fourth-largest economy," she observed. "Why does a country with the world's 12th largest population still maintain one of the world's leading economic powers? There must be something that is working well."
That "something" according to Schaede is a structural transformation that has largely escaped notice amid the doom and gloom dominating Japanese media coverage.
While Schaede lives in the United States, she visits Japan several times a year. Each time, she observes a prevailing negativity Japanese society
After the end of the bubble economy in the mid-1990s, Japan fell into a period of sluggish growth and economic stagnation. Add to that population decline, aging, the depopulation of rural areas and mounting government debt—the challenges facing Japanese society are endless, and negative headlines dominate the media. It's no wonder Japanese people feel pessimistic.
But Schaede points to data that reveals a more complex reality. Japan has maintained the world's top position in the Economic Complexity Index (ECI) for 30 consecutive years since 1995—a ranking that measures a country's industrial sophistication based on the diversity and advanced technologies of its exports.
Plus "slow does not mean stagnation," Schaede argued. "Japanese companies have deliberately pursued gradual, planned business transformation while ensuring stability, to limit as much as possible the shock to society that such a drastic transformation in business strategy would otherwise have caused."
This reframing positions the past three decades not as lost years, but as a "slow-paced era" during which companies strategically deliberately transformed their business models—prioritizing social stability over rapid GDP growth in a way that aligns with Japanese values.
Schaede explains this transformation by distinguishing between two types of firms. Japanese Traditional Companies (JTCs) that rely on past success models, while Japanese New Companies (JNCs) read the signs of change and move into new competitive territories.
The key to understanding JNCs' strategy lies in the "Smile Curve," a framework developed by Stan Shih, founder of Taiwan's Acer. The curve illustrates that profits are not equally distributed across the value chain. Rather, with the arrival of China as an assembly powerhouse, profits in assembly have been wiped out for high-cost countries such as Japan. In contrast, high profits come from upstream processes (R&D, design) and downstream activities (logistics, retail sales).
The JNC saw this early and decided to exit commoditized products and low-margin consumer end products, and move upstream toward difficult-to-make, difficult-to-copy inputs, such as advanced materials. For example, a 2010 study by the Asian Development Bank Institute of the first iPhone showed that 37% of the value-added of that phone were made in Japan, followed by Germany (17%). China’s assembly constituted a mere 3.6% of the value added.
Japanese companies today demonstrate a solid presence in areas that are less visible," she noted. "This stems from the accumulation of expertise honed over many years."
Returning to her sumo analogy, Schaede talked about what she calls the "Mainoumi Strategy."
"Mainoumi understood he couldn't win through size alone," Schaede explained. "That's why he relentlessly honed his winning edge. Japanese companies evolved similarly, shifting toward the mindset: 'If we can't win on scale (volume), we'll compete with the skills we possess'."
They shifted their focus upstream to R&D, materials, and components, to invent or improve on indispensable technologies. However, because most of these are upstream components and materials, they are much less visible to the public.
Breaking free from volume-based competition requires what Schaede calls "Diet + α."
"'Diet' does not necessarily mean shrinking business scale," she clarified, "but rather creating a new focus, away from generic products to high-value-added specialized technologies”. It's strategic streamlining—withdrawing from unwinnable markets and concentrating on winnable upstream processes.
The "+α" refers to redesigning corporate culture to foster innovation.
According to NEDO's 2021 analysis of 1,024 product categories, Japanese companies held over 50% global market share in 409 of them. This was just a snapshot limited to 5 industries, due to data restrictions.
"There are two main patterns in how Japanese companies capture market share," Schaede observed. "One is where a single company dominates multiple segments, like JSR's and TOK’s photoresists and polarizing films. The other is where multiple companies collectively build overwhelming market share, as seen with Olympus, Pentax, and Fujifilm in endoscopes."
This differs markedly from China, which has many large-scale industries but few domains where it controls over 75% of the global market, and Taiwan, whose dominance is largely confined to specific semiconductor segments.
This "slim and strong" model manifests clearly in East Asian trade structures. South Korea and Taiwan's trade deficits with Japan have widened, largely due to semiconductor materials, components, and production machinery. Components supplied from Japan enable Korean and Taiwanese manufacturers to produce displays and parts, which are then assembled in China for global distribution.
"Japan, as the starting point of the supply chain, underpins the entire network with its strong presence," Schaede said.
Even so, Japanese workers will need to constantly upgrade their skills and techniques to stay relevant and competitive. Schaede urged young professionals to "raise their hand and take on challenges themselves, even if they're small," and to maintain "the mindset of 'acquiring one new skill every year'."
Schaede's championing of Japanese business from San Diego reflects her conviction that multiple capitalisms can coexist.
“Japan and America have fundamentally different capitalist structures. America's strength is speed, but it pays a heavy cost behind the scenes, like widening inequality. Japan possesses a unique strength in designing systems that don't break down."
Her conclusion? The Silicon Valley model isn't the only form of innovation. Japan can have its own, uniquely suited innovation model—one she aims to uncover and use to show Japanese companies a path to thrive globally.
As debates intensify about measuring prosperity beyond GDP, Japan's approach offers a template: guardrails that enable rather than constrain, systems designed not to break, and leaders who shape the future rather than merely execute plans. Mainoumi didn't beat the giants by predicting their moves. He won by perfecting technique they couldn't match.
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