Viewpoint of a global investor in Japan    

The Circular Economy is not just an environmental regulation, but is being promoted in many countries as a policy to change the very structure of the economy. How is Japan faring in this context? How does it look to those who, like investors, keep a close eye on economic trends and changes?

 In 'Talk Circular x Economy', Mr. Andre-Hottinguer, who has been involved in investments in global companies for more than 10 years and has travelled back and forth between Europe and Japan, gives his unique perspective on these topics, drawing on his background as an investor and as a foreigner.  Let's enjoy his 'way of seeing' and explore the 'Circularity x Economy'.

In line with Hachi Media's mission to promote learning and enjoyment that support the development of a circular economy-friendly society, this column will explore what circularity could mean for investors and, more broadly, for those observing economic trends and changes. 

Rather than providing an exhaustive analysis of Japan’s circular economy—a topic covered in numerous research papers—this column will highlight specific themes that I believe are particularly relevant today.

Having spent over a decade investing in global companies and dividing my time between Europe and Japan, I aim to use this first article to share my observations on circularity in Japan, offering perspectives shaped by my background as both an investor and a foreigner.

Starting with one example that resonate with nearly all stakeholders - plastic - provides valuable insight into Japan's approach and philosophy regarding circularity.

One significant issue that stands out to all of us as consumers, is plastic. This lightweight, highly functional product is everywhere, yet it often ends up unrecycled. From a foreign perspective, Japan’s relationship with plastic is paradoxical.

The country has implemented exceptionally strict waste sorting regulations for households and businesses, often exceeding even the most rigorous practices found in European nations. A system so comprehensive that it can sometimes confuse users about proper waste disposal procedures.

On the other hand, despite the strict recycling framework, Japan has one of the highest consumption of single-use plastics, particularly evident in the extensive food packaging, with individual items often wrapped separately, widespread use of plastic bottles for beverages and the frequent distribution of plastic bags. 

Taking a step back and looking at the history of circular economy in Japan, my biggest surprise is that the country seems to have addressed this topic very early on. In recent years, Europe has garnered global attention as a leader in circular economy efforts. However, Japan’s journey toward circularity started long before the term became widely recognized. Its approach appears to be heavily influenced by geographical and resource limitations, shaped by factors such as scarce natural resources, limited land availability, and more generally, its insular nature.

Several milestones highlight Japan's journey, showing how necessity often fosters innovation.

The first milestone dates back to the 1970s oil crisis, when high energy costs pushed Japan to recover energy from waste. This led to the creation of the Direct Melting System, a technology still regarded today as one of the most advanced waste-to-energy solutions thanks to its efficiency and flexibility. However, the limited availability of English disclosures and the relatively small scale of companies adopting these technologies often result in many technological breakthroughs going unnoticed.

The "Sound Material-Cycle Society" regulations introduced in 1999, along with subsequent updates, were also shaped by pressing economic and environmental concerns. At the time, Japan’s landfill capacity was alarmingly low—just 8.5 years for municipal waste and 3 years for industrial waste. By focusing on reducing waste through reuse and recycling, Japan significantly decreased its waste generation, extending the lifespan of final disposal sites.  

However, as is often the case, external shocks have driven some of the most profound changes. In 2017, China’s ban on importing paper and plastic waste created a pivotal moment. While the ban had a major impact on European companies, it hit Japan particularly hard, as the country was one of the largest exporters of plastic waste. The sudden shift forced Japan to rethink its waste policies to avoid plastic waste piling up, triggering a review of the full plastic supply chain.

Today, more than 90% of an air conditioner’s or a washing machine weight is recycled. Despite this impressive achievement, I am still surprised by the absence of large companies dominating this sector. As in other areas in Japan, the industry seems to be composed primarily of small to mid-sized companies, which unfortunately often lack the scale needed to achieve greater efficiency in a capital intensive sector.

Going back further in time, we can see that some Japanese business principles developed well before the term circularity existed, align closely with its core philosophy. An example is the concept of "Sanpo Yoshi" (三方よし), which emerged during the Edo period (1603-1867). "Sanpo Yoshi," which translates to "three-way satisfaction," encapsulates the idea that business transactions should benefits all stakeholders involved, including the buyers, the seller, but also the wider community.

These days, in my conversations with Japanese management teams, I frequently see variations of the "Sanpo Yoshi" concept. These modern interpretations of the traditional principle continue to shape Japanese business ethics, and while the specific applications may have evolved, the core idea of balancing the interests of multiple parties - including society at large - remains a significant factor in Japanese corporate culture.

My discussions with corporate executives also highlighted a key difference in Japan's legal approach, with its focus on multiple channels for implementing change rather than just using law and regulations. These channels include soft laws, guidelines and peer pressure, which may seem unconventional or ineffective methods to most foreigners. However, these often prove to be successful, albeit sometimes requiring a longer timeframe.

Japan's Ministry of Economy, Trade and Industry (METI) seems to employ such an approach that favors voluntary corporate initiatives over strict regulatory measures. This strategy isn't indicative of underdeveloped regulations in Japan, but rather acknowledges, in some specific domains, companies' autonomy and expertise in leading changes.

Over the past ten years, I have closely observed this approach in a different context and witnessed its effectiveness. This soft law strategy has proven particularly successful in enhancing Japanese corporate governance, through voluntary initiatives, guided by frameworks like the Corporate Governance Code. It has resulted in significant progress with companies and made dialogue with investors much more engaging and constructive (more details will follow in a future article).

In conclusion circularity does not always provide immediate benefits to consumers, requiring alternative motivators. While government subsidies and incentives can play a role, their impact is often limited in scope and duration, making them insufficient as the sole driving force. Therefore the actors who are most likely to lead this transition alongside consumers are corporations that see the value in embracing new practices. Japan is fortunate to have many such companies that strike an effective balance between stakeholders and adopt a long-term perspective

In the next issue, I will explore how family businesses approach circularity, often making it a fundamental part of their long-term vision.

The Next Article