Two prominent Japanese professors recently authored the Fukao-Kwon report, which revealed that from 1996-2006, when total employment in Japan decreased by 3.5 million, young, newly established firms and foreign companies were the only ones to create net job growth. This report also suggests that new companies have higher success rates than older, established companies in Japan and that entrepreneurs clearly need to be the central catalysts in Japan’s next chapter. Have the great innovators of the post-war years – Toyota, Nippon Steel, Sony, etc – become so huge and successful that they have lost their propensity to create disruptive new technologies?

At a gathering I hosted of 40 experts from Japan at our conference center in Washington DC earlier this month, the notion indeed emerged that Japan needs to launch a rebirth by being more open, building a better startup ecosystem, bringing in more foreigners and sending more Japanese overseas. Japan also needs some good examples of Japanese startup success that have understood the importance of globalization; startups that convince others that taking risks is alright, and political leadership that encourages entrepreneurial behavior even if only to keep Japan’s big businesses competitive and dynamic. Japan needs to celebrate the great Japanese pioneers and entrepreneurs who built some of the most innovative companies in the world and pose the entrepreneurial imperative to a new generation.

The good news is that there is already a cacophony of local startup communities in Japan populated by smart, global, open, socially-motivated founders driven to do good and do well. Impact Japan, has done an outstanding job with the Honda Foundation of seeding a next wave of startup fever, of the like felt at Startup Weekend, TEDx and Japan Satellite events in Tokyo and elsewhere in Japan. Today, we cannot talk about Japan’s entrepreneurship ecosystem without mentioning Open Network Lab (“Onlab”), a startup incubator equivalent to a Y Combinator or TechStars in the U.S., which has already provided three batches of startups with mentorship, office space, and a suitably small amount of cash in exchange for a piece of equity.

Hironori (Hiro) Maeda, who is directing Onlab, made an interesting observation in an interview with TechCrunch:
“Launching a startup, where there is a lot of uncertainty and unsuitability, does not fit a culture where harmony and stability are strongly emphasized. However, a lot of younger Japanese are realizing that the nation itself is at a point of uncertainty. The employment rate of college graduates have reached the lowest point in the past decade and the Japanese earthquake has made the people in entire nation uncertain about their future. The uncertainty and the increasing interest of the success that Silicon Valley is experiencing has made more younger Japanese take bigger risks.”

This observation reminded me of my last visit to Japan to meet with entrepreneur, author and visionary, William Saito. On that trip I attended Startup Weekend Tokyo and saw that one participant had been moved to tears by the experience. The dynamic in the room spoke of a new Japan embracing startups and risk, engaging with foreigners, communicating openly and effectively.

With these bottom-up startup communities and their flourishing initiatives already helping people take risks, government should focus on the best rules and incentives to nurture a startup culture by establishing policies that do not hamper the efforts of entrepreneurs. I made the point to the group attending the session at our Washington offices that no government program will ever compete with bootcamps like Startup Weekend, or accelerators like Open Network Lab. New firm creation cannot be “governed” and traditional public sector linear thinking is unsuitable for fostering entrepreneurial activity. Entrepreneurship will always be messy and as such leaders need to stick to policy and the pulpit.

For example, with Japan’s regulatory system for businesses within healthy parameters (it ranks 20th in the Ease of Doing Business Rank and 22nd in theIndex of Economic Freedom), government leaders might see the greatest benefits by focusing on encouraging more citizens to join the bottom-up communities and inspire those who would otherwise not consider entrepreneurship as a path. For example, leaders in Japan could join the dozens of heads of state and Ministers elsewhere in actively participating this November in Global Entrepreneurship Week which typically attracts more than 7 million participants at 33,000 activities in 125 nations. The initiative helps legitimize entrepreneurship, puts successful national role models on a pedestal and allows policymakers to see firsthand what is working among their own so they can focus on creating the best legal environment for nascent entrepreneurs and young firms to thrive in their country.

In terms of new policies for entrepreneurship, public dialogue should focus on the inventors and makers of things and on how to increase the number of new starts and raise their success rate so that more companies can become high-growth firms. Japan succeeded in policy reform before. A study has shown, for example, Japan’s bankruptcy reform in 2002-2003 succeeded in stimulating entrepreneurial activity. Yet the country still has a long way to go make its institutional environment favorable to new firms. Japan might now look for example, at how to leverage the patents created at universities. According to the UN World Intellectual Property Organization (WIPO), Japan universities are the second most prolific international patent filers among higher education institutions worldwide. It would be also be interesting to tackle the bureaucratic hurdles in starting a business. While its overall ease of Doing Business Rank is 20th, Japan’s Ease of Starting a Business rank is 107th among 183 economies. Then, there is the issue of how to open immigration to boost the talent within the emerging startup communities in Japan. The American Chamber of Commerce in Japan has an interesting report with policy recommendations in this regard.

Japan is building a “Generation Re-create.” If there ever was a tipping point in a nation, it is right now in Japan. Just maybe mother natures’ cruelty to this nation a year ago might have one silver lining. If it could drive a shift in attitudes toward risk and failure and open Japanese society to globalization, I fully expect Japan to once again be a world leader in the creation of young high growth companies.