[paper] Adaption or Stagnation- The Japanese Dilemma

T. J. Pempel: Director of Institute of East Asian Studies, and Professor of Political Science, University of California

T. J. Pempel is the Director of Institute of East Asian Studies, and a Professor of Political Science, University of California, Berkeley. His research and teaching focus on comparative politics, political economy, contemporary Japan, and Asian regionalism. Also he is the chairman of the American Advisory Committee of the Japan Foundation, and is on the editorial boards of several professional journals. His major works are “The Politics of the Asian Economic Crisis, Regime Shift: comparative Dynamics of the Japanese Political Economy”.

That Japan’s economy is in trouble is obvious. That Japanese are sick of hearing this truism reiterated on a daily basis, however, is even more obvious. And they become sicker still when they hear Americans repeat over and over that Japan’s problems would magically vanish if they just took the sage advice of knowledgeable Americans, abandoned their idiosyncratic practices and accepted the wisdom of market (i.e. American) principles. Too many Americans are quick to presume that what works well in the U.S. represents the ‘one right way’ and that the world would be a much better place if everyone in it would simply accept this obvious reality. Such American triumphalism in 2003 is as tedious to foreigners (and to many Americans) as was its Japanese counterpart in 1988 or 1990, particularly since American economic successes have become so much more problematic in 2003 than they were a few short years ago. So I begin with a promise: I will not suggest that Japan’s solutions rest on adopting American economic practices. Still, the American experience, as I will suggest, is not totally marginal to that of Japan.

THE STAKES ARE HIGH

Failure to revitalize the Japanese economy is not simply a matter of concern to today’s Japanese. It is not enough to assume that they are the only ones who are negatively affected. First of all, any serious long term loss of economic vitality on the part of Japan has profound effects on the global and regional economies. A strong Japanese economy has been central to the economic stability of the OECD countries, as well as to the rest of Asia. Japan has long used its economic and technological prowess as its major diplomatic tool. Any decline in that prowess reduces Japan’s capacity to influence global and regional events.

At a minimum Japan’s economic troubles have major impacts on the rest of the Asian region. Particularly during the latter half of the 1980s, large numbers of Japanese companies moved major portions of their operations abroad, including establishing many production networks in machine tools, electronic machinery and automobiles in the rest of Asia. The result was a substantial boost to growth across the entire East Asian region and one that was extremely positive for numerous Japanese companies as well. Asian growth also reconfirmed the image of the flying geese model, with Japan safely at the front of an Asian hierarchy, unchallenged by any other country in the region.

The economic crisis of 1997-98 saw a massive withdrawal of Japanese investment from Asia. From about $275 billion in outstanding loans to the region in 1997, Japanese banks cut their regional loans to $101.5 billion in mid-2001. Asia now accounts for 10.5 percent of total international lending by Japanese banks, compared to about 25 percent before the crisis. Further, it is not just the level of Japanese lending and investment to Asia that has declined, the share of Japan’s outward capital flows directed to Asia has also declined markedly.

To many in Japan that may appear irrelevant: why worry about the rest of the world when my job or my company is at stake? But loss of short-term competitiveness can have long term consequences, particularly as countries gain or loose valuable infrastructural leads with big ripple effects across a nation’s entire economy.

This is certainly seen with China which has begun to take the diplomatic, if not the economic, lead in many areas: agreement to negotiate a bilateral free trade pact between China and ASEAN; the key source of influence on matters of non-state terror; or as a major source of U.S. imports from Asia. In addition, Shanghai, Hong Kong and Singapore have gained serious edges over Tokyo as financial hubs and service sectors. Similarly, deregulation in South Korea has made the country the world’s leader in broadband hookups to the internet, with roughly three times the per capita rate of penetration as Japan. Taiwan, Singapore and Hong Kong also lead Japan in broadband access. Japan remains by far the most economically powerful country in Asia, but it is no longer the universally acknowledged lead goose in a flying geese pattern. Many other sources of economic dynamism have sprung up in Asia to challenge Japan’s leadership in critical economic sectors and the longer it takes for Japan’s economy to recover, the more difficult it will be for the country to catch up.

The second point to consider is that the longer Japan delays in coming to grips with its current problems, the more the difficulties and costs of solving them will be passed on to Japan’s next generation. As the country’s national debt mounts, paying it off consumes an ever larger share of the national budget. Today some 20 percent of Japan’s national budget goes simply to service the nation’s mounting debt. As the country’s population ages the taxpaying workforce shrinks. And the longer current policies of public borrowing continue the more difficult it will be for the subsequent generations of Japanese citizens to escape the mounting debt.

Such high stakes make it even more vital that Japan’s problems be dealt with sooner rather than later. The longer it takes the country to come to grips with its economic troubles, the further behind its neighbors Japan will fall and the more difficult it will become for subsequent generations to catch up.

OLD WAYS WON’T WORK

A common definition of insanity is continuing to do the same things while expecting different results. Far too many of Japan’s leaders embody this definition of collective insanity. Despite thirteen years of anemic growth, ever falling stock and land prices, collective deflation and rising unemployment, massive bankruptcies, and the industrial world’s largest public debt they continue to pursue failed policy measures in the apparent belief that ‘this time’ will be different.

Without a doubt “the Japanese economic model” of the past brought amazingly successful results. Given such successes, many Japanese—whether political or business leaders or general citizens--must find it difficult to believe that what worked so well in the past is not still the key to success. However, what companies and national economies do well changes with time as conditions within a country and around the globe change. Much of what worked well for Japan twenty years ago can no longer achieve the same results because of changes within Japan, changes in Asia, changes in global finance, and changes in world politics. Certainly, Japan can no longer expect to devote huge portions of its domestic capital to manufacturing within a protected Japanese market and then to use the home markets as a base from which to export to the rest of the world. The most valuable component of any effective model is its ability to self-adjust to altered circumstances. And so far, Japan’s has not done that terribly well. What is now vital is for Japan’s leaders and its citizens to reexamine its past practices in light of the new conditions Japan faces at home and abroad, and to retain those elements of the model that are still suitable and to discard those which have now become impediments.

Changes within Japan are well known. The country’s population is much older with fewer younger, cheaper, taxpaying workers. Labor and land costs have become vastly higher than two decades ago. Much of the production of Japanese-owned companies has moved offshore. The Big Bang has made for major changes in the financial sector. These and other changes at home make it increasingly difficult for many traditional Japanese firms and industries to do well following their past business models.

Equally importantly, the world has become a vastly different place. It is no longer a world divided into two competing spheres by the Cold War. Hence, Japan is no longer as vital a strategic and economic partner to the U.S. as it once was. China has become an increasingly important global actor both to the United States and within East Asia changing both the strategic and the economic calculations by the U.S. China is just one country that can now out compete Japan on most products that depend on inexpensive labor costs. Furthermore, cross border movements of investments have become vastly more important than the movement of goods. International capital markets move much more quickly than in the past, with non-governmental actors playing a vastly larger role than central banks and national governments. Japanese-owned companies now produce a larger portion of Japan’s exports overseas than they do in Japan. Companies, in turn, including Japanese owned firms, are now far freer to raise capital, outsource production, and shift markets with vastly less deference to national governmental monetary or regulatory policies than they once showed. Governments, including the Japanese government, now find it vastly more difficult to conceptualize and carry out any “national” economic policies. In the famous phrase of Robert Reich, it is increasingly difficult to know “who is us?” The summary, although overused, term that encompasses these and other such changes is ‘globalization.’

GLOBALIZATION IS NOT A ONE WAY STREET

Two things about globalization deserve noting. First, despite the presumptions of many of its critics, globalization is not an integrated force of alien origins that must be accepted in toto or resisted on all fronts. Globalization is not like a fixed dinner course, but more like a smorgasbord or a Viking, made up of many diverse dishes from which one can choose based on one’s appetite, preferences, and also the suggestions of earlier dinners.

A second thing is that Honda Accords, Canon digital cameras, sushi, J pop, just-in-time management, and karaoke are as integral to globalization as Citibank, Coca Cola, Windows or rap music. Japan is a stimulator as well as a recipient of globalization. Globalization has its sources around the globe and the speed with which any particular product, process or fad spreads to other parts of the world is a function, not only of supply, i.e. the power of those who provide and market it, but also of demand, i.e. its inherent appeal and applicability to those who embrace it. Japan can be as much a source of global forces as its recipient. Globalization is thus a two way street allowing traffic to flow in both directions.

To date, however, Japan has been far better at exporting things that require changes in other parts of the world than it is in opening itself up to foreign things that might challenge Japan’s existing patterns. This is certainly clear in Japan’s pattern of exports. For forty years Japanese manufactured products have captured large shares of world market. Japan has been a far less ready recipient of manufactured goods from Europe or the U.S. Even more dramatically with foreign investment: while most of the other major industrial democracies have incoming foreign direct investments ranging between $1700-8000 per capita, foreign direct investments into Japan total barely above $200 per capita. It is time for Japan to adjust its presumptions about the dangers of foreign influences within the castle town.

A less macro-economic and more down-to-earth example can be found in tourism. Prime Minister Koizumi recently told a number of his advisors that he wanted them to make Japan a tourist attraction for the world. Without a doubt, Japan has much that should make it a logical destination for many foreign travelers. A huge number of historical and architecturally rich temples, shrines and gardens; the night life and corporate dynamism of many of its cities; photographic natural attractions in the mountains and the coasts; spas; technological sophistication in communication and transportation; high quality fashion goods and a ‘different’ culture with warm and helpful people are but a few of the possible attractions that would attract non-Japanese.

Yet, Japan suffers from a massive tourism imbalance. While sixteen million Japanese tourists departed in the last year for which statistics are readily available only five million foreigners visited Japan. Even more dramatically, Japanese spend some Y3.2 trillion abroad while foreign tourists spent only Y 402 billion in Japan—an even more dramatic 8:1 imbalance. Koizumi is right to be concerned and to suggest this as a target for correction.

But to a non-Japanese such as myself who reads and speaks Japanese and who has lived in Japan on and off for a total of perhaps six years since the early 1960s, I find the idea that Japan would attract huge numbers of tourists laughable. Despite its many “tourist attractions,” and despite the obvious personal generosity and warmth of almost all Japanese people toward foreigners, the country still presents major hurdles to any potential tourist not found in most other industrialized countries or even many non-industrialized spots. Anyone who has traveled in Europe, for example, could quickly make a long list of reasons why Japan is less hospitable to foreigners. For example, few Western tourists now carry travelers’ checks. Instead most take advantage of the fact that most North American and European ATMs are equipped to do so, and they use their home bank cards to withdraw cash in the local currency wherever they travel, twenty-four hours a day. Japanese banks barely connect to one another, let alone to foreign banks. Few are open all day, seven days a week. Foreigners, whether long term residents or tourists, can simply not rely on Japanese ATMs to access their home accounts.

Or consider the complexity of trying to navigate Japan’s complex trains in any language other than Japanese. I for one am still never quite sure about the distinctions among joshaken, tokyuken, jiyuseki, and shiteiseki. I recently bought a ticket on the shinkansen from Kyoto to Tokyo and sought to pay with my Visa Gold card. No, I was told, we only take JTB cards; I had to pay in cash. Such impediments may seem trivial to Japanese, who are familiar with them and who can adjust. But to a foreign visitor they are major impediments not faced in most other industrialized countries. Put such specific problems on top of the well-known difficulties of high cost lodgings, lack of romanization, sign, map and address difficulties, and it becomes much clearer why more foreigners do not pick Japan as a ready country to visit.

AMERICA’S ECONOMIC TURNAROUND

I promised that I would not suggest that Japan emulate U.S. economic policies. Nevertheless, there are certain powerful lessons to be learned from relatively recent American economic experiences that transcend specific policy choices. Less than fifteen years ago, the United States was in a collective funk. Throughout Washington and across the country, there was widespread trepidation that America had lost its collective ability to compete economically. Much of the industrial heartland had turned into a ‘rustbelt.’ Inflation was rampant; the budget deficit and trade deficit were ballooning out of sight; an underclass of welfare recipients had become a permanent part of numerous urban landscapes; job growth was minimal; government regulations, many argued, were stifling business ingenuity and profits. Meanwhile, Japan’s marvelous record of success, along with that of the Asian NICs, as well as many countries in Western Europe bolstered American fears that the greatest economic vigor lay elsewhere in the world. Yet, by the end of the 1990s the pessimism had given way to the realization that America once again led the world in economic vitality. What had happened?

To any Japanese leader looking at the American turnaround and wondering about the economic prospects for Japan three things are critical. First, despite the claims of political acolytes from both political parties, no single ‘key’ policy or ideological direction accounts for America’s turnaround. Rather, the reversal came from several seemingly diverse, but ultimately interlinked, actions in separate fields. Second, the reversal was not at all natural or easy. On the contrary, it required actions that were controversial politically and that necessitated fundamental and painful deviations from longstanding patterns. Third, and most critically, the changes required a redefinition of how America related to the world at large.

On the first point, America’s revitalization was the result of several seemingly separate but ultimately reinforcing policy changes during the Reagan, Bush 41 and Clinton administrations. A major tightening of monetary policy from 1979 well into the 1990s curtailed longstanding inflation. Regulatory policies were loosened in numerous areas. Targeted tax cuts encouraged investments in new service sector businesses. The national labor supply expanded quickly as large numbers of women and immigrants entered the work force. The ballooning budget deficit was brought under control largely by program cuts in domestic discretionary programs as well as by certain tax hikes, but ultimately by enhanced economic vitality in new sectors. Extensive reforms in social welfare reduced national governmental expenditures while simultaneously breaking into the seemingly ceaseless cycle of poverty that had created a semi-permanent, and often economically hopeless, underclass.

Together, these changes transformed the U.S. economy from its earlier reliance on manufacturing and ushered in an economic renaissance based on services, with a particular boost from information technology. Despite the failure of many early start-ups and a drop off in many technology stock prices, there can be little doubt but that American companies now lead the world in most areas of IT, and that the United States has gone through a transformation from manufacturing to services that has been at least as dramatic as the change one hundred years earlier from a reliance on agriculture to manufacturing and that has been far more dramatic than the similar transformation in Japan or Western Europe.

A second point follows quickly from this. Even though the end results may be quite positive in macro-economic terms, the transformation process was viciously political and hardly linear. Numerous groups and geographical areas opposed all or part of these changes, demanding exceptions to policies that others were contending would be ‘good for the country.’ These included: organized labor, numerous business associations, hundreds of interest groups, welfare workers and welfare recipients, government officials both nationally and locally, tax lawyers, ethnic groups, and many others, not to mention male chauvinists, anti-migrant nativists, some religious fundamentalists, and not a few people opposed to any changes on general principles. Considerable political will by an ideologically diverse group of leaders was needed to press these changes, even though with hindsight they may look very ‘logical.’

Finally, and perhaps most importantly, these changes required a rethinking of some fundamental ideas about America’s relationship to the broader world. For most of the postwar period the United States had been an unchallenged economic leader. It came out of World War II with a GNP that was six times larger than that of the number two country, Britain. U.S. exports and foreign direct investment spread throughout the world. Few American manufacturers faced serious competition in home markets from foreign products until at least the mid-1970s, and many were free from such competition for another decade or so. It was easy enough for Americans to conclude that what worked in the U.S. would ensure its continued global dominance economically. Clearly, that was not the case and American presumptions were dramatically altered by the oil shock, Japanese and European competition in a host of upscale and sophisticated products, changes in global finance and the like. Though it did not come easily or quickly, eventually American business leaders and politicians repositioned the country better to take advantage of contemporary, not past, American strengths and to enter into a more dynamic give and take with the rest of the world.

REASSESSING JAPAN’S STRENGTHS AND WEAKNESSES

Ultimately, Japan, just as America did with such pain, must rethink its interaction with the rest of the world. This means, not a complete discarding of what brought Japan its strengths in the past, and not the wholesale embrace of some perceived model of “globalization” emanating from the U.S. or elsewhere. Rather it demands a hard hearted and candid look at contemporary Japan’s assets and liabilities as well as the new world conditions. From such a perspective, it is clear that as a country, Japan has tremendous assets that can continue to be a source of strength: numerous highly competitive global companies; a well educated population; an extensive social and economic infrastructure and many other attributes. These must be retained and built upon.

The process of turning these raw assets into refocused strengths, however, requires fresh ideas and new perspectives. Where can such ideas come from? Clearly, Japanese government officials and senior executives should be expected to begin ‘thinking outside the box.’ But there are new sources of ideas that should also be considered. I see at least four that are not being well tapped in current debates—youth, women, foreigners, and NGOs. All are currently somewhat marginal to Japan’s power circles. But all have the potential to provide fresh new ideas.

Consider younger Japanese. Confucian traditions and Japanese culture certainly value age and experience. And now that I am sixty years of age, I can appreciate the value of wisdom and perspective. But I can also still remember how reluctant I was nearly twenty years ago to give up my trusted typewriter when my university required all of us to purchase personal computers. I had no intuitive grasp of this new technology and for the first few months, I was completely baffled. Even today, though I use the internet, email and electronic banking with some regularity, much of it is still somewhat alien and non-intuitive to me in ways that are incomprehensible to my much younger students.

One imaginative American CEO, aware of the ways that his company’s more senior managers were (like me) not relying quickly and easily on available IT introduced an inexpensive but revolutionary procedure within his company. All senior managers were required to take on a ‘junior technology apprentice.’ This younger employee, typically only a 20-25 year old, would meet with the senior person for an hour a day for several weeks to provide them with hands on training on the various uses of the computer such as email, internet, power point, B-to-B ordering, and spread sheets. To the younger workers all of these were as simple and familiar as preparing a packet of instant ramen would be to any Japanese housewife. But to most of the executives these were initially as frightening as swimming solo in a tank full of sharks. Yet, after a few weeks of work with their new apprentices, all of the senior executives had not only overcome their reluctance but they were enthusiastically using their new skills to great advantage at work. The result was a massive jump in the company’s overall productivity as well as in corporate morale.

Women are also potential sources of intellectual vitality and new perspectives. Some of Japan’s most creative women have started their own companies and proven to be top flight executives. Others have been dynamic voices for changes in social welfare and educational policy. Yet female parliamentarians remain relatively few and usually on the margins of power; female leaders in major corporations or government agencies also remain rare. Hence, services that would make it easier for women to become full participants in the modern work force are hard to find. Yet many Japanese men in power continue to wonder why so many Japanese women are reluctant to marry, have large families or actually emigrate abroad.

Foreign practices can also be major sources of new inspiration. This was proven in Detroit when American manufacturers were forced to confront the sudden loss of market share to Japanese and German auto imports in the 1970s. Only after studying the actual manufacturing successes of their competitors did American auto companies begin to change, adopting numerous practices from Toyota, Honda, Volkswagen, Saab and Volvo among others. The benefits from foreign competition became clear to Japanese firms that have been successful abroad. Virtually all have succeeded by making better products. In a similar way, almost all Japanese, despite their initial reluctance, are now united on the benefits to Nissan of having partnered with Renault and Ghosn. In contrast, companies that have been protected from such competition in the Japanese home market have often managed to avoid any serious adjustment and remain alive despite their lack of longstanding viability.

Finally, a word should be said about NPOs. These too are hardly at the heart of Japanese power circles but many of them are brimming with new ideas, some perhaps impractical, but many more that are likely to bring out greater Japanese creativity in problem solving. One of the more vibrant of these groups is Peace Winds, which has extensive experience in delivering humanitarian aid in to countries in need. Peace Winds sought inclusion at the January 2002 Tokyo conference on Afghanistan; Suzuki Muneo and the Ministry of Foreign Affairs blocked them because they were seen as a challenge to their monopoly of Japan’s foreign assistance. In fact, however, groups such as Peace Winds can provide important catalysts to rethinking old patterns of official thinking. And given the recent track record of official Japanese thinking, such new ideas should be welcomed.

CONCLUSION

Japan’s politics, economics and society were tightly woven together in ways that were highly beneficial economically from the end of the war until the bursting of the bubble. Those tight connections today, however, serve as a barrier to creativity and change. In many ways, Japan’s current problems mirror many of those faced by the U.S. a decade or more ago—not so much in the specifics, but in the need for the country to go through a fundamental reorganization of many pieces of its former model so that the country can again return to a position of global and regional leadership. The United States made such a change; it is now Japan’s turn. Today’s leaders owe it not only to current citizens, but also to the next generation of Japanese to act quickly for if they do not, the country will fall further behind its neighbors, making the task of catching up ever more difficult. The ideas of how to change are certainly available in many circles. What is now critical is for the inner circles of Japanese power to become open to inputs that they have not traditionally welcomed.