February 6, 2001

In Stagnant Japan, Economic and Social Ills Match

By HOWARD W. FRENCH

OKYO, Feb. 5 — For anyone living in gloomy Japan these days, it is easy to forget that just 12 years ago, this country was seen by the United States and much of the world as a juggernaut, 10 feet tall and rising.

From academic journals to the popular imagination, Japan was perceived as a ruthless predator that borrowed American technology and factory methods to take over the industries of yesterday, today and tomorrow, from steel, transistor radios and televisions, to automobiles, semiconductors and computers.

Whether they praised or criticized Japan's methods, the most influential books in the 1980's — with titles like "Japan as No. 1" — predicted that Japan would dominate virtually every industry worth being in, and that a United States in decline would be left to play a supporting role.

But the two countries could hardly have followed more different paths, and after more than a decade of slow growth, bankruptcy and record unemployment in Japan, and a resurgence in the United States, the change in the views about Japan is as revealing as any statistic.

With Japan's edge being dulled in industry after industry, either by the United States or by newer rivals in Asia, one of the most widely talked about Japan books these days, written jointly by two Japanese and one American scholar, bears the stark title "Can Japan Compete?"

And increasingly, experts say Japan will only be able to compete if it looks at the problems more broadly, addressing not just its economic institutions but its politics and the very way Japanese live their lives.

At a discussion devoted to Japan at the recent gathering of economic leaders in Davos, Switzerland, there was much grim talk about the depressed stock prices, the possibility of a banking collapse and what has become a perennial flirtation with recession. In his closing remarks at the session, a leading Japanese industrialist, Minoru Makihara, the chairman of Mitsubishi, reportedly raised a copy of "Can Japan Compete?" and recommended it to the audience.

"The title says it all," said Hirotaka Takeuchi, one of the authors and dean of the new School of International Corporate Strategy at Hito tsubashi University in Tokyo. "Of course the answer is, `Yes.' But the real question is: Will Japan compete? Does it have the will to compete? The government has basically mistrusted competition, and we are paying the price for that now."

The dramatic sweep of this reversal of fortunes between the world's two largest economies was also captured symbolically in a bit of news last week: The Sega Corporation, a pioneer in an industry that has long been a Japanese franchise, announced that it would stop making video-game consoles, concentrating instead on providing software for newer competitors, including recent entrants into the field like Palm Inc. and Microsoft.

Although they are virtual corporate newborns, Palm and its technological sibling Handspring together already have more than half the market value of Sony, the leader in video-game technology and the most prestigious name in Japanese consumer electronics.

Just as Americans became used to having Toyotas in their driveways and Sonys in their living rooms, Japanese are increasingly having to come to terms with products that say Intel or emit Microsoft's chimes, and with American chains like Starbucks and Costco, which are proliferating.

For some Japanese, the transition is not comfortable.

If Japan's recent problems were limited to a single industry, like games, they could be brushed off. Instead, in broad fields that have long been strongholds of Japanese industry — from electronics to auto parts to computer chips — there has been a decline or a conspicuous leveling in performance.

Indeed, this mirrors Japan's overall economy. While the United States grew at an annual clip of 3.6 percent from 1992 to 2000, Japan limped along at a 1 percent growth rate.

The collapse of stock prices here in 1990 is usually considered the starting point for the crisis. But in a recent analysis titled "Shrinking Japan," the American economist Richard Katz, citing World Bank statistics, showed that the percentage of global exports coming from Japan peaked at 8.8 percent in 1986.

"Japan is virtually the only major country whose exports as a share of G.D.P. were no higher in 1999 (10.4 percent) than in the 1950's (11 percent)," Mr. Katz wrote in the newsletter The Oriental Economist. The share of gross domestic product that American exports accounted for doubled over a similar period, and now slightly exceeds Japan's.

In fact, the most worrying elements of Japan's economic condition are not reflected in trade data at all but are reflected in internal data: Whether one considers bankruptcies, unemployment or funds for the national pension system, Japan is approaching postwar lows.

The fearful talk in Tokyo financial circles for more than a month now has been the possible collapse of the banking system. Banks never recovered from the bursting of Japan's speculative bubble in 1990 and remain saddled with an untold (and undisclosed) sea of unrecoverable debts. If defaulting creditors set off a wave of failures, it would mark the second time in two years that Japan has experienced a banking crisis.

"The danger for Japan is not cataclysm," Mr. Katz said in an interview. "The danger is corrosion. There is a great reluctance to believe that the system is broke, and people are living proof of the adage, If it ain't broke, don't fix it."

There is one statistic that seems to have caught people's attention, and it may be the most damaging and difficult to deal with: the shrinking population. Japan has one of the highest percentages of older people in the world, with almost one in five — 26 million people — over 65. And their numbers are growing about 1 million a year.

At the same time Japan's fertility rate, the average number of births per woman of child-bearing age, dropped to 1.34 last year, the lowest since 1947 and far lower than the 2.08 needed to maintain a stable population. The number of Japanese is now expected to fall from 127 million now to 100 million by 2050, and only 67 million by the end of the century.

As it stands now, if current trends continue, today's teenagers could face two and a half times the current rates of taxation and expect 30 percent less in pension benefits just to keep the system afloat.

The list of purely economic problems is well known, from the debt hangover caused by foolhardy lending during the bubble, to the heavy regulation that affects almost every aspect of life, to the expensive subsidies that have long cushioned large sectors from competition.

But increasingly, economists and experts are saying Japan's problems are first and foremost political: This is the only major industrial democracy that for the last half century — except for one brief interruption — has been governed by the same political group, the Liberal Democratic Party.

And the Liberal Democrats' biggest legacy, economists say, is an aversion to a free market and, above all, to competition.

Just last month, as stock prices in Tokyo flirted again with a 10-year low, Shizuka Kamei, one of the party's most powerful politicians, proposed that the government even find a way to prop up Japanese stocks.

"There are stupid people who say stupid things, like, `Just leave it to the market,' " he said. "That's no joke. In a situation where stocks fall for reasons which have nothing to do with the economy, politicians must shoulder their responsibilities."

But Tadashi Nakamae, an economist who is president of Nakamae International Economic Research, and a fierce critic of the government, said, "Japan has had a more socialist economy than, say, the Eastern Europeans.

"Our ruling philosophy has been the convoy system, which means that every company must grow together at the same pace, without true winners or losers. As long as Japan was growing fast, we were blinded to the negative side of this system. But it's time to realize that this kind of structure is impossible to maintain."

Many economists are no less scathing in their criticism of the advice that the United States has offered to Japan.

The Clinton administration advised Japan to irrigate the economy through heavy deficit spending to avoid a steep recession. Economists say this spending has wasted huge sums of money on public works of dubious utility and merely postponed the day of reckoning for thousands of unprofitable protected companies.

The Bush administration has already quietly shifted the direction of Washington's advice, suggesting that Japan begin reducing its huge fiscal deficits and hinting that the United States will help keep the dollar strong. That, in theory, would help Japanese exporters.

But growing numbers of economists say the postwar obsession with exports here is a major part of the problem. According to this view, the welfare of Japanese people has been sacrificed in the name of mobilizing the nation's capital toward exports instead of developing goods for local consumption. Japan's electronic brands are known worldwide, but many middle-class Japanese do not own a clothes dryer or a dishwasher.

Thus, this argument goes, the Japanese have been stuck with tiny, expensive homes in overcrowded neighborhoods, high prices for consumer goods and few affordable options for day care for children or the elderly, which meant women had to remain homemakers to care for both their children and their parents.

"The Japanese focus has never been on making Japanese richer, their lives happier or more convenient and predictable," said Haruo Shimada, an economist at Keio University. "All of our energy has been focused on competing with the United States.

"Japan's government has done all sorts of things to help export industry in this cause, but almost nothing for ordinary people. Our future growth will come from an untapped market: investing in satisfying the family, making life happier for people."

Copyright 2001 The New York Times Company