In 1979, Japan was still growing rapidly. Since then, as its salaries reached the levels of advanced European countries, Japan has lost jobs to South Korea, Taiwan and other countries that acquired technology while enjoying lower labor costs. Growth rates in those later-developing countries have, in turn, begun to slow for similar reasons.
The transition to slower growth is difficult for all countries, but the problems were especially severe in Japan because of the structures it put in place to promote rapid growth, including permanent employment, close ties between large industrial producers and their subsidiaries, and systems to channel national savings into infrastructure and industry. When growth slows in America, companies can discharge workers and break links with suppliers relatively easily, but Japanese companies cannot.
Japan and other rapid later-developers rationally chose not to reinvent the wheel but, rather, to borrow and buy technology. Schools and universities were designed to teach lessons from advanced countries, rather than to foster independent analysis and creativity. Once Japan caught up with the West’s technology, it was not easy to transform educational goals from learning to creativity and analysis. Even when Japan became one of the world leaders in technology, it lagged others in creativity.
After World War II, Japanese industrial firms made special efforts to gain a reputation for high quality and to compete globally. In contrast, the country’s financial system promoted savings at home, kept foreign banks out and did not seek to expand abroad. When growth at home slowed in the 1990s, Japanese financial firms were unprepared and found it difficult to compete in international markets.
Perhaps the most difficult transition in Japan in recent decades is in the political sphere. The close cooperation between the bureaucracy and the Liberal Democratic Party (LDP) from 1955 to 1990 rested on the fear that socialists and communists might seize power. When Soviet and Eastern European communism collapsed after 1989, the glue that had united the LDP melted away. Since then, leaders change almost annually, there is no structure to provide policy coherence and no one cultivates future leaders. If the LDP returns to power, as expected, this will not easily change.