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.
Media coverage of the Japanese economy dwells on financial news and the gross national product. The international media call the ’90s Japan’s “lost decade.” But in fact Japanese companies were working to adapt to difficult conditions. Unlike Western companies, which are dominated by shareholder capitalism, Japanese companies have struggled to provide benefits to other stakeholders — to employees, former employees, suppliers and surrounding communities. That has meant slower growth but a stronger society.
Japanese vitality is far greater than most foreigners realize. Despite having very high labor costs, Japan still exports about as much as it imports. Exports have remained strong even though the yen has greatly increased in value since the late 1980s.
And financial statistics don’t tell the whole story. An American friend, returning to the United States after two decades in Japan, said that he is surprised by how many things do not work in the United States: Public transportation is slow and unpredictable. Deliveries are often tardy. Products break. Service is shoddy. Parents in many neighborhoods cannot assume that small children will be safe on the streets. All these things, he confessed, work far better in Japan.
Japanese people are concerned that their country no longer has the political standing it did. They are concerned that they must use more of their savings to maintain their standard of living. They fear energy shortages if they close nuclear plants to reduce the risk from earthquakes. They fear China, with a bigger gross national product, as it flexes its muscles and moves into high technology. They are concerned that companies provide fewer permanent jobs and that the society is aging.
But they choose to live in Japan because the crime rate is low, things work, people are polite and considerate, and unemployment is far lower than in the United States. In short, it is still a great place to live despite the worries of Japanese people and the laments of the world’s financial media.