Japan's Choices

Japan faces wrenching economic and social decisions in the next few years—decisions that will determine its economic direction for years to come.

As every thoughtful Japanese knows, the export boom of the last few years cannot possibly go on. It could not have lasted even if the dollar had remained grossly overvalued against the yen. For Japan’s basic industrial strategy of the last 30 years—to do better what the West is already doing well—is rapidly becoming obsolete. And Japan’s latest strategies—to "go multinational" and to "outflank" the West’s growth industries—while powerful indeed, are incompatible with such fundamentals of Japan’s economic policy as "administrative guidance" and lifetime employment. Indeed, they may be incompatible with the very tenets on which Japan has based its relationship to the outside world since Commodore Perry’s black ships forced it out of self-imposed isolation a century and a quarter ago.

The choices Japan makes will determine how the world’s youngest economic great power—the only economic great power to emerge so far in this century—integrates itself into the world economy. But Japan’s decisions will also profoundly affect the international economy itself.

II

Japan’s enormous economic success since World War II has largely rested on its having been the only country that had both the low labor costs of a developing nation and the high labor productivity of a fully developed one. Now this is simply no longer true.

All earlier major economic powers—Great Britain between 1770 and 1840 or Germany and the United States in the second half of the nineteenth century—entered into the first rank by being innovators. The Japanese alone made it as imitators—precisely because the combination of low wage-costs and high labor productivity enabled them to catch up with and then overtake the pioneers.