Fixing What Really Ails Japan

CONVENTIONAL WISDOM

Not so long ago, the entire world stood in awe of Japan's postwar economic miracle. Some Japanese policymakers boasted that they had invented a new and superior form of capitalism. But today, Japan is stuck in the slump that just will not quit. In policy circles there is talk of a defeat, this time at the hands of Anglo-Saxon capitalism. Yet despite the depth and the persistence of the slide, remarkably few question Japan's underlying economic model. Everyone agrees that some reforms are needed but assumes that the economic engine is basically sound, if only the government would jump-start it with a massive kick of credit. Only recently, confronted with company failures and huge losses, have most Japanese begun to realize the magnitude of their problem.

The prevailing consensus over Japan's failings in the 1990s centers around three related explanations. One is the collapse of the so-called bubble economy of overvalued equities and real estate. Imploding asset prices have sent ripples through the banking system, making credit scarce. A second explanation argues that Japan is overregulated by meddlesome government ministries. The third claims that bureaucrats have mismanaged macroeconomic policy by raising taxes, failing to stimulate internal demand, and clinging to export-led growth for too long.

Stimulating the economy and restoring the flow of capital are necessary. But quick fixes and macroeconomic adjustments will not do enough. What ails Japan runs deeper, has been brewing for decades, and is rooted in the microeconomics of how Japan competes. Our research challenges the conventional wisdom about Japan's unparalleled rise in competitiveness. Since the 1980s, this stream of scholarship has offered two related explanations for Japan's meteoric rise: one points to a set of government policies, the second to a set of common corporate management techniques. Both explanations have been widely accepted and have had a profound impact on the rest of the world. Policymakers and business leaders in other countries have tried to clone the Japanese model or to borrow its parts. In Japan and elsewhere, it has been appealing for a variety of political and cultural reasons to believe that Japan had invented a new and intrinsically superior form of capitalism, one more controlled and egalitarian than the Anglo-Saxon version.