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.

This also explains why the Japanese based their strategy on exports rather than on the development of the domestic market, as the earlier growth countries had done. The markets for the goods the Japanese excelled in making were primarily in the developed countries of the West. Thus Japan’s own development came to be export-led. The surefire cure for any domestic economic slowdown in Japan from 1955 on was an export push. Finally, that Japan’s was both a low-wage and high-productivity economy explains why, after World War II, Japan deliberately concentrated on what we now call smokestack industries, including steel, automobiles, shipbuilding and consumer electronics. These industries are both labor-intensive and, in the West, fully unionized and thus high-wage, which gives maximum advantage to a low-wage competitor with high labor productivity.

For 200 years economists have held that a country cannot possibly occupy the position Japan chose for itself. A country cannot have both a low-wage and a high-productivity economy, for this means being "developing" and "developed" at the same time. High labor productivity comes only after a long gestation period, according to the theories; and by then, wage costs must have risen, must be high. Japan was thus seen—and saw itself—as the one exception to a universal rule. Both Japanese and foreign observers attributed its feat to uniquely Japanese cultural traits which would not be duplicated elsewhere.

But now there is South Korea. South Korea can do today what yesterday only Japan could do, and its performance is even better in a good many industries, including shipbuilding and small computers.

It may be argued that South Korea is also a Confucian culture, but no such claim can be made for Brazil. Yet exactly what has been happening in South Korea—and earlier in Japan—is now also happening in Brazil, where a whole raft of industries is emerging that have both low wages and high productivity: machine tools, armaments (including fighter planes), automobiles, shoes, and so on. The best example is even closer to the United States and even more telling: the maquiladora plants on the U.S.-Mexican border, which employ low-wage Mexican workers—a quarter of a million by now—to assemble complex goods, most of whose components have been made in the United States. These finished goods are then sold in the U.S. market (and increasingly also exported to the rest of Latin America and to Europe). Productivity in a well-run maquiladora reaches U.S. and Japanese levels within two to three years of operation even though its workers had neither skill nor industrial tradition when they started.

What had been seen as the product of a unique element of Japanese culture is, in other words, becoming universally possible. The explanation for this phenomenon involves an American invention dating back to World War I: training.

Adam Smith concluded 200 years ago that high-productivity labor required a century or more of indoctrination and perfection of skills. And what we now call "management"—the capacity to integrate working individuals into a social organization and to plan, finance and market—Adam Smith thought took even longer to develop. Until quite recently all historical experience supported Smith’s conclusions.

But in World War I the United States had to convert preindustrial people, e.g., sharecroppers from the Deep South only a generation away from slavery, into productive industrial workers in a few weeks or months. Modern training slowly spread to peacetime industry after World War I. In World War II it became the foundation for the unprecedented and almost totally unforeseen explosive expansion of American war production which, in the final analysis, defeated Nazi Germany and Japan. World War II also brought into focus the complement to training—management—and made it into something that can be learned and thus developed in a short time, as the Japanese were the first to realize.

Now modern training and management techniques have spread worldwide. As a result even a preindustrial country can attain high labor productivity within a short period. It is still a "developing" nation, however, and thus low-wage, especially if it has a large supply of young people. It is able to do what only Japan had been able to do earlier: compete on world markets by offering quality goods at substantially lower prices.

The emergence of training and management as new factors in the world economy has enormous implications. No developed country can hope any longer to maintain labor-intensive manufacturing industries. It can only remain competitive in manufactured goods if it eliminates blue-collar labor as a cost factor, that is, if it automates. For automation, as we now know, results in lower costs of production than even the lowest wages.

The first to realize this and to prove it, by the way, were a few American companies that successfully used automation to defend themselves against the onslaught of Japanese imports. The very first was probably Xerox in the late 1970s. Having almost lost to the Japanese the market for copiers that it had created only ten years earlier, Xerox reorganized both product line and production process; within a few years it once again became the largest supplier of copiers to the American market. A few years later, some of the American consumer-electronics makers, notably RCA, followed suit. RCA’s automated plant for color televisions in Indiana is now probably the lowest-cost producer in the world. General Electric (which now owns RCA) had obtained all its television sets for many years from Japan or from low-wage countries in Southeast Asia. In early 1987 it moved color-television production back to the United States and into RCA’s Indiana plant.

Another example was the successful automation-based counterattack of Swiss watchmakers against the Japanese. The Swiss had invented the digital watch but did not market the product aggressively. This gave the Japanese the chance to move in through organized imitation. By 1980 the Japanese had come to dominate the largest single segment of the market world-wide: medium-priced, high-quality watches. The Swiss had been almost totally driven out. Then the Swiss rallied. They redesigned the manufacturing process and automated it. They redesigned the product as well and came out with the "Swatch"—a high-fashion, "disposable" watch. Swatches have become a hot product and now account for close to two-fifths of the market.

These examples show that successful automation is quite different from what most people imagine when they hear the word. Indeed, the word is a misnomer but is far too deeply entrenched in common usage to be changed. Automation is not the replacement of humans by robots doing the same work. That can actually raise costs as it makes the productive process more capital-intensive. Automation restructures the process of production. If done properly it is information-intensive rather than capital-intensive or labor-intensive.

Four out of five present manufacturing processes can probably be automated—and will be automated within the next ten or fifteen years. The fifth, especially if it is labor-intensive, will no longer be done in a developed country. It will have been moved to a developing country with low-wage labor.

Blue-collar labor will thus largely disappear as a factor of production in the manufacturing industries of developed countries. There, increasingly, higher production will mean lower blue-collar employment. In developed countries, blue-collar manufacturing labor will join domestic servants—only 80 years ago the largest single employment category in all developed countries—in the limbo of history.

III

These two new developments—the emergence of training and management rather than cultural uniqueness as the true secret of competitiveness, and of automation as the new manufacturing organization—have greater significance for Japan than for any other country. Yet the economic challenge is probably less serious than the challenge to the social compact that has held post-World War II Japan together, a challenge to the harmony, or at least compatibility, between national interest and the interests of business and labor—the reality underlying the myth of "Japan, Inc." Most serious of all, the new economic developments may undermine the national assumptions—held almost as articles of faith in Japan—regarding the position of the country in an outside, "modern" and fundamentally Western world.

Ten or so years ago it was becoming increasingly clear to many Japanese, both in industry and in government, that Japan had to change economic course. Economic growth could no longer be based on a strategy of imitation, that is, on doing better what the West was already doing well. In part this was because newcomers such as South Korea could imitate even better; in part, because the Japanese expected the United States to automate much faster than it actually did and thus to offset rapidly whatever competitive advantage Japan had. Above all, it had become clear that smokestack industries were no longer growing worldwide, and were indeed in global decline. Yet Japan’s economic strategy had been based on becoming the world’s leading low-cost and high-quality "smokestack" producer.

Even more important, the first signs were appearing ten years ago that, even if successful, the traditional policy no longer yielded the desired results. Exports were rapidly losing their capacity to stimulate Japan’s domestic economy. In other words, Japan’s economic growth was no longer capable of being export-led.

Many Japanese were coming to the conclusion that their country’s economic policy had to be changed and its economy had to be restructured. But then came the record oil shock of 1979, which created American demand for the fuel-efficient cars that American industry could not produce. A year or two later the new Reagan Administration began to push up the exchange rate of the U.S. dollar. This at once gave the Japanese a competitive price advantage that was a good deal larger—some estimates are 40 percent larger—than any they had had before. The Japanese export boom was on.

In Japan, as well as in the West, the boom is commonly viewed as a fantastic Japanese triumph. But it may well come to be seen a few years hence as a major disaster for Japan.

The Japanese recognize that their export boom cannot continue for long. Indeed, most informed Japanese accept that in ten years their country’s export surplus will have disappeared or at least shrunk sharply. It is not tenable. The reason is not primarily economic, but rather social. The export surplus is created by adversarial trade. This type of trade creates serious social dislocation in the importing country and is seen as a hostile act rather than as fair competition. The Japanese did not plan to engage in adversarial trade; it was, nevertheless, implicit from the beginning in the imitation strategy, for this strategy aims at mature industries, where processes, products and markets are fully developed. These are by definition industries past their prime, whose markets are shrinking rather than expanding. A newcomer can therefore gain sales only by taking business away from firms that are already in a precarious position. The imitation strategy, moreover, implicitly aims at industries that are large employers of blue-collar labor.

To the extent that the imitator succeeds, he threatens to drive out and to destroy an already weak industry and thus to create major economic damage. But above all, it creates massive unemployment and social dislocation. In addition, the exporting country, seeing itself as a "developing" country, will still maintain protectionist practices for its own infant industries and will not let in imports of manufactured goods from the developed countries to whom it sells the products of its own imitation strategy. It is no coincidence that South Korea, Brazil and Mexico—Japan’s pupils in the imitation strategy—are as mercantilist as Japan and as tightly closed to foreign goods.

Japan’s export surplus thus cannot last—whether it is cut down by protectionist barriers against Japanese goods in the West such as those going up already all over Europe, by the replacement of goods "Made in Japan" with goods made in South Korea or Taiwan, or by the replacement of goods "Made in Japan" with those made in automated plants in the buying countries.

The Japanese economy has become increasingly dependent on the export boom. It may even, as some Japanese observers argue, need ever-increasing exports to stay in balance. It is thus exceedingly vulnerable to anything that threatens the export boom. At the same time, the boom has created a false sense of well-being, if not smugness, in Japan, leaving the Japanese unprepared to redirect economic policy and restructure their industry.

Ten years ago Japanese traditionalists in industry and government asserted that the country would be able to continue its economic policy by substituting the insatiable markets of post-Mao China for the markets of the West. The experience of the last ten years has dispelled this delusion. The record has taught again the old lesson of economic history: no very poor country, no matter how big, provides a major market for the goods of a developed country. By 1984 or 1985, even the most traditional of Japanese businessmen had come to realize that the "insatiable markets" of China are a mirage. In other words, it has become obvious that only developed countries, that is, the countries of the West, can provide Japan with adequate markets.

Thus a year and a half ago, when the dollar ceased to be highly overvalued in relation to the yen, Japan suddenly found itself face-to-face with the fact that it had to find new ways of integrating itself into the world economy.

IV

Japanese business is responding with three defensive reactions and one new, major, offensive approach.

The first defensive response is a shift from competing for markets in the West through price to competing through quality. This shift started when Washington first limited the number of cars Japan could export to the United States. To maintain their profits, the largest Japanese companies, beginning with Toyota and Nissan, changed their product mix. Starting in 1980, they shifted increasingly to higher-priced cars distinguished by quality, service and luxury. Within two or three years the average Japanese car sold in the United States brought 30 to 40 percent more, even after adjustment for inflation. Sony’s consumer electronics such as tape recorders, television sets and video cassette recorders cost up to 40 percent more than other brands—again, competing on the basis of quality and service rather than price.

This did not entirely protect Japanese exporters when the yen became expensive. Their profits went down sharply. But they maintained market share in the United States and in Europe even though they substantially raised their prices.

The second strategy of Japanese business employs rapid automation to defend their cost structure against newcomers such as South Korea. After Xerox succeeded in regaining its market leadership in the United States some ten years ago, the Japanese started to obtain American licenses for automation equipment and then began to improve on the equipment. There is infinitely more awareness in Japan of the urgency to automate and more understanding of what automation really means than in the United States, let alone in Europe. The Japanese have thus clearly taken a massive lead in manufacturing and selling automation equipment.

Japan’s main defensive response to the threat to its world market position is to "go multinational"; that is, to move production out of Japan. Japanese firms began to go multinational before the sharp drop in the dollar’s exchange rate that began in 1985. But the rapid appreciation of the yen since—the Japanese now speak of the "mighty yen"—has turned going multinational into a stampede. Japan is moving manufacturing either to low-wage countries or directly to the countries in which it sells.

Fifteen years ago everyone thought that Japanese multinationals would be a contradiction in terms. Analysts cited many reasons why Japanese companies could not possibly operate successfully in foreign countries: the language barrier, culture, the tight cohesion of a Japanese management group and so on. These obstacles are real, and still exist. But Japan has gone further in a few years toward making its industry multinational than any country has ever done in a comparable period. In 1983, 98 percent of all the goods sold by Japanese companies overseas were produced in Japan; only two percent were made offshore. By the end of 1986 the offshore proportion had risen to five percent of a much larger Japanese manufacturing volume. This is still well below the corresponding American figure of 20 percent, but at the rate at which the Japanese industry has been going multinational in the last two years, it will reach the American proportion in the early or mid-1990s.

As recently as 1985, for example, Japanese-owned companies did not employ anyone in the border city of Tijuana, Mexico. By early 1987 Japanese companies employed a full third of all Tijuana industrial workers who worked for a foreign employer, or a total of 10,000 people. By the end of 1987 Matsushita alone will employ 3,000 people in a Tijuana plant making television sets for the American market. Now that Spain has entered the European Common Market, Japanese companies are flocking in to exploit its fairly low labor costs and are building one Spanish plant after the other. I was recently told in Madrid that in three or four years Japanese companies are likely to be the largest foreign employers of Spanish labor. Finally, the goods that are being sold in America as "Made in South Korea" are, to a large extent, also products of Japanese multinationals. The Hyundai Excel—the fastest growing automobile model in North America last year—was designed by Mitsubishi, which also supplies the transmission and the electronics and holds a substantial interest in the Hyundai Company.

These offshore Japanese plants are new, efficient and enjoy high productivity and low costs. The lowest-cost producers in the Matsushita group, for example, are now said to be the semiconductor plant in Dallas, Texas, and the color television plant in Hamburg, West Germany. Similarly, Honda’s costs in its Marysville, Ohio, plant are now believed to be as low as its lowest costs in Japan. And the plant that Toyota runs in Fremont, California, in a joint venture with General Motors is said to have costs that compare favorably with Toyota’s Japanese plants.

The Japanese have been equally successful in some service industries. In the last few years, the four major Japanese brokerage houses have moved into leadership positions in the capital markets of New York, London, Hong Kong and Singapore. Japanese construction companies, faced with a sharp slowdown of building activity at home, are successfully bidding on major jobs overseas, including a museum in Los Angeles, a water purification complex in Virginia and a petrochemical plant in Algeria.

The Japanese have thus become successful multinationals in amazingly little time. It is a truly remarkable achievement and the true Japanese "management miracle" of the last decade.

Finally, there is Japan’s new offensive strategy—the one least understood in the West. One might call it "outflanking" the West, especially the United States.

Outflanking aims at getting and keeping leadership in those industries that are taking over from smokestack industries as the engines of economic growth. These industries are already well established. The science on which they base themselves is known. They already enjoy large and rapidly growing markets, especially in the developed West. Yet their technology is still changing. Hence it is possible in these industries to look five years ahead and predict what new and advanced technology and products will be needed tomorrow but can already be defined and specified today. This then makes possible organized systematic work today on these future products.

The outflanking strategy, like training and management, is based on an American invention of this century: program research. Program research goes back to the first industrial lab in America, the General Electric lab in Schenectady, New York, built in the early years of this century. It then became the concept on which the famed Bell Labs were organized. The history of American program research is rich with success: the conquest of polio through a planned research program spanning 30 years, the Manhattan Project during World War II, and NASA’s effort to put a man on the moon. Now the Japanese are systematically applying program research to gain leadership in the new major growth industries.

For Japan the results of outflanking have been rather mixed. Ten years ago, when it first became apparent to the Japanese that their traditional economic policy would have to change, they targeted seven industries for systematic outflanking of the West: semiconductors, robots, computers, office automation, telecommunications, pharmaceuticals, and biotechnology and genetics. Only in semiconductors and robots have the Japanese so far attained worldwide leadership. Their success in both owes a great deal to American mistakes: cutting back research expenditures in semiconductors during a temporary slump in the early 1970s, and stopping work on robot development in the short but sharp recession of the early Reagan Administration. These mistakes enabled the Japanese to move in.

In the other five target industries, where America has kept up research and development work, the Japanese are still far from anything that could be called a leadership position. In pharmaceuticals, for instance, Japan today is more dependent on prescription drugs developed by foreign (and especially American) firms than ten years ago. Furthermore, to the extent that Japanese companies have developed important drugs, they are being sold outside Japan by foreign licensees rather than by the Japanese companies themselves.

Outflanking is still imitation rather than innovation. But it is far riskier than the strategy that earlier gave the Japanese success in the export boom. The cue for both comes from Western technology and already-developed Western markets. But in the earlier imitation strategy, the products too had already been developed by the West and were already successful in the Western markets. Outflanking, on the other hand, tries to anticipate tomorrow’s products by projecting today’s trends. And if the trend changes, outflanking will then have produced the wrong products.

This actually happened in computers. When the Japanese decided to make computers a target industry ten or twelve years ago, the large mainframe computer dominated. It was only logical for the Japanese to concentrate their outflanking efforts on mainframes. The technical results are very impressive—they now have world-class mainframes. However, this is not where the growth in computers is. Just about the time the Japanese organized their mainframe efforts, two totally unknown young Americans designed a personal computer, the Apple. At once the dynamics of the industry switched from mainframes to mini- and personal computers. As a result the brilliant work of the Japanese on mainframes has not given them a major market position in computers anywhere except in their own country.

The Japanese are clearly aware that the outflanking strategy so far has not been particularly successful. They are in the process of converting outflanking into a multinational strategy. A good example is the increasingly common joint ventures between a large Japanese manufacturer and a small American high-tech designer (often buttressed by an infusion of capital from Japan) under which integrated circuits for semiconductors are designed by the American partner, turned into semiconductors in the plants of the Japanese partners in Japan, and finally sold primarily to American industry. Similar joint ventures are becoming common in computers and in pharmaceuticals. And the Japanese are teaming up with American universities, especially in the field of biogenetics in which Japanese universities are far behind.

Outflanking, therefore, has yet to be proven. But it is always a mistake to underrate the Japanese—a mistake foreigners have made ever since the Chinese first came into contact with Japan around A.D. 500. Once the Japanese have made up their minds to do something, they are likely to persevere. The Japanese will persevere in their outflanking strategy, whatever adaptation it may require. It alone promises to shift the Japanese economy from depending on the industries of yesterday to the industries of today and tomorrow. The only sensible assumption, therefore, is that Japan will become an even more serious competitor to the West on the world’s markets.

V

There is one major reservation to this assessment: the impact of the needed changes in the economy on Japan’s society and politics, if not its social cohesion altogether.

Japan’s drive to become a great economic power was supported by all major social groups: civil service, big business, small business and labor. For 30 years the task of building Japan into a world economic power has united the major interests in a common goal, which has given Japan a social consensus and created "harmony," to use Japan’s favorite word.

There have been, of course, plenty of conflicts and plenty of competition. There is nothing more competitive anywhere in the world than the Japanese school examination, which determines whether a youngster can get into the right high school and the right university, and thereby determines whether the youngster will gain access to a decent job and a promising career. There is nothing as fierce as the competition among Japanese companies in the same industry, e.g., the competition between Toyota and Nissan in the automobile market, or the competition between two major banks for the Tokyo housewife’s savings. And despite "industrial harmony" the annual battle between large companies and the unions over wages and bonuses is not a sham fight. But for 30 years these were not conflicts between the winner and loser, but conflicts over who gained more.

This congruence cannot survive into the next stage of Japan’s economic development. Whatever decisions Japan makes on economic policy will be antagonistic rather than consensual ones. Whatever directions Japan’s decision-makers choose will represent a victory for one interest over another and a change in economic and social balance.

Japanese business is still very much less multinational than that of any other developed country. And so far, despite all the threats of trade sanctions in the West, there is still mostly only talk of opening Japan to foreign imports. Yet there is almost panicky fear in Japan of "de-industrialization"; the Japanese term is the "hollowing out" of industry.

If Japanese industry successfully goes multinational, Japan’s civil service loses its leadership role. "Administrative guidance," under which Japan’s business is directed toward the economic goals that the mandarins in the major ministries have formulated, no longer works. A Japanese company that goes multinational effectively slips the leash; it generates abroad—that is, beyond the controlling power of the Japanese bureaucracy—the resources for its own growth and expansion. Above all, its economic transactions are increasingly between units located abroad, under foreign jurisdiction, and largely staffed by foreigners rather than by Japanese. Similarly, the moment Japan becomes a major importer of industrial goods rather than a producer, the mandarins have lost power. They can no longer decide which goods should be manufactured in Japan, by whom, under what terms, and so on. At the very best they become regulators rather than leaders.

Furthermore, there is no longer unity within the business interest. Multinationalism and the importation of industrial goods from abroad may indeed be in the best interest of Japan. But they also are in the best interest of big business. It is big business that is going multinational. And big business can expect to be in control of whatever industrial imports come into Japan; they will be funneled through the joint ventures of the big companies. Medium-sized and small businesses, on the other hand, see themselves endangered by either development. The labor-intensive production that multinationals move offshore is precisely what medium-sized and small suppliers provide now. Japanese companies are already buying abroad, in Taiwan, in Hong Kong, even in the United States, parts and components that only a year or two ago they bought from small- and medium-sized Japanese suppliers. The firms that would be most threatened if Japan opened itself to imports of manufactured goods from abroad would again be small- and medium-sized companies.

The decisions that lie ahead for Japan, in other words, threaten to reopen the dangerous fissures of the 1920s and 1930s between big business and small business, between sophisticated corporations which live in the modern world and traditional Japanese businesses which are still struggling with modernization.

But the greatest challenge posed by the economic decisions ahead is the challenge to the social compact on which Japanese society and Japanese domestic peace largely rest: lifetime employment.

Demographically it makes abundant sense for Japanese industry to go multinational. Japan faces a sharp drop in the supply of young people as a result of the "baby bust" of the 1960s. Ten years hence the number of young people reaching working age will be between a quarter and a third less than it has been in the last ten years. And the number of young people available for blue-collar manufacturing work will be even smaller—at most half of what it has been. Two-fifths of all male Japanese now stay in school beyond high school. In Japan, more than in any other country, this means they cannot be hired as blue-collar workers but are available only for managerial and professional employment.

Exports of manufactured goods primarily create jobs for blue-collar workers. Multinational subsidiaries offshore, however, create jobs at home primarily for engineers, accountants, managers and so on. The people for whom Japan will have to create good jobs tomorrow are not blue-collar workers but university graduates. To go multinational is thus the right policy for the year 2000. It is even the right policy for the Japan of today’s young people—at least for half of them. But it makes redundant thousands of today’s blue-collar jobs in the steel, automotive, consumer electronics and machinery industries. Because of the export boom of the last ten years, these industries employ proportionately far more people in Japan than they do in most countries of the West. They pay the best wages by far, and are most heavily unionized. Above all, they are the industries that preeminently offer lifetime employment.

In fact there is already considerable true unemployment in Japan. The official figure stands at three percent. But practically every informed Japanese knows that this is statistical fiction. The Ministry of International Trade and Industry is known to put the real figure at five percent. Many industry observers put it even higher, at around seven-and-a-half to eight percent, well above the corresponding U.S. figure. One reason for this discrepancy is that a good deal of the reduction in employment in Japan has taken the form of forced early retirement of middle-aged people. They face a very sharp reduction—up to two-thirds—in their income. But officially they are not unemployed; they are "retired." Equally important is that large companies do not "lay off" people. They keep them on the payroll—some of them coming to work, many more being "furloughed"—rather than violate their unwritten lifetime employment obligation.

But it would not take much hollowing out of industry to force Japanese industry into massive layoffs. Indeed, they are already in the making. The Japanese National Railroads—notoriously overstaffed for decades and operating at a horrendous deficit—will lay off around one quarter of their total work force in the next few years. The steel industry will lay off one third. Similarly, with the shift of automobile production for the export market from Japan to plants in the United States and Spain, the automobile industry—Japan’s largest single industrial employer—may face forced reductions of up to 50 percent.

In terms of economics and statistics, it should be much easier for Japan than the United States to find new jobs for redundant blue-collar workers, and perhaps jobs that pay just as well. Japan has enormous infrastructure needs. Japan needs to modernize its coastal ports, for instance, in order to provide efficient domestic freight transportation. Japan also needs more high-rise residential units closer to its downtowns that will cut commuting time—now often running to four hours a day for white-collar employees. In contrast to the United States or Western Europe, the new jobs would be close to where the laid-off workers live.

Nevertheless, such changes would cause massive social dislocation; such a shift would fracture the concept of lifetime employment, which guarantees an employee more than just a job until retirement. A worker in Japan becomes unemployable if he loses his job. Wages in Japan are based on seniority rather than on position, rank or performance. A blue-collar worker at age 30 makes twice what a blue-collar worker makes at age 18. So does a clerk or a manager. To pay a 30-year-old man who has a wife and children the starting salary of an 18-year-old or a college leaver is obviously not possible. But it is equally not possible to pay someone who enters a company the wage or salary of the employee with 12 or 15 years’ seniority. The 30-year-old unemployed is thus unlikely ever to find steady employment again.

Nevertheless, the economic problems of shifting workers with lifetime employment to new employers and new jobs can be finessed. The real challenge is psychological and social. Lifetime employment is a status symbol and a powerful one. It is above all a symbol of the underlying harmony between company and employee. It expresses the most profound conviction of modern Japan, that the large enterprise is run primarily for its employees, at least as long as it does not get into severe financial trouble.

The strength of post-World War II Japan—or at least its unique characteristic—is that it sees itself as a community, as a kazoku, or family. Japan itself is a kazoku. So is Kawasaki Steel and the Fuji Bank—and also the Ginza branch of the bank or the toy section in the departo, the big department store. It is this unique characteristic, this identification with the kazoku, the family, that lifetime employment symbolizes. Can Japan maintain kazoku and yet restructure industry and employment?

Japan’s economic policies are criticized in the West as protectionist and mercantilist. Yet when they were first conceived 30 years ago they brilliantly matched the realities of Japan’s economy and its needs. Indeed, no other policies could possibly have worked. Japan was then, as now, totally dependent on imports of raw materials. As a result Japan, everyone agreed, was bound to have a permanent and incurable payments deficit. (Indeed the deficit persisted until 1980, which most people in the West—though few Japanese—have forgotten.) Yet Japan needed industrial equipment. And it had a large, rapidly growing and highly educated population which needed jobs. There was also a need to provide this population with the material incentives to work hard. These needs were met by the joint venture with the foreigner, an arrangement that brought to Japan industrial know-how and industrial production, and with it jobs and material incentives.

While conceived in economic terms, the arrangement equally served Japan’s social and political needs. It provided a common goal and social cohesion. It also restored the leadership position of Japan’s political elite, the bureaucracy, which the war and its defeat had discredited. There are few, if any, examples in economic and social history of a policy design that was both so simple and so successful. Its very success has rendered it obsolete. Nothing, especially in politics, is as difficult to argue with as success. Nothing is more controversial and more emotional, however, than the problems of success.

VI

There is even more at stake in the economic policy decisions Japan now faces, though it is intangible and elusive: Japan’s position in the world, if not its identity.

Since the arrival of Commodore Perry’s black ships, Japan’s long-range aim has been to become a modern civilization while maintaining its own unique culture.

Nothing is more hotly debated in Japan than what "Japanese culture" really stands for. The arguments often become scurrilous. "Genuine" Japanese culture, for instance, is said to be whatever existed 200 years ago when Japan was still closed off to the outside world. Another popular definition of genuine Japanese culture is that it is something that exists only in Japan.

But no matter how vague the concept or its definition, there is no doubt that Japanese culture is a reality. As a knowledgeable Japanese friend phrases it: for Japan to be equal requires Japan to be separate. If Japan were not separate, it could only be inferior, and would soon become a colony of the West.

There is, of course, a fair amount of chauvinism behind this attitude, and quite a bit of parochialism. But at bottom, the Japanese attitude reflects the knowledge that they will never be Westerners no matter how westernized they might become.

The Japanese are arguably more receptive to the lure of foreign goods than any other people. Japan buys proportionately more goods with foreign trademarks and foreign labels than any other country in the world. Each Japanese, for instance, spends three times as much on goods with American labels as Americans spend on goods from Japan. But the American-labeled goods the Japanese buy, whether a computer, soft drink, prescription drug or chocolate bar, are "Made in Japan," not imported. There are more concerts of Western music every day in Tokyo than in any city in the world. The Japanese today translate more foreign books into their own language than any other nation in the world. And yet the achievements that have given Japan artistic leadership in the period since World War II—the Japanese cinema, the modern Japanese wood block print, and the works of such great writers as the Nobel Prize winner Yasunari Kawabata, or Yukio Mishima—though thoroughly modern, are distinctly Japanese.

The traditional Japanese policy puts Japan into the modern world, but it still does not force it to be of the modern world. It gives Japan modern Western civilization. But it keeps the West, so to speak, at arm’s length. Or at least—and this is perhaps the salient point—it leaves it up to the Japanese how far to go in being westernized.

But can this be the case if the economic integration between Japan and the outside world takes the form of the multinational? In the traditional relationship the Japanese stayed at home and their goods traveled abroad. In a multinational, the Japanese move abroad, live abroad, become members of a non-Japanese community and in turn accept non-Japanese as colleagues and even as superiors. To be sure, it is a triumph for Japanese adaptability that the American subsidiaries of major Japanese companies are run very much as American companies; and the Spanish subsidiary of the same company is, in turn, run very much as a Spanish company. It is equally a triumph for Japanese adaptability that Mitsui, a major Japanese trading company, has adopted English as its business language in all its offices. But does this then still permit maintenance of a separate and distinct Japanese culture? Will it not deprive the Japanese of their uniqueness as "Japanese" without making them accepted and acceptable as Westerners?

These may sound like esoteric concerns. But they are real, and cannot be dismissed. They are the ultimate reason why the Japanese today are so worried over the hollowing out of their industry. It is not primarily an economic fear. Indeed, many Japanese accept the economic case for multinationalism and for economic integration into the world economy. It is not even primarily a social fear, although there is a real danger to Japan’s highly valued (and yet quite fragile) social harmony. The fear is what the Japanese call haragai—literally "gut feeling." It might be called an existential fear. The decisions ahead, while about economic policies and economic relationships, are at bottom decisions about the persona of Japan in a modern, that is, Western world. They are decisions about automobiles, about tariffs, about foreign exchange rates, to be sure. But they are also decisions about the integration of the first, and so far only, non-Western country that has fully mastered modern material civilization and has become an economic great power. They are, in other words, decisions not only about the meaning of Japan but also about the meaning of the West itself.

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  • Peter F. Drucker is Clarke Professor of Social Science and Management at the Claremont Graduate School, California. His latest book is The Frontiers of Management.
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