Everyone I met in Japan last fall, during my tenth long trip to that country in 18 years, talked economics and only economics. Even the theoretical mathematician and the elderly abbot of the famous Zen temple were obsessed with the dollar/yen exchange rate, the export surplus, and the cost of petroleum. Japan is indeed undergoing traumatic economic changes. Yet the basic issues facing Japan are not economic. They are changes in social structure and social values. Social policies that have served Japan superbly well for a century are rapidly becoming untenable. These policies were designed to change Japan from a poor, and poorly educated, rural society with low life expectancies into a wealthy, highly educated, industrial society with high life expectancies. Their very success is rendering them obsolete and is turning them into dangers to Japan's social cohesion and her ability to compete economically.

This is true with respect to the Japanese seniority-wage system, under which incomes of all three kinds of employees - manual workers, clerks, and managers and professionals - are determined solely, or at least primarily, by length of service, with an employee at the entrance level getting about one-third of what the same employee, regardless of his job or title, will receive as income after 25 years of service, that is, in his forties. But equally obsolescent is Japan's traditional linkage of education to career opportunities, under which people who finish their formal schooling with "middle school," that is, at age 15, are slotted for a lifetime as manual workers in manufacturing, farming, or service work; with high school graduates becoming clerks or technicians for their entire working life; and with university graduates becoming managers and professionals - and with practically no crossover from one group into the other. The employee's lifetime commitment to one employer and one place of employment - often, and misleadingly, called "lifetime employment" - may equally turn into a serious threat to social harmony, rather than remain its strongest pillar. And equally untenable by now is the policy, as old as "modern Japan," of preventing social dislocation by using economic measures to shield the social order of the "old Japan" while building a radically different "new Japan."


The villain is not the petroleum cartel, Japan's dependence on raw material imports, or the "world recession" - the monsters of today's popular Japanese demonology. If the world recession were really the serious threat to Japan that almost any Japanese maintains it to be, Japan could hardly export enormous quantities of advanced and technologically complex near-luxuries, such as motor cars, color TV sets and calculators, to practically every market in the non-communist world. And while Japan's petroleum bill has, of course, gone up sharply since 1973, her bill for all industrial raw materials, including petroleum and petroleum products, has actually gone down as a percentage both of industrial production and of gross national product. For the petroleum cartel has had the impact cartels always have had, and have been known to have for over 70 years, since a German economist, Arthur Spiethoff, first studied cartels around the turn of the century. Every cartel depresses the prices of other goods competing for a share of the same income category - e.g., other raw materials in the case of petroleum - by as much as, if not by more than, the percentage increase in the price of the product the cartel controls. The drop in raw material prices is altogether a major contributory cause of Japan's record balance-of-trade surplus. Since Japan imports virtually all her raw materials, and since petroleum is a fairly small fraction of total material needs - less than ten percent - Japan, in her terms of trade and in her balance of payments, has actually benefited from the high petroleum price and from the resulting depression in the prices of all other raw materials. (Conversely, the fact that the United States is most nearly self-sufficient of all major developed countries in raw materials means that it is the country hardest hit in its trade accounts by higher petroleum prices. We pay more for imported petroleum while getting less for the raw materials that we produce for export.)

Rather, the villain in Japan's story - if "villain" be the right word - is Japan's population dynamics, and especially Japan's great success in raising life spans faster than any country has ever done before. Seventy-five years ago, the average life expectancy was age 42. Fifty years ago, it was still only 53. It was, therefore, completely realistic for the Japanese to set their "official" retirement age in government service at age 55 in the 1880s and to extend this retirement age to most private employees in the 1920s. Japanese life expectancies, by now, are 73 years for men and 78 for women - the same as in the West. Infant mortality rates in Japan fell sharply in the 1920s to the low levels of the developed West. But the birthrate stayed high until World War II. And after World War II, Japan, very much like the United States or Western Europe, experienced a short-lived, but sharp, "baby boom." A policy that based economic growth on a large supply of young workers - the policy that is expressed in the seniority-wage system - therefore made abundant sense as late as 1965. But the "baby boom" in Japan ended in a "baby bust" in the mid-1950s - some six years before a similar "baby bust" in the United States and ten years before the birthrate dropped sharply in Germany. And as in the West, the birthrate in Japan has stayed at, or below, the net reproduction level ever since.

As late as 1946, at the end of World War II, three-fifths of the Japanese population lived on the land and almost half the labor force worked in farming, and yet Japan had to import rice. Japan reacted by giving top priority to higher rice production regardless of costs. Japan has more than doubled her farm output in the last 30 years and has an unsalable rice surplus. Yet only one-eighth of the Japanese population now lives on the farm, and less than one-twelfth of the labor force is employed in farming.

The Japanese people have shifted drastically the educational structure of the population. As late as 1938 - the last "normal" year before Japan began to mobilize for war - only four to five percent of the young men - one of every 20 - went to the university, and half of the young men went to work after graduating from middle school. Today, more than half of the young men go to the university. There are literally no middle-school leavers of either sex. Practically every Japanese, whether male or female, goes on to high school. Yet Japan's social structures and policies still push heavily the expansion of college education.

In 1970, less than ten years ago, Japan was still the youngest of all developed countries. People over 65 amounted to less than seven percent of the population, which meant that only one out of every 15 Japanese was 65 years or older. And for every Japanese over 65, there were about seven to eight adult Japanese employed and working. The comparable U.S. figures for 1970 were ten percent of the population over 65 and five people in the labor force for every one past retirement age. In Sweden and France, the two oldest Western countries, the comparable figures were then 12 percent and one retired to three-and-a-half working people, respectively. By 1977, Japan had moved to the U.S. level of 1970. By 1990, just a little more than ten years hence, Japan will be beyond the Swedish level of 1970 and will have close to 15 percent of her population in the over-65 age bracket, with a ratio of only three people in the labor force to every one over 65 and past traditional Western retirement age. Japan will, by then, be one of the very oldest of the developed countries - somewhat older even than the United States is likely to be.

The overwhelming majority of Japanese who reach retirement age now are middle-school graduates who therefore have spent their entire working lives as manual workers. At least half the males entering the labor force in Japan are now university graduates and too highly schooled to be employed in any but managerial or professional jobs.1 At the same time, the reservoir of surplus labor on the farm available for manufacturing and service jobs in the cities has by now completely dried up.


Similar developments have taken place in every single developed country. However, they have taken place much faster in Japan than in the West - much faster than in any country on record. The transformation of the Japanese age structure, for instance, required 25 years. The same transformation took 70 years in the United States, 100 years in Germany, and 200 years in France. The educational shift that Japan performed in 30 years took well over 60 years in the United States and a century in Western Europe. And the shift that Japan performed in 30 years, from a near-majority of the labor force employed in farming to agriculture being the employer of the smallest group in the working population, took almost a century in the United States and is not yet complete in some West European countries.

Above all, the impact of these shifts is infinitely greater in Japan than in any country in the West. For the basic policies on which Japan's society is based presume yesterday's age structure, yesterday's educational structure, yesterday's rural society, and yesterday's consumption pattern.

In particular, Japan's economic growth and competitive strength are based on the availability of large numbers of manual workers at the entrance age - that is, on the availability of young middle-school graduates. Under the seniority-wage system, productivity automatically increases, the more young people are being employed. It makes little sense to talk of an "average Japanese wage" or "average Japanese labor costs." Two plants of the same company, using the same equipment and the same methods, turning out the same products and paying exactly the same wages and benefits to workers of the same age, may still have labor-cost differentials of 100 percent, depending on the age distribution of their work force. For every year by which the average age of the labor force in a plant goes up, the plant's labor costs rise by five to seven percent.

This explains why Japanese businesses have put the emphasis on sales volume and have seemed to neglect profitability. If sales volume goes up sufficiently so that young people in large numbers can be hired, profitability takes care of itself. Conversely, if sales volume does not go up, or goes down, so that no young workers can be hired, profitability will inexorably go down - no matter how high the profit margin. And now Japan faces a period in which the labor force will inevitably become older. The more labor-intensive any particular Japanese industry is - and even the most modern steel mill is still highly labor-intensive - the more serious will be the drop in productivity from population dynamics.

No one, to my knowledge, has tried to separate productivity increases in Japanese industry that resulted from improved working methods and modernization from productivity increases that resulted from population dynamics. The best guesses I can find credit population dynamics with about half of the productivity increases of the last 20 years. For during these last 20 years, young people were available in very large numbers, as a result of the "baby boom" and of the large-scale migration of young people from the farms into the cities. On that basis, real productivity growth in Japanese industry - as against the impact of population dynamics - would work out at no more than five to seven percent a year for the postwar period - still respectable by any Western standard, but barely enough to offset the downturn in productivity caused by the imminent aging of the Japanese labor force. And for Japan to maintain her competitive position against such newcomers as South Korea or Brazil, with their lower labor costs, would obviously require an even greater growth rate in real productivity.

This leads to what would appear to be an insoluble growth dilemma for Japan. A growth rate of six percent is the minimum for Japan to sustain her competitive position in the world, given the seniority-wage system and its impact on productivities and competitive position. But the Japanese population, and especially the population available for manual work - that is the middle-school leavers - is not going to grow at anywhere near that rate. A six-percent growth rate in the traditional industries is simply not sustainable on the basis of available manpower and existing retirement policies.

But the population dynamics also threaten Japan's traditional capital supply. Japan has, for 100 years, had the highest rate of savings and capital formation of any industrial country in the world, with personal savings of 35 percent of gross personal income being the norm rather than the exception. This, too, very largely rested on the simple fact that until recently few Japanese survived to retirement age. We have learned, in the West, that as life expectancies go up, capital formation inexorably goes down. A larger and larger share of personal savings becomes "transfer payments" to the older retired people and to "survivors," that is widows of retirees who have died. These "transfer payments," through social security taxes and through payments into employers' pension funds, look like savings. But older people - that is the recipients of these "savings" - do not save; they consume.

Japanese government economists calculate that the Japanese personal savings rate would be lower by at least one-third, if not a full half - that is, it would run at 17-24 percent of gross personal income - if Japan today had the same age structure the United States has, where there are 32 million people who are on social security, including eight million "survivors," as against a working population of 92 million. This would still be one of the highest savings rates in the world, and on a par with those of West Germany and Switzerland. But it would be a low savings rate for Japan, and perhaps too low a savings rate in the light of Japan's future needs. For Japan, to offset the impact on productivity of an aging labor force under the seniority-wage system, will have to step up capital investment tremendously to obtain the real productivity increases she needs to remain competitive. Yet capital formation will almost certainly drop sharply, just when Japan needs capital formation the most.


There is one category of young people in which Japan will experience no shortage: university-educated people, prepared to be managers or professionals, either in the private or the public sector. In fact, there is already a surplus. Despite the sharp drop in the birthrate, the supply of university-educated young people in Japan during the next ten years will be many times what it was only 20 years ago. It is still likely to increase, for a university degree is the only way to have career opportunities in Japan.

Knowledge workers will thus be Japan's major, and most important, resource. And Japan's economic strategy will increasingly have to be to export knowledge work and its fruits, rather than manual work and its fruits. Increasingly, Japan will have to go in for the form of economic integration that, for want of a better term, I have called "production-sharing" - that is, for economic integration under which the developed country performs those stages in the productive process that are management-intensive, capital-intensive, and technology-intensive, while the abundant labor resources of young manual workers in the developing country perform the stages that are labor-intensive, with the final product sold and consumed in the large markets, that is in the developed countries. Japan, alone of all the developed countries, has seen the need for systematic work on "production-sharing." The Ministry of International Trade and Industry (MITI), several years ago, switched to a policy of encouraging the export of entire manufacturing plants rather than of the products of such plants. And while MITI so far still expects these plants, e.g., a petrochemical plant designed and built by Japanese in Algeria, to sell its products in other markets, MITI is increasingly willing to accept payment for such a plant in the products of the plant - that is, payment for the Japanese-designed and Japanese-built petrochemical plant in Algeria in the form of petrochemicals to be sold in Japan.

Increasingly, this will mean that Japanese managers and professionals will design, build and perhaps manage consumer goods plants in developing countries - plants for shoes, textiles, automobiles and electronic products - that are going to be paid for by their own output, to be sold to the Japanese consumer in Japan. It is hard to see any other way of finding employment for the one resource in which Japan will have a continuing surplus - that is, highly schooled people, qualified under the Japanese system only for managerial and professional work.

Such a policy is obviously exceedingly difficult in any country, and likely to run into determined opposition on the part of unions, old industries and politicians alike. It is doubly difficult in Japan because of the traditional policy under which the employee is committed to one employer and cannot easily find other employment, once he is past the entrance age. Under the Japanese seniority-wage system, an employee, and especially a low-paid and low-skilled employee, such as a manual worker, cannot normally find a job past age 30 or 35. At that age, he would have to be paid twice the entrance wage. But since wage is based on seniority, he can only be paid the entrance wage. He is, therefore, basically unemployable. If he loses his job, he becomes a "problem worker," very much the way in which the samurai of old became a ronin and reduced to banditry if his lord dismissed him or if the lord lost his fief. The worker of 35 who loses his job cannot, normally, expect to become a "permanent employee" anyplace. He becomes a "casual employee," who will never again have employment security, never again have seniority, never again have a good job, and never again, in fact, work for a major company.

"Lifetime employment," that is the right of the worker to his job, developed as an answer to the burden that lifetime commitment to the job imposed on the Japanese worker. At that, only about one-quarter of the Japanese labor force has the security of lifetime employment. Women, by definition, are "temporary employees," who are expected to leave the labor force when they marry - and are expected to marry by their mid-twenties. And employees in the "old industries" - that is in the service industries, the small shops, the small artisans' factories and on the farm - have no lifetime employment either. It is reserved for the male employees in government and large businesses - and is not even universal there. But precisely because of the Japanese worker's constant and nagging fear of becoming a ronin, lifetime employment has been the core of Japanese labor relations and the pillar of social order and harmony in Japan.

Now it is rapidly becoming a threat, both to the Japanese worker and to Japanese society. But any effort to change the system would not only cause the labor unions directly involved to fight very hard indeed in opposition, but would engage a host of other groups that are in one way or another taken care of by the economic enterprises or institutions in which they work, albeit on a basis that falls short of strict lifetime employment. In essence, the practice reflects a whole concept of responsibility in the society, as well as a symbol of fairness. Any attempt to modify or to eliminate it would strike at deep emotional roots throughout Japanese society.

Today, to deploy her one abundant resource - highly educated people - Japan needs to be able to liquidate fast the most labor-intensive and least productive stages of production, i.e., old low-skill industries. But these industries - whether textile industries or shoe factories - are, of course, precisely the industries that employ the largest number of low-skilled and older workers. Even without the barrier to reemployment that lifetime employment and the seniority-wage system together create, these workers, while relatively small in numbers, would present a serious economic and social problem. These workers will, of necessity, cling the more tenaciously to lifetime employment, the less productive they and their industries become. Yet, unless they can move out of their old employments and into new ones, Japan will find it increasingly difficult to find work for the tremendous potential of highly schooled knowledge workers who constitute Japan's major and potentially most productive capital investment.

The alternative - and one that is hardly realistic anymore - is dumping high-cost, labor-intensive products, at a loss, in foreign markets that are bound to have surplus capacity and redundant over-aged labor in precisely the same industries as Japan.


No other country has had as purposeful and as successful an educational policy as has Japan. That career opportunities are dependent almost entirely on educational attainment was deliberate and planned. It was meant to make economic progress the engine of educational advancement. A famous story is told of Shibusawa Eiichi (1840-1931), the Meiji statesman who left a high government post to become Japan's leading industrial entrepreneur and her first banker. When approached for a loan by a successful businessman, Shibusawa turned the application down because the man was not a university graduate. This was not snobbery. And Shibusawa knew perfectly well that success in business does not depend on a sheepskin. But he had decided earlier to make managerial positions the monopoly of university graduates so as to give young Japanese an incentive to stay in school and to acquire higher education.

As a result, Japan has become the only genuine "meritocracy" around, in which birth and wealth count for almost nothing and educational attainment for almost everything. By now this has outlived its usefulness. School is turning into a nightmare. There is increasingly an oversupply of university graduates. But this has not, at least so far, resulted in a lessening of the pressure on young people to get into the right educational track and to acquire the university degree that is the passport to all opportunity and preferment.

On the contrary, during the last few years the pressure has reached a fever pitch. It now begins with the child's application to nursery school, that is before the age of three. There is an entrance examination - and little tots, barely able to walk, are being pushed into taking ballet lessons, into learning arithmetic, and into learning a few words of English. And the pressure keeps on building up. More than half of all middle-school students in Japan attend juku - afternoon and evening cram schools that drill for the exams. According to a study that the Ministry of Education released last fall, middle-school students aged 12-15 spend almost nine hours each day after school doing homework and going to the juku. It is normal for a middle-school child to work until two o'clock in the morning each day, and to take a sample test of the high school examinations every Sunday for years on end. Senior high school students spend "only" eight hours a day in after-school work and juku. The pressure is becoming more and more intense with the suicide rate among teenagers, and even among preteens, reaching alarming proportions.

But worse, school instead of being accessible to everyone on the basis of merit is becoming increasingly expensive. To be sure, school - from kindergarten on - is nominally free. But to get into the "right" school requires larger and larger "voluntary contributions." The most expensive school to get into is medical school. A candidate, even if his father is a physician, will have to pay about $100,000 in "voluntary gifts" and "voluntary presents" to the faculty members on the admissions' committee to have his application even considered. A friend of mine, the widow of a Japanese clergyman, who is working as an administrative assistant in a small government agency, will have to find $4,000 by next April to have her son admitted to the entrance examination of a supposedly free public high school. If he fails, she will not get the money back - and only one out of every ten candidates passes. Then the boy will have to go for a year to a juku - at a cost of about $7,500 - pay another $4,000 in "voluntary contributions" and try again. And the Ministry of Education study referred to above makes clear that these are not unusual but, on the contrary, fairly standard fees and financial contributions. For not to get into the "right" high school means not to get into the "right" university four years later; this would debar the boy forever from access to better jobs and career opportunities. Not to go to high school at all is a life sentence to manual labor, from which there is no appeal.

At the same time, the rewards are beginning to lose their luster. With the shortage of middle-school leavers, and therefore of manual workers, and the abundance of university graduates, the differential in the pay of the two groups is bound to shrink. In the 1950s and 1960s, when the demand for university graduates was high while the supply was still low, the differential became greater than it had been traditionally. It is already back to where it was before World War II. It is bound to go down, and fairly rapidly. University graduates are already beginning to have difficulty finding "good" jobs, and in many cases jobs of any kind - especially if they have no technical qualifications. And while the salaries of university graduates, once they have found employment, still go up with seniority, the promotional opportunities are rapidly shrinking as most organizations find themselves well supplied with highly schooled people in their early and mid-thirties.

Again the lifetime employment system aggravates the problem. The university graduate can, as a rule, not leave the employer with whom he starts. And more and more of the graduates even of the "prestige" universities have to start in dead-end jobs with employers who have no future themselves - without hope of being able to switch jobs, no matter how well they perform. For the time being, these conditions are likely to increase the premium on going to the "right" schools, and with it both the emotional and the financial pressures. But there is a distinct possibility of a collapse of the system, or of an explosion - and surely a system that puts such extreme pressure on children and literally forbids them to have any leisure time, any interests of their own, any learning of their own, can hardly produce educated adults. It is likely to produce people who can take examinations, but who do not know how to learn.2


Japan is considered the most "protectionist" country by foreigners - and of all the complaints foreigners have about Japan, this is the one the Japanese themselves understand the least. For, what to the foreigner seems to be economic protection, appears to the Japanese to be self-defense of Japanese society against the Westerner's cultural imperialism.

From the early days of "modern Japan," after the Meiji Restoration of 1867, Japan has always defined her policy as using Western instrumentalities to maintain the essence of Japan. And economic policy is the foremost Western instrumentality thus used. "Old Japan" means the distribution system in which large numbers of people are employed at rather low wages by small wholesalers, in "Papa, Mama and Rosie" retail shops, and in small workshops making traditional goods and acting as suppliers to modern industry. It also means a system of small family farms growing rice. But while there was once a cultural rationale for the farm policy, it has long become economic insanity. The underlying economic premises of Japan's farm policy are the fear of a rice shortage; the belief that a country as dependent as Japan on imported raw materials has to keep as large as possible a proportion of the population on the farm and out of the consumer society; the conviction that as poor a country as Japan has to discourage its people from eating anything but rice and fish; and finally the notion that the fish catch is capable of being expanded indefinitely while the rice crop is finite and will always be inadequate. All these premises have been proven fallacies during the last ten years.

It has been Japanese farm policy to encourage rice growing and to discourage growing anything else. A Japanese farmer gets a larger subsidy, the less suitable his land is for growing rice. The origin of this policy was the fear that Japan could not produce enough rice for her own domestic demands - which was still a rational fear 25 years ago. By now the policy has produced an unmanageable rice surplus, while at the same time the cost of the rice subsidy has become so high that the rice subsidy fund has become bankrupt. And since the rice that the subsidy produces is grown on land not suitable for growing rice, the surplus rice is of poor quality and could not possibly be sold on the world market. In respect to proteins, Japan has similarly pursued a policy that, however rational its origins, has become bankrupt. It has been national policy to encourage fishing and to discourage and to penalize every other production of proteins, whether vegetable, such as oil-bearing crops, or animal, such as livestock or poultry. But the fishing yield has long been stagnant and is now going down fast, with the growing resistance of other nations against Japanese fishing practices that threaten to overfish and to destroy the fish population of major fishing zones. The extension of sovereignty, and with it the control of fishing 200 miles from the shore, which by now has become general, was directed in large measure against the Japanese threat to marine ecology, whether real or perceived.

These policies were designed to ensure low-cost food for Japan - they have had the opposite effect for at least ten years now. Japan has, without doubt, the highest food costs of any major country - twice those of the United States and perhaps 50 percent higher than those of the most expensive and most protectionist countries of Western Europe. Meat costs about four times what it costs in the United States or in Western Europe - and even twice what it costs in the Soviet bloc countries. Fish, at the same time, has become almost as expensive as meat, and food costs are still rising fast. The Japanese inflation rate in the last few years has rarely fallen below ten percent a year. Food prices have been rising at a rate of 30 percent a year. At the same time, food production - other than rice production - has remained stagnant, and in some cases has actually gone down.

The high cost of animal proteins has acted like a suction pump on the cost of all other food products. 1977 was a year of bumper harvests of such things as Japanese oranges and vegetables - with crops so large as to be almost unsalable. Yet the costs of these products have kept going up. There is now virtually no dish - even soba (buckwheat noodles), which used to be what peanut butter sandwiches are to the American diet - that can be bought for less than $1.50 a portion.

Food and education are basic economic costs. They are the costs of forming the human resource. Both, in Japan, are out of control. And as they keep rising, the real income of the Japanese family is going down. Even well-to-do people, during my last trip to Japan, had begun to ration food. Even well-to-do people are hard pressed to find the increasing sums to finance their children's access to education. That the basic costs of the Japanese economy are going up so fast will endanger the long-range basic cohesion of Japanese society. It is the greatest threat, both to Japan's economic position in a competitive world and to her social order.


Some of the policies that Japan will have to develop - including some that only a few years ago were unthinkable - are emerging with reasonable clarity, and are beginning to be discussed in Japan. The government is beginning to press for delayed retirement - at age 60 instead of 55. There is talk of retraining redundant workers and of placing them in new employments where there is demand for labor, e.g., shipyard workers in automobile plants. There are the beginnings of mobility for highly qualified young professionals. And there is some slight movement toward tempering the seniority-wage system with wage measures based on productivity.

But the policies that are most needed - and needed most urgently - are still beyond Japanese political will and social imagination. What is needed most is a sharp cut in prices for the domestic consumer. Japan suffers from excess inventory, both of raw materials and of finished goods. Her policy, these last few years, has been to maintain domestic prices - if only to protect the domestic distribution system - by conducting a gigantic clearance sale abroad. That policy has to come to an end - it can only destroy Japan's capacity to export altogether. Now is the time to bring prices down in the domestic market, both to answer the charge of "dumping" and to boost the domestic economy.

There is need for a shift in agricultural policy from one that encourages the production of unsalable high-cost rice to one that, like the British farm policy, maintains farm incomes while giving the consumer low food prices. Especially there is need for a shift to a farm program that encourages farmers to take poor rice land out of rice production and to shift it into producing feed crops, oil-bearing crops, and animal proteins. Japan could probably supply far more - one estimate is at least two-fifths - of her growing demand for animal and vegetable protein, other than fish (which is likely to keep on declining), by domestic production on land that today produces rice at high cost.

There is need to encourage "production-sharing" - that is, the offshore performance of labor-intensive work, with the product sold on the Japanese market, in exchange against export of knowledge and technology.

Seventy years ago, the general manager of the Mitsui Group, then as now one of Japan's leading industrial concerns, worked out the solution to the seniority-wage conundrum. When some of the Mitsui companies had to lay off employees in the recession that followed the Russo-Japanese War, he organized their systematic placement with other Mitsui companies, in which the new employer would pay the wage befitting the employee's seniority, i.e., the entrance wage, while the Mitsui Group itself would make up the difference between that wage and the wage befitting the employee's age. The sum that the Mitsui Group had to pay was ludicrously small, yet Mitsui could maintain employment security without employment rigidity. Some such policy will be needed on a national scale in Japan, together with a policy of systematically retraining and replacing employees of industries that cannot be maintained under Japanese labor costs, population structures and education structures.

What needs to be done is not so very difficult to discern, albeit difficult to do. The one area, however, in which no one in Japan can see a solution is that of education. At most, there is talk - and only talk so far - of loosening the linkage between the "right" university and the "prestige employments," under which careers in major companies, major universities, and practically all government agencies are reserved to the graduates of a few schools. But the "tracking" of people that reserves career opportunities to the graduate from the "prestige" university and that, in turn, creates what are increasingly unbearable emotional pressures and financial costs, is still beyond challenge, with no substitute for it in sight or even imaginable.

For the first time in 20 years, I left Japan not wholly confident about the country's future. So far, it seemed to me, few people in Japan have faced up to the fundamental issues. But Japan has shown unparalleled capacity throughout her history for the 180-degree turn and for forging, almost overnight, a national consensus to impose on herself radical change. Japan has also shown unparalleled capacity, throughout her history, for social innovation. This capacity, going back almost 1,500 years, may indeed be Japan's greatest strength. Japan may well suddenly face up to her problems of success and to the need to maintain the essence of Japan in new forms and through new policies. But also, Japan faces a turbulent, a difficult and a dangerous period - a period in which there will be surprises for Japan, as well as for the Western world, with which Japan is now so strongly linked, and on which she is so heavily dependent. The economic problems and needs - the resistance to Japan's trade offensive, the currency chaos, the petroleum cartel - may be the catalysts. But the real decisions will have to be on social structure, social policies and social values.


1 The best available Japanese study concludes that university graduates make up 58 percent of the males now entering the labor force in Japan. This is the highest percentage in the world. The comparable U.S. figure is 48 percent.

2 So far as I can tell, there are as yet few signs of the kinds of explosion of resentment and rejection that I am suggesting is possible. During this visit to Japan, I heard for the first time of apparently qualified students dropping out of the university-but these appeared to be only among members of families with such strong connections that the children would still have substantial advantages. My hunch is that the system may not show many signs of erosion up to a certain point, but that it may then change very rapidly once, so to speak, it boils over.

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  • Peter F. Drucker is Clarke Professor of Social Science at the Claremont Graduate School in California. He is the author of The Age of Discontinuity and Management: Tasks, Practices, Responsibilities, among other works.
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