Japan, Inc. is in disarray. Individual Japanese companies compete just as aggressively as before on the world market. But no distinctive Japanese policy exists any more, least of all in economics. Instead short-term fixes and panicky reactions to the unexpected are the norm. As in the West, these are no substitutes for policy, and they are having little, if any, success. Part of the problem is that none of Japan's available choices looks attractive: none would produce consensus. They would instead divide the nation's major groups--bureaucrats, politicians, business leaders, academia and labor. Japanese newspapers are full of plaints about "weak leadership." But that is only a symptom. The root problem is that the four pillars on which Japanese policy has been based for over thirty years have collapsed or are tottering.

The first pillar of Japanese policy was the belief that Japan was sufficiently important as a bulwark against Soviet communism that the United States would subordinate economic interests to the maintenance of Tokyo's political stability and to the U.S.-Japanese strategic alliance. During the 1970s and 1980s U.S. Ambassador Mike Mansfield repeatedly asserted the priority of the U.S.-Japanese political relationship over all other considerations. The same priorities clearly existed in the Bush administration. The Japanese assumed, correctly, that no matter how loud the American bark, the bite would be only a nip and draw no blood.

Japan must now question this assumption. Will the Clinton administration subordinate U.S. economic interests, real or perceived, to alliance politics? To be sure, America declares itself committed to the defense of Japan, were the country attacked by armed force. However, the Japanese are beginning to realize that the United States will increasingly exact a substantial economic price for this political support--and just at a time when China, Japan's big neighbor, has become the world's one major power that is increasing its military strength. The Europeans, who never subscribed to the Mansfield thesis, are less encumbered. In the next few years, Europe will be deciding not only how many Japanese-made goods to let in, but also whether goods made within Europe by Japanese companies can be sold freely and in large quantities on European markets.

The second pillar of Japan's economic policy was the belief that its businesses could dominate world markets by projecting Western trends and then doing better and faster what the West is doing slowly and halfheartedly. Such a strategy, first used in the early 1960s by Sony for transistor radios, followed a few years later by camera- and copier-makers, has hit one bull's-eye after the other. It can still be a winning strategy, as witnessed by the way the Japanese outflanked European luxury cars on the American market in the last few years, or speedily took over the fax machine business from the Americans who invented it.

But these successes are no longer a sure thing. The strategy has failed in computers. Projecting where ibm was going and then attempting to outmaneuver it made the Japanese miss the growth industries of work stations and networking. In computer chips, the Japanese fumbled the shift to high-value, dedicated circuits and instead concentrated on low-value commodity products in which they are now being hard pressed by producers from low-wage countries. In telecommunications, the Japanese missed the swing to over-the-air telephone transmission (cellular phones) where world market growth is likely to occur. In consumer electronics and high-definition television, where the final returns are not yet in, the Japanese are again on the defensive instead of delivering knockout blows.

Even though quantitatively Japan's export surplus with the United States rose again in 1992, qualitatively it is deteriorating. Almost three-quarters of it is now being earned by the products of one old industry with saturated markets in every developed country: automobiles. Even there the Japanese are no longer taking business away from U.S. producers but rather from European imports. To be sure, General Motors is still losing market share, but now to Ford and Chrysler.

Japan's third traditional pillar of strength was the assumption that the country's domestic economy was largely immune to outside troubles. Underpinning this belief was the preponderance of imported foodstuffs and raw materials rather than manufactured products. In a recession raw materials prices slide faster and farther than manufactured goods prices--that is, the prices of Japan's exports. Hence both Japan's terms of trade (its relative economic strength) and balance of trade (its absolute economic strength) tend to improve when the world economy goes down.

This equation still works. It largely explains the persistent Japanese trade surplus of the last few years. The depression in the world prices of foodstuffs and raw materials--now in its second decade--constitutes a massive subsidy to the Japanese economy. It gets its raw materials and its foodstuffs for about half of 1979 prices, in relation to the prices of manufactured goods. Yet at home Japan has now been mired in recession for more than two years. Employment, output, profits and investments are still declining, and all four, it seems, are determined by trends in the world economy from which they should be immune.

The fourth pillar was the commitment to long-term policy, with the flexibility to make exceptions, to cater to special interests and to seize opportunities. It was periodically reviewed and, if necessary, updated or revised. But the strategy shunned short-term, quick fixes whose ineffectualness would jeopardize national consensus.

Commitment to long-term policy was maintained for 25 years, from the 1960s until 1985, when floating the overvalued U.S. dollar led to a 50 percent drop against the yen in just a few months. The Japanese panicked at the threat to their exports, two-fifths of which went to the United States. To shore up lifetime employment and social stability by replacing the lost sales and profits of exports, the government rushed into a frenzied campaign to stimulate domestic consumption.

Whether Japan's manufacturers really needed such a heavy shot of economic adrenalin is debatable. Most adjusted quickly to the lower value of the dollar and to lower export earnings. Needed or not, stimulating domestic consumption could not have come at a worse time for the Japanese economy. It occurred just when purchasing power and lifestyles were shifting rapidly from a consumption-shy older generation, still scarred by wartime and postwar deprivations, to the "yuppies" of the "baby boom." The government policy thus kicked off the biggest spending spree in economic history. It also ignited a speculative firestorm in real estate and stock prices. Three years ago, at the height of what the Japanese now call the "bubble economy," shares on the Tokyo Stock Exchange were quoted at 50 or 60 times pre-tax earnings (that is, at an after-tax yield of less than one percent). Real estate in Tokyo's better office districts was mortgaged for up to 50 times annual rental income.

The bubble burst in early 1990 with the stock market losing half its value in just a few months. If savings banks, commercial banks and insurance companies had been forced to write down to realistic values their holdings of shares and real estate loans, there would have been massive financial collapse. Instead of organizing a managed and controlled retreat--akin to U.S. management of Latin American loans and real estate loans by commercial banks and thrifts--Japan is pretending the losses never happened. Massive government purchase of stocks and bonds accounted for one-third of all purchases on the Tokyo Stock Exchange in the spring of 1993. The official line is that the markets "must" go up as soon as the economy recovers, allowing the government to sell its equity holdings and even to make a profit. But that has never worked. The very existence of such holdings puts a lid on the market. And every day of postponement in facing financial reality makes the problem less tractable, more controversial, more divisive and more politically corrosive.

The official line in Japan is still that the country will return to the traditional long-term policy once the situation becomes "normal" again. It is doubtful that any informed Japanese, in or out of government, takes this profession seriously. The likelihood is that Japan will not, in the foreseeable future, return to having an economic policy. Rather, it will increasingly look like the major Western countries, whose economic irresolution and lack of direction the Japanese have been deriding for years. There will be no more "Japan, Inc.," no consensus, and no one policy-setting group steering the economy through "administrative guidance." Individual companies, industries and interest groups will go their own way, both domestically and internationally. Instead of "policy" there will be ad hoc, short-term measures but perhaps also increasing immobility (probably accompanied, as in the West, by increasingly grandiose promises).

This policy discord will be universally deplored in Japan as it is in the West, but it will not be universally unpopular. Leading manufacturers, especially those who are successful on the world markets, prefer a return to the days of a consistent economic policy in the hands of a powerful government bureaucracy. Japanese business leaders are disenchanted with "administrative guidance," which committed them in the last ten years to such strategic blunders as the emphasis on mainframe and supercomputers and the maintenance of the monopolies in telecommunications and telecommunications equipment.

If there is no consensus policy and no administrative guidance, individual Japanese companies should become tougher competitors on the world market. Their response to market opportunities and market challenges will be quicker. They are likely to work even harder on the three prongs of competition with which they attack Western competitors: control of the economics of the entire production and distribution process rather than accounting control of the costs of each step; zero-defects quality; and shortening development, production and delivery cycles by spending money to save time.

Already individual companies have shifted from the traditional strategy of outguessing and outflanking Western competitors to genuine research aimed at innovative breakthroughs. Just as some individual companies in the West have prospered by doing things entirely their own way, so some Japanese companies can be expected to prosper greatly, by doing things their own way rather than the "Japanese way." But it remains questionable whether the Japanese economy as a whole will do any better without a consistent long-range policy and strong leadership than have the short-term-driven Western economies of the United States, the United Kingdom, France or Germany.

Taking Japan Seriously

The United States should, but probably will not, refrain from gloating and "Japan bashing." A financial crisis in Japan is the last thing the United States or anyone else in the developed world needs. Nor is it in America's interest for the world's second-largest economy to have a disorganized and drifting government or an increasingly disoriented society. Such circumstances could only mean that the Japanese would start hunting for a scapegoat and would find it in Americans.

Washington will rightfully press Tokyo much harder to eliminate the obstacles to the entry on fair terms of American goods, services and investments. Japan is not nearly as protectionist as American public opinion believes--or else American manufactured-goods exports to Japan would not have almost doubled in the last ten years--particularly in high-technology products. In fact as a proportion of total U.S.-Japanese trade, the deficit is now only a fraction of what it was ten years ago. And Japan is still the best customer by far for American foodstuffs and forest products, all of which the Japanese could easily buy from other suppliers at the same price and quality.

Still, there are real obstacles to foreign business in Japan. For better or worse, the disappearance of the Soviet threat means that there is now no reason the United States should not demand the same access for its products, services and investments that the Japanese enjoy to the far less restricted U.S. markets.

Washington needs a trade policy that focuses on those areas where removing Japanese barriers would actually make a difference. This means, for instance, forgetting about the Japanese ban on rice imports. U.S. nagging on rice helps no one but the Japanese politicians who skillfully blame American pressure for whittling down increasingly onerous subsidies to Japan's politically powerful rice growers. If any foreign country gets to supply Japan with large quantities of rice, it will not be California; it will be lower-cost Thailand or Vietnam. Also, penalizing Japanese automobile imports, for which Detroit's Big Three have been clamoring, is nothing but pure emotion; the automobile workers' union would applaud, but it would not help Detroit at all. It would, however, greatly help the major Japanese automobile manufacturers' public relations. Such demands would give them the pretext they badly need to speed up their plans to move production for the U.S. market entirely out of Japan and into their U.S. plants where costs are actually lower than they are at home. It would give them a perfect excuse for doing the politically unthinkable but economically inevitable--laying off Japanese workers who have lifetime employment.

Beyond using a little more intelligence and a good deal less rhetoric in relations with Japan, the only thing Washington can do is to understand the transition Japan is going through. It needs to take Japan seriously, for it is the only big customer left for U.S. farm and forest products and one of America's biggest manufactured goods customers. Japan is still the only fully developed and democratic non-Western country, with the world's second-largest economy. It is not a happy omen that there is, apparently, no one in a senior policymaking position in the present administration who seems to know or care much about Japan.

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