January 24, 1997

Japan's Economic Report Card: Where Did the A's and B's Go?

By SHERYL WuDUNN

OKYO -- Many Japanese used to think that the next century would be the Japanese century. But after years of unremitting economic struggles and a convulsing stock market, that now sounds like a bitter joke to people like Yukiko Shinya.

"As a shareholder, I'm just terrified," said Mrs. Shinya, a 70-year-old retiree as she watched stock prices fall recently on an electronic securities board. "There is just no future."

Mrs. Shinya's bleak mood may sound unduly alarmist here in Japan -- one of the richest countries in the world and one where only about 7 percent of all Japanese own stock. But her pessimism is widely shared by business leaders, some best-selling authors, top government officials and economists, many of whom feel that drastic changes are needed to recover lost dynamism.

Despite Japan's overall economic strength, the 11 percent drop in the stock market so far this year and the continued slide of the yen against the dollar amounts to, in the psyche of many Japanese, a "D" report card for the nation's stagnant economy.

The Japanese, of course, are celebrated for their pessimism and modesty, but now the discontent seems to be stirring a movement that something must be done.

Japanese books, business magazines and dailies are arguing that, like Britain a century ago, Japan may be in an inexorable decline in international prestige and economic might.

Headlines and stories blare: "Japan Is Disappearing," "Japan Is in Danger, Starting to Decline," "Japan Is Heading Toward Collapse." Commentators argue that Japan will be carried into the sea of sclerotic countries burdened by complacency and over-regulation.

"Japan stands at a crossroads," Shoichiro Toyoda, chairman of Keidanren, the nation's most influential business organization, said in a recent speech. "If we take no action and let these problems linger on, the Japanese economy will be headed for catastrophe and will be left out of the world's prosperity in the 21st century."

Toyoda is no Cassandra. He is also chairman of Toyota Motor Corp., and he stressed that unless the economy was freed of regulatory barriers, the bureaucracy reorganized and the approach to policymaking changed, Japan's aging society and the flight of its manufacturing industries to lower-wage countries would present even greater challenges than the ones that burden Japan today.

Prime Minister Ryutaro Hashimoto has called for broad changes, from reorganization of the bureaucracy to reform in fiscal budgeting, social security, education and drastic restructuring in the financial industry and the overall economy.

Ten years ago, the Maekawa Reports also layed out a wide-ranging plan for change, but they never were fully implemented, and so now, many voters and investors are skeptical that Hashimoto can bring about real change.

Since the first trading week of the year stocks have spiraled way up and way down, the yen has further weakened against the dollar, offering opportunity for some, but serious concern for many. The index closed Thursday at 17,909.46, down 104.42 points from Wednesday's close. In late New York trading, the yen flirted with 120 yen to the dollar, its weakest point in nearly 4 years.

Some people, including Japanese financial officials, are quietly grateful for the recent stock market crash because it may jolt the nation into taking the extreme steps they say are necessary to bring about far-reaching change. The market's incremental declines, they argue, have brought about only incremental change.

"I would like to see it go to 13,000 or so, for that would cause a shock wave," said Masao Miyamoto, a social commentator and author of a best-selling book critical of Japan's bureaucracy and society. "Japan has to go through some devastating experience before people will say we have to start doing something."

For now, the recent wild fluctuations in the currency and stock markets reflect more immediate concerns, like an anemic economic outlook, tightened government spending and an over-regulated financial system plagued by bad bank debt and a real estate crash.

But longer term, the market jitters expose a deeper uneasiness about Japan's future and its global economic role as it moves into the next century.

What a difference a half-dozen years can make. When the Japanese stock market was at its peak, in 1989, many experts around the world foresaw Japan capturing global economic and industrial leadership from America. Japanese companies bought up chunks of Hollywood and New York real estate, they talked about their nation's gross national product surpassing America's in the next century, and some people here felt so rich that they sprinkled gold on their food.

Americans and Japanese alike came to believe that Japanese corporations were simply more efficient than American ones, and that Japanese products were more durable, and that the next century belonged to the industrialists who created the Walkman or the virtually flawless car.

Now it is Americans who are seeing their stock market soar, and believing that their economy is blessed. And while some Japanese and Americans wonder if Americans are not imitating the Japanese hubris of the 1980s, the New York stock market does not think so -- at least not yet.

"Asian countries are now seeking their models in the United States, not Japan," said Heizo Takenaka, an economist at Keio University. "Japan was an important model for economic development, but from now on, Japan is no longer a model."

Japan's economy is the second largest in the world, partly powered by top competitors like Toyota, Canon Inc., and Matsushita Electric Industrial Co. But about four-fifths of the economy, including the financial industry, lumbers through commerce under heavy regulation, cartel-like behavior or a herd mentality.

Trucking companies, for instance, mutually agree to charge almost identical rates; wholesale prices for rice, wheat and barley are controlled by the government; the three largest daily newspapers charge the same price, and a fourth just joined the price club this year.

This used to be thought of as a strength of mighty Japan Inc. But now, to many Japanese, it is pitied as a failing of a economy in decline.

For the regulated swath of the economy, the transition toward the market mechanism is fraught with growing pains. Some economists worry that the best of Japan is moving out of the country as manufacturers build their cars and television sets abroad, leaving some smaller, inefficient operations at home.

What changes have taken place have been slow in coming.

In a country dominated by small shops and high prices, large retailers and discounters are growing, and more companies bucked the trend and opened for service during the traditional New Year holidays.

But critics say the pace of change is neither fast nor substantial. Prime Minister Ryutaro Hashimoto has talked about transforming Japan's economy and financial system, but the government's latest budget proposals offered little encouragement to financial markets.

While bureaucrats reined in spending, Japan's transportation lobbyists somehow ended up with a $10 billion bullet train extension. Farmers won $85 million in subsidies to plant less rice, and $2.6 billion once slated for economic restructuring is going to support farmers, construction workers and the oil industry.

Meanwhile, a national sales tax will rise to 5 percent from 3, and other income tax breaks will end. The comparison with America makes Japan's difficulties look even more acute.

"Twelve years ago, American corporate managers were almost losing confidence against the Japanese," who were buying up properties like New York's Rockefeller Center, said Tetsundo Iwakuni, a member of Parliament and former head of Merrill Lynch in Japan. "Now the Japanese are selling back and Americans are buying back, regaining confidence against Japanese competition."

Yet, for all the talk of gloom, many business leaders say that beyond financial and property circles, there still may not be enough of a crisis among voters to bring about significant change. Only a minority of Japanese individuals invest in the stock market and fewer trade yen for dollars so the recent volatility touches only a relative few.

Moreover, at 3.3 percent, unemployment is extremely low; company salaries still rise essentially in lock-step with seniority; small store owners still benefit from regulatory support; inflation is virtually zero though threatens to rise; and there is a buying boom now as people try to make large purchases before the national sales tax increases in April.

Indeed, there is tacit resistance to change, and not only from bureaucrats who stand to lose regulatory influence. The prime minister's grand plans to impose greater competition will produce winners and losers, even bankruptcies and probably greater unemployment. So Japan's efforts to change are like Americans and taxes: let the next person pay more.

"As a general argument, the businessman says, yes, this is the trend and deregulation is necessary," said Masao Ogura, the former chairman of Yamato Transport who has fought bitterly against regulatory barriers. "But once you go into specific industries, if the question comes down to my company, they say, we don't want it."

Even so, the recent pessimism and the currency and stock market declines may have worried some leaders to spin sentiment in the opposite direction. The Finance Ministry released a mildly optimistic report this week, and Jiro Ushio, chairman of Keizai Doyukai, the Japan Association of Corporate Executives, suggested that business leaders be "prudent so that negative factors not be written about too much."

Amid this gloom, however, some economists are less worried and are even optimistic. Though Japan may not rival America in innovation, it has repeatedly shown prowess in catching up with the West, and its Asian competitors are inching ahead only in selected specialties.

For instance, while South Korea may surpass Japan in certain kinds of memory chips, Japan is still leading in other types, and though Singapore is boosting research and development, much of it is being done by multinationals. Furthermore, Japan is still investing in research and development at about the same rate as other advanced economies, and significantly more than its Asian competitors.

"It's a kind of social phenomenon in Japan, that people think it's time to talk rather pessimistically, for Japan is a country that starts to move only when it is triggered by pessimism," said Masatake Wada, a professor of industrial policy at Teikyo University. "Japan can't be No. 1, but I think Japan has a role to play in successfully refining technologies."

---

Other Places of Interest on the Web

Japan Window, a U.S.-Japan Collaboration

---