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Second Thoughts

Corruption and decay in the Japanese economy; is it really so wise for the U.S. economy to emulate Japan's?
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Before we start imitating Japan's managed economy, we should take another look at how it's working

Imagine a country in turmoil. Its political structure is rife with corruption, and reports of scandal fill the nightly news. Meanwhile, it faces growing economic woes. Living costs are outrageously high, and it's almost impossible to buy a house. Industry is finding it increasingly difficult to attract the best and brightest university graduates, more and more of whom are being lured away by the big bucks in real estate and financial services. Technology experts have begun to worry that the brain drain may do serious damage to the nation's long-term competitiveness. Already it has fallen behind its greatest rival in certain key areas of technology.

No, it's not the United States I am describing. This is Japan.

The Japan I visited in April is not a country anyone would hold up as a role model. It is certainly not the mighty Asian paragon that stirs the passions of Washington's planners and industrial-policy advocates, the ones who now call for trade wars and neoprotectionism. Rather, this Japan is a politically and even morally crippled nation that suddenly seems in danger of losing faith in itself. "Our national culture is being eroded," says Hiroshi Takeuchi, chief economist at the Long Term Credit Bank of Japan. "Our values, our belief in hard work and industriousness, are falling apart. Those who work the hardest get the least. That undermines everything."

Never before on my previous trips to Japan had I heard such harsh and widespread complaining from so many sectors of this respectful, authority-conscious society. To some extent, of course, the current rash of Asiatic angst is a reaction to the Recruit Co. scandal, a sordid affair revolving around an aggressive young real-estate company. Recruit was caught making large gifts of stock in a privately owned subsidiary to various rich and powerful people -- stock that was worth millions of yen when the subsidiary went public. The recipients included top government officials and such corporate heavyweights as the head of Nihon Keizai Shimbun Inc., publisher of Japan's leading financial newspaper, as well as the former chairman of Nippon Telegraph & Telephone Corp., the world's most highly valued public company. Among the political leaders implicated are former prime minister Yasuhiro Nakasone and his lame-duck successor, Noboru Takeshita, both of whom have a reasonable chance of winding up in the slammer as a result.

Indeed, the dominant Liberal Democratic Party (LDP) has almost no leaders left who haven't been discredited. Yet, after 40 years of LDP rule, few people can imagine the opposition, led by the leftist Socialist Party, actually being in charge of the world's second largest economic power. So Japan -- a supposed model of effective, can-do government -- careens between continuing scandal and the prospect of political chaos. "We are at the edge of Niagara Falls," says Jiro Tokuyama, one of Japan's foremost economic thinkers. "We are good at dealing with outside crises, the oil shock of the 1970s or the rise of the yen today, but now the collapse is coming from inside."

It is not just the current political turmoil that is generating malaise, however. The Recruit scandal comes at a time when many Japanese are becoming increasingly dissatisfied with the way their economy functions, and for good reason. After all, the value of the yen has increased 50% during the past few years. That should have driven down prices of imports, including food and manufactured goods, but it did no such thing, largely because of a politically protected and wildly inefficient distribution system. A cup of coffee still costs three times as much in Tokyo as in Los Angeles. Meanwhile, the government has imposed a 3% consumption tax, further boosting the absurd price levels.

Housing prices are even more outlandish. Japan's trade surpluses have brought in lots of cash, much of which has gone into real estate. As a result, the price of land has skyrocketed. Residential real estate now costs 3 or 4 times as much as comparable property in the United States. For factory land, the multiple is said to be closer to 30. These days all but the wealthiest Japanese have had to relinquish even the modest dream of owning a small house in the suburbs -- a dream that includes spending three hours every day commuting to and from the city on a crowded train.

All this has inevitably fed the mood of discontent. Recent polls show a steady decline in the Japanese people's satisfaction with their food, housing, and general quality of life. Many have grown cynical, believing that the only beneficiaries of the economic boom have been the so-called bubble-money people -- that is, speculators in real estate and financial deals of one sort or another. It's a belief with some basis in reality. According to Long Term Credit Bank estimates, the average salariman, or business executive, has a standard of living roughly half that enjoyed by his peers in the United States and Germany. "Everyone is beginning to realize that the trade surpluses have not helped our lives at all," bank economist Takeuchi says.

Among those most affected by the malaise are young people, the under-30 set, who seem increasingly reluctant to adopt their parents' code of self-denial. Many of them have abandoned the goal of conquering the world with better products and, like their U.S. counterparts in the early '80s, have started looking for the quick buck. This year, for instance, about half of the computer scientists graduating from the University of Tokyo, the country's preeminent institution of higher education, chose careers in banking and insurance, professions in which they can earn up to 50% more than they would by going to work for Japan's great industrial companies.

"We are moving from an industrial culture to a money-flow culture," laments Tosiyasu L. Kunii, chairman of the university's computer-science program. "We are seeing all the worst of the American corruptions." The situation is exacerbated, he adds, by Japan's lack of a vibrant entrepreneurial sector that would keep some of his young computer scientists in the field even if they preferred not to work for the giant companies. Their loss does not bode well for Japan's future in computer technology. As it is, the Japanese have provided much hardware but virtually no major software or operating-system innovations. In the coming years, Kunii predicts, his country will fall even further behind the United States in this crucial area of competition.

That thought should give pause to those on this side of the Pacific who contend we could compete better against the Japanese by managing our economy the way they do theirs. The evidence in Tokyo indicates otherwise. Yes, we can learn many things from the Japanese about doing business. But the lessons lie in the individual companies that have set new standards for excellence in large-scale manufacturing and in the long-term development of markets. We have nothing to gain by adopting the policies of a corrupt, inbred political and economic system whose limitations are only now becoming visible to the rest of the world.

Last updated: Jul 1, 1989




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