Japan Echo Web

A Growth Strategy for a Nation Running Out of Time

Getting Ready to Rejoin the World

Some of Japan’s structural problems are peculiar to this country. As a latecomer among the industrial nations, Japan embarked on economic development using systems and practices of the catch-up type in the hope of overtaking the more advanced nations of the West. When the catch-up process eventually came to a successful conclusion, the catch-up model ceased to match the needs of the time. There was no failure in the model; it had performed just as it was supposed to. But its historical mission had come to an end.

At that point Japan needed to construct an original post-catch-up model and adopt new systems and practices in order to keep its economy growing and developing. By the second half of the 1980s, not only had Japanese technology and production capacity reached the level of other advanced countries, but the yen had surged in value. The yen gained so much strength, in fact, that Japanese per capita income measured in dollars became the world’s highest, saddling companies with heavy wage costs. Clearly this was a situation calling for the construction of a new model.

It was just at that time, however, that Japan’s bubble economy began to inflate. This came about as a result of an inappropriate response to both the high-flying yen, which was sent aloft by the 1985 Plaza Accord on currency realignment, and mounting trade friction with other countries. In the euphoria of the bubble years, companies grew overconfident and succumbed to the illusion of success. Surely, they thought, the Japanese model of growth and development, including the approach to corporate governance, must be more fully developed than and superior to the models of the forerunners in industrial development. When the bubble collapsed at the start of the 1990s, accordingly, the work of building a post-catch-up model had not even begun. The process was then further delayed by a series of complicating factors, notably the piles of bad debts that needed to be cleared away, and it has continued to be put off to this day.

Even as the Japanese economy fell into stagnation following the bubble’s collapse, the emerging markets were recording spectacular growth. China, India, and other countries got a helping hand from some of the world’s best corporations, which selected them as sites for foreign direct investment. Enthusiasm for attracting investment then spread widely, and Western nations joined the FDI game. The Soviet Union, meanwhile, was unraveling. It came undone in 1991, the very year when Japan’s bubble burst, and its demise led to the rejection of the command economy model. Countries around the world began vigorously competing in the field of systemic reform, seeking to come up with systems that would put them out in front in the race for growth potential. Japan, however, had no leeway for action. With chronic deflation complicating its economic stagnation, it had its hands full just dealing with the crises it kept stumbling into. When we Japanese finally aroused ourselves, we came face to face with the new realities presented in “Industrial Structure Vision 2010.”

This is a world in which companies select countries. A country like Japan with high corporate taxes will not find itself being selected by foreign corporations as a suitable base for operations. Indeed, even Japanese corporations are having second thoughts, and some are moving R&D centers and even home offices to other countries. Many Japanese politicians are making a big fuss about how the reforms the government has initiated are causing social disparities to widen, but compared with what other countries have done, Japan’s reform process has barely begun. Now that the administration has come up with a new growth strategy and METI has unveiled its vision, we may say that the day of postponing action, of steering clear of the global current of competition to create the best systems, is drawing to a close. Japan is finally beginning a serious debate on structural reform.

We have no time to waste. The Japanese population is aging at the fastest pace in the world. The postwar baby-boom generation is approaching age 65, and in another 10 years or so its members will be entering the ranks of the older senior citizens, where they will drive up the costs of nursing care and place a heavy load on public finances. Instead of looking back at decades lost in the past, we must look forward to the time we have remaining. It is said that if nothing is done, Japan is sure to encounter a fiscal crisis within 10 years at the longest. In this remaining time, we will be put to the test of completing the construction of an effective growth strategy and using it to produce results.

Translated from an original article in Japanese written for Japan Echo Web. [August 2010]