Myopia: the Crux of the Japanese Problem

Taizo YAKUSHIJI (Keio University and Institute for International Policy Studies)

Rejection of Wireless Internet Access Based on Misunderstandings

In the late 1980s and early 1990s, Japan was considered to be a formidable economic contender to the United States. The global responses to Japan's high productive capabilities were both positive and negative. Positive reactions could be seen in Made in America produced by the Massachusetts Institute of Technology (MIT) and Michel Albert's Capitalism vs. Capitalism. The negative reactions included workers smashing up Japanese electronic products in Detroit, and the Coordinating Committee for Multilateral Export Controls (CoCom) speared the Toshiba incident.

Japan's good old days are over. As is well known, Japan is still not over the hangover from the economic bubble party. Post-bubble quandaries include the large number of bad loans in the banking sector, the unprecedented level of unemployment and serious deflation. Also, Japanese products are losing their competitive edge due to sluggish production and overseas competition in electronic goods such as from South Korea (semiconductors) and China (televisions). Japan's ranking in the 2002 IMD's World Competitiveness Yearbook was as low as 30. Major Japanese companies no longer establish domestic manufacturing plants as they have moved much of their operations to China, thereby creating an industrial "hollow" back at home.

In spite of the doom and gloom, I would like to suggest that aspects of the Japanese economy remain vigorous: This year, Toyota and Honda have marked unprecedented sales and Canon's sales remain impressive. Samsung may lead in the production of semiconductors and liquid crystal displays (LCDs), but Sharp and other Japanese electronic giants have maintained their top position in plasma display technology.

Nathan Rosenberg of Stanford once said that the latecomer leapfrogs over those who are ahead. His rationale is simple: Companies that are ahead cannot afford the high cost of replacing their current machinery with technologically more advanced equipment. The latecomers are not so encumbered as they can go straight for the better equipment without the financial burden of replacing the obsolete equipment. This is the logic of leapfrogging.

Application of this logic helps dispel the mystery of the rise and fall of the big industrial giants. There is one way, however, in which this logic does not apply: By keeping the equipment that is still good and instead installing the more advanced equipment abroad to the latecomer countries such as China and the countries of the Association of Southeast Asian Nations (ASEAN). By doing so, a company can become internationally competitive. Of course, this "virtual leapfrogging" strategy is dependent on the labor skills of the host countries. This explains the exodus of Japanese companies to China, especially if one considers that the average Chinese wage is about one-thirtieth of that in Japan. The difference in wage is but one factor.

Clearly, the Japanese companies' international "virtual leapfrogging" strategy exacerbates domestic unemployment. It should be noted that industrial hollowing is not instantaneous because adequate equipment continues to be in operation in Japan. In the end, however, such equipment quickly becomes obsolete and cannot maintain its high performance. Internationally competitive companies such as Toyota and Honda can invest their huge profits into substituting domestic machines with more technologically advanced equipment. Those companies that are only relatively competitive cannot afford the costs of substitution.

The point is that the overseas operations of Japanese companies reveal a healthy economic performance, albeit relative. In contrast, just focusing on the domestic market (and by definition all economic statistics tend to concentrate on the domestic scene) Japan's overall performance is dismal. This is the crux of Japan's problem. The most problematic sector is not manufacturing but the service sector, such as banks and retailing. Therefore, Japan's course of action should be two-fold:

1) Reform the service sector, in particular the banking system, and
2) Adopt a "virtual general headquarters (GHQ)" or supreme commander of the allied powers (SCAP).

The latter needs clarification: Japan's production capabilities were nearly all destroyed by the US air raid during World War II. Thus, at that time Japan was forced to reequip itself with the latest technologies (using foreign currencies). In the meantime, the GHQ discharged the societal élite of managers and bureaucrats from their duties, replacing them with capable young people (including from the élite of the military) to take on important positions in companies and government. In fact, the "devastation" of equipment and "purge" of people turned out to be the key contributions to Japan's postwar economic success.

The clock cannot be set back to those days, but at the very least a policy that would bring about a similar result should be implemented. This is what I have dubbed the "virtual GHQ" policy. The first step of such a policy would be to open the market to allow the foreign purchase of non-obsolete Japanese equipment, which would have the same impact as clearing land by a strong explosion. The point is that we Japanese cannot do this by ourselves due to our overly strong attachment to our own resources and thus must rely on foreign action. The second step is a policy of manpower. In Japan, too many of the best and brightest take up generalist positions. Thus, the reform of the higher education system is a national priority if business, government and politics are to be led by an internationally competitive workforce.