Myopia: the Crux of the Japanese Problem

[Dave Farber <dave () farber net>]

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Myopia: the Crux of the Japanese Problem

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

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Summary:

Professor Taizo Yakushiji points out that the overseas operations of
Japanese companies are relatively healthy, but Japan's overall performance
seems dismal by just focusing on the domestic market. And the most
problematic sector is not manufacturing but the service sector, such as
banks and retailing. Therefore, Japan's course of action should be to
reform the service sector, in particular the banking system, and to open
the market for the foreign purchase of non-obsolete Japanese equipment as
well as to reform the higher education system for a better manpower policy
in Japan.

Main Text:

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 elite
of managers and bureaucrats from their duties, replacing them with capable
young people (including from the elite 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.

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