Counterpoint: Japan's woes far from over.

Not many economists can drop references to the French Revolution or World War II when describing Japan's economic woes. But Kenneth Courtis, managing director and vice chairman, Goldman Sachs Asia, does this easily as he pontificates on how the world's second-largest economy needs a major shake-up to deal with an economic crisis of proportions not seen since the Great Depression of the 1930s.

In a recent interview with CE at the Park Lane Hotel in New York City Courtis describes a Japan of paralyzed politics and fragile finances. He speaks of Japan's Himalyan-sized bad debt, which he estimates at $3.5 trillion for a $4 trillion economy, far overshad owing the U.S. savings and loan crisis or the Asian financial crisis of the late 1990s. He forecasts that Japan's budget deficit as a percentage of GDP will climb to 170 percent by 2005, up from 143 percent today. And in one of his characteristically glib quotes, he notes that the only way to be optimistic about Japan is to look at the economic charts upside down. Why? Because unemployment is nearly 9 percent, deflation stands at 3.5 percent and economic growth at zero.

But within this crisis, he sees opportunities, likening it to the time-worn Chinese phrase: "Crisis equals opportunity." Those benefits will come, however, only to companies with the strategic resources and commitment to tackle Japan's challenges, he explains.

A prominent commentator on global economic, financial and political developments, Courtis travels the world's financial capitals, doling out wise words about the state of Asia and the world's economies. Canadian-born Courtis earned his MBA at the highly regarded European Institute of Business Adminstration (INSEAD) in Fountainebleau, France, and his doctorate from the Institute of Economic and Political Studies in Paris, A true global citizen, he has lectured at leading universities in Europe, North America and Japan, and has homes in Tokyo, Paris and New York. Formerly a chief economist for Deutsche Bank, Courtis advises major multinational companies such as Nissan Motors on international business strategy.

What advice do you have for CEOs doing business in Japan?

Japan's economy is in a building crisis that is still far from its climax. When it does reach its climax in the next four to five years, it will shake the country to its very roots. If you don't get prepared for that, you could very easily get sideswiped. But there is also tremendous opportunity. For those with a strategic vision, the resources and the will, this is the environment of unique opportunities. As the Chinese say, you never catch big fish in clean water.

Where are those opportunities?

One of the great handicaps of international business in Japan has been the inability to hire quality people. Yes, you could pluck one or two here or there. But why would a top-quality person go to work for ABC Valve Lifter Corp. when Japan was on such a roll and that person could hope to be head of Mitsubishi or Mitsui? Today, good-quality companies can hire virtually anyone they want. And Japanese people are extremely well-educated, loyal, very hard-working. Once they come to a consensus on what they are doing and share the vision, they are extremely rapid in execution.

Secondly, assets are available for the first time on a large scale. Take the Japanese car industry. Fifteen years ago, had I told you that all but two Japanese car companies would be foreign-controlled, you'd have said I was nuts.

What impact will Japan's deepening economic woes have on the world economy?

When Japan's economic problems intensify and get toward a climax, it will not just be a Japanese crisis. It will spill over and have broad regional and worldwide implications. You remember a little country called Thailand? [The Asian financial crisis of 1997-98 started in Thailand.] Japan's economy is 46 times larger than Thailand's. It is infinitely more integrated into the world financial system.

you put Japan's problems into perspective with other economic problems?

We have building here the biggest economic and financial crisis seen since the 1930s in any major economy. Never will so much money have been lost by so many people by the mismanagement of so few, to coin a Churchillian expression.

Not even during the Internet bubble years?

No, no.

Will Japan he forced to address the crisis?

Even for a rich country like Japan, it will have to do what Korea did--face the music. Korea did that because they were virtually bankrupt. Foreign exchange was down to zero by mid-December '97. They had no choice. And the turnaround is extraordinary. Capital has been deployed, reform has occurred, red tape has been cut back; there are more companies created every month in Korea than there are in a year in Japan. And its population is half the size and its economy a quarter of Japan's size. But Japan's crisis will hit a peak and then it will resurge, just as Japan had a big renaissance after the catastrophe of World War II.

You've been quoted as saying, 'If Japan were a company. I'd buy it.' Why?

Well, what is the worst-case scenario? Twenty years from now, Japan is the third-largest economy in the world instead of the second. A new, different Japan will emerge from this crisis.

Will reform happen politically as well?

Japan's problems--if they were just economic and financial--would have been solved a long time ago.

Can Prime Minister Koizumi bring about reform?

The political leadership of the country is largely blocked, unable to come together in a consensus about its future -- unable because the vested interest in the status quo is still so very powerful. Koizumi stands for election in September as head of the Liberal Democratic Party. There will be a strong group trying to unseat him. But he has such strong support in the public opinion that at the end of the day, people are going to say, better to have a prime minister who is popular who talks about reform and can't do anything than one who is unpopular and can't do anything.

Have you seen any progress in reforms?

The deregulation of the telecom market is an example. It was done under tremendous, extraordinary duress with Japan kicking and screaming in the early '90s. Guess what happened? The Japanese cell phone market exploded and it has become the most dynamic, creative, leading cell phone market in the world.

Would you bet on China ahead of Japan?

Japan's leadership has embraced the past and can't turn to face the future. China's leadership has embraced the future and is running at that new horizon at a faster pace. This is changing the whole balance of power in Asia. Last year, China's economy became larger than the economy of Italy and this year it will increase by another $100 billion. Next year it will come close to the size of the U.K., and by the end of this decade it will be comfortably larger than the economy of Germany. And in many sectors now, it is becoming a key player. Unlike Japan and Korea when they emerged, China from the beginning has said, foreign investors come in. The interest of so many international companies -- the Japanese, the Europeans -- are tied now to the success of China. In Japan, you didn't make GM cars in Japan and then export. It was verboten, right? But over half the exports from China are made by foreign capital.

Should multinational CEOs increase their investment in Japan?

If you've got good management, you've got interesting products and technology, you have an entry point into Japan today that you have never had. Look at Renault, one of the greatest stories in automotive history. Before Renault took 44 percent of Nissan and turned Nissan around, Renault was a relatively well-known regional car company probably destined to be consolidated into another company. Today, it is one of the world's top five car companies. It's created itself a long-term defendable competitive position. It's totally transformed its position. It couldn't have done that without Nissan.

Are there more investment opportunities like Nissan?

You have the killer companies -- the Toyotas, the Canons. As they continue to survive and thrive in this extraordinarily harsh environment domestically, they just get tougher, tougher and tougher. Take Toyota -- $32 billion in cash, no debt and on course to take worldwide market share of 15 percent. Or Canon, with two-thirds of its products developed within the last two years. Quick, innovative, nimble; those are not companies you are going to be able to take over. But that is what Japan is capable of.

What is the ideal business model for Japan?

What you really want to do is have a base in Japan so that you can mobilize Japanese brains and technology, produce at Chinese production costs, build a good business and export to America and Europe. That's what you are increasingly going to see.

Why is Japan's aging population worrisome?

Japan's labor market will contract by 1.5 percent annually over the next 20 years. If you aim for 3 percent growth and your labor market is contracting by 1.5 percent, that's 4.5 percent in productivity. Not many countries have generated that at a mature state of their growth. By 2020, 43 percent of the electorate will be over the age of 60. Japan is going to make retirement communities like Miami and Nice look juvenile in comparison. And old people typically do not lead revolutions.

The irony is that prices in Japan are high anyway. So we have to bring prices down. Japan can't compete at these high prices. Either prices come down or the yen comes down.

Any bright signs among the economic indicators?

No. Higher oil prices will hurt Japan and investment flow into China will accelerate from Japan. Japan's competitive position will continue to weaken. There will be more bankrupt companies. Unemployment, (officially at 5.7 percent and unofficially at 8.5-9 percent) will go higher as the crisis intensifies. Some companies that are in trouble will be forced to sell off businesses that aren't core. More privatizations will be announced as the government has to raise cash. Any growth will come largely from exports. I think it will be another year of pervasive pain, popular anxiety in Japan and a year of deepening crisis where the strong will get stronger and the weak will get weaker.