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Will the 21st century belong to Japan?

". . . Challenged by forces from within and outside, Japan may see its economic lead threatened and its future shadowed and complicated."

A QUARTER of a century ago, America commanded almost 46% of the world's Gross National Product. In international commerce, it enjoyed a monopoly in most manufacturing exports. In technology, the U.S. invented most advances, from the jet plane to the computer, and pioneered the transition from an industrial to information society.

Things sure have changed. Diminishing economic horizons, fewer jobs, stagnating real income, faltering living standards, escalating health care costs, a ballooning national deficit, and accumulating personal and business debts are becoming the critical concerns besetting an America in decline. Not only that, the U.S. has traded places with Japan and complacently watched that nation take the lead in world economy today.

By comparison, Japan has made technology its arts, commerce its religion, and frugality and patience its culture. Japan's three trillion-dollar-a-year GNP accounts for 15% of the global share, making it the world's second largest economy. Nevertheless, even Japan, for all its stunning success, has some serious structural flaws and will be met with tough challenges, emanating from within and outside. So the question is not whether Japan will go unchallenged. Rather, it is: Will the 21st century be Japanese?

Japan's toughest international competitors will be the best and the brightest U.S. companies, which are becoming lean and efficient by streamlining organizations and cutting costs. With the help of innovative home-grown technology, they will stage a quick comeback with renewed strength. For instance, a powerful new technology called digital signal processing will help blue-chip companies such as AT&T, Motorola, Texas Instruments, and IBM reclaim part of America's lost electronics market. In addition, other U.S. manufacturers--many of whom have gone through severe belt tightening in recent years--have become more productive and competitive enough to challenge Japan effectively. American labor costs--growing slower during the past few years than Japan's--also will add to the U.S.'s competitiveness.

What's more, the free trade agreement with Mexico will allow American companies to gain a cost advantage. For example, today's weakened U.S. auto giants will be able to draw low-cost and high-quality labor from an almost unlimited supply of Mexican workers. These companies quickly will switch to relatively cheaper labor-intensive techniques of production because they can cut capital cost by using fewer expensive robots and less pricey machinery. As a result, the U.S. will bolster competitiveness to meet Japan's price and quality challenges in the global marketplace.

Japan's competition from Asia's newly industrializing countries (NICs) will intensify further in the future. These emerging economic powers are getting bigger and better by building a powerful manufacturing export base, which has climbed from less than two percent in early 1970 to nearly 20% today. They have gained their shares largely at Japan's expense. Their continued success in textiles, clothing, leather, and footwear exports has penalized Japanese industries severely. They also have sharpened their competitive positions in scale-intensive sectors like iron, steel, shipbuilding, and petrochemicals, as well as science-based sectors such as electronics. Thus, by combining labor- and technology-intensive techniques of production, Asian NICs will do to the Japanese in the 21st century what the latter did to the U.S. during the 1970s.

To make matters worse for Japan, a united Europe, led by Germany will emerge as a strong economic giant. Indisputably, Germany will occupy a dominant position in the global economic scene in the years to come. Moreover, by the turn of the century, Japan may be seeing a Greater Europe with combined GNPs of over seven trillion dollars and 450,000,000 consumers, living in at least 25 countries from Finland to Portugal to Bulgaria.

To meet these challenges, Japan will be bound to shift more of its manufacturing to nations that have low-cost and high-quality workforces. There is no question that this will reduce its manufacturing share in gross domestic product and ship more jobs out of the country. Some 600,000-1,000,000 positions will be eliminated by the end of the century as a result of its direct foreign production.

Japan's economic health also will be threatened by a chronic labor crunch that continues to constrain its ability to cut costs of doing business. There are more than 100,000 jobs unfilled in building trades and three vacancies for every applicant in the job market as a whole. As companies scramble to fill positions, labor costs rise. To cap expenses, manufacturers are investing billions in labor-saving technology and greater automation. Ironically, the labor crunch is showing in industries already stuffed with robots and computers. Even worse for Japanese manufacturers, they already are competing fiercely with financial institutions to hire top engineers. However, electrical and computer-software engineers prefer fatter salaries and the gogo image of banking and finance to manufacturing jobs. Today, one-third of Tokyo science and technology graduates sign up with manufacturing companies, compared with half in 1986. As a result, the manufacturing sector is failing to attract and keep the best technical professionals. This, in turn, will slow productivity gain in manufacturing. On the other hand, unit-labor cost has started to rise, after falling 4.5% in 1987 and six percent in 1988.

The decline in productivity, coupled with a sharp increase in labor expenses, is forcing Japanese firms to raise prices considerably. This will start to fan inflation fears, thereby handcuffing Japan's ability to compete effectively with low-cost producers of Asian NICs. Also, Japan is not willing to admit foreign workers as easily and freely as the U.S. does, fearing that more unskilled foreign workers will leave Japan with a permanent alien underclass and endanger its future competitiveness. Japan's cherished racial homogenity and stand against multi-racism will not ease, even if its economy starts to cool in the years ahead. While the growth of labor-intensive services will continue to increase labor demand, the number of younger workers will decline after 1995. This means Japan will not be able to sustain its high productivity and, at the same time, follow through on its desired policy of cutting work hours to increase leisure time.

Japan's toughest challenge from within will be presented by its own people. At home, the Japanese are showing increasing signs of despair and hopelessness. This is because, in its pursuit of an economic miracle, Japan has neglected social and civic details. Such unmet social needs as overcrowding, excrutiatingly long commutes, woefully inadequate leisure facilities, and a Third-World level of drains, parks, and roads leave most Japanese feeling distinctly unrich. Even its sea of savings and towering trade surpluses do not buy the good life, which remains frustratingly out of reach. The Japanese pay up to three times as much as Americans do for food and nearly twice as much for other goods. Rice costs 10 times the world market price. Japanese workers have to spend six times their annual salary to buy a house half the size of what that amount would buy in America. The standard of living for average city dwellers is lower than that enjoyed by their counterparts in less wealthy European nations.

Even though the Japanese have yet to turn their hopelessness and frustration into disturbing social unrest, the potential is growing daily. This leads to the question of whether ordinary Japanese could be made to sacrifice for the good of the company and country if they continue to be deprived of their fair share in national wealth. Japanese society currently is split into property-owning rich and property-less poor. The latter have lost their dreams of owning their own home one day. Meanwhile, the growing gulf between the new rich and new poor threatens to erode social cohesion that has motivated Japanese to work hard and sacrifice during the past half-century.

The young Japanese workers are changing, too. They are turning away from the work ethic and shifting jobs more often. Their work habits are getting sloppy and they rarely put in overtime. Students are pressured by their parents who want them to achieve excellence in education; their government wants them to sacrifice for the national interest; and their companies demand loyalty and hard work. This pressure cooker environment at home is making Japan an unattractive place in which to live. Consequently, a large number of Japanese studying abroad stay there to escape a narrow and restrictive system. Their search for a better life abroad means a brain-drain in their homeland that eventually will hurt Japan's technological and innovative lead.

Pressures also are mounting on the Japanese government to improve living standards. At the same time, companies are facing demands to reform the way they do business. For instance, Akio Morita, chairman of Sony, is calling for a significant reconstruction of the economy and a radical reform of Japan's business practices at home and abroad. The Japanese investors are getting impatient waiting for long-term payouts and increasingly are demanding higher and quicker returns. To meet such shareholder demands and wishes of workers to enjoy the prosperity of 40 years of relentless toil, companies will have to cut back on long-term investment, focus more on quick profit-making, raise dividends and salaries, and reduce working hours. Such changes could damage the very foundations of Japan's economic might. Also, higher domestic consumption will transform Japan from an economy that primarily is savings-driven to one that is consumption-driven--a change in culture that will erode its economic clout in the 21st century.

Japan's elderly population is growing at nearly twice the German rate and six times that of America's. While an average of six workers support one retiree today, there will be only three for each retiree by 2020. This means Japan's government will be burdened to support a great many unproductive consumers in the 21st century. Such a demographic transition will curtail capital export, fiscally burden the government, and contribute to the collapse of the social welfare system.

While the U.S. still is Japan's best ally, many Americans view Japan with suspicion and ambivalence. There is a growing international perception that Japan is an unfair trading partner since it tends to engage in collusion, dumping, and predatory pricing to keep foreign products and investments out of its markets. To protect its business interests, Japan buys what is called political market share" in the US. For example, in 1991, Japan invested $400,000,000 in lobbying, politicking and image-making in America. In addition, Japanese corporations doing business in the U.S. have not been paying their fair shares of profit taxes. Instead, they are ploughing most of their earnings in the U.S. back to Japan through transfer pricing practices. These are causing trade tensions, increasing anti-Japanese sentiments and a lack of trust in that nation's business practices in the US.

What if Japan opens up its markets and competes according to the same rules as the rest of the world? This will make Japan absorb more imports and shrink the huge current account trade surplus that is a vital source of its economic clout. What if Japan does not bow to international pressures and, consequently, the U.S. resorts to such protectionist measures as tariffs and quotas? There is little doubt that Japan's exports and foreign investments will be curtailed greatly. This will deliver a devastating blow to the nation's economic health, considering that it earns more than $45,000,000,000 from the trade surplus with the U.S. alone and America is Japan's biggest and richest market for investments and income.

Structural weakness

Japan already is beginning to show some signs of structural weakness. After enjoying its longest sustained economic boom since World War 11, Japan is faced with a painful, but long overdue, contraction. The sharp cutback in industrial production, anemic manufacturing demand, loss of profits for Japan's highest-priced companies, decline in the value of real estate, and a big slash of corporate capital investments are the leading indicators pointing to its loss of economic vitality and robustness. Even worse, Japan's Nikkei Index, which so far has lost more than two trillion dollars in value, and the banking industry, which is saddled with over one trillion dollars in bad real estate loans, are passing along the bad news to the financial community that Japan's banks are not capable of sufficiently meeting the financial needs of its industrial sector at lower interest rates. These anxiety-producing economic indicators are creating market uncertainties. Consequently, business and consumer confidence is in a free fall. By all economic measures, Japan's looming slump will weaken its economic health considerably and very well may mark the beginning of the end of its lead in the years to come.

Looking inward, Japan's old ways are shaken badly and the new ones are moving at so hectic a pace that many of the old values and virtues, which helped create Japan's miracle, are being swept away. Unless Japan meets its challenges--and fast-it is possible Japan will begin to suffer from the "American disease" of living beyond one's means, quick profits over long-term investments, inequity over egalitarianism, individualism over group cohesion, large-scale corruption in government and business, and global interests over national well-being. Challenged by forces from within and outside, Japan may see its economic lead threatened and its future shadowed and complicated.
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Author:Selimuddin, Abu
Publication:USA Today (Magazine)
Date:May 1, 1993
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