Can Japan's Cozy System Come To Terms With Change?

Like many of the things you buy, this column was made in Japan, where I am spending some time trying to unravel the mysteries of the Japanese economy. Since Japanese scholars who have devoted years to this task still find themselves somewhat in the dark, I do not expect to figure the whole thing out in two weeks. Nonetheless, as I travel around sultry Tokyo talking to economists, business executives, and government officials, two terms keep cropping up. These expressions will not surprise you: "long-term" and "cooperation." Whether the subject is employment practices, linkages among business firms, or the role of government in the economy, the essence of the Japanese system seems to be long-term, cooperative relations.

It's true that workers and companies stick together much longer in Japan than in the U.S. Practically no one gets fired. And labor-management relations are, by our standards, astonishingly cooperative. In the U.S. and Europe, the "us vs. them" attitude often impairs industrial productivity. In Japan, it is just "us."

Much the same can be said about relations between companies doing business with one another. Japanese companies tend to remain more loyal to their suppliers, banks, and distributors than is typical in the U.S. These relationships-some would say cozy relationships-are not formalized in written contracts but are based on mutual trust built on long-term associations.

BOTH/NEITHER. The same two words come up in discussing relations between government and business. Why is the business-government relationship, which is so adversarial in the U.S., so amazingly cooperative in Japan? One main reason is that Japan's big companies know they will encounter the country's powerful ministries time and time again. There is not much incentive to stonewall, ignore, or double-cross the other guy (yes, they are all guys) when you know you will be dealing with him often throughout your career. Besides, businesses believe that the ministries are there to help. Does that mean that government controls business or that business controls government? Actually, it's both-and neither. A Japanese businessman will either comply with a bureaucrat's wishes or humor him; outright defiance is bad form-and unwise.

Long-term, cooperative behavior holds some evident rewards. It enables Japanese workers, companies, and ministries to invest in physical capital, skill formation, and human relationships much more than their U.S. counterparts. And it increases economic efficiency by sharply delimiting incentives to engage in opportunistic behavior for short-term gain. This much is obvious. But when we think more deeply about these matters, certain problems arise.

There is such a thing, for instance, as staying together too long. Basic economics teaches that the invisible hand works best only when labor and other resources are free to move. Indeed, during the 1980s one popular diagnosis of "Eurosclerosis" was that Europe suffered from locking resources in place, while the U.S. let them move. In Japan, however, midcareer job mobility hardly exists, manufacturers tend to use the same suppliers and distributors for years, and it is far from clear that even capital flows freely to maximize its return. Yet, somehow, the Japanese have done very nicely, thank you. Could it be that the virtues of mobility have been oversold?

MEMBERS ONLY. A second puzzle is how long-term, cooperative arrangements are maintained in the face of what appear to be other powerful incentives to break them. Consider the gentlemen's agreement not to raid other firms for talent. Suppose Yoshio is a talented executive at Sumitomo Bank, but his career path is blocked by Kazuo, who has been with the bank a year longer. In the U.S., Yoshio would probably find a new job. But in Japan, the doors at other banks are shut. Why? On the surface, it would appear that Yoshio, the competing bank, and the Japanese economy would all benefit from mobility. But Japanese mores and business practices block the way. Somehow the lid is kept on.

There's the rub. Foreigners pose two kinds of problems for Japan's long-term, cooperative system. First, while long-term relationships may be efficient, they are also inevitably exclusionary. So foreign businesses entering Japanese markets complain that they cannot gain admission to the club. Japan must therefore choose between modifying its eminently successful system or seeing itself embroiled in endless trade disputes.

The second problem pertains to the potential conflict between imported self-interest and cooperation. If, for example, an American bank opens up in Tokyo, it will be only too happy to hire the talented Yoshio. Once there are enough foreign banks in the Japanese market, the boat will be heavily rocked.

The Japanese see change coming; you hear them say so everywhere. The pressure to change comes partly from the outside world and partly from the younger generation, which finds the status quo somewhat stultifying. Japan's leaders are understandably concerned. What happens, they wonder, when a system that is not broken gets fixed?

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