Has Japan Peaked? Don't Bet Your Lexus

To some, Tokyo's financial woes seem an awful lot like the vital signs of a dying patient. The stock market has dropped 45% since its 1989 peak, robbing Japanese companies of one of their big competitive advantages: cheap cash. Tokyo real estate values have plummeted. Bankruptcies have soared. By 2000, the country faces a shortage of a million skilled software engineers. And the government is consumed by a new political scandal nearly every week. Could it be that mighty Japan has peaked?

Far from it. In fact, Japanese economists say the market could languish for years without harm. Sure, the downturn may force more revamping of Tokyo's scandal-plagued financial sector. But Japan's giant manufacturers, the backbone of the country's economy, are stronger than ever. During the past five years, they've managed to plow a staggering $3 trillion into plant and equipment, according to DB Capital Markets (Asia). They've pumped $500 billion more into research and development. And they've matched the U.S. in private-sector research spending (chart).

The result? Japan's heavyweights have seized near-control of entire industries--including global electronics. They're squeezing profits out of sunset businesses such as steel and shipbuilding. And they're coming on strong in software and systems design, once the domain of the U.S. So even if Japan has lost its relatively low cost of capital, the country still figures to outshine competitors in the 21st century.

SPOTLESS ROBOTS. Japan built its post-war economic miracle on manufacturing, and Tokyo plans to keep expanding the base. Its next push: to make products and whole production systems artificially intelligent, so that electronic systems of all sizes--from basic personal computers to steel plants and subway systems--will need little human supervision or maintenance. Nippon Steel Corp., for one, now uses computer-based intelligence to streamline the complex flow of materials in its steel plants.

Japan's most impressive success in top-of-the-line automation could be in microelectronics. Take Sony Corp.'s Kohda plant, outside Nagoya. The world's largest assembly plant for 8mm camcorders, Kohda boasts unrivaled high-density chip-mounting capability. In one assembly area, three-unit clusters of insertion machines take less than 30 seconds to pack 1,000 chips of different shapes and functions onto a surface the size of two cigarette packs. In a process that's 99.3% automated, spotless white robots stamp 370 million chips into position each month, with only a few defects per million.

Building such manufacturing technology is massively expensive. For proof, look at capital outlays by Japan's leading memory-chip manufacturers, NEC, Toshiba, and Hitachi. They have spent billions on the technology. Hitachi Ltd. alone plans to put $3.3 billion into research this year and $1.8 billion more into plants and equipment. Next up: a Hitachi research center focused on developing chips that can store 1 billion bits of data, vs. the 4 million stored on chips today.

Such advances guarantee that the world's consumer electronics makers will become increasingly reliant on Japanese suppliers. That explains why Intel Corp., for instance, bypassed various American candidates to announce on Feb. 5 that Japan's Sharp Corp. will act as its strategic partner in the market for "flash" memory chips. That red-hot technology lets a computer retain data even after its power is switched off.

Because of such deals, America's PC companies may have little choice but to head to Japan for components. But PC makers these days are becoming dependent on Japan for far more. Apple, IBM, Compaq, and most other U.S. makers of laptop computers are heavy users of Japanese chips, power supplies, and other technologies. In the ultimate bow to Japanese manufacturing, Apple Computer Inc. now purchases finished notebook computers from Sony. Although neither company will confirm the details, Apple is discussing a similar arrangement with Sharp. Digital Equipment Corp. just tapped Seiko Epson Corp. as a laptop partner. And there are rumors that workstation giant Sun Microsystems Inc. may ask Matsushita Electric Industrial Co. to jointly develop multimedia computers, which will double as entertainment and education systems.

BASIC CHALLENGE. America's computer marketers face little competition from Japan in brand-name coputers. That's not true for Detroit, where Japanese autos continue to gain U.S. share. For that, Japan can thank smart capital spending and R&D. In 1990, Japan's top five auto makers pumped about $12 billion into R&D. The industry as a whole spent an equal sum on new equipment. At last year's Tokyo Motor Show, Japan's auto makers showcased the latest in fuel efficiency and environmental technology, including electric cars and so-called lean-burn engines that save gas by using a mixture with a higher air-to-fuel ratio. "By 1995, the environment will be at the heart of Japanese auto marketing," predicts Tadao Amemiya, an executive at Tokyo-based Sky Aluminum Co., a supplier of sheet aluminum for cars.

Now, Japan is in a better position than ever to challenge a cherished frontier: basic science. Last year, the Japanese poured a hefty $97 billion into scientific research, and the Japanese government wants to up its stake. Its Science & Technology Agency is pushing to double government spending to $30 billion over the next seven years. Even the success of the U.S. Superconducting Super Collider project, which could deepen the understanding of atomic forces, hinges on Japanese largesse.

So don't be misled when the Nikkei Stock Average drops again, a real estate speculator goes bust, or yet another politician is implicated in a scandal. It may sound like bad news, but in Japan the real economic news is overwhelmingly upbeat--as long as Japan's manufacturers keep their checkbooks open and their robots humming.

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