Japan Takes A Good, Hard Look At Itself

What's going on here? On Feb. 3, just two days after leaving New York, Japanese Prime Minister Kiichi Miyazawa stunned America by declaring on live television that "American workers have come to lack a work ethic." Rubbing it in, a former Japanese trade minister proclaimed that U.S. auto workers goof off on Fridays and Mondays because they're obsessed with weekend play. Both remarks inflamed a trans-Pacific fire storm sparked by similar comments from another Japanese politico.

Why Miyazawa and the others said what they did remains unclear. But the thrust of the message is not: The Japanese view their nation as the economic powerhouse of this decade, if not the coming century. Meanwhile, as Japanese politicians preen and businessmen profit, Japanese intellectuals are grappling with a disturbing conflict: Are Japan's runaway economic gains turning the island nation into a global pariah? "We can't overdo it," warns Masaya Miyoshi, president and director general of Keidanren, Japan's powerful big business association. "Defeating our competitors means we'll defeat ourselves."

TIME TO PREACH. Shaping a response may be the country's most agonizing policy dilemma of the postwar era--one that goes straight to the heart of Japan's most fundamental economic strategies. How can Japan make its overwhelming economic success acceptable to the rest of the world? Should the nation change to make itself less fearsome, even if it means shedding some of its strengths?

Leaders such as Sony Corp. Chairman Akio Morita and Keidanren Chairman Gaishi Hiraiwa have started to say yes. On the other side of the issue are some of Japan's most powerful industrialists and bureaucrats, such as Eisuke Sakakibara, a deputy director general at the Finance Ministry. Their position: Japan is different and should proselytize abroad. "It's time for Japan to become a little more assertive," says Sakakibara, author of the 1990 book The Japan that Surpassed Capitalism. "We have to identify the special characteristics that should be preserved."

Earnest talk of the need for change is an age-old Japanese ploy. But a real debate is crackling in high-level Japanese circles. Many are asking: Just what constitutes Japanese-style capitalism? How incompatible is it with orthodox Western models? And the really big question: What, if anything, can be done about it? The discussion has become so heated that it has even won a name: Nihon Ishitsuron, Japan as different.

There is a risk to doing nothing. Without action, Japan may find its economic victories increasingly contested by protectionist barriers. Already, such pressures are steadily mounting in the U.S. and Europe. Ultimately, they could be strong enough to force Japan to change. "To the extent we don't establish the appropriateness of Japanese-style capitalism, our economic expansion can't be justified," says Iwao Nakatani, professor of economics at Osaka University.

For years, many Japanese argued that their system differed only superficially from the West's. Only now are the nation's leading-edge economists gaining credence with their new school of "neocapitalism." Japanese intellectuals "have begun to see clearly that there must be special reasons for the excellent performance of the Japanese economy," says Koji Matsumoto, professor of policy science at Saitama University and author of the 1991 book The Rise of the Japanese Corporate System.

FUZZY RULES. At the core of this argument is the idea that Japan's capitalism is distinct from the West's in four ways (table). The most important is a dedication to building relationships that don't exist--or exist only rarely--in the U.S. In Japan, for instance, government and industry are closely allied. The result? Controlled prices, targeting of strategic industries for growth, and regulation of industry through bureaucratic "guidance" rather than clear-cut rules. A case in point: Officials only winked at last summer's revelations that Japan's biggest brokers were colluding to cover customer losses. "Without rules, it's very hard for outsiders to participate," says Haruo Shimada, professor of economics at Keio University.

Then there are the links between Japanese companies--ties that are built on history, cross-shareholdings, and old-boy networks. Conglomerates, called keiretsu, protect companies from takeovers, minimize transaction costs, and spread risk. Sumitomo Bank, for example, doesn't need to do a Western-style financial analysis of fellow keiretsu member NEC Corp. before granting it a loan. "One reason NEC is a leader in integrated circuits is Sumitomo Bank's willingness to supply funds even when that business is unprofitable," says Shimada. "No U.S. bank would have given so much money to NEC."

The weak role of Japanese shareholders also gives management an edge. As many as three-quarters of a Japanese company's shares are held by other corporations, which are invited to buy them. The result: Japanese managers don't worry about short-term results. "Shareholding is not a system of control," says Saitama's Matsumoto. "Japanese companies are controlled by and exist for employees. If forced to choose between skipping dividends and laying off personnel, almost all Japanese managers will choose the former."

The relationship between companies and their workers marks another major difference in Japan's capitalism. Guaranteed lifetime employment means little turnover and high productivity. Docile company unions and the scarcity of outside directors present no challenge to top management. It's no wonder Japanese executives are reluctant to delegate authority, especially to overseas operations. "The power elite protects its own interests, which means not paying dividends but simply increasing market share and the size of the company," says Ken Moroi, chairman of Chichibu Cement Co. and a prominent business leader. "That increases their position, status, and compensation."

The timing for this debate about Japan's success may seem curious. After all, Japan's economy is sliding toward recession. Its overseas investments last year tapered off sharply, and the Tokyo stock market is languishing. The low cost of capital long enjoyed by Japanese companies has disappeared. But many of Japan's overseas rivals are focused instead on the country's awesome array of fundamental competitive strengths, which are ready to exploit the world's next economic upturn (box). It was this prospect, and foreigners' fear of it, that helped spur Japan's elite into debate.

Then there's the end of the cold war--another reason the Japanese are taking a hard look at themselves now. The clash between capitalism and communism is over. Today's tension lies between competing forms of capitalism. "Without the Soviet Union, suddenly an economic threat that's completely different in nature has emerged," says Keidanren's Miyoshi. "We've come to the point where we've got to discuss the differences in systems." What's more, last year's spate of securities-industry and real estate scandals dramatized the degree of collective scheming that occurs within the Japanese system. The upshot? Japan's "neocapitalist" thinkers began to search even more intently.

`ON THE THRESHOLD.' Wherever the debate leads, Japan must come to terms with its own might. "Japan is on the threshold of greatness," says Kenneth S. Courtis, strategist and senior economist at DB Capital Markets (Asia) Ltd. in Tokyo. "But it can't run a $1 trillion current-account surplus this decade without incurring huge problems."

Within the country, there are plenty of people who would benefit from change. Workers who routinely put in a 44-hour workweek certainly wouldn't complain if Japanese companies decided to cut back on hours, but not on pay, to give them more free time. And most citizens would welcome massive spending of Japan's surplus on improved roads, sewers, housing, and public parks.

But these are relatively easy reforms. It would be much tougher to change the keiretsu system or the cozy links between government and industry. The bulk of Japan's powerful corporate interests are dead set against tampering with a system that has enjoyed such smashing success.

For the visionaries who see the danger of being out of sync with the rest of the world, the challenge is to adjust Japan's winning formula without destroying its competitiveness. Then again, the Japanese are known for their amazing skill in packaging a product to meet local tastes. The trick is to make their brand of capitalism more acceptable worldwide.

      BENEFITS: Protects failing industries, nurtures growth industries
      DRAWBACKS: Distorts market prices, hinders newcomers' entry
      BENEFITS: Relationships between companies allow risk-sharing, access to capital 
      and technology
      DRAWBACKS: Excluded companies have trouble competing
      BENEFITS: High productivity and quality. Stable work force and top management 
      DRAWBACKS: Excessive employee obedience and dependence limits time for 
      socializing and leisure
      BENEFITS: Managers don't need to focus on short-term results
      DRAWBACKS: Managers don't feel shareholder accountability
      DATA: BW
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