In Japan, Plus Ca Change...

In so many respects, Japan seems to be changing. The political world appears to have been turned on its head, with a Socialist serving as Prime Minister. The once all-powerful Ministry of International Trade & Industry (MITI) has lost some of its grip, and Japan's business groups, or keiretsu, appear to be loosening their cozy ties. Consumers are winning more spending opportunities, thanks to the spread of 7-Eleven-style corner stores and big discounters. The air is filled with cries for "deregulation" and "reform."

All that leads some outsiders to conclude that Japan is undergoing a radical overhaul. In this view, Japan's very structure is evolving increasingly toward an Anglo-Saxon model. Its competitiveness will wane as consumers demand a better deal. Thanks to a punitively high yen, foreigners will sell more of their products as Japan inevitably opens up, and Japanese companies will hollow out as they move offshore. All the world has to do is wait, and Japan will change. This reasoning is at the heart of the Clinton Administration's strategy for tackling Japan's trade surplus.

But it is a dangerously misguided understanding of Japanese-style change. None of these forces will be allowed to go far enough or fast enough to undermine the core of Japan's competitiveness or its international economic expansion. Despite a whirlwind of change on the surface, Japan at heart is retaining and improving its political and economic model, not discarding it. "Our Japanese capitalism will remain Japanese capitalism," asserts Eisuke Sakakibara, a key official at the Finance Ministry and author of the book Beyond Capitalism.

-- POLITICS. One of the worst areas of confusion is Japanese politics. On the surface, it seems that the entire postwar political order has been shattered. First, Young Turks led by Ichiro Ozawa and Tsutomu Hata bolted from the long-ruling Liberal-Democratic Party last summer and created an awkward eight-party coalition that elected two Prime Ministers. Now, a leader of the Social Democratic Party, Tomiichi Murayama, has maneuvered his way into power, thanks to a coalition with the rump LDP.

Does that mean a completely different kind of political leadership? Hardly. In effect, the LDP is using Murayama as a convenient front man to move itself back into the driver's seat. Because of the end of the cold war, the ideological divisions between Murayama and the LDP have vanished, and the 70-year-old leader is quickly shedding his socialist spots to sign on to LDP policy positions. "The LDP is back in power," proclaims Koichi Kato, a ranking member of the party and potential Prime Minister. Meanwhile, the renegades who proclaimed themselves reformers have been banished to the political wilderness.

During this past year of political fluidity, the flow of money from business to politicians was to some extent interrupted. But now that the LDP has regained its grip on power, the Keidanren, the powerful federation of businesses, is likely to resume its campaign contributions to the LDP. The electoral reform laws that were enacted will bring about a redistricting and set the stage for new elections, probably next year. But it's the LDP, not the gaggle of opposition parties, that shapes up as the big winner.

Thus the pundits who argued that Japan's reform-minded politicians were inevitably leading it toward Western-style pluralism were just plain wrong. Japanese politics is back to business, almost as usual.

-- BUREAUCRACY. The outside world also wanted to believe that the bureaucrats who really run Japan were being humbled. MITI's supposed fall from grace is a case in point. True, this institution, the preeminent symbol of bureaucratic omnipotence, has lost an important measure of influence in recent years. Japanese media trumpet this shift in fortunes as evidence that the entire Japanese bureaucratic system is in decay.

But it's not quite the way it seems. MITI's influence has declined because its client base, Japanese manufacturers, don't need MITI as much anymore. They are vastly more successful and sophisticated than they were 30 years ago. And the spread of their investments around the world means MITI can't possibly monitor their every step.

So in pursuit of a new role, the agency has become an unlikely convert to reform. The mandarins of MITI these days are urging wholesale deregulation of such key sectors as telecommunications, land and housing, distribution, power generation, financial markets, and pricing.

But its transmogrification into a voice for reform is misleading. MITI's goal is to make Japanese industry more efficient, not less. And other ministries, particularly Finance, have gained power as MITI has faltered. The ministries governing posts and telecommunications, transport, health, and agriculture have never been more supremely confident of their role in guiding Japan. Their vision of change is entirely different from MITI's. They want to undertake deregulation but only at the margins. Adjustments are welcomed. Sweeping change is rejected. The Posts & Telecommunications Ministry, for example, sees the need for "almost nothing" in the way of deregulation, says Yoshio Utsumi, director general of international affairs.

MITI can't force these other ministries to undertake sweeping deregulation. Politicians are not strong enough to muscle it through. Nor are consumers or voters. So in spite of all MITI's talk of radical deregulation, there is no challenge to bureaucratic control of Japan's economy on the horizon. It will be steady as she goes.

-- KEIRETSU. Outside of government, some of Japan's spinmeisters are arguing that the keiretsu, the business groups that form the backbone of Japan's economy, are weakening. The evidence is said to be some sell-offs of the cross-holdings among companies in the groups and some decline in sales to each other. If in fact the keiretsu are undoing some of their cozy ties, that might represent a fundamental opening of Japan's economy.

The keiretsu that has attracted the most attention in this regard is Mitsubishi, Japan's largest group. In one notable case, the trading company Mitsubishi Corp. sold 4.5 million shares of Mitsubishi Bank, and the bank sold 3 million shares of Mitsubishi Corp. Group members also don't seem to be selling as much to each other. Executives say that sales of Mitsubishi companies to one another is now typically below 10% of each company's total sales. Mitsubishi Motors Corp. recently created a flap by going outside its normal buying pattern to buy steel from South Korea because of cost pressures from the strong yen. Mitsubishi Heavy Industries Ltd. has been particularly aggressive in looking outside the group for parts. Mitsubishi Corp. is distributing Hondas or Isuzus in Asian markets, not cars made by Mitsubishi Motors.

Is the Mitsubishi keiretsu fading away? That's not the way Minoru Makihara, president of Mitsubishi Corp., sees it. What's happening is a natural step in the evolution of Mitsubishi companies as they expand internationally, he says. Group cohesiveness has weakened only in areas where it's no longer necessary. In other sectors, the group is still pulling together. Mitsubishi Petrochemical and Mitsubishi Kasei merged because, separately, the two chemical companies were too small to compete against Dow and DuPont, says Makihara. That is a classic example of keiretsu behavior--orchestrating the survival of weaker members.

The disposal of cross-shareholdings, meanwhile, has taken place only in a few isolated cases. Such deals are done by prior agreement of all concerned and the shares usually sold to a new cross-holder approved by the company whose shares are being sold. And the fact that group members are looking outward for suppliers or other relationships when warranted is a sign of strength. "There is more competitiveness introduced with the weakening of the group links," says Makihara. Like a flock of birds, members of the keiretsu flew closer together 30 or 40 years ago when they were weak. But now that they are more confident and bigger, "they can fly apart," he adds.

So despite appearances, the underlying trend in Japan's keiretsu is one of gathering competitive strength and sharper international focus, not dissolution. Despite a few sell-offs, the real mechanisms of financial control through banks, insurance companies, and trust banks are still in place, says Sakakibara of the Finance Ministry.

In sector after sector, it's not a question of Japan clinging rigidly to the past. Instead, the real message from Tokyo is: Yes, we Japanese are changing. But we're not giving up on our model or our values. We're just getting better. And we're expanding into the world.

That's what makes the confusion about change in Japan so tragic. "There are tremendous changes that take place," says Glen S. Fukushima, vice-president of the American Chamber of Commerce in Tokyo. "But if you ask what are the implications for Western interests, the answer is that these changes are not going to create automatic benefits for the outside world. The changes that take place will benefit Japan." The sooner the Western world recognizes that central truth, the better able it will be to come to grips with a new Japan that may be even stronger than the old.

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