"Japan Will Remain A Terribly Important Economy"

Asia expert Ezra Vogel on the nation's plight--and its prospects

Ezra F. Vogel gained global attention in 1979 with his book Japan As Number One. It argued that other countries could learn from Japan's social organization and management methods. Now, 20 years after the book's publication, Vogel, director of Harvard University's Fairbank and Asia Centers, reflects on Japan's plight and how well his thesis stands up. He spoke with Contributing Editor Robert Neff in Tokyo.

Q: The Japanese government says GDP grew 1.9% in the first quarter. Is Japan's economy out of the woods?

A: I don't think so. There are still a lot of bad loans. One of the biggest problems is that, with the globalization of the financial community, there will have to be a higher return on investment to attract foreign capital. Getting those returns will require tremendous restructuring.

Q: What should be done?

A: A lot of government deregulation is still necessary. Paradoxically, real suffering may force companies to move more quickly.

Q:What went wrong with Japan?

A: The system [promoted] savings and channeled them into sectors where people were willing to learn, work hard, and unite. Now, when you have global flows of capital, Japan has to adapt to international financial markets. [But] fear of what would happen if they had open competition and the fact that people are fairly satisfied with their lives have muffled the push for change.

Q: Why was Japan able to adapt its economy so well back in the '50s, '60s, and '70s but not since the bubble burst in the early 1990s?

A: Already in the '50s, they were preparing for the '60s and '70s. They were studying the markets and foreign products. The targets were fairly clear. But once they caught up with the industrial levels of Europe and the U.S., some of the best Japanese companies could issue bonds overseas. Local banks then were stuck with the poor companies. [And] a lot of protected banks and insurance companies were afraid they would flop if they gave up the old system.

Q: How serious is the erosion of lifetime employment and seniority in companies?

A: I am still very skeptical. Even though the formal contract may be ending, I think the basic understanding is that when young college graduates go to a sizable company for a regular job, companies will continue to look after them. Overall, I think the social contract is still remarkably in place.

Q: Do Japan's travails suggest its model isn't viable for developing


Many Western economists who haven't carefully studied the situation argue that Japan could have been even better had it opened its markets completely. But consider how Japan became the second-largest economy in the world. That was an extraordinary achievement. I think for countries like Indonesia, Thailand, and to some extent China, many aspects of the Japanese model are still appealing.

Q: To what extent will Japan's political economy converge with the Anglo-Saxon model?

A: They have to develop a system where return on investment is up to international standards. But I think Japanese companies will still have ways to preserve some benefits of social unity.

Q: Are you still bullish on Japan?

A: I'm a bull in this sense: I think the Japanese have the organizational capacity, education, and economic size to continue to be a player. Americans and Chinese who count them out are simply wrong. I think Japan will remain a terribly important economy. Whether Japan will maintain its leadership in Asia with the rise of China is an open question. It depends partly on how well Japanese institutions adapt.