Why Japan Needs the Net

Embracing it may be the only way its hidebound industries can become efficient. But although a plan exists, it's going nowhere

By Ken Belson

This past year hasn't been kind to Japan. A budding recovery and market rally were snuffed out, the nation's banking crisis just keeps getting worse, and yet another Prime Minister, seemingly powerless to change anything, has lost the support of voters and will probably be ousted soon. But for all of Japan's troubles, the key to growth again could well lie in adapting to the Internet.

The stakes are huge. If the country doesn't act swiftly, it risks falling further behind the rest of the developed world in adopting productivity-enhancing innovations that could boost global competitiveness.

There's no shortage of ideas about what to do. Japan can take what has worked in the U.S. and Europe and make it better -- a technique that has served the nation well in manufacturing and electronics. Alas, the resolve to implement needed legislative reforms appears to be lagging. Japan's heavy-handed bureaucrats, clumsy politicians, and hidebound business establishment have long had a way of smothering innovation. Japan isn't unique here. Look at the struggle in the U.S. to enact campaign-finance reforms.


  But the Internet may be the only way for the country to pull itself out of a decade-long slump. That's because Japan's service industries -- banks, retailers, contractors, and real estate companies -- are drowning in red ink. Embracing the Internet could improve their efficiency, help save money on operating expenses, extend the global reach of Japanese business, and reverse the countries sagging fortunes.

Last year, the government set a goal of turning Japan into an info-tech (IT) powerhouse by 2005. It approved what the Japanese know as the Basic IT Law. The law proposes blanketing the country with a high-speed fiber-optic network and providing computers and Net training for all students. Japan's Antimonopoly Law also was amended to strip away regulatory obstacles to Internet service. Government functions will be digitized, the new law states. On paper, it's a sound, capitalistic blueprint for moving into the 21st century.

"If the past is a guide, [Japan's vested interests] will not passively accept their own obsolescence"

Just getting the blueprint was a big deal in Japan, where companies move in packs and mandarins write policy behind closed doors. But there are already signs that those same policymakers and businessmen who embraced the new Internet policy are realizing that they stand to lose the most from its success.

Japan's elites are now backpedaling. That was underscored recently in a report from the Washington (D.C.) international law firm Dewey Ballantine, entitled "The Internet in Japan: Driving a Paradigm Shift?" The advent of the Internet, says the report, "is potentially destabilizing to a number of domestic vested interests and, if the past is a guide, they will not passively accept their own obsolescence."


  Already, the banner of reform is starting to fray. Take the backbone of Japan's Internet infrastructure, the former government monopoly Nippon Telephone & Telegraph. Last December, in a highly public case, Japan's Fair Trade Commission -- usually a toothless tiger -- threatened to break up NTT's holding company if it didn't stop thwarting smaller competitors with red tape and high interconnection fees. NTT's local telephone fees are some of the highest in the industrialized world and the biggest reason why many Japanese remain reluctant to use the Internet at home.

Yet the FTC is backing off under pressure from Japan's politicians, as the powerful NTT lobby lumbers into action. Now is the time for the politicians to strengthen the commission, not weaken it.

Others warn that the government's plan for building a network of high-speed Internet service to every home, school, and business is just camouflage for old-fashioned Japanese pork-barrel politics. Says John Barber, managing director of AOL Japan: "Silicon Valley wasn't built by the government, but by entrepreneurs." Barber wants the government to deregulate sclerotic industries, then allow companies to drive the building of key services like telecommunications.


  These suggestions are good ones, but Tokyo needs to go even further. Lawmakers should revise the Commercial Code, scrapping the requirement that each newly issued company share be matched by at least $400 in tangible assets. This minimum-value requirement may have made sense for traditional Japanese manufacturers with factories and huge investments in machine tools, but it makes no sense for Internet companies. A single share in Yahoo! Japan -- the country's best known Internet stock -- sells for $41,280, and that's after falling 87% from its February, 2000, peak. Scrapping the minimum-value rule would allow companies to issue more shares at lower prices. That will boost investor interest and market liquidity.

The Japanese Diet should also speedily approve bills to allow companies to set up 401(k)-style portable pension plans. Such legislation was introduced last year but has been buried in a Lower House Welfare & Labor Committee since January. The longer the ruling LDP weighs the measure, the weaker it will become. Japanese workers still can't take their pensions with them if they change jobs.

Although many pension experts say the proposed maximum contributions in the bill -- $3,456 per year for company employees without pension plans and $6,528 for self-employed -- are too low, the government shouldn't dally. It should push for more worker mobility now and raise the limits later. And while they're at it, Japanese lawmakers should change the rules to tax stock options at a lower capital-gains rate, rather than as ordinary income. That will encourage more high-tech companies to extend stock options as compensation to employees, without risking inflation of their overall tax bills.


  As the Dewey Ballantine report notes, Japan also needs stronger intellectual property safeguards that will reassure foreign software companies that their copyrights will be protected. As it stands, many companies thinking of investing in Japan fret that Japanese competitors will buy their software, clone it, and sell it locally. Foreign investors shouldn't have to worry.

With the economy slumping and general elections ahead in July, it's time for Japan's politicians to champion a high-tech policy with long-term benefits that will appeal to voters. These fundamental issues are crucial if Japan hopes to use the Internet to transform its economy. It may the country's only way out of its long, long slump.

Belson covers high-tech issues for BusinessWeek from Tokyo

Edited by Douglas Harbrecht

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