This Nation Is An Island

Others say they've been disillusioned by the efforts of corporate managers and bureaucrats to prevent foreign shareholders from exercising significant control over Japanese companies. The case of the Children's Investment Fund is only the most recent. Last fall, the Bull-Dog Sauce Co.—a 100-year old iconic company—diluted the shares held by Steel Partners, a U.S. investment fund that was angling for a takeover. The move was later approved by Japan's Supreme Court. "From the investors' point of view, this suggests that there is an enormous risk" in investing in Japan, says Nomura's Nishiyama.

Many members of the Japanese elite seem to like it that way. Tony Miller of the investment fund Ramius Capital says the problem is less a matter of irrational xenophobia than a deep fear of change, no matter who's bringing it. "The concern that companies with entrenched management have is that a new investor will come and force them to change doing business the way they have for years," says Miller. "They have the same level of resistance to domestic agents of change as they do to foreign agents of change." The establishment's fear is quite understandable. Thanks to the protections they've enjoyed at home, Japanese companies are now valued far less highly by the global market than international rivals are, making them potential targets for foreign takeovers—such as Arcelor Mittal v. Nippon Steel, the world's largest steel maker. Hence the recent rush among Japanese companies to set up poison pills and other takeover defenses—including a revival of cross-shareholdings, which allow a conglomerate to protect its subsidiaries behind a complex mesh of ownership ties. Under the cross-shareholding scheme, companies own shares with each other on the long-term basis and mutually become "stable shareholders." Such cozy webs appeared to be disappearing under Koizumi.

Then again, a lot of the reluctance to open up seems to have its roots in plain old complacency. Ordinary Japanese can be forgiven for thinking that their economy is still big and rich enough that there's no need to court outsiders. "On a certain level Japan just doesn't need money from the outside world," says R. Taggart Murphy, a professor of international business at Tsukuba University. "It's not like the U.S., which daily requires inflows of foreign savings." Kiyoshi Kurokawa, special adviser to the Japanese cabinet, frets that fewer Japanese are traveling to the United States to study—in striking contrast to the Indians and Chinese who are queuing up for foreign M.B.A. degrees. Kurokawa notes that one recent South Korean TV-sitcom told the story of two Koreans who fall in love at Harvard. "Can you imagine? For the Japanese that would be impossible." Tsuyoshi Komori, president of Mercer Japan, says there's "not enough sense of urgency here. The domestic market is so big that many people think they don't have to change right away."

Exhibit A: the striking lack of conversational English among many educated Japanese. In the past, says Komori, many assumed that they didn't need English, given that the primary task of the economy was making things for export. "Manufactured goods in and of themselves served as the medium of communication. But now the structure of the Japanese economy is changing. The service industry, which requires personal communications, matters far more than before." Whatever the reasons, it's clear that something has to give. Japanese companies, says Komori, have to globalize themselves. "The nature of money has changed profoundly in recent years," he says. "Capital moves so much faster than it did before. And Japanese companies [still putting emphasis on the consensus] just can't keep up with the trend."

So, how to break out of Japan's self-imposed culture of isolation? There are no quick fixes, as the obstacles are deeply rooted in Japan's economic model.

Some voices in Japan, including ex-economic reform czar Heizo Takenaka, are now calling for assets to be diversified into higher-return investments—perhaps via a Japanese sovereign wealth fund à la China or Abu Dhabi. Any unwinding of those American bonds would cause the yen to rise, something that no one in Tokyo wants to see.

But beyond the sheer economic challenges, there are massive cultural hurdles to overcome before Japan can take its rightful place in the global economy. The broadcaster NHK recently aired a memorable exchange between Charles Lake, a former U.S. trade official and present-day business executive in Tokyo, and a few of his fortysomething friends from the days when he attended Japanese school as a young expatriate. Over dinner, Lake—who also happens to be the head of the American Chamber of Commerce in Japan—found himself defending Western investors against the accusation that they're "vultures" who buy shares in Japanese companies merely so that they can plunder them and run. One of the Japanese friends wondered aloud whether Americans can work for American interests without somehow shortchanging Japan. When Lake responded that it's not a "zero-sum situation," one of the men shook his head skeptically. "If Japanese people say something is win-win, I'd understand that. But if an American says it's a win-win, I'd think, 'Is that true? Does he really mean it?' " The name of the documentary that contained the scene is revealing: "Nihon Banare," or "Battle Against Japan Passing." It's a phrase that's becoming ubiquitous, as Japan watches the world go by.

© 2008