Japan: The World's Worst Economy

When the financial crisis first began, one big worry was that China would be hit hardest amongst the Asian countries because of its huge dependence on exports to the West. In fact, China is doing pretty well, thanks to an enormous government stimulus package – it will likely grow 6-8 percent this year, which is less than before, but about as good as it gets in this environment.

Instead, it's the rich neighbor to the East – Japan – that's done worst. I was in Japan last week when the government released truly shocking first quarter GDP figures – Japan's economy shrank nearly 16 percent on an annualized basis. No rich country has shrunk that much since the 1930s, maybe even further back (I'm working on getting that historic context, will post as I do).

What happened? Very simply, about half of Japan's economy is dependent on manufacturing (a much higher percentage than most other rich nations), and in particular, on car and consumer electronic exports to the U.S. Given that, it's no surprise that production has fallen completely off a cliff – Toyota, for example, had to shut down all its plants for 41 days to slash inventory. Sony is laying off 10,000 people – so much for Japan's "job for life" model.

The entire country spent last week wringing its hands about all this. Why did we depend so much on the U.S.? How can we grow the China market? What's the next big industry we can develop? (On that front, green technology and more efficient agriculture are amongst the ideas being bandied about).

While all these things are worth discussing, I don't think Japan's problems will be so easily solved. A couple of years ago, Newsweek's Tokyo correspondent Christian Caryl did a fabulous Newsweek International cover story on why the Japanese – with all their tech prowess – didn't invent the iPod. The simple answer is that they are stuck in old paradigms – the same political party has been running things for 50 years, companies can't move on from their 1980s business models, demographics are dismal, and people are terrified of embracing new ideas (gadgets aside) and newcomers (immigrants make up less than 2 percent of the population, and aren't encouraged despite a rapidly aging society).

I must say that while I love the Japanese aesthetic, as well as the country's art and music, I wasn't sorry to leave last week. This probably says more about me than the Japanese, but I had a constant, subtle feeling of being an awkward gaijin always on the verge of making some etiquette error. I find that culturally, I'm much more comfortable in China. I'm now in the Pearl River Delta area, aka The World's Factory. Yesterday, I interviewed a bunch of students at Sun-Yat Sen University in Guangzhou, and when I asked one of the students her impressions of the Japanese, she said that she felt they had a lot of rules, and that she didn't know how to follow them. It put me in mind once again of the similarities in character between Americans and Chinese. Despite our obvious political differences, we are both generally brash, arrogant people from big empire countries, and on the upside, have fewer barriers to movement within our societies than either Japan or Europe.

Japan is still America's oldest and best ally in Asia, but will be interesting to see how these similarities and differences play out as the U.S. moves closer to China diplomatically.