Japan's Harsh Reality Check

It was only a few years ago that the new century was being called "the Asian Century." Led by Japan, Asia would (we were told) dazzle with its own brand of efficient and humane capitalism. The new century could still belong to Asia--who can tell?--but the odds that Japan will be at its head are falling. The reasons for this transcend China's growing power and heavily implicate Japan's own resistance to change. Here lies a lesson for Americans and, indeed, everyone.

Visiting Japan (as I recently did), you do not sense a country in obvious crisis. Tokyo remains vibrant and congested. Its port--miles of cranes, docks, warehouses and ships--creates a captivating panorama. The outward prosperity, though, conceals two deep problems. The first (well known) is feeble economic growth. The second (less well known) is a low birthrate.

Let's inspect some numbers. In the 1980s, Japan's economy grew at an average annual rate of almost 4 percent, easily exceeding the U.S. rate of 3 percent. Japanese industries seemed poised to dominate global technology and finance. In the 1990s, the picture completely reversed. Japan's economic growth averaged only 1.5 percent, half the United States' 3 percent. The vision of Japanese technological and financial superiority has faded.

By itself, slow economic growth need not cripple a country as wealthy as Japan. People can live well and pay for needed government services. By contrast, the low birthrate threatens Japan's vitality through progressive depopulation. Without immigration, a country's population stabilizes if adult women have an average of two children. In Japan, women are now having an average of 1.5 children, reports the U.S. Census Bureau. The present population of 126 million is projected to drop to 101 million by 2050. About a third would be older than 65, up from 17 percent now.

Of course, most advanced countries face falling birthrates and aging societies. Germany's and Italy's birthrates are below Japan's, and the United States is at the replacement rate (two children per woman). Moreover, projections of the present into the future are usually simplistic. Still, Japan exhibits a pervasive difficulty in adapting to change.

What has immobilized the economy is a collision between the country's social preferences and its economic needs. In the mid-1980s, the export-driven economy foundered on its own success. Huge trade surpluses caused the yen to appreciate and made exports less competitive. The obvious solution was to replace export demand with domestic demand. If Japan couldn't flourish by producing for Americans, why not flourish by producing for Japanese?

The trouble was that Japan had protected countless domestic industries (farming, banking, small retailers) for social reasons. People valued tradition, job security. Government rules and private custom discouraged disruptive competition. But uncompetitive industries couldn't generate new products and low prices that would ignite domestic buying and job creation. Only grudgingly have restrictions been relaxed, as expedient economic policies (low interest rates, big budget deficits) proved ineffective.

Japan's economy is now a titanic struggle between old and new. There are signs of revival. Deregulation in some industries--mobile phones, for instance--has succeeded brilliantly. Since 1994, mobile-phone ownership has spurted from 2 percent to 36 percent of households. More venture-capital companies are nurturing start-ups, from Internet firms to temporary-work agencies. Foreign companies are making acquisitions that once seemed off-limits and also finding it easier to hire bright Japanese managers.

Against this is the heavy drag of the past. Many industries have excess capacity and padded payrolls: a legacy of overoptimism and the cheap credit of the 1980s' "bubble economy." Chemical companies are cutting capacity at 15 plants, reports Goldman Sachs, the investment banking firm. Nippon Telephone & Telegraph recently froze hiring and aims to eliminate 21,000 jobs by 2003. Huge government budget deficits will probably ultimately require a tax increase.

Given Japan's strengths--a strong work ethic, technological virtuosity--the economy could pleasantly surprise. What's harder to imagine is how the low birthrate might reverse. In Tokyo, it's explained this way: Japanese mothers are expected to commit themselves single-mindedly to children and husbands; fathers do little housework and spend much time socializing with co-workers; younger women increasingly reject their allotted roles and, with more job opportunities, marry later or don't have children. Says one longtime career woman: "Japanese women have been disillusioned by their mothers--they devoted themselves to their children and husbands, and what did they get for it?"

Compared with the United States, Japan hasn't reconciled work and family. In America, parents--and companies--constantly agonize over who's shortchanged, children or jobs. But many messy and imperfect accommodations still encourage couples to have families.

Here lies the larger lesson. Every society faces the need to protect social stability and its values while also adjusting to change. The American and Japanese approaches differ dramatically. In the United States, the process is often informal. People and enterprises have to adapt. Facing competitive threats, U.S. companies meet the competition--or fail. In general, government doesn't protect them. Parents and bosses grapple with work and family issues. This system, reflecting America's individualistic heritage and suspicion of government, has many drawbacks. It often inflicts hardships and inflames social conflict. But in general, people gradually learn to cope.

Japan's approach--emphasizing regulation and conformity to communal values--aims to manage change. This system can provide a strong sense of national direction, as Japan showed for decades. But a system that mistakes managing change with muffling it engages in illusion. The result is to allow irresistible pressures to build to disastrous proportions. This, for Japan, was the 1990s' reality check.