What makes the slump significant is that it coincides with Japan’s loss of other advantages–especially a favorable exchange rate–that supported its economic success. Japan is completing the progression from an “economic miracle” (poor, but rapidly growing) to a “mature economy” (prosperous, but problem ridden). Between 1950 and 1973, the economy grew about 10 percent a year. Between 1974 and 1990, annual growth averaged only 3.9 percent. Assuming the recession ends soon, potential growth may now be 3 to 3.5 percent. This hardly exceeds the present U.S. rate (2.5 to 3 percent).
These drab numbers refute the view that Japan has discovered a new model for economic growth, vastly superior to our own. To be sure, there are differences, and some Japanese practices are usefully copied. But the main ingredients of Japan’s success are not novel: hard work, good management and productive investment.
To these, Japan added some special advantages. For many years, it sustained high growth by adopting technological advances already pioneered abroad. More recently–say, since the mid-1970s–its exports benefited from two special factors: first, a low value for the yen, which made Japan’s exports less expensive in global markets; and second, sleepy competitors (often American) that underestimated Japanese products.
All these favorable conditions are now vanishing. There aren’t many major foreign technological advances left to borrow. The yen’s appreciation (rising to 101 to the dollar, before retreating slightly) has deprived Japan’s exports of their huge cost advantage. And U.S. companies have awakened to Japanese competition, reclaiming lost ground in some industries (autos and semiconductors, to name two). The recession merely makes matters worse.
By the statistics, it looks mild. In 1993, Japan’s output will decline nearly 1 percent, says economist Peter Morgan of Merrill Lynch’s Tokyo office. This would be the first drop since 1974. But unemployment is still below 3 percent and, even if it rises, is not severe by our standards. The statistics, though, obscure the downturn’s pervasiveness and the possibility that the worst is yet to come. Consider some recent Japanese press reports (as summarized by Japan Digest, an English-language newsletter):
Nov. 9: “Representatives of ten major industrial sectors glumly told the Economic Planning Agency they expect the recession to continue at least through next spring–and the steel, electric machinery and machine tool industries all said they may have to start laying people off if there isn’t a turnaround soon.”
Nov. 16: “October sales of 27 Tokyo-area department stores plunged 10.4 percent from a year ago in a 20th monthly decline.”
Nov. 23: “Mazda furloughed all but the security guards among its 25,000 workers Monday, making it the first Japanese auto company to use that tactic as a way to cut production.”
The whole notion of “Japan as No. I” presumes that Japan is a better-organized society than ours. In some areas, it is. The economy is not yet one of them. Those who think otherwise–both in Japan and the United States–believe that farsighted governmental guidance explains Japan’s economic superiority. Recent events have battered this theory. For starters, the recession is mostly self-inflicted. In the late 1980s, Japan sustained high growth with easy credit. Low interest rates induced an investment boom in new factories–and stock-market and realestate speculation. This could not last. The stock and real-estate markets crashed. Banks were stuck with billions of yen in bad loans. Japanese firms built surplus production capacity.
Perhaps a tax cut (widely expected, but not yet announced) can stop the slump. Economist Morgan expects a 7 trillion-yen tax reduction–about $65 billion–to help the economy grow a meager 0.8 percent in 1994. But at most, this is a stopgap. The real indictment of Japan’s governmental and bureaucratic leadership is that it hasn’t prepared for a future that had to happen. Sooner or later, the export machine had to slow and, with it, the accompanying investment spending. Japan can sustain solid growth only by permanently raising consumer and government spending on housing, leisure and public services.
This is Japan’s blind spot. For years, the government has churned out reports about the need to increase consumers’ living standards and relax restrictions against inexpensive imports. Unfortunately, these pronouncements have been mostly rhetoric. The Japanese don’t genuinely see the need for higher consumer spending. They don’t genuinely understand that, unless they import more, they will hurt their exports by forcing up the yen’s exchange even more. (Overseas surpluses ultimately push up a nation’s exchange rate.) Indeed, the slump’s scariest aspect is that Japan won’t make the basic changes needed to revive growth; the danger then is that weak exports and investment would raise unemployment, deepen consumer pessimism and prolong the slump.
Americans should not gloat. Bad news for Japan is not good news for us. Its recession depresses our exports and weakens global economic growth. Nor should Americans delude themselves that the best Japanese companies have suddenly lost au their technological and commercial edge; they haven’t. They will remain fierce competitors and, in some markets, dominate.
But we should keep perspective. We’ve been told for years that our economy is about to be overtaken–by the Soviet Union, Germany, Japan. It hasn’t happened yet and won’t any time soon. Our system isn’t perfect. It’s chaotic and often cruel. But its very messiness is a measure of a capacity to change that is missing in many other societies. It has created the world’s biggest and most productive economy for all of this century–and will into the next.
