TOKYO – As the sun climbs out of the Pacific, a dull orange disk on a steamy, smoggy morning, I discover today’s Japan in the green oasis of a Tokyo park.
Across the street sit the twin towers of City Hall, a skyscraper inspired by the Cathedral of Notre Dame. At one end of the park, an old man visits a Shinto shrine, clapping twice to get the attention of the spirits to whom he has come to pray. At the other end, the Park Hyatt Tokyo perches 40 stories high atop a busy office building.
I have come out for a morning jog, but I find myself in a campground. The park teems with homeless men. Most look as though they have been homeless for a long time. Mostly they are sleeping. Some are bathing in a fountain. One has a portable generator hooked up to a radio.
The homeless brigades are not menacing. A mother with a toddler, and several Tokyoites out walking their dogs, ignore them.
Japan has just endured its fourth recession in a decade. Though most of Tokyo still bustles, and everything from the Shinkansen bullet train to the Disneyland bus runs like clockwork, the men in the park are evidence that something in Japan is broken. This is an egalitarian society, not given to extremes of wealth and poverty. It is a place where everyone is expected to contribute to the struggle for prosperity on a resource-poor chain of islands. It is a place where, until recently, large companies guaranteed their workers lifetime employment.
What’s wrong? And when will it be right?
From my home base in New York, I have advised clients for years that it would be foolish not to invest in Japan. This is the world’s second-largest economy, twice the size of Germany’s. Its people are universally literate, highly educated, hardworking and thrifty. It is a stable democracy, the capital of Asian capitalism. Would a rational investor not want to be here? I did not think so.
Yet the country’s economic performance has been dismal for well over a decade. The Nikkei stock index hit 18-year lows this winter before rebounding a bit this spring. Unemployment hovers near postwar highs, though still only at half the rate recorded in much of Europe.
So our family vacation to Japan also served as a reality check. Is Japan, up close, as attractive an investment as it seems from 8,000 miles away? Is a turnaround at least foreseeable? Or is Japan destined to be another Argentina, a place that two generations ago was economically on par with Canada, but has since mismanaged itself to Third World status?
A week in Tokyo and Kyoto did not make me an expert on Japan. Because of the language barrier, it did not even allow for a look at much of the Japanese popular and business press, although there are some very good English-language newspapers available here. But it did provide a chance to meet the Japanese people on their home turf. I was able to discuss the country with English-speaking natives and to see firsthand the quality of the infrastructure and the discipline and energy of the people who still thronged the business district at 9 p.m. Though I came of age in the 1970s and 1980s, when Japan’s manufacturing prowess already was the envy of the world, I was nonetheless startled by the vast scale of the industrial heartland that sprawls from factory to factory in an arc around Osaka.
My visit also gave me an opportunity to study Japan’s history and culture, to gain some clues about how the Japanese are likely to deal with their current adversities.
A Good Long-Term Bet
I came away still convinced that Japan is a good bet in the long term. How long is unknowable. The country’s economic wounds are almost entirely self-inflicted, the result of wrongheaded policies that make Japan poorer than it ought to be in light of its generous stock of human and financial capital.
Japan is what the United States might look like economically if the restructuring of the 1980s and 1990s had never happened. Bloated industries stumble along, sustained by financing from banks that throw good money after bad.
Enormous sums are sucked from the cities to sustain an unproductive hinterland. Trade barriers protect farmers from competition, tying up scarce land in useless rice fields, which are kept green by huge irrigation systems that drain tax dollars. The rice is then hauled over expensive, underused roads that are built and repaired just to create jobs in the politically connected construction industry.
Meanwhile, lack of land stunts the housing industry, which in the United States is a reliable generator of consumer demand and economic growth. High marginal tax rates discourage initiative and risk-taking, which are hard enough to come by in Japan’s conformist culture. A Japanese citizen is only one-fifth as likely as an American is to own stock.
In its fruitless attempt to spend its way out of economic decline, the Japanese government has built one of the world’s largest debts. Now, with the country nearly tapped out, investors have been worrying that this last prop of the Japanese economy is about to give way. Japan’s credit rating is poised to sink to a point below that of Botswana.
It’s a gloomy picture. One can understand why many investors have given up on Japan. I think they are making a mistake, however, by underestimating Japan’s capacity for change.
Change does not happen here in the same manner as in the West. In the West, change comes like a tide, steadily but often gradually, as new practices and beliefs are adopted by some who serve as examples for the rest of us.
Japan relies more on consensus. Disagreement is unseemly and confrontation is avoided. Things tend to stay as they are for a very long time, until the old way simply ceases to function. Then a new way is adopted almost overnight. Just after America’s Civil War, Japan went from being a feudal society under the Tokugawa shoguns to being an industrial power under Emperor Meiji. At the end of World War II, a parliamentary democracy was installed and the would-be empire dismantled, and Japan staged one of history’s great economic booms as it rebuilt. When the Japanese decide to do something, everyone gets on board, and they almost always do it well.
In this case, Japan is going to have to decide to put more power in the hands of the individual, and much less in the hands of politicians and the bureaucracy. Labor and capital have to be allowed to flow to where they can be most productive. The homeless men in that Tokyo park are evidence that the process of reallocating labor is at last under way. Now, the perhaps even more difficult task of reallocating capital must begin. Japan’s banks must be recapitalized, if necessary by foreign investors, so they can resume lending to productive businesses. Failing enterprises should be shuttered or sold for whatever they can bring.
The restructuring process appeared to get a major boost last year with the election of reformist Prime Minister Junichiro Koizumi. But Koizumi’s proposals have met slow going against entrenched opponents. It remains to be seen to what extent Koizumi actually will be able to force his policies through a legislature and a bureaucracy peppered with an unyielding Old Guard. But if Koizumi fails, someone else is bound to come along behind him with similar or even more radical ideas, and probably with even greater popular backing in the face of continued economic failure.
Yes, there are pitfalls that could thwart a Japanese economic renaissance. With its almost absurdly low birth rate and its continuing failure to give women their due in the workplace and the home, Japan may be condemning itself to a future shortage of skilled labor. It probably will not be willing to bridge this gap with immigration, at least in our lifetimes.
I also worry about the potential for a dangerous economic and political rivalry between Japan and China. While armed conflict may seem like the remotest possibility, a “Finlandization” that makes Japan unwilling to challenge China (as the democratic Finns were too intimidated to challenge the Soviets during the Cold War) could marginalize the Japanese and undermine their economic success. Democratic transition in China would greatly reduce the risk of strife for all of the major countries in East Asia, increasing the prospects for long-term prosperity for all.
These are very long-range fears, however. In the shorter term, Japan has a chance to engage in the kind of restructuring and associated burst of economic growth that the United States has experienced for most of the past 20 years. For that to happen, the Japanese will have to be prepared to withstand a painful transition. But these are people who have shown, time and again across the centuries, their capacity to observe what goes on elsewhere, and to adopt and adapt practices that can be helpful here.
I think the odds are good that the Japanese will get it right, sooner or later. I am preparing myself for a fair share of policy and investment setbacks along the way, but I am not giving up on Japan just yet.