Soon to be number three
IT LEFT American executives quaking in their loafers and cheered a generation of Japanese salarymen. “The extent of Japanese superiority over the United States in industrial competitiveness is underpublicised,” trumpeted Ezra Vogel of Harvard University 30 years ago in “Japan as Number One” (see article), which became one of the most-discussed business books of its time.
The world's second-largest economy had surpassed America in gross national product per person according to some measures, and looked on course to overtake it. “Vogel's book helps explain why Japan is the most dynamic of all modern industrial nations,” gushed Foreign Affairs. America was mired in stagflation, with an unemployment rate nearing double digits. Japan seemed to be the better bet.
Yet things didn't quite work out the way Professor Vogel expected. Japanese industrial production rose by 50% in the decade after 1980—a remarkable trajectory for a country crammed into an area the size of Montana. But growth was driven by financial leverage and overinvestment. Property and share prices bubbled, rising as much as sixfold.
The bubble's collapse, beginning 20 years ago this December, led to almost two decades of economic doldrums. It took 15 years for industrial production to surpass the 1991 peak. In the current crisis it collapsed to levels last seen in the 1980s. In time America's fearful “Japan bashing” gave way to sniggering, then indifference. Last month a poll of market professionals by Bloomberg, a news provider, put Tokyo last among several big cities as a financial capital. In the 1980s all of the world's top ten banks measured by deposits were Japanese.
Why didn't Japanese business regain momentum? Companies, accustomed to being protected, were too slow to change, says Karel Van Wolferen, author of “The Enigma of Japanese Power”, published 20 years ago this year. Steven Vogel of the University of California in Berkeley (and Professor Vogel's son), blames regulators for failing to clean up the banking system until long after the crash.
His father had argued in 1979 that Japan set many examples to America: good labour relations, low crime, excellent schools and elite bureaucrats with long time horizons. “And the US did learn,” particularly in manufacturing, he says today from retirement in Cambridge, Massachusetts. Yet change is needed in Japan, he admits. A system geared for high growth has been unable to adapt.
Though it is still the second-largest economy, Japan may well lose that title to China in 2010. Many are now cooing about China's growth. But the lesson of Japan is that nothing is inevitable.
This article appeared in the Business section of the print edition under the headline "Land of the setting sun"
