“It was the best of times, it was the worst of times,” wrote Charles Dickens in the opening passage of his famous novel “A Tale of Two Cities.” Although written 150 years ago, the sentiment aptly describes Japan’s current predicament, barely two decades after seeming on the cusp of global economic supremacy.
By the end of 2009, Japan may have surrendered its long-held position as the No. 2 global economy to regional rival China. Government stimulus packages aimed at ending the worst recession since World War II are set to increase public debt to more than 170 percent of gross domestic product, the highest in the industrialized world. Meanwhile, politicians squabble over pension reform and how to raise the birthrate before the demographic time bomb detonates.
On the plus side, Japan is set to post an economic recovery in 2010 and remains a manufacturing and creditor superpower, with a healthy trade surplus and over $1 trillion in foreign currency reserves. Household financial assets exceed ¥1,400 trillion, bolstering the spending power of the longest living and healthiest people on the planet.
In such a fluid situation, politically and economically, it takes a keen analytical mind to identify the key underlying issues and assess the potential options. Such qualities mark the work of Akira Kojima in “A New Development Model for Japan,” a select compilation of the distinguished journalist, economist and author’s essays written from 2000 to 2008.
The title is somewhat of a misnomer, however, as the book includes a wide-ranging collection of articles on topics ranging from the “quiet rebellion” of young Japanese, East Asian energy and foreign policy issues to lifetime employment and judicial reform.
Yet the underlying message is clear: Japan needs a new model for success in the globalized world of the 21st century, one reflecting the significantly different internal and external environment compared to that of the second half of the 20th century.
According to Kojima, Japan went through two stages of “catch up” development in the postwar period in its efforts to achieve advanced-nation status. The first concluded at the end of the 1970s, when Japan achieved U.S. levels of automotive and steel production, and the second, an income catch up, occurred due to the yen’s appreciation following the 1985 Plaza Accord.
Japan can be justly proud of its economic miracle, which was achieved largely by importing advanced Western technology, improving on it and exporting, with a bank-centric system of indirect finance ensuring that the high savings of the household sector were funneled into the government’s preferred industries for increased business investment.
Nevertheless, Kojima argues that it was exactly at this point in the mid-to-late ’80s — a time when the “Japanese system” was being lauded as a successful role model for the world — that a switch was needed to a “post-catch up” model in which the nation stopped copying and started leading.
The failure of the political and business leadership to change its ways is blamed for the late ’80s economic bubble and subsequent slump of the 1990s, with the private sector unable to eradicate the “three excesses” of production capacity, debt and employment until 2005.
However, while the authorities made numerous policy errors during the bubble period, few would have considered amid the general euphoria that the system that created the nation’s economic success could also be responsible for its failure.
Kojima is on more solid ground when he criticizes the delayed disposal of the mountain of bad loans that resulted from the bursting of the bubble, which wiped out three years’ worth of GDP in the 1990s, the “lost decade.”
While Japan’s battered economy underwent slow surgery, the Cold War ended and China, India and other emerging economies abandoned socialism for market-driven policies friendly to foreign investors, launching what the author calls an era of “mega-competition.”
When Japan’s business sector finally started showing signs of life again in 2002, it had awakened to a world that saw the Japanese system as a model for failure rather than one to emulate.
While the country yet remains in an “exploratory stage” searching for a new structure, Kojima sees the next “post-catch up” period as one in which Japan takes “risks on its own to develop and explore new technologies and new industrial frontiers.”
By pioneering the products and services required for an aged society along with improving working opportunities for women and seniors, Japan has the opportunity to seize the leadership again in Asia ahead of similar demographic trends in China and South Korea.
While only hinting at how this might be achieved, there is enough material in Kojima’s essays to inspire some optimism about Japan’s future. Only time will tell if the present generation of leaders is up to the challenge, and whether the “best of times” lie in the future or the past.