BOSTON/TOKYO — As they lament the West's obsession with China and prepare to host the Group of Eight in July, Japanese fear becoming a minor planet in the Chinese orbit. Trouble is, Japan still sees manufacturing as the key to prosperity, despite the fact that it is vulnerable to offshoring.

To stay ahead of China, Japan needs to develop players who innovate at the top of the value chain — providers of things like software, content and services. But these sectors are the country's Achilles' heel, as exemplified by the absence of Japanese companies internationally in these fields as well as consulting, advertising and media. Unless it changes course, Japan could be crushed between the anvil of China's manufacturing clout and the hammer of Western companies' prowess in services.

Why can't Japan lead in the industries of the 21st century, where success is no longer synonymous with manufacturing excellence? One key reason is that many of its sectors are still organized in rigid hierarchical structures, reminiscent of the keiretsu of the heyday of Japan Inc. in the 1980s. In a keiretsu, the industrial group's top firms, linked by interlocking shareholdings, lead the conglomerate, while smaller players, often suppliers, depend on them for essential functions such as financing, marketing, export services and innovation. This practice can stifle entrepreneurship by creating a kind of planned economy within the keiretsu that fails to transmit market signals.