As the Internet insinuates itself deeper into daily life, one key facet of its future role — electronic commerce — continues its explosive growth. Estimates of the amount of business conducted in cyberspace vary from $30 billion annually to nearly twice that. But one thing is certain: It is increasing by leaps and bounds. One study concludes that the “virtual economy” is growing 30 times faster than the real-world economy. Even sober analysts predict that by the year 2002 $1 million worth of business will be conducted online each minute.

Companies are wasting no time in responding. Worldwide, over half a million businesses have set up shop online. In the United States, 39 percent of real-world retailers have cyber-boutiques as well. One-third of online households in the U.S. have made purchases on the the Internet. Many more window-shop in cyberspace, even if they do not make the final purchase online.

Japan has been slow to catch the fever. According to the Japan Development Bank, business-to-consumer e-commerce reached $695 million in 1997, or about 0.1 percent of overall sales revenue. Yet the potential for explosive growth exists. Fourteen million people are already wired in Japan; the number should reach 27 million by 2001. Nearly 12,000 companies have set up shop in cyberspace, and Japanese consumers have been quick to use them. A majority of Internet users in this country have shopped online, a figure that even tops the U.S. Experts predict that sales will top 100 billion yen this year.

That is a mere splash in the bit stream. The Electronic Commerce Promotion Council of Japan expects that e-commerce will total 15 trillion yen within three years, or 1 percent of all transactions. Moreover, in true virtual-economy style, the impact of electronic commerce will ricochet throughout the economy, producing economic benefits that could reach as high as 63 trillion, yen or 13 percent of Japan’s gross domestic product, within a decade.

There is no guarantee that those gains will be realized. Electronic commerce requires both an infrastructure — much more than just telecommunications networks — and an attitudinal change. Both are difficult and time-consuming. Unfortunately, the pace of change is so fast there is no time to lose. The failure to act aggressively now could mean that opportunities will be lost for good.

Two key policies involve security and privacy guarantees. The technology for secure transactions exists, but the legal framework is lagging. Privacy need not be a concern. Databases can be protected and companies can be given incentives to ensure that they are. In fact, the real challenge is impressing upon Japanese companies the need to take that job seriously. They already have a poor record of safeguarding such information. That is one of the key attitudinal changes that the digital economy will require.

Another critical policy concerns telecommunications pricing. Opportunity is only available once people are online, however. Anything hampering that process must be eliminated. The cost of a phone call — the first step in getting online — has proven to be the chief obstacle to increasing Internet use in Japan. The introduction of cable modems and other distribution technologies will help cut costs — and the competition is forcing down the prices of land lines. Still, more should be done.

Two other attitudinal changes should be mentioned. The first is the Japanese preference for doing business face to face. It is more personal and congenial, but it is also increasingly irrelevant in a borderless, timeless world. Japanese executives must not only adopt new technology, but adapt themselves to it. That means accepting the modifications in traditional Japanese business practices that it will create.

The other shift in thinking requires accepting the changes in the structure of the Japanese economy that electronic commerce will trigger. The distribution system is going to be flattened, if not pulverized. That will have powerful repercussions, since Japan’s multilayered distribution system has provided a large number of jobs. Any policy that threatens to increase unemployment at a time when joblessness is already at historic levels must be approached with caution.

That can be finessed by encouraging the development of Internet-related businesses and by touting the ripple effects of electronic commerce throughout the entire economy. As in the debate over deregulation, the winning argument is that loosening the fetters on business will create opportunities and new jobs. The difference in this case is that Japan has no choice. It cannot opt out of the digital economy. The only question is how long it will wait, and how high a price it will pay.

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