LONDON — A three-week visit to Japan in October left me somewhat more optimistic about the Japanese scene than I was six months or a year ago. Why? There seemed to be a greater recognition that Japan had to change if its economy were not only to deliver continued prosperity to the Japanese people but also to contribute effectively to the world economy. There was not yet a consensus on the nature and extent of the changes required, but it seemed to be recognized that changes would need to be deep and fairly radical.

The main areas of concern can be summarized as follows.

One fundamental problem is Japan’s education system. Much has been written about Japanese rote-teaching methods and the practice of cramming to get into the best universities. Educators have also deplored the failure of universities to teach young people to think for themselves. Sadly, while the problem is increasingly recognized, I found little evidence that anything was being done to effect radical changes in education.

The failure of Japanese schools to encourage questioning and debate lies behind the difficulties encountered by anyone trying to teach entrepreneurship in Japan. Young Japanese who have studied at business schools in the United States or Britain tend to be much more business-minded than those educated solely in Japan, but successful entrepreneurs need to be risk takers and in the Japanese financial and industrial system the emphasis seems now to be on avoiding risks. So startup companies have problems getting finance and breaking into established markets. However, the number of new companies coming into the market — and changing attitudes toward such newcomers — suggest that the situation is changing.

Another problem is the aging population and the fact that Japan currently has a net reproduction rate among the lowest in the world. This means that the burden on those who are working will inevitably rise and the problem of funding adequate pensions will grow. Many company pensions are seriously underfunded, and much of the funding for state pensions has been invested in projects that may not provide a reasonable rate of return.

Lifetime employment is a fine principle, but the system is no longer viable. The problem is how to move to a more flexible labor system without creating too much misery in the process. Companies do have a strong obligation to their workforces, but they cannot fulfill this obligation unless they are financially sound and competitive. It would have been better for Yamaichi Securities employees in the long run, for example, if Yamaichi management had recognized this fact years ago.

The alternative of subsidizing an uneconomic enterprise at the taxpayers’ expense is no longer viable for a government whose debts grow hugely every year. I grew up at a time when many people in Britain expected jobs for life. Now the reality is that most people will have a number of different jobs working for different companies during their careers. Such changes can and do cause insecurity and family worries, but the challenges can also be stimulating.

A related problem is the slowness of progress being made in improving corporate governance in Japan. Some Japanese argue that employees come before shareholders, but employees have no power to get rid of managements that fail to maintain competitiveness and profitability. I have described Japanese (and some other) managements as self-perpetuating oligarchies. This has been especially true of large companies in which “keiretsu” holdings ensure a stable shareholder base that has been very reluctant to exercise shareholder rights to upset their friends in the company’s management. This cozy relationship is analogous to “crony capitalism.” The system is gradually breaking down as banks and insurance companies increasingly need their capital to produce better real returns. The growing emphasis placed by Keidanren on including outside auditors on boards is a step toward greater accountability and transparency, yet Japanese companies still need to do much more to improve corporate governance if they are to compete in the global marketplace.

One of Japan’s most serious problems is that of the burgeoning national debt. There still seems to be a belief in some political circles that the only way to get the Japanese economy surging ahead again is to “throw money at it,” although more radical restructuring and a greater emphasis on return on capital will be more productive in the long run.

Supplementary budgets have ensured that construction companies can continue to provide jobs, but what is the point of having excellent new museums and concert halls in every prefecture and major town if there is not enough money to fill them with exhibits, concerts and operas of adequate quality to attract audiences? The “hardware” needs to be backed up by more emphasis on “software.”

It is impossible not to be impressed by the huge improvements in the infrastructure, especially in rural areas, which remain overrepresented in the Japanese Diet not least because members of the Liberal Democratic Party draw their main support from these areas. But the prefectures, especially those in urban areas, are finding their debts mounting and are encountering great difficulties in meeting their funding obligations. Much has been done to reduce environmental pollution (although anyone passing through in the shinkansen must notice the air pollution in, for example, Fuji City), but too little attention seems to have been given to preserving the best of the Japanese countryside and ancient architecture.

The problems facing Japanese financial institutions remain serious, but the “big bang” is now unstoppable, and delaying particular liberalization measures would only increase future problems. Japanese financial reconstruction has only just begun. The process will be painful, but it has to be carried out and, as with a surgical operation on the human body, the sooner the better.

I think that Japan’s third “revolution” (the first followed the Meiji Restoration in 1868 and the second Japan’s defeat in 1945) has probably begun in earnest. Let us hope that the forces of reaction will fail if they try to halt the revolution in its tracks. The Japanese economy is not a house of cards that can be swept away by the winds of foreign competition. It can revive and flourish if, as I believe and hope will be the case, there is enough courage and determination to make the sweeping changes needed.

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