Commentary / Japan

Japan as No. 1: The 21st-century version

by Jesper Koll

Forty years ago, in 1979, two events occurred that would forever change the global perception of Japan: Sony launched the Walkman portable audio player and Harvard professor Ezra Vogel published “Japan As Number One — Lessons for America.” The rest, as they say, is history.

The rise of “small and resource-poor Japan” to seemingly unstoppable economic dominance throughout the 1980s unfolded just as prophesied by Vogel, with the Walkman becoming the most obvious symbol that, yes, Japan was No. 1.

In 1989, just 10 years after the book’s publication and the Walkman’s debut, Japanese technology giants and car manufacturers not only dominated American and global markets but captured the imagination and aspirations of global consumers.

At the same time, global financiers and capitalists stood in awe as the stock market capitalization of Japan Inc. surpassed that of America Inc., and the real estate value of the Imperial Palace grounds alone were worth more than all of California.

Of course, 1989 was “peak Japan,” and it has seemingly been on a downward slope ever since. In 2019, when economic policymakers and financial markets discuss Japan, “Japan as Number One” and the Walkman, they come up as an incredibly useful history lesson: Let’s learn what not to do, prepare for what can go wrong, understand how economic empires fail and remind ourselves that hubris comes before the fall.

All that and, among many of us Japan watchers, a strong sense of nostalgic pride: “Japan as No. 1 — those were the days.”

So how about a reality check? Yes, Japan’s stock market has collapsed and is still at barely half the level of its historic peak (while Wall Street is up more than 900 percent since the end of 1989); China’s gross domestic product has long surpassed that of Japan (and maybe on track to surpass that of America; and, yes, the combined real estate value of Silicon Valley, the San Francisco Bay area and greater Los Angeles alone is worth more than all of Japan.

In 2019, there is no shortage of statistics where Japan is not No. 1, or not even in the global top 10. However, here are three key statistics that, in my view, suggest Japan is not just much better than her reputation, but still the undisputed No. 1 in the world:

1) Japan is the global leader in income equality.

Japan no longer tops global rankings in GDP growth, but it continues to lead in the equality of income distribution. The gap between the rich and the poor is lowest in Japan among the Group of 20 and major OECD countries. OECD data suggest that the top 10 percent of income earners in Japan make on average about three times more than the bottom 10 percent, while in the United States the gap is almost six times.

Importantly, since the start of Abenomics, Japan has become the OECD leader in raising incomes for the bottom 10 percent of income earners (which have stagnated almost everywhere else). Specifically, the bottom 10 percent in Japan now earn approximately $4,000 more than the bottom 10 percent in America while 10 years ago they earned $1,000 less. Much of this positive dynamic is due to womenomics, with the rise in female labor participation rates and part-time wages combining to lift the economic fortunes for those stuck at the bottom end of the human capital spectrum.

2) Japan has the highest upward social mobility for the next generation.

Japan comes out as the clear global leader in social mobility. Social mobility is a key performance factor for the health and future well-being of a society and economy. It is arguably the most important metric to have confidence in civil society and a nation’s future. Specifically, the key measurement is called “intergenerational earnings elasticity,” which is fancy language for estimating how dependent is a child’s future economic performance on the financial status of his or her parents.

New research by the highly respected Bank Credit Analyst (based in Canada) suggests that in Japan, the financial status of parents only explains about one-third of a child’s future income and financial status. For most European countries, it is about 40 to 45 percent, while in the U.S. parents’ financial class accounts for slightly more than 50 percent of a child’s future earnings power. And while Japan is clearly No. 1 for intergenerational social mobility, perhaps shockingly, China scores extremely poorly. In China as much as two-thirds of the next generation’s economic status appears to be dependent on the parents’ status.

3) Japan leads the world in civil and social sanity.

Japan is not free of social or civil problems, but in a global ranking of major countries social problems, Japan comes out on top for aggregate scores on social and civil health. Specifically, aggregate data on the major social problem factors — ranging from life expectancy, infant mortality and math literacy, to homicides, teenage births, obesity and drug and alcohol addiction — show Japan as the clear global best in class, significantly freer of social problems than all of Europe and all of Asia. In contrast, the U.S. comes out at the bottom, logging the highest score on social problems. (My analysis here is based on the U.K.-based Equality Trust, the OECD and data assembled by researchers Richard Wilkinson and Kate Pickett.)

Of course, estimating and modeling for intergenerational earnings elasticity is extremely complex and data should always be scrutinized further, particularly when making international comparisons. However, the basic message does not change — Japan as No. 1 is still empirically true, particularly when attempting to measure the “quality” of an economy’s and society’s performance. And it is hard to argue that social mobility, income equality and social sanity are not much more important for a society than GDP growth for GDP growth’s sake, or the seemingly desperate longing for new stock market highs.

In fact, I think Japan’s top scores on economic opportunity and social health are the root cause for why Japan’s elite is not caught up in the rising tide of global populism. Japan does not want “disruption” or radical change, and does not need to rally the masses behind nostalgic calls “to make the country great again.” If it ain’t broken, no need to fix it. We’ll keep doing what we’ve always been doing because, yes, all things considered, Japan as No. 1 is still very real.

Of course, there is no one product that, like the Sony Walkman, symbolizes Japan’s newfound leadership in quality of economic life. However, I suggest that “KonMari” — Marie Kondo’s post-consumer spark of joy — is the perfect symbol for the current version of “Japan as Number One.” Just as the Walkman did 40 years ago, KonMari has captured the imagination of global consumers and, slowly but surely, is changing spending patterns and lifestyle choices.

Jesper Koll is WisdomTree’s head of Japan and is consistently ranked as a top Japan strategist/economist. He publishes blogs at www.wisdomtree.com/blog .

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