Why Japan still fails today

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The reason why it is more than likely that Japan’s economic growth will continue to hover at a very low level as it had done in the 1990s until today, for a long time in the future, is simply because of the inability of the Japanese government to appreciate that the economy’s real problem is not investment per se.  Its real problem is getting the right type of investment, and unfortunately at the moment the Japanese economy is incapable of attracting the right type of investment.  And all this is due to successive Japanese governments and corporations continuing to pursue the same old strategy that had served them well during the four decades of post-war economic rise.

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Here are two factors to consider.

OLD HABIT.  Japan fails to appreciate that its economy faces serious structural problems.  But it refuses to acknowledge this or at best belatedly acknowledges some portion of it and by merely paying lip service that it will do something about the situation without undertaking anything concrete policy-wise.  This is precisely what the previous Koizumi administration had done when it mentioned that “what we need are opening and deregulation… electricity, nursing, childcare, agriculture, fishery, forestry”.  Critics of the Koizumi era rightly point out that despite big words the Japanese government had done none of those that could spur Japan’s economy to much greater efficiency and innovation through competition.  The question is, is Koizumi to be blamed for inaction, or is there much more to this.  One thing for sure is that Japanese successes in the four decades of its meteoric post-war economic rise were built upon a strong foundation of big business-industrial complex.  If the post war U.S. economy was based upon the Cold War era military-industrial complex, Japan’s equivalent is its big businesses.

BIG FINANCE.  The downside to this heavy focus on big business is that all of Japan’s financial resources were geared toward serving the needs of big business.  In fact, Japan’s big financial institutions were intricately linked with big businesses as their patrons and borrowers.  Very little is left for the small and medium size businesses, those entrepreneurial upstarts that logically rely on innovations and niche marketing to survive.  On the other hand, big businesses don’t typically risk their capital on the unknown or waste their resources to develop markets for breakthrough inventions.  Logically, for big businesses to grow they will take the route of market domination of established product lines and incremental innovations at most.  This is not only more stable and certain for their shareholders, but typically suits the highly bureaucratic and hierarchical corporate structure that hinders rather than encourages quantum leap innovations.

In this regard, the Koizumi administration was either, (a) not to be faulted as it merely existed in an old system that was already in place when he became prime minister, or (b) to be faulted for not trying its best to change the old system itself by promoting policies that drove the private sector in the right direction.

Comments welcomed.