On The Same Track
For 17 years after the property bubble burst in Japan in 1991, most of the OECD critics have been on a hand-wringing about the Japanese economy. They’re putting out stimulus measures that won’t help, they’re adding massive debt, they’re not expanding domestic consumption (read buying American crap over their own) they’re losing their competitiveness to other Asian Nations, and so on.
During the 1990s when I was there, the economy seemed to be moving along at lower margins and tighter budgets. Sometimes industry sectors would see short booms, like computers and mobile phones as they were introduced to the market, but pretty soon the market would saturate and it would not really flow on to other areas. In short, there didn’t seem to be an immediate fix, while the whole economy wasn’t going to just fold. It’s been interesting watching Japan try to address the problems.
Well, it looks like America is now headed in the same direction.
WASHINGTON – Heavy government stimulus spending and near-zero interest rates did little to end a “lost decade” of stagnation and mushrooming debt in Japan. Some economists and lawmakers say the U.S. may wind up following the same trajectory.
Despite early signs of recovery and a strong U.S. stock market rally, fears persist that the failure to generate new jobs or ignite more consumer spending could drag the economy back into recession, or result in a protracted Japan-like period of poor economic and stock-market performance.
Japan is President Barack Obama’s first stop on a tour of Asia beginning Friday — and the gloomy world economy will be high on the agenda. Both Japan, beginning in the 1990s, and the U.S., in the most recent economic crisis, had credit and housing bubbles and both engaged in huge amounts of overborrowing leading up to sharp economic downturns. And both used historically low interest rates and government stimulus spending to try to lift their economies out of the ditch — with questionable results in Japan.
“It seems to me we are on the exact same path that the Japanese took in their `lost decade’ — of running up huge government debts, of not stimulating growth and at the end of the decade having this massive debt,” said Kansas Sen. Sam Brownback, senior Republican on Congress’ Joint Economic Committee.
Others cite differences in the American and Japanese economies and business cultures to argue that things here are different and less susceptible to a prolonged period of economic lethargy. While the debate rages, both sides agree Japan’s painful experience offers the U.S. a lesson of how attempts at stimulus can go horribly wrong.
The manifestations are different and the way money flows through the system is different but what’s alarmingly similar is the way the US economy has had to embrace the near-zero interest rate while spending lots of money in stimulus packages. Then, there is the issue of production – Japan held on to a lot of production through the last 17 years, and now we’re finding the production they held on to is helping them hold on to what they have as an economic strength.
Whereas big Japanese electronics companies such as Panasonic, Sharp and Sony have been losing market share to rivals from China, South Korea and Taiwan, these smaller, less well known Japanese firms continue to dominate niches upon which the global technology industry depends. The Japanese even have a term for them: chuken kigyo (strong, medium-sized firms). It doesn’t matter if the brand on the casing says Apple, Nokia or Samsung: the innards are stuffed with Japanese wares. According to an official at Apple, the company depends on Japanese firms for vital components because few suppliers elsewhere can live up to its rigorous standards.
“They may not be the sexiest products, but you can’t make a semiconductor chip or an LCD panel without them,” says Alberto Moel, an expert on high-tech manufacturing with Monitor Group, a consulting firm, in Tokyo. Japanese companies serve more than 70% of the worldwide market in at least 30 technology sectors worth more than $1 billion apiece, according to the Ministry of Economy, Trade and Industry (METI). They range from certain films to diffuse light used in LCD screens (where they have the whole of a market worth more than ¥270 billion, or $3 billion) to multilayer ceramic capacitors that regulate the current in electrical equipment (77% of ¥540 billion).
Japan’s technological prowess is a reminder of the country’s industrial strength at a time when it is struggling to overcome nearly two decades of economic stagnation and is poised to lose its place as the world’s second-largest economy to China. It is also an answer to decades of criticism by Western management experts who breathlessly argued that the country’s business culture, from a rigid labour market to weak shareholder rights, was holding companies back. Corporate Japan must have been doing something right after all.
Of course, some foreign companies can boast similar supremacy in global markets. Microsoft’s Windows operating system is on more than 90% of the world’s 1 billion or so personal computers, of which around 80% are powered by Intel chips. And chips designed by ARM, a British firm, dominate the market for application processors, which run software on smart-phones. Germany’s Mittelstand, the closest Western equivalent of the chuken kigyo, also boasts many smallish world-beaters. In much the same way as the Mittelstand, Japan’s chuken kigyo is not simply a part of the national economy, but the core of its industrial structure. It enables the country’s bigger, well-known electronics firms to exist, as well as meeting foreigners’ essential needs. Strikingly, doubts are growing about Japanese companies’ ability to maintain their enviable position—but for now their grip remains mostly firm
The problem the US economy has is that it has moved so much of its production capacity off shore so it is hard to see where the industrial capacity is going to come from to power the growth required to pay off the debt. The upshot of all this is that America might be forced to walk the path Japan has explored for the last 17 years, and in some ways it might go even longer. We may not see a strong US economy until way after Barack Obama’s second term is over.
