The painful transformation of Japanese society

By Christian Sautter, Le Monde diplomatique, June 1997

Japan is still paying the price for speculation during the bubble economy years. A series of economy recovery plans costing over $500 billion from 1992-95 have failed to trigger a return to growth. 1995 and 1996 saw a record number of corporate bankruptcies, along with a dramatic deterioriation in public finances. But the energy shown by some new sectors of industry, a growing trade surplus and the younger generation's aspirations for a profound transformation of society argue against an over-pessimistic view.

There are so many conflicting signals coming out of Japan that it is hard to keep your bearings. Economic stagnation goes hand in hand with low unemployment. The banking sector is in a shambles, but the US deficit is funded by Japanese savings. The bureaucrats at the Ministry of Finance are discredited, but Mr Yen, the top official who has engineered a 33% depreciation of the currency in 18 months, is a national hero. An incredible bout of speculation from 1985-90 was accompanied paradoxically by economic growth, only to be followed by stagnation from 1990-95. In 1996 the economy picked up to a respectable growth rate of 3.6%, but a deflationary budget has severely dented the outlook for 1997.

Is Japan in crisis or is it mutating? Are we perhaps looking at a chrysalis in which deep structural changes are taking place beneath the surface?

Industrial mutation is a Japanese tradition. The key sectors of the economy have followed each other in a series of waves which the Japanese liken to flocks of wild geese. Light industry, textiles, etc. belong to the pre-1973 past and are now the province of China and Vietnam, Asia's least developed countries. The 1973 oil crisis also saw the demise of the heavy industry and chemicals sectors, which have been taken over by South Korea and Taiwan.

Production of cars, air conditioners and television sets peaked in 1985, before the rise in the yen. Exports of cars and televisions have been falling ever since, but the manufacturers have not given up. They are pursuing world competition by other means, mainly by shifting production to the biggest markets (North America and Western Europe) and those that are most dynamic (the emerging countries of Asia). Japanese car production outside Japan, which hardly existed in 1980, had risen to five or six million vehicles by the mid-1990s, in addition to the 13 million manufactured in Japan itself. Only the Japanese car industry is present on all four continents. It is in mutation rather than crisis, and it has not abandoned its leading position despite a strong comeback by the big American companies. Meanwhile, most European car manufacturers are barely managing to rub along on their own continent.

The second wave, which is in full flood, is the capital goods sector, supplying machine-tools to the emerging countries of Asia and the world beyond. For firms in this sector, there is no question of relocating or hollowing out. They are the backbone of the Japanese manufacturing industry, representing the strongest concentration of highly skilled labour, and have no inclination to leave the country.

High value-added services are another boom sector, directed at business (software, telecommunications, finance and legal services) and the home (multimedia, mobile phones, Internet, etc.) This third wave, stimulated by the United States, has taken businessmen by surprise. The Japanese are traditionally excellent mechanics, working best with things you can put your hands on. But the domestic market for services is really taking off and, whether they want to or not, companies will have to respond to the new demand.

Rebirth of community spirit

It is just at this time that the country is feeling the impact of the bank crisis. The problem is structural. During its golden age of economic growth, Japan was locked into a solid pyramidal system. Firms were overindebted to the banks, since they needed to fund enormous investments. The banks were over indebted to the Bank of Japan, since, despite the abundance of low-interest savings and a propensity to lend to companies in the same group, they needed the support of the central bank. The Bank of Japan itself was subject to the directives of the Ministry of Finance, perched comfortably on top of a credit pyramid carefully shielded from foreign influence. The practice of transferring top civil servants to comfortable jobs in the financial institutions added to connivance at the top of the pyramid.

It was industry that dealt the first blow to this carefully constructed edifice. From the onset of the 1973 oil crisis, industrial firms began to fund their capital investment by self-financing rather than by borrowing. Deprived of their best customers, the banks turned to government loans and higher-risk areas such as consumer credit. In particular, they began to supply credit to speculators who were not always entirely respectable and on several occasions came badly unstuck in land, real-estate and stock-market operations.

The second blow came from came from badly managed deregulation. The United States could not accept that Japan should be the only country in the world with an abundant supply of low-interest savings. It brought strong pressure to bear on the Japanese financial fortress. The yen-dollar agreement of 1984 and the fall in the dollar from 1985 onward were the high points of this strategy. The Japanese financial sector suffered considerably. It is now trying to absorb the bad debts left over from the crazy speculation of the late 1980s. Of the 20 big banks, five still need another four years to cover their bad debts and may well go out of business in the near future.

The bank crisis will last a few more years, but the more solid institutions will be back in the race for world supremacy well before the end of the century. One source of weakness will nevertheless persist for some time longer, namely a propensity for connivance rather than the provision of strictly accurate information. In an inward-looking system administered by the Ministry of Finance, personal relations of trust were sufficient. Exposure to the cold wind of world competition imposes obligations to inform shareholders, partners and customers that are not always fully appreciated.

Every change of industrial generation in Japan raises the question of creativity. This time it is particularly tricky, for two reasons. The first is that new products and services now have very short lifetimes. A late starter has no time to carve out a place before the innovator, now more often than not American, saturates the world market.

The second reason is that the Japanese education system excels at producing intelligent, hard-working, docile managers, rather than bold, inventive, non-conformist entrepreneurs. The large pyramid structures of the Japanese corporations, the descendants of the zaibatsu of the pre-war period, already missed the boat in the 1960s at the time of the automobile revolution and the development of mass-market electronics. They are in striking contrast to the profusion of innovative small and medium-size enterprises backed by risk-capital professionals in Silicon Valley. Only time will tell whether SMEs can find a place in the sun among the big groups like Sony, Matsushita and Honda that were born in the confusion of the immediate post-war years.

Japanese optimists argue that their country has a future, that competitive depreciation of the yen will give industry a second wind, and that Japan has the resources in young skilled labour, long-term savings and research and development needed for a return to rapid growth. The pessimists point to the ageing population. By 2020 more than a quarter will be over 65, compared with 21% in Germany, 20% in France and 16% in the United States. But pensions seem safe enough, since the retirement age has just been put back from 60 to 65 as from 2002. By 2020, when the shortage of manpower will have become acute, it is likely be close on 70.

Japan also has a margin for increasing compulsory contributions which continental Europe has long exhausted. Moreover, longer life-expectancy will open up lucrative markets in products and services for pensioners, whose individual purchasing power, in Japan as in France, is higher than that of 40 year-olds and their families.

Nonetheless, the collapse of the birth rate is a catastrophe for which the Japanese authorities appear to be seeking neither explanations nor remedies. With a 1995 average of 1.4 children per woman, the country is heading for a rapid decline in its population from 2010-15. The low birth rate is an urban phenomenon, as low as one child per woman in the Tokyo-Osaka conurbation. It reflects women's living and working conditions in the cities. Forced to choose between a career and a child, Japanese women are increasingly opting for the professional career to which their university education now entitles them. Celibacy is becoming more common and marriage is increasingly postponed. Women are having children later and often stop at one. The lack of child-care facilities and nursery schools, excessive travel time from home to work, and long working hours, combine to produce a resistance to motherhood. The population is slowly committing suicide.

The last remaining distinctive feature of the Japanese model are the guarantees enjoyed by the blue-collar aristocracy, about a third of the workforce, the vast majority of whom are men. Jobs for life, salary according to length of service, and company unions, known in Japan as the three treasures, have withstood the slackening growth rate from 1973 onwards and stagnation from 1991-95. Union membership has stayed more or less constant, and the car industry has avoided forced redundancies.

The three treasures reflect a philosophy incompatible with the new liberal religion of flexibility. In that philosophy, skilled workers are regarded as human capital that pays dividends as professional experience grows, and contributes to the gradual improvement of quality and productivity. Workers know that gains in productivity will not rebound on them. Nevertheless, the retention of excess labour during slack periods has its limits. The sharp fall in the yen in 1995 and 1996 saved export industries from painful choices they would have been forced to make if stagnation had continued for another two or three years. So far, employers have made do by creaming off the automatic salary increases that are paid at age 50-55, by taking on more temporary workers, and by recourse to extreme professional and geographical mobility within company groups.

The basis of the unwritten agreement between large corporations and their employees has thus been preserved. But what will happen in sectors like banking, where major structural upheaval is inevitable, or in the new industries hungry for creative, young and mobile specialists? Employees' guarantees are likely to be eroded or even abolished.

The changes are just as great in the political field. So far, the oligarchy of conservative politicians (the Liberal Democratic Party), high-ranking civil servants and big company bosses, known in Japan as the iron triangle, has practised a form of enlightened despotism designed to promote the highest possible growth rate.

In 1993 the LDP was defeated at the polls, after having been in power since the war with only one short interruption. By the time it regained control in 1996, the electoral law had been changed. Henceforth 300 members of parliament are to be elected according to the first-past-the-post system and 200 by proportional representation. This ought to result in polarisation around two large parties. One will be the LDP, but which will be the other? The left has got off to a poor start, with only a few seats in the new parliament elected in October 1966. Its pacifism distinguishes it from the LDP in foreign policy, but on the home front it has yet to propose any real alternative.

Society is changing, but there is no forward-looking party to take up the cudgels. Women of the younger generation are not content to choose between a child and a career. They want the option of having both. Their dynamism is shown by their greater propensity to create business enterprises than men of their age. Neighbourhoods are witnessing a rebirth of community spirit and an increasing reluctance to accept directives from on high. Command by a mutually reinforcing oligarchy of graduates from the same few universities is less and less acceptable. There is a widespread aspiration for grass-roots democracy, fuelled by concern for quality of life. Child-care facilities, nursery schools and public transport are among the most important issues.

Two recent accidents in a small power station and a nuclear processing plant testify to new behaviour. The information given out by the authorities, too little and too late, was met by shock. In the budding new democracy, the public will accept mistakes but not cover-ups. Society is awakening. Will it succeed in merging isolated protests into a collective political force?