Technology and Japan's downward spiral

The resignation of Prime Minister Ryutaro Hashimoto caps yet another round of increasingly loud warnings regarding the sad state of the once-mighty Japanese economy. As usual, most of the commentary has focused on Japan's bottomless pit of bad loans, a government that vacillates between paralysis and denial, and the long-term prospects for an aging, racially homogeneous, male-dominated society.

Strangely, the most immediate cause of the current malaise -- the humbling of Japan's corporate giants -- has been almost completely overlooked. Let's face it: Japan's financial, social and political systems were never the envy of the world. It was Japanese companies that inspired awe: Toyota, Sony, NEC, Fujitsu, Toshiba, Mitsubishi, NTT, Matsushita, the Bank of Japan and others. And it's the decline of so many (but not all) of those titans that goes to the real heart of the issue.

The extent of the decline is difficult to overestimate. With the Nikkei stock average still less than half of what it was a decade ago, it's easy to see the late 1980s as a foolish speculative bubble. Certainly, gross excesses did occur. But the real problem wasn't that investors were wrong about the future; what they were wrong about were the prospects for Japanese corporations.

In the late 1980s, it was conventional wisdom that Japanese companies would take over large parts of the computer, communications and semiconductor businesses. Now consider the wealth created during the 1990s by Microsoft, Intel, Cisco, Compaq and so many others. Had this fortune accrued to Japanese companies, the stock valuations of the late 1980s would now seem quite reasonable, even cheap. In that sense, the Nikkei's decline is really just the flip side of the Dow's gain.

So the first question is, why have so many Japanese technology companies lost out in so many major emerging product markets? (Whether they will recover is a topic for another day.)Yet, as important as that question is, it's the fact that this basic lack of competitiveness extends far beyond the technology sector that accounts for much of today's pervasive economic gloom.

To fully appreciate this, you have to understand that Japan's manufacturing companies are by far its most efficient firms. They are the ones that have been most exposed to global competition and modern management practices. In contrast, Japan's banking, insurance, retail, telecommunications and services sectors have been largely isolated from world-class rivals, allowing legendary levels of bureaucracy, overstaffing and other inefficiencies.

As the Web makes it easier than ever to do global business, this long-standing lack of competitiveness is being exposed. Citibank and Merrill Lynch can provide superior returns to long-suffering Japanese savers. Japanese insurance and pension funds haven't kept up with world standards. Online travel services reveal the absurdity of many Japanese airline and travel prices.

Worse still, technology-driven change is accelerating in the world but is developing very slowly in Japan. For a range of reasons, Japan's use of the Web is still several years behind that of the leaders -- and if anything, the gap appears to be widening.

The world is certainly right to worry about Japan, but we need to understand that technology is a critical part of the problem and, eventually, an indispensable part of the solution.

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David Moschella

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