No. 13 — March 31, 2000

Feature Article


Interview With Edward J. Lincoln, The Brookings Institution

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Some long-overdue structural changes finally are occurring in the world's second-largest economy. This assertion is particularly applicable to the financial sector, which is being reshaped by Tokyo's Big Bang reform initiative, but it also covers the transportation, retailing and communications industries. The ongoing transformation is partly a response to the bursting of the "bubble economy" at the start of the 1990s. The slowdown in growth that followed forced government decisionmakers and corporate leaders to take a hard look at the economy's structure as well as at established policies and practices in their efforts to explain Japan's persistently subpar performance. The collapse of asset prices also sparked a public discourse and made much more persuasive the arguments of those who maintained that Japan would do better if it abandoned the framework that had worked so well in the first three decades or so of the postwar era but that eventually became an albatross.

Noted Japan specialist Edward J. Lincoln, a longtime senior fellow in the Foreign Policy Studies department of The Brookings Institution, has published numerous books and papers on Japan's economy, including last year's Troubled Times: U.S.-Japan Trade Relations in the 1990s. He currently is researching structural rigidities in Japan and impediments to deregulation there. Mr. Lincoln recently offered his unique perspective on the subject of change in the Japanese economy in an interview with JEI President Arthur J. Alexander.



Q: How important is financial deregulation in Japan, and what is its likely effect over the longer term? Is there more or less there than meets the eye?

A: The good news is that the process of financial deregulation clearly is more extensive now than in the past. Throughout most of the 1970s and the 1980s, I observed far less effort by Tokyo to reform the economic system than should have been the case. By the mid-1970s, the Japanese economy had matured, but the supporting framework was more appropriate for a rapidly growing and industrializing country.

Tokyo initiated some reforms that never really took off. You could discount in advance most of the effects of any change. The Japanese government created the image of change, but the reality did not match it.

Given that 30-year history, I am quite pleased to see changes that go beyond the boundaries of what I have seen in the past. Clearly, something has happened in Japan to shake up society and the system enough to get things moving faster than before. That said, I do think that there is less than meets the eye, even in terms of current economic reform efforts.

The industry that has come the closest to real transformation is finance. The Big Bang financial reforms largely are being implemented as announced three years ago, which is relatively encouraging. Some reforms were long overdue — for example, the deregulation of brokerage commissions, a change made in the United States 25 years ago. The lowering of the barriers that traditionally separated different parts of the financial industry also is an important step forward.

But I disagree with the view of some people on Wall Street that a revolution is taking place in Japan and that American investment bankers now can march in and really transform the industry. The U.S. financial services industry is going to find that for a decade or so, it will have a bigger niche market in Japan than in the past. However, Japanese financial market behavior is not going to converge with the U.S. norm. And, at the margin, American investment bankers will be left a little disappointed. Some of the things they thought they could do just won't work out terribly well.

Q: What is stopping the process of change? Continued regulation, adherence to the customary ways of doing things, or is it simply that Japan is a different place?

A: Japan is just a different place. Household expectations are different. The behavior patterns of nonfinancial companies are different.

For example, I spoke several months ago with an American investment banker about corporate governance in Japan. His firm manages a Japan fund, and it actually has had some success. His group had bought shares in a Japanese company that simultaneously was sitting on large bank debts and very sizable savings deposits. Over the space of several weeks, the U.S. company convinced the managers of the Japanese firm that the company would be stronger financially if it transferred some of its money from savings accounts paying 0.6 percent interest and used those funds to pay down its debts. Not surprisingly, this investment banker is feeling pretty optimistic about Japan at the moment.

From my viewpoint, though, the specific issue raised by the investment bank is a no-brainer. The larger question is whether shareholders actually will be able to pressure management to do such things as improve the return on assets. In the end, this will not happen in Japan to the extent that it does in the United States.

Q: Is cross-shareholding one of the major barriers to this kind of corporate governance? How much is that changing?

A: I don't know. I simply do not believe some of the reports about companies unwinding their cross-shareholding positions. I know that various analysts in Tokyo have attempted to estimate the extent of such activity, and some think that the unwinding has been very substantial. I'm skeptical.

Sometimes, you'll see an announcement about an unwinding of cross-shareholdings and realize that the action involves only a relatively small portion of shares. Alternatively, some companies may be unwinding existing positions while, at the same time, other firms are establishing new ones.

In early March, The Wall Street Journal ran a wonderful piece about Japanese companies unwinding their positions. Several pages later, there was a story about Toyota Motor Corp. and Yamaha Motor Co., Ltd. striking a deal that gives Toyota access to Yamaha engine technology. And what was the basis of this deal? The exchange of shares! So, it seems that the anecdotal evidence is somewhat contradictory. The notion of exchanging shares to cement a business relationship is not dead in Japan.

Q: Is that practice the reason for limited shareholder influence on management decisions?

A: The key barrier simply is that the management of Japanese corporations thinks that it is the company. Japanese managers don't believe in the theory of the principal-agent relationship. They feel that the firm is theirs and doesn't really belong to shareholders. The managers are the experts; therefore, they should run the company.

At the margin, they supposedly are willing to accept input from the firm's banks. This is due in part to the fact that companies have long-standing relationships with their banks and presumably are dealing with lending officers who, as specialists, know something about the firm. So, bankers have a bit more legitimacy as voices of criticism of company management. Even so, I think that the whole idea that corporate governance is provided by a firm's main bank is probably a little bit overblown.

Q: What about other industries undergoing deregulation — for example, transportation and retailing, where loosened implementation of the major law seems to have had a big effect, and telecommunications with its large number of new entrants. Is the pot boiling a little bit more now?

A: Clearly, something is happening. Japan does not have the same transportation system it had 30 years ago. Concerning airline deregulation, the Japanese are where we were in 1977. Beginning this month, the government is relinquishing control over fares and routes.

However, the Ministry of Transport still controls the allocation of landing slots. I'm not entirely sure whether this applies to all airports in Japan or simply the crowded ones, like Haneda [International Airport] and Narita [International Airport]. But, certainly, it is critical for domestic airlines in the throes of deregulation to have access to Haneda. It means, in essence, that MOT still has life-and-death power over the nature of competition in the commercial aviation industry.

For example, there are two new Japanese airlines, but these carriers do not represent deregulation so much as they indicate MOT's willingness to let two other competitors into the industry. Each of the new airlines initially was granted three round-trips a day between Tokyo and Sapporo and Tokyo and Fukuoka. Now, MOT is debating whether to give each of them three additional round-trips a day.

Deregulated fares and routes mean nothing unless airlines have landing slots, which they have to get from MOT. So, essentially, competition in the commercial aviation industry has not changed all that much. Hopefully, consumers will derive some benefits from the deregulation of fares. Periodic outbreaks of real competition on fares actually may occur. But it's not going to be the same kind of dynamic competition that we've had in the United States over the last 20 years, with new entrants and real changes in market share.

Q: What about retailing?

A: We really won't know what's going on in retailing for about 10 years. On the one hand, it's supposedly a step forward that the 27-year-old Large Retail Store Law will be rescinded this spring. I remain concerned or at least skeptical about the impact of that action since the Ministry of International Trade and Industry has encouraged prefectural and local governments to pass their own laws regulating retail operations. Local governments could turn out to be even more conservative than MITI. On the other hand, some cities or prefectures may see the advantage in creating a more liberal environment so that a shopping center gets built within their political jurisdiction rather than the one next door. If that happens, the impact of local regulations won't be so bad, but we probably won't get a fix on those trends for at least five or six years, if not longer.

Q: You mentioned the pressures for change evident since the slowdown in growth in the early 1970s, but it only has been in the last four or five years that the government has made a concerted effort to pursue reforms. What accounts for the recent activity?

A: In the 1970s, the average annual growth rate dropped from 10 percent to 4 percent. That was a pretty big shock. It brought about a recognition that the economy was maturing, but it wasn't a sufficiently poor performance to lead to a wholesale reconsideration of Japan's economic framework. In the 1990s, however, the annual growth rate dropped from the 4 percent average of the 1970s to less than 1 percent, punctuated by two real recessions. Those developments left a bigger segment of Japanese society wondering what on earth went wrong. The recessionary conditions made policymakers more willing to listen to those who claimed that structural problems were the cause of the economy's poor performance.

As economists, you and I can agree that a large part of what went wrong in the 1990s was simply a macroeconomic phenomenon. Japan had an asset "bubble," and it burst. A collapse of asset prices of that magnitude in any economy will cause problems that continue for a number of years. In that sense, you don't need structural elements to explain a poor performance. But in terms of public discourse in Japan, the problems of the 1990s really did give more credence to those who for many years had been trying to make the point that Japan would do better if it abandoned its old economic framework. However, when the economy seemed to rebound in 1996, there was a marked decline of interest in reform.

Q: You mentioned that financial markets have become somewhat more concerned about corporate governance. Is there more focus on profitability and rate of return, or are those forces still pretty weak?

A: The Japanese interest in profitability and rate of return seems to be a fad. I've seen a number of newspaper and magazine articles about the meaning of return on equity and return on assets and which firms are and are not doing well. It's also true that as frequently as it used to be said that Japanese companies don't care about profits, the bottom line in any economy, whether free market or Stalinist, is that if you lose money, you are in trouble. And, indeed, in Japan, some companies either already have failed or are in such bad financial shape that they may go bankrupt. Such dire prospects certainly provide a wonderful means of focusing management attention on changing things.

It's a little harder, though, to figure out whether companies that are earning profits are going to become more focused and move toward much higher rates of return. I haven't seen very good data, but I understand that the return on assets over the last four to five years has only been half the level it was back in the 1980s, which already was low.

I'd like to believe that something positive is developing, possibly because banks, insurers and investment banks are more concerned about earning a return for their investors. The financial industry, in turn, may put corporations in other parts of the economy under additional pressure to produce profits.

Q: Is some of that pressure — as weak or strong as it might be — behind the restructuring phenomenon?

A: I think it is part of it. Back in 1991 and 1992, the corporate sector could not believe what was coming. Therefore, they simply continued to hire and invest until 1997. Then, the economy went into a real recession, and corporate Japan finally woke up to the realization that it really did have excess labor and excess capital and needed to do something about these problems.

Corporate Japan has been tackling restructuring since about mid-1997. That is, employment has been falling, while capital investment has been marked by a string of negative numbers. This all suggests that Japanese firms finally have come to grips with their problems. They had sunk so far below previous levels that they no longer could justify carrying superfluous workers or excess factories.

Q: Very few plant shutdowns have been reported.

A: That's another of my favorite myths. In the United States, many people who know a little bit about Japan and read newspapers are under the impression that the Japanese have finally realized that they must end the practice of lifetime employment and lay off workers. But, based on business announcements, that's not happening. A Japanese corporation — even a big company that offers lifetime employment — ought to be able to generate a 4 percent to 5 percent reduction in labor input a year without actually resorting to U.S.-style layoffs.

It turns out that separation rates in Japan's corporate sector are fairly high. Of course, you can't get data that identifies companies that practice lifetime employment, or think they do. But even a firm in which the average tenure is 20 years will lose 5 percent of its work force every year. Some people may stay longer than average, but you've also got women who stay only four or five years. A company can reduce its payroll by averaging out this attrition. That seems to be what most of the firms that have announced cutbacks are aiming for.

Q: What about plant-closing announcements made by foreign management, like the case of Renault S.A. and Nissan Motor Co., Ltd.?

A: We haven't seen the effects yet. But in the past, when Toyota or Nissan has made such announcements, it has taken time. Employees are given the old paternalistic choices: You can go sell cars at a showroom, or you can take a job at a different factory. It may be that those choices are unpalatable. If you live in Tokyo and the alternative is working in a factory in Kyushu, you may choose not to pack up your family and go off to Kyushu. But at least the firm has made an effort to offer choices.

Q: Have foreign mergers and acquisitions and foreign direct investment stimulated or reinforced some of these pressures for change?

A: Of course. To begin with, even given the upturn in foreign direct investment, foreign-owned or foreign-controlled firms are not a very big part of the picture in Japan. That said, these companies certainly have a disproportionate hold on the public imagination. The Nissan-Renault tie-up has gotten enormous coverage. Each time a foreign-domestic merger makes the news, it becomes an example that either prompts observers to say, "yes, we should do more of that," or "anything but that."

The direction in which industry is moving is unclear. I'm inclined to think, though, that FDI has been helpful. The Nissan-Renault case conveys a fairly dramatic message to people that times have changed, the economy is in trouble and, if you want to survive, drastic reform is necessary.

I have mixed feelings about the Nissan-Renault tie-up for a couple of reasons. First, Renault is not renowned as the world's greatest automotive company. But the second, and bigger, issue is that Renault doesn't own Nissan. The French firm has only a 37 percent stake, which, notwithstanding the media hype, is not necessarily a controlling interest. Ford Motor Co. has owned almost that much of Mazda Motor Corp. for several years and has gotten relatively little out of it.

An investor holding more than 34 percent of a Japanese company's stock gets veto rights over certain fundamental board decisions, such as whether to declare bankruptcy or whether to issue new stock. That level of ownership does not give an investor veto rights over decisions like the disposition of profits. I've known people who've worked in joint ventures, and every year they locked horns with their Japanese partners because the latter wanted to plow all the money back into the company. The Americans wanted to divvy up the profits. They lost every time.

The perception of Renault owning or controlling Nissan when, in fact, it really doesn't is interesting. In this case, you have the combination of a large minority ownership by one company and the near-bankruptcy of the other. Nissan knew it had to be restructured, and Renault suited its purposes. If Renault management is smart, it will restructure Nissan in a way that truly ties the two together in an operational sense. Then, Renault really would get control.

Ford is doing that with Mazda. The next generation of Mazda cars will be built on Ford platforms. If Renault accomplished something like that, it would be harder for Nissan to throw off the control that came with the French firm's minority ownership.

Q: Retailing is another industry that is attracting foreign investment, as are Internet-related and telecommunications firms. Will these firms, like some foreign financial companies, also ultimately be let down by the Japanese market?

A: Actually, we've already witnessed some disappointment. DirecTV International Inc. just pulled out of Japan. I talked to executives from this company when it was new to the country. DirecTV had a variety of problems related to antitrust regulations in the cable TV industry. The Ministry of Posts and Telecommunications was not terribly enthused about the idea of granting authority to one company to broadcast 150 channels — particularly if the company itself was providing content for several of those channels.

Even though DirecTV resolved most of its regulatory problems, it still didn't do well. It wasn't able to sign up enough customers, so the firm was sold at a fire-sale price to a domestic competitor. I don't know whether DirecTV just didn't know how to attract customers, or whether the Japanese were suspicious of a foreign company providing programming, even though DirecTV had Japanese partners. Whatever the problems were, the joint venture didn't work.

And that's been the story for the last 150 years. Some foreign investment has been successful, some hasn't. The perception that opportunities have expanded in Japan, which I think is a correct perception, draws in businesses that haven't got a clue as to what the country is like, so they stumble all over themselves.

Q: What is your advice for companies that are considering entering the Japanese market? Should they jump in right now?

A: This is the right time to invest in Japan, but do it quickly before the window closes. Also, companies should hire people with Japan-related business expertise.

Why do you think the window will close?

A: History repeats itself. We've seen investment booms before. They happened during the Meiji period, again after World War II and may happen again. This is because there is a mood in Japan that the nation has fallen behind and needs some help from the outside. But once the Japanese are back on their feet again, they probably will be less interested in additional inputs.

The American companies that have rushed in during the last couple of years are the ones most likely to be successful in Japan. If the economy recovers over the next two or three years, however, you will find less interest in M&As, and those transactions very well could decrease again.

Q: You don't see a ratcheting up that would prevent backsliding?

A: No. Even over the past couple of decades, it hasn't been laws and regulations that are the biggest obstacles to change. Different norms of behavior have been the stumbling block. You can't buy control of a company if the company doesn't want you to. Some managers and shareholders in Japan still have that mind-set.

More recently, a few companies were performing so badly that they really were looking for white knights. Both management and shareholders were willing to sell a minority — or even a majority — interest to foreigners. That attitude is likely to change, though.

Q: What is the role of foreign governments in this window of opportunity?

A: A variety of familiar trade issues, which only can be negotiated by government, still causes friction between the United States and Japan. So, from that standpoint, the two governments should continue to address trade disputes. I argued in my last book [Troubled Times: U.S.-Japan Relations in the 1990s] that, as problematic as some of these trade disputes can be, they no longer deserve the level of attention from Washington that they have received over the past 15 years or so.

Q: These are the normal problems that arise between two big countries with large-scale, intimate relations?

A: Sometimes, they seem a little abnormal in the sense that we really have moved beyond tariffs and quotas as the focus of trade negotiations. Some of the issues pertaining to the Japanese market can be rather opaque, complex and difficult to resolve.

On the investment side, however, probably the most important thing the U.S. government can do right now is to stay on the sidelines. The environment in Japan has improved even since my book was published last year. In fact, I'm a bit surprised at how far things have progressed. U.S. government officials should give supportive speeches from time to time about what a good thing foreign investment is for Japan, as I certainly believe it is.

Q: Should Washington be standing by if the window closes again?

A: On investment issues, there probably is not a lot that the U.S. government can do. Washington and Tokyo have had a dialogue on investment ever since the [1989-90] Structural Impediments Initiative talks, but it has not produced very much. The Japanese government has sponsored a variety of small promotional programs; JETRO [Japan External Trade Organization], for example, has an office to help foreigners figure out how to invest in Japan. There is nothing wrong with those things; it's just that they are trivial.

What it really comes down to is whether shareholders and managers of Japanese companies view foreigners as legitimate parties to take over their companies. That attitude was not prevalent in the past. The environment is a bit more positive now, but what can the government do if it turns negative again?

Q: Beyond addressing trade problems, what else should Washington do to keep the window open?

A: There's always macroeconomic policy, which is an equally hard issue to deal with. Washington believes, as it should, that a healthy Japanese economy is in the best interest of the United States. Generally, what we have done over the past seven years is to explain to Japanese officials what we think they have done wrong. In some cases, Tokyo actually has asked for guidance. The Japanese government obviously is in the midst of a bureaucratic struggle, which has compelled some agencies to come to Washington and say: "This other agency is following a stupid macroeconomic policy. Could you please put some pressure on and get them to change it." And, Washington willingly complies.

In other cases, however, U.S. officials have said: "We know better how the Japanese economy should be managed." That message is not taken very well. I've had that experience myself in dealing with the Japanese government; there isn't much else that you can do. We are talking about two very large sovereign nations. U.S. officials can try tactical moves to convince their Japanese counterparts that we really want them to do better, but it's their country. They're the ones who have to make the decisions on monetary and fiscal policies, bad-debt issues, restructuring the financial sector and so forth.

Q: Recently, consultants have set up shop in Washington to help Americans and other foreigners do business in Japan. In the past, companies looked to the government for that kind of assistance. Can such specialists, who presumably know whom to talk to in Japan, be an effective way to approach the open window?

A: That's part of it. You have to keep in mind that government resources are quite limited. The Department of Commerce has a full-time staff of six Foreign Commercial Service officers focused on Japan. They have a fairly sizable local staff, probably 30 or 40 people, working out of the American Embassy in Tokyo. But even that's not a lot when you think about the magnitude of the bilateral relationship.

Combined with those constraints is the fact that relative to setting up shop in Europe, Americans still seem to know far less about conditions in Japan. Obviously, it's not quite as bad as it was 30 years ago, but it's still not a great situation. So, the emergence of both small and large consulting groups that can help companies with the elementary stuff as well as with some of the political issues, such as knowing which politician or bureaucrat one must meet to resolve a problem, is a good development.

Nonetheless, it seems to me that there's a big difference between a consulting firm that has some contacts with politicians or bureaucrats and can get routine issues solved and the government. Sometimes, it really does take the force and power of Washington to get something done. When someone from the American Embassy walks into a ministry in Japan, it's a little different than a consultant walking through the door.

Q: Can you give examples of how that has worked effectively?

A: Probably one of the best examples happened six years ago. The United States and Japan were in the final stage of resolving the issue of market access for cellular telephones. Two prior agreements had opened the door to competition in Japan. Competitors of Nippon Telegraph and Telephone Corp. were allowed to choose technologies other than the NTT standard for cell phone service. Most of them chose Motorola Inc.'s technology. The NTT competitor in the Tokyo area was authorized to build a system using Motorola technology, but it wasn't doing that. The firm actually was buying equipment and sticking it in warehouses.

The situation was a huge puzzle to everyone involved. Motorola folks felt that what should have happened would have been enormously profitable for the prospective NTT rival. There was no obvious reason why that company wasn't taking advantage of the opening. I've never heard the full explanation, but it involved political machinations among some of that firm's managers, MPT and NTT. In the end, it took high-level American intervention with a person who had real clout on the issue to make this potential NTT competitor a real rival. U.S. officials went to a politician reputed to be the godfather of MPT, even though at that time, he held no official government post. He had the whole problem resolved within two weeks. This type of U.S. government pressure often doesn't work, but in this particular case, it did.

Q: Let me turn to other areas. First, whatever happened to the labor crunch that everyone was predicting in 1990? Now that we've had 10 years of slow growth, is a labor crunch still coming?

A: I don't see how Japan can avoid one. Just doing the arithmetic shows that it's not only coming but that it's roaring down the highway really fast. As far as I can figure, Japan would have to experience a fairly serious, unending recession to avoid a labor crunch.

Q: What about productivity gains to offset a labor shortage?

A: I can imagine productivity gains increasing somewhat, but I'm not sure that they can go up fast enough to offset the other factors. Some analysts don't foresee a labor crunch, but I think that their estimated labor productivity gains are unrealistic. In fact, the part of the population considered to be working age — people between ages 15 and 64 — already is shrinking. It will continue to get smaller in the foreseeable future.

What is worse, it's not just the certainty of an overall labor crunch, but the fact that it probably will be of the worst possible sort: the shrinkage will occur in the pool of younger workers. One of my favorite statistics is that in Japan over the next 20 years, the absolute number of people in the 20-to-24 cohort will drop 40 percent. These are people who are both cheap, because they are the newest entrants to the labor force, and the workers with the latest skills, whatever those may be.

Now, maybe people with newly minted social science degrees don't have any skills, but certainly engineers learn something when they go to class and do lab work. So, they've got the latest knowledge of engineering. What's perhaps even more important, these are the kids who grew up playing computer games. Unlike 40-to-50 year olds in Japan, younger workers have no fear of computers or computer-based devices. For the health of a corporation, you want those people — they are the new blood. They're the ones who probably are least risk-averse. Japanese companies are going to be starved for that kind of input.

I'm a little worried about what this does to corporate Japan's vitality. Granted, a Toyota or Matsushita Electrical Industrial Co., Ltd. or NEC Corp. can go abroad and perhaps hire similar kinds of people, but, still, I think that this could hurt.

Q: Does that say anything about relative opportunities for women?

A: I hope so.

Which is going to change faster in Japan, social norms or the liberalizing power of economic incentives?

A: I've always felt that social norms change fairly slowly, but certainly the economic pressure to open more opportunities for women will be overwhelming. If there is a ray of hope given the declining population and the labor crunch, it is women and their potential. My impression of Japanese women is that in many cases, they tend to be more imaginative than Japanese men. They also have better foreign language skills, at least among the elites in Japanese society.

There's been a surge over the past 15 years in the number of Japanese families living in other countries because the primary wage earner was sent abroad by his or her company. Corporate families tend to stay longer abroad than those of government officials. The latter come for two or three years. People in the private sector often come for four, five or six years, sometimes even longer. When the kids are young, they come too.

Typically, boys go back to Japan for high school because their parents are concerned that even if they go to the Saturday Japanese school in America, they're just not going to have a good enough background to pass university entrance exams. In many families, girls don't go home. Most of them
eventually do return to Japan with their families, but by that time, they've acquired a cosmopolitan set of experiences and attitudes and advanced language skills. I think that these girls will be a wonderful asset for the Japan of tomorrow, given the chance. At the moment, it appears that most of the opportunities are at American investment banks, which is good for those firms. One hopes that the successes of these women in a corporate environment will open up opportunities at Japanese companies as well.

Q: Many of the social, business and economic norms that we see in Japan — for example, lifetime employment — seem to be an outgrowth of a very short period in Japanese history — 1950-1970 — but they continue to color or, in some cases, dominate thinking. What happened then that has cast such a long shadow?

A: After the Meiji restoration, the Japanese government imported a foreign institutional structure for its new economy. Observing the industrialization of the United States and Europe, Japan realized that it needed a framework for similar progress and borrowed pieces of laws and concepts. A modern economy began to evolve. Companies were formed and started to grow.

But as time went on, dissatisfaction arose. For example, Japanese companies were very concerned about high labor turnover. Over time, they began to tinker with the system. Starting in 1910 or 1920 or so, the rate of these adjustments accelerated enormously. In the mid-1930s, the government stepped in and began to impose all kinds of controls. In that instance, it actually went too far. Gross domestic product in Japan fell from 1939 on, long before there was any wartime destruction in Japan. After the war, the Japanese tinkered with the system again. By the mid-1950s or so, they had a set of institutions and laws and behavioral norms that they considered satisfactory. The Japanese finally had gotten to the point where they felt comfortable that they had a system that had been modified to fit what they perceived as being domestic social norms.

You can ask why Japan seems so wedded to a system that only has been around for 30 or 40 years. Part of the answer is that although the system is relatively recent, it was a means of trying to make a capitalist economic framework conform to a perception of what Japanese norms were. It was highly successful for a period of time. Even today, I think there are some people in Japan who are kind of puzzled about whether the problem is that the system was wrong or just that some particularly bad things happened.

For example, lifetime employment as a norm, at least for large Japanese companies, seems to make some sense. A corporation is a group, and longevity is an important ingredient in other Japanese groups, like clubs and colleges or even sports clubs for adults. The initiation period is fairly long. Take sports teams. Typically, the first year you belong, you don't do anything but carry balls. That's part of the process of becoming an accepted member of the group. Once you are in, you're in and everybody is your closest buddy.

Japanese corporations apparently decided that since this works and that people behave productively within a group setting, companies should behave like groups. Lifetime employment is a logical step to take in the direction of creating an environment in which people feel comfortable and give their maximum.

Q: Do you think that these practices will continue to evolve in a way that is still Japanese but consistent with the new situation?

A: Yes. Things will change. Society itself is changing. The adjustments that the Japanese make for the next iteration of their economic model will be influenced by a fairly well-defined sense of what is comfortable within the broader norms of society. They are less likely to be as risk-averse as the norms of the past 50 years, but I'd be very surprised if 10 years from now, you could go to Japan and feel like you were in the United States.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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Edward J. Lincoln is a senior fellow in Foreign Policy Studies at The Brookings Institution and a professorial lecturer at Johns Hopkins University's School of Advanced International Studies, both in Washington, D.C. During former Vice President Walter Mondale's tenure as U.S. Ambassador to Japan, Mr. Lincoln advised him on economic issues. That assignment followed his initial affiliation with The Brookings Institution. Before then, Mr. Lincoln was executive vice president and chief economist at the Japan Economic Institute.

Mr. Lincoln is the author of a number of books and other publications, including Troubled Times: U.S.-Japan Trade Relations in the 1990s (1999), Japan's New Global Role (1993), Japan's Unequal Trade (1990) and Japan: Facing Economic Maturity (1988), all published by The Brookings Institution.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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