Japan is awash in savings, its people still work hard, its industries still churn out many of the world's consumer goods, its cities sprout gleaming new buildings every year. Yet, many believe this is simply the fading light from a burnt-out star. The country cannot seem to stop what seems to be a long, slow decline into political and economic irrelevance. What's the problem? asks David McNeill in Tokyo
When I was a student in Tokyo in 1993, my friend Yoshi took me for a walk around the Kanda area of the city one day with his 72-year-old mother. Crowds of rich shoppers, many decked out in Gucci and Armani, crowded the streets, surrounded by some of the most expensive real estate on the planet. "I can remember when everything around here was smoking rubble," she said.
It seemed impossible that a single human memory could span the enormous gulf between Japan's devastation in the second World War and its modern transformation into an economic superpower.
And what devastation. In 1945, Kanda and much of the rest of Tokyo had been napalmed by US bombers, killing 140,000 and reducing the city to ashes. Sixty more cities met the same fate before Hiroshima and Nagasaki were obliterated. Millions were dead or missing, a quarter of all national wealth had been destroyed and years of occupation loomed.
Yet, as my walk around Kanda with an old survivor indicated, the country engineered probably the most remarkable feat of economic regeneration in history, climbing from this humiliated post-war wreck to the world's second-largest economy in just 30 years. This achievement was called the Japanese economic miracle and there was a time, just over 10 years ago, when some predicted it would overtake the US for the mantle of global No.1 economy.
Few seriously consider that likely now. Instead, after more than a decade of slump, the talk is of slow, arthritic decline. Many of Japan's once world-beating industries are in trouble, bankruptcies and unemployment are at record highs, the country is locked into a deflationary spiral reminiscent of the crisis that struck the US in the 1930s, and it is now considered a bigger credit risk than Botswana by international credit rating agency Moodys. And watching over the mess is the country's sclerotic political establishment, apparently unable to stop the rot.
"Japan is looking every day more like an east-Asian Argentina," says Chalmers Johnson, veteran commentator on Japan affairs and author of the seminal MITI and the Japanese Miracle. "It is an extremely rich country, now complacent, much more interested in dealing with its established political system and political elite. Probably the only thing that will save it is a revolution."
A country that pulled itself so forcefully up the ranks of the global economic league tables and that now seems content to watch as it slips back again baffles many. The fact that all the elements of the old Japan are present and correct deepens the mystery.
People still work very hard, its industries still churn out many of the key components and consumer goods that keep the world turning, new buildings sprout up every year. The country is fantastically rich, with a GDP almost three times the size of Britain, a mountain of foreign reserves and the largest pool of personal savings in the world.
But to see the impact of a decade of slump, you only have to take a short subway ride to Ueno Park, where hundreds of newly homeless people sleep in cardboard boxes.
Gucci handbags still swing from female arms, but the retailing phenomenon of the last decade has been the rise of the discount shop. The Uniqlo chain is the most famous, pioneering a much-copied business model of mass producing clothes cheap in China for sale to penny-pinching Japanese consumers.
The streets of Tokyo are still among the safest in the world, but newspapers, starved of new political or economic news, obsess about the rise in juvenile crime. High school non-attendance rates are growing fast and lurid tales of teenagers attacking teachers and parents are increasingly common on front pages.
With businesses now failing to absorb graduates, the prospect of thousands of unemployed youngsters roaming the streets keeps the mandarins in Tokyo awake at night. An August labour survey found that there are just 115,000 jobs waiting for the current batch of 231,000 high-school students, the worst ever ratio.
At the other end of the corporate ladder are older men pushed out by early retirement. Not surprisingly, middle-aged men feature heavily in the 30,000-odd people who took their own lives last year. One of them, my neighbour Takahiro Arai, hung himself after the ramen noodle shop he set up with his retirement money went bust.
Many believe that Japan's problems are like the weak foundations of a tall building that is steadily sinking into the ground. Ironically these problems were previously seen as the reason for the strength and distinctiveness of the Japanese system.
Japan barged its way into the club of rich nations with a breed of capitalism "very different from the other developed industrial countries", says Karel Van Wolferen, best-selling author of a number of books on the country. "The country was made strong by a system of industrial planning dominated by bureaucrats who controlled policy-making and finance."
The origins of this system go back to the war. The country's economic activities were rationalised following military defeat in 1945 into a system of unlimited industrial expansion in the pursuit of market share, under the guidance of a bureaucratic apparatus heavily influenced by centralised wartime controls.
Massive state-directed investment into key industrial sectors such as steel, cars and information technology was co-ordinated by the two key bureaucratic agencies, the Ministry of International Trade and Industry (MITI) and the Ministry of Finance.
The MOF used the Bank of Japan to control the supply of investment funds to city banks and their corporate clients, guiding and nurturing preferred industries and phasing out obsolete ones. A poorly developed stock market kept industry heavily dependent on financial flows directed by the central bank, and thus on this administrative guidance.
Although touted as a rare example of Asian "democracy", politicians had little say in how this system was run and ordinary people even less. The bureaucrats ran it with the country's business leaders, holding down wages and consumption to generate funds for their holy grail - overtaking the advanced economies of the West.
"The Japanese economy is basically a war economy operating in peacetime," says Van Wolferen. And like in wartime, cartels and cross-holdings were used to keep out foreign capital, to protect the country from "invasion". The system proved ruthlessly efficient in increasing the country's wealth and grabbing market share abroad. Japan's GDP, or national wealth, grew annually by nearly 10 per cent from 1951 to 1973. Even Ireland's "miraculous" growth of around 7 per cent between 1991 and 2000 pales in comparison. There has never been anything like it.
By the 1980s, large sections of European and US industry were beginning to tumble. At the end of the decade Japan was headquarters of the 10 largest banking organisations in the world, a single Japanese company - Matsushita - was turning out two-thirds of the world's video recorders and Toyota and Nissan were helping to wrestle US car giant Chrysler to the ground.
Yet, even as the US and European business press filled up with of images of Godzillas and giant Sumo wrestlers stalking Wall Street or gobbling up famous assets such as Columbia Pictures and the Rockefeller Centre, problems were brewing.
"The Japanese strategy of funnelling investment in one direction to build up a massive export machine depended on the rest of world absorbing the goods it produced. Eventually this reached its limits," says Chalmers Johnson.
And because most industries relied mainly on group banks for capital, which in turn held most of their assets in cross-shareholdings with other companies or in land, all the ingredients for a speculative bubble were in place as super-inflated assets lost any relation to their real value.
On December 31st, 1989, the Nikkei stock index hit its peak of 38,915, three times its level in 1983-1984. Rising share prices were used to finance further borrowing, investment and speculation in the belief that the only way these assets could go was up.
But like someone sticking a pin in the giant Sumo of the 1980s, Japan's national wealth has been steadily shrinking since.
The Nikkei currently stands at levels not seen since 1983 and land prices in some parts of Tokyo have slumped by 80 per cent.
The banks, stuck with portfolios of these declining assets, are in deep trouble, and the more land and stocks decline, the deeper the trouble gets. The equivalent of Ireland's entire output for a generation has been wiped off the books.
It's a classic deflationary spiral and Johnson says it proves that Japan has "surely the most incompetent financial authorities on earth. The Ministry of Finance and the central bank have come up with endless excuses to do nothing. They should have moved much earlier and now they are looking at an Argentina-type scenario."
The reason for this inaction lies in the cosy ties built up over the years of explosive growth between the bureaucrats who effectively run the government and the banks and businesses they supposedly supervise. "You do not have a clearly defined public and private sector in Japan," says Van Wolferen. "It is always a collective effort that is impossible in Western countries." Rather than squeeze the debt out of the financial system the authorities shored it up in the hope that the slump would prove temporary. Years later, they're still trying.
The result of all this is that for most of the 1990s Japan was forced to operate at about one-third below its capacity.
With poor housing, welfare and medical services and short summer holidays, the solution might be for the industrial juggernaut to steer away from its focus on foreign consumer markets and concentrate more on the quality of life at home.
There are no shortage of supporters for such a move. "Japan is ageing very quickly and the number of children is declining sharply," says Professor Tetsuo Kato, professor of political science at Tokyo's Hitotsubashi University. "Focusing on better care for children and the elderly and building bigger houses would help solve our problems. But this system is incapable of turning itself around." Change of this magnitude - effectively developing a welfare state - takes political will, but the politicians do not control this system. Instead, they provide access to it by redistributing bureaucratic funds to their constituents and political supporters, overwhelmingly in the countryside.
In particular, the Liberal Democratic Party (LDP), which has ruled the country for all but a year since 1955, is welded to the construction industry, which has bankrolled it for the last half century. The LDP's solution to the sinking economy has been to pump money into construction rather than the root and branch reform it is incapable of providing. Dams, dykes and bridges to nowhere fill up the countryside. Some of the stadiums built for the soccer World Cup will hardly be used again.
Instead of the welfare state, Japan's beleaguered citizens get the construction state.
In an angry 2001 book called Dogs and Demons: The Fall of Modern Japan, veteran commentator Alex Kerr wrote: "In fiscal 1998, spending on public works came to billion at 1999 exchange rates), the kind of money that dwarfs the cost of building the Panama Canal and far surpasses the budget of the US space >U>nited S>"paraly>system that is at the root of the country's problems. "There is a very gloomy mood in Japan that works like a self-fulfilling prophecy, so there is no economic growth. And as long as you measure by growth, then Japan is in trouble, but if you look at it in another way, the productive apparatus created in the 1980s is still intact, and when world demand picks up that >no political entity that can take the initiatives necessary to get out of these doldrums." A rightward drift?
ALTHOUGH the faces of the shoppers around Kanda today are gloomier than in 1993, new buildings, many constructed over >To see the impact of a decade of slump, you have to take a short subway ride to Ueno Park, where hundreds of newly homeless people sleep in cardboard boxes.
Gucci handbags still swing from female arms, but the retailing phenomenon of the last decade has been the rise of the discount shop. The Uniqlo chain is the most famous, pioneering a much-copied business model of mass producing clothes cheap in China for sale to penny-pinching Japanese consumers.
The streets of Tokyo are still among the safest in the world, but newspapers, starved of new political or economic news, obsess about the rise in juvenile crime. High school non-attendance rates are growing fast and lurid tales of teenagers attacking teachers and parents are increasingly common on front pages.
With businesses now failing to absorb graduates, the prospect of thousands of unemployed youngsters roaming the streets keeps the mandarins in Tokyo awake at night. An August labor survey found that there are just 115,000 jobs waiting for the current batch of 231,000 high school students, the worst ever ratio.
At the other end of the corporate ladder are older men pushed out by early retirement. Not surprisingly, middle-aged men feature heavily in the 30,000-odd people who took their own lives last year. On of them, my neighbor Takahiro Arai, hung himself after the ramen noodle shop he set up with his retirement money went bust. >And yet, mysterious wealth is still evident in a clutch of massive redevelopment projects in Roppongi and Shinjuku in the heart of Tokyo. This wealth continues to be amassed in corporate and state coffers. Years of exports to U>S>>heavily >economy. Japan retains significant holdings of US treasury bonds, which if suddenly liquidated could trigger a financial crash.
U>S>economies may be Japan's best safeguard against an Argentine-type collapse. "American economic expansion depends upon Japan's ability and willingness to >American deficits," writes economist R. Taggart Murphy. The disintegration of the U>S>.this does not happen.
More likely is some sort of muddle-through approach, but here too lie dangers because drift means more suffering for ordinary Japanese and the risk of a political backlash. "People are very fed up," says Professor Kato. "Many have been downsized, many more public workers will be fired in the years to come. People hate the LDP but the opposition is so weak there is no leadership to turn to. There's some demand for a strong leader and that's the road toward nationalism, and that's the direction Japan is heading, with China in its path."
Indeed, one of the more unlikely outcomes of Japan's hosting of the World Cup was the sight of the once-taboo rising-sun flag draped around the shoulders of thousands of youngsters. While the authorities fretted about the influx of foreign hooligans, others worried about the shouts of "Nippon! Nippon!" belting from the lungs of teenagers too young to remember how controversial such outward displays of nationalism once were.
Collapse, drift or conflict, few of Japan's options inspire much confidence in the future. Professor Kato says he is deeply worried. "It's really not a good time to be Japanese right now."