How to understand Japan

First published in the Telegraph on 15 March 2010

I’ve just returned from a fascinating trip to Japan, where, as a guest of the Keizo Koho Centre – the economics offshoot of their business lobby – I was trying to get my head round the place, and work out what lessons it could teach us. A feature on the fiscal problemshas already gone in the paper, but I also wrote a longer piece on the demographic crisis, and on some of those cultural factors which make it rather difficult to try to draw direct lessons from the place. Apparently two Japanese features was overkill for the paper, so here, exclusively for you blog readers, is that second piece.

DEMOGRAPHY isn’t the kind of thing that is supposed to make front page news. People live, they die. A population gets older or younger as slowly and quietly as a tree lives and dies. Not so here in Japan. Here, with the population both shrinking and ageing, the issue has taken centre stage. Jeremy Kyle-style television shows pit the young against the old to debate their corner in front of millions. National newspapers have had to double the size of their print to cater for the weakening eyes of their readers. An army of robots is being developed to care for the elderly.

The worrying story the statistics have been telling for years – that the country’s paltry fertility rate has caused a shortage of youngsters – is now being played out for real. While most of the rich world is getting older, no-one is suffering quite like Japan. A quarter of the population is aged 65 or over, compared with less than 15pc in the US. By 2050, the projections suggest a disturbing 40pc will be pensioners, and the country’s population, which peaked last year, will have dropped from 125m to below 100m.

It is just one of the disturbing visions of a possible future conjured up when those from Anglo-American economies come to Tokyo. Just over two decades ago Westerners came here to learn how to run their economies better. Then they came to teach the Japanese how to run their economy more like the West. Now they come to learn what lies in store for them in the post-bubble world.

The problem they face when they arrive is that although in many senses the country is highly similar to the UK – most of the political and infrastructural details were modelled on British, European and American systems – the culture that underlies everything from business to society is markedly different.

An example: So deeply do the Japanese prize honour and ideology that they fulfil their promises to a level which goes far beyond that of the average European. Here, a promise really is a promise, which works fine unless those promises become unattainable.

Take Toyota. It is a little-remarked fact that Ford actually tends to recall more cars on an average year than the Japanese car giant. But because Toyota’s constitution simply does not allow for imperfection, it faced an embarrassing internal crisis of confidence when it had to recall various cars because it simply had not prepared for such an eventuality.

Says Masahiro Sakane, chairman of Komatsu, the world’s second-biggest manufacturer of heavy construction equipment: “We used to have a code of conduct which said that mistakes should be eliminated 100pc. Clearly this is unrealistic. Mistakes will happen. That is the lesson from Toyota.”

That this is news in itself would probably strike any Western executive as bizarre, and yet it underlines one of the important distinctions of Japanese culture – that it is honour-driven to the extreme.

When a minister cannot keep an imprudent promise, in Europe it is an embarrassment. In Japan it is a genuine resignation issue. Partly as a result, in just over 20 years the country has been through 16 Prime Ministers and hundreds of ministers.

The country recently elected a new government – its first genuine change of ruling party in 50 years. But even the newly-installed Prime Minister, Yukio Hatoyama, of the Democratic Party of Japan, is suffering the same problems.

Having promised to renegotiate the terms of a contract with the United States over the lease of its Futenma air base on the Southern Japanese island of Okinawa by May, many suspect he may have to resign if he cannot improve the terms.

Such perfectionism works when a country is doing well. The remarkable stability of government in Japan throughout the post-war decades, and up to the end of the 1980s, became regarded as one of the wonders of the political and economic world. But in the wake of the country’s financial collapse in 1989, it has slowly become a burden.

In the two decades since Japan’s asset bubble imploded, the Government experimented every way it could to yank the economy out of recession and stagnation. It spent trillions of yen on public work projects. When this pump-priming failed to do the trick the Bank of Japan embarked on quantitative easing. But nothing has roused the economy from an almost-permanent state of deflation and economic stasis. In part the problem is that for some years the policymakers, like Toyota’s management, refused to believe anything was wrong. The consensus is that they took too long to do anything about the crisis.

And over the course of twenty years, budget deficits piled on top of each other, with the result that the country’s net national debt stands at around 120pc of GDP. This is similar to Greek levels, but because the majority of it is bought by Japanese savers (another Japanese peculiarity), the Government has not had to suffer the higher interest rates outside investors would likely impose on them.

This conjunction has meant that the country has been able to plod on. Tokyo has hardly been plunged into the depths of poverty. According to Tetsurou Kikuchi, editor of the Mainichi Shimbun newspaper, around 300 skyscrapers have sprouted up in the capital over the two lost decades.

“This does not feel like a city in economic crisis,” he says. “Gross domestic product doesn’t tell the full story.”

Perhaps not. But the air of decay is nonetheless palpable. The streets are clean, the roads well-paved, thanks to those public works programmes. But one is struck by how many of the offices – whether government or commercial, have not been modernised since the heydays of the 1980s. The trains all run on time, but the infrastructure has not been expanded to cater for the growth in urban commuters, so Tokyo Metro is so packed at rush hour that station attendants have to lever people into the carriages manually before the doors close.

And for the first time in their lives affluent Tokyo workers are coming to terms with the sight of the homeless – once almost non-existent in Japanese society. The Imperial Palace, once valued at more than the value of all the real estate in California, now has its outer grounds littered with unfortunate unemployed people, huddled in sleeping bags.

Another new phenomenon is “net cafe refugees” – those who find shelter in internet cafes during the day because they have nowhere else to go.

According to Noriko Hama, a professor at the school of business at Doshisha University, Japan, once a paragon of equality among the world’s most developed nations, is facing up to an unpalatable truth.

“Inequality is now a big issue,” she says. “The unemployment figures hide the fact that there is a whole army of ‘working poor’. Our bookshops are now full of books about the growing income disparity. For the first time, people are talking about poverty.”

Adds Naohiro Yashiro of the International Christian University: “It looks prosperous in Tokyo, but not in the rural areas. GDP has not risen in nominal terms in the past 20 years. Which means we are getting poorer.”

But try as they might, none of the policymakers has been able to crack the puzzle of how to boost growth. In part, the problem was the scale of the 1980s asset bubble, which left the private sector facing a debt bubble it is still saving its way out of. In part the problem was the Government’s flat-footedness in tackling the crisis. Partly the issue is that the country relied too much on its undoubtedly brilliant manufacturing sector, but failed to reform the rest of its economy.

According to Prof Yashiro: “Japan is a dual economy like the old East Germany. The manufacturing side of the economy is run like a Market economy. The services sector is run like a socialist economy.”

Efforts to reform public services and health have faltered as a series of Prime Ministers has resigned. The tax system is bizarrely skewed towards levies on the corporate sector, which scare off direct investment. And as a result Japanese companies have tended to migrate, to pour investment overseas – to Europe, America and, most recently, China. It means that although GDP itself (which measures the ouput within the country’s borders) has been flat, the income from overseas investments has been climbing steadily, according to Ryuji Yasuda of Hitotsubashi University.

The problem is that while this phenomenon ensures the country maintains its wealth, the cash goes to shareholders rather than employees, and so inequality climbs higher and higher in a state ill-prepared for this kind of disparity.

Inequality is a familiar phenomenon in the West, but less so in Japan, where the gaps between rich and poor, between old and young, are starting to cause genuine consternation. The most striking thing one finds when one spends time in Japan today is that although everyone is aware of these problems – from the businessmen and politicians to the protagonists on the television shows – they seem unable to dream up any solutions.

Perhaps this is a consequence of twenty years of disappointment. Perhaps it is an acknowledgement of how difficult it is to pass radical legislation in a country not geared up for any political shifts. Perhaps it is because standards of living have not yet been dealt a major blow.

But there are solutions: immigration could help mitigate the demographic crisis. A period of fiscal austerity and monetary laxity could help with the budget quandary. A more sensible tax system could help reverse inequalities. But none of these solutions looks close at hand. Japan’s restraint is at risk of leaving it stuck even further in the sclerotic mire of economic stagnation.