Prof Jean-Pierre Lehmann On Why Japan Will Not Rise Again

[Mulboyne]

Lehmann responds to Bill Emmott's optimism on Japan. Again, no web link to the original text.

I have to preface my remarks by making a confession. When Bill Emmott's excellent and truly prescient book, The Sun Also Sets, was published in 1989, I wrote a review saying that his analysis was spot-on, but not his timing. In other words, the ills Japan suffered from that he diagnosed were there, but that it would take some time before they were to have any major effect. Two years later, the Nikkei Index dropped precipitously and Japan began its "lost" decade-and-a-half, underperforming all major OECD countries. Both Emmott's analysis and the timing were right and I was wrong.

No one, I believe, apart from Bill Emmott, realised that in fact 1989 was the peak. 1989 was the year that the Nikkei briefly touched 40,000, it was the year that virtually every head of state on planet earth came to the funeral of Emperor Hirohito, recognising Japan's role as global paymaster. It was at about that time that the Japan Economic Research Centre forecast that Japan's economy would overtake the US' in 2005. It was a time of great Japanese hubris and, consequently, considerable contempt for the US especially, but generally the rest of the world. I remember the day the news broke that Drexel had collapsed, I happened to be dining in Tokyo with some analysts from Yamaichi Securities (one of the then "big four") who scoffed at Drexel's collapse and explained how such a thing could not happen in Japan!! This was the period when the Japanese were buying everything, Pebble Beach, Rockefeller Center, etc. There was a cartoon showing a group of Japanese in dark suits in a New York penthouse singing the Woody Guthrie song, "this land is your land, this land is my land, from California to the New York Island..." etc.

It was not just the Japanese lionising themselves. Books on how Japan was conquering the world, how there was so much for everyone to learn from Japanese management, etc, were popping up all over, as business schools taught the great virtues of Japanese management. Emmott's book was really going against the Japanese tsunami! How Japan went from being super-model to basket-case deserves more attention than it has received. The comment was being made in the early 90s that foreigners had gone from Japan-bashing to Japan-passing. As the Japanese souffle collapsed, China rose and Tokyo no longer became a favoured destination. This was also to some extent true of academe and punditry. The world has been generally quite disinterested in Japan. In spite of still being the world's second biggest economy, it is quite amazing how little reference is made to Japan.

Having visited Japan in every decade since the war in one capacity or another and actually having been based in Tokyo in the second half of the 80s, I have often reflected on how we could have all (except Bill Emmott) been so wrong. I will not go into the many things that were either revealed or came to feature more as the collapse occurred. But one thing that I believe is very important is that in Japanese institutions and in the relationship between institutions there was a total lack of transparency. The Japanese approach to "information" is politburo-ish. And this is partly because there is strong control by the Japanese nomenklatura. Take the very prestigious, blue-blooded LTCB (Long Term Credit Bank of Japan). Recruitment was reserved for la creme-de-la-creme of Japanese society! And the bank's senior advisers was a who's who of the most prominent Japanese establishment figures. In such august companies, one does not ask questions, and certainly not difficult ones. The lack of transparency extends to the press, which is totally docile and complicit with the establishment. So we never really knew "the truth" or anything approximating it. And when I say "we", I include not only foreigners, but also the Japanese, not part of the nomenklatura.

So where are we today?

Having been very wrong about Bill Emmott's assessment of the Japanese economy in 1989, I should be very wary of expressing any disagreement in 2006. Nevertheless at the risk of recidivism, let me give a few reasons why I do not believe the sun will rise again to any dizzying heights, though that it is not to say it will undergo an eclipse as it has during the last decade-and-a-half. My basic point may be that while Japan has gone back to what it was, in the meantime the world has changed beyond recognition. Japan will have difficulty adjusting.

1) Japan is not really a market economy. Throughout the 90s and the early part of this decade, I kept being told that "Japan is changing". I agree there is change, but change to what? I thought it quite incredulous that people would point to the fact that it became de rigueur for teenagers to die their hair ludicrous and unbecoming colours to show how society was being "liberated". And the fact that the prime minister has long hair, is divorced, and likes rock (visiting Graceland almost as we communicate), so touted as evidence of a new Japan does not really sound very convincing. The salary-man, the big company employee, the hero of the Japanese anabolic-steroid economy, became more of a laughing stock in the 90s. Suicide rates went astronomically upwards. This may all be true, but I am not sure what it all adds up to. Society is perhaps more in flux. But my own view is that while Japan has changed, including economic governance (the command and control bureaucratic governance is a relic) and industrial structure (the keiretsu/industrial groups a la Mitsui, etc) are not what they were, I do not believe it has become a liberal market economy. There remains a lack of transparency (borne out by the Livedoor and Murakami incidents that Emmott refers to) and a general absence of economic freedom and movement that characterise market economies. Mercantilism and even interventionism remain a powerful ideological force.

2) There is no creative destruction. A must-read on the Japanese economy is a book by the late excellent Japanese economist Shigeto Tsuru entitled "Japanese Capitalism -- Creative Destruction and Beyond", in which he argues, inter alia, that the Japanese do not understand creative destruction. Throughout the post-war decades, there was basically construction, no destruction. As the economy tanked in the 1990s, eventually perforce there has been some destruction (a good number of Japanese companies have disappeared or been merged), but not much evidence of creative destruction. The process has been Darwinian, but it has been so amongst existing players. The leading Japanese companies today - Canon, Toyota, Honda - are the same companies that were in the lead one or two or more decades ago. And they are very good. But there is no new major player -- and not many new minor ones either. The passing glitz of Softbank notwithstanding, there is not a single major Japanese global actor in software, financial services, consulting or in education. (Not a single Japanese business school has ever made it in the FT top 50 rankings.) Part of the reason is that there is little scope for innovation outside the corporation's core competencies. A Japanese friend of mine commented that when Drexel went belly-up, ex-Drexel executives were still very much in demand in the market because of their individual skills, know-how and innovation. When Yamaichi went belly up, Yamaichi executives were not in demand because the only advantage they brought would have been the Yamaichi address book. Without Yamaichi, they were next to useless.

[Mulboyne]

3) There is considerable weakness in both the innovation and application of IT. Among the mirages that have failed to materialise, we must include NTT-DoCoMo. This was the company that was going to revolutionise 3G mobile -- telephony. We are still waiting. In fact, when the Japanese electronic corporate majors (NEC, Fujitsu, Hitachi, Toshiba, Mitsubishi Electric) were dominating the universe in virtually everything from very heavy electric equipment to the smallest chip, they failed miserably to appreciate the importance of the emerging internet. There was in fact great resistance to the introduction of IT in Japanese corporations because of the equalising effect that it has. Japanese companies were (are?) rigidly hierarchical organisations. Information is meant to flow upwards and downwards with lots of bowing and scraping at every level. The idea of sending out a collective e-mail across boundaries and hierarchies was sheer heresy. (One upside may be that a Japanese Martin Lukes [a fictional business executive in the Financial Times who communicates often and badly by email] would be unimaginable!) Thus, while IT has now been completely adopted by society at large and SMS-ing in particular is the national rage, at the business level, Japan has not really changed from being a hierarchical to a network business society. All of the buzz in business today is on managing the global supply chain through a very loose and extended network across the world. The Japanese are not part of that. An interesting illustration is that Japan has a very weak presence in India.

4) Japan is not at all globalised. Take any index of globalisation and Japan is likely to feature very low. For reasons that remain totally beyond comprehension, the Japanese have not mastered English, or even come to terms with English, even among the young (with the exception of young women who were brought up in English speaking countries). It was revealed a few years ago that average Japanese TOEFL scores were the worst in Asia with the exception of North Korea! I remember a friend of mine in 1992 saying that to be literate in the "global era", it was necessary to be well versed in IT and to speak fluent English. The Japanese do so-so on the first and absolutely lamentably on the second. The inability to speak English is not a purely linguistic phenomenon. It reflects a deeper hang-up, a sort of visceral desire not to be part of this world. Japan is an amazingly closed society. It is the only country in the world that I know of where ATM machines function only for cards emitted in Japan, with the exception of a few designated for foreigners that are generally hard to find. In other words, in Japan, your Visa or MasterCard is totally useless unless it has been issued by a bank in Japan. In Tokyo, you can more or less survive as there are a few "foreigner-friendly ATMs", especially those of Citibank, but try going into the provinces. And in Japan, your mobile phone, even triband(!) is as useless as your MasterCard. Doesn't work. What kind of country is this? And all that is only surface. Japan is a closed society. The level of foreign investment remains extremely low, even though it has risen. There are virtually no foreigners working in senior positions in any Japanese corporation or institution, eg universities. Carlos Ghosn, the charismatic Lebanese-Brazilian who ran Nissan and now runs Nissan and Renault (and maybe soon will run Nissan, Renault and GM!) was the glorious exception. He became a cult figure, and he was indeed highly successful. But this is the single and very exceptional swallow. The German president of Mitsubishi Motors (during the time it was acquired by Daimler) was refused admission at a golf club near Tokyo because membership is exclusively for the Japanese! While there are a few Western exceptions, Japanese corridors of corporate and academic power remain hermetically closed to Asians. There are no Philippino, Indian, Taiwanese, Korean, Malaysian, etc, etc, in senior management positions in Japanese companies. While, for example, a person from Madagascar runs France's most prestigious business school (HEC) and an Indian ran the London School of Economics, the idea of, say, a Korean heading leading Japanese universities such as Tokyo or Hitotsubashi is totally implausible. I believe that this lack of globalisation is what is at the heart of the Yasukuni, textbook, sex slave, etc, controversies. There is a lack of sensitivity regarding other nations and their suffering, including those that have been caused by the Japanese. About ten years ago there was an awful case of four US GIs who gang-raped a teenage Japanese girl. It caused, understandably, an uproar. It was also a time when there was some commotion over the sufferings caused to Korean sex slaves (euphemistically known as "comfort women") and Japan's lack of apology and even sense of responsibility. On an occasion when I was in Japan, I mentioned that the awful case of the gang-raped Japanese girl might cause more understanding in Japan for the plight of the Korean sex slaves, many of whom were also in their teens when they were forced into prostitution for the Japanese military. I was met with utmost resentment: how could I possibly compare the two? The Japan is unique and superior syndrome is still very strong

For all of these reasons, and more, in respect to the title of Bill Emmott's contribution, Japan's future in a globalising economy, I believe Japan has a very limited future. Where Japan may succeed is in a de-globalising economy, which I think is what we may well be seeing happening. In a world economy dominated by nationalism and mercantilism, then I have no doubt Japan will do well.

[Greji]

For all of these reasons, and more, in respect to the title of Bill Emmott's contribution, Japan's future in a globalising economy, I believe Japan has a very limited future. Where Japan may succeed is in a de-globalising economy, which I think is what we may well be seeing happening. In a world economy dominated by nationalism and mercantilism, then I have no doubt Japan will do well.

Very interesting post Mulboyne. I had pretty well written off Mssr Lehmann, for some of his previous positions/presentations circa the eighties. I believed him a rather typical Sasagawa group hanger-on, who, at best, would lightlly critique Japan, but was "expected" to generaly keep within acceptable Nippon-set bounds for any thought or presentations being sent out to the "world".

This is a bit out of character for what I was expecting from him. I also did like his comment on the Yamaichi people. I also watched some of their people go from the exalted few to the ranks of the untouchables, but I would like to comment on their treatment by ML. After the merger/takeover, ML kept as many Yamaichi people as they could. Although the numbers were not great, it was felt by a lot of Japanese to be a very noble thing. Many people I know likened it to the "way of business" of a "true Japanese comnpany". Although most of these employees were later forced into retirement (most were close enough in age anyway) and there was a lot of gnashing of teeth because the "expertise" of the Yamaichi people was never used, most of these comments that I heard, were initiated by the Yamaichi people and/or their associates. ML gained a lot of free PR in this venture and it probably came at a time where they really needed it in Asia, given their on-going management problems in the states of that era (?).

At any rate I believe I have to re-evaluate my position vis a vis Jean-Pierre Lehmann, thanks for an interesting post.

[TobidashiChui]

3) There is considerable weakness in both the innovation and application of IT. Among the mirages that have failed to materialise, we must include NTT-DoCoMo. This was the company that was going to revolutionise 3G mobile -- telephony. We are still waiting. In fact, when the Japanese electronic corporate majors (NEC, Fujitsu, Hitachi, Toshiba, Mitsubishi Electric) were dominating the universe in virtually everything from very heavy electric equipment to the smallest chip, they failed miserably to appreciate the importance of the emerging internet.

The problem with NTT-DoCoMo, and grant me that what I am telling you is here-say and not something I can give you direct citation on, is they signed a "partnership" with Motorola in the U.S. This contract has, unfortunately, contractually crippled them from making any strong leaps in the US Telephony market.

DoCoMo wants the major markets in the US to adopt their "greatest cell technology in the world" but the US wants to maintain their current tower infrastructure until growth requires the technological leap. DoCoMo's phones could be in the US tomorrow, if the phones immediately supported the networks they were put upon.

In Japan, DoCoMo grows because Japanese people have a greater tendency to adopt new phones as they are released. In the US, while the trend is somewhat changing, cell phone users adopt new phones as they are able to adopt newer, more beneficial monthly contracts. Japanese market supports the introduction of newer cell phone technologies with much greater aggressiveness than the US market does. NTT would have to, in affect, work backward and around their Motorola partnership to obtain a foothold in the US market. Their development teams would have to retrofit their newer phones and features to support older towers and networks. It isn't impossible, but the people of DoCoMo would have to expect small short-term rewards which will expand as the general public of the US develops a greater appetite for new wireless phones (the Motorola Razor, for example, broke that mold)

[Mulboyne]

...I had pretty well written off Mssr Lehmann, for some of his previous positions/presentations circa the eighties. I believed him a rather typical Sasagawa group hanger-on, who, at best, would lightlly critique Japan, but was "expected" to generaly keep within acceptable Nippon-set bounds for any thought or presentations being sent out to the "world". This is a bit out of character for what I was expecting from him...

I never came across his Sasakawa-era views but I thought something of that kind must have been the case when he talks of how he wrongly refuted Emmott's predictions of the bursting of the bubble. He also seems to see Emmott as a lone dissenting voice at the time which completely ignores the large body of criticism of Japan which was out there. The economy's resilience in the face of the 1987 market meltdown and strong yen certainly pushed some critics out of the limelight but not many of them changed their minds.

As the link above to Taro's earlier post shows, Lehmann has been making the same general points for some years now. They probably ring true to most people who have lived and worked in Japan for any time. It's when he tries to back it up that he stumbles. He says that friends tell him Japan is changing but he doubts it; the difficulty for his argument is that when he gives details of what is wrong with Japan, often that's where there have been changes over the years Although Carlos Ghosn as a foreign manager is a "glorious exception", he says no foreigner will ever run a top university. Funny that, the same used to be said about running a top Japanese company and I'm sure Howard Stringer doesn't think Ghosn is an exception. On another point, you can now use overseas bank cards at the post office ATMs nationwide so they aren't "totally useless". Are all his criticisms swept away by this? Well, if you choose to make a song and dance about these examples in the first instance then they must have some place in your analysis. If you don't anticipate change then you can't say it doesn't matter with any credibility when it then takes place.

His criticisms would be more valuable if he conceded a bit more ground. Is Softbank just passing glitz? Yahoo Japan looks like a valuable asset to me. However the general point about the lack of an international service industry behemoth is a good one. It also raises the question of why international giants in the industries he does mention often find it hard going in Japan. An answer to that question might tell us as much about what's important in today's economy and where the strengths lie as well as the weaknesses.

[Buraku]

Bank of Japan governor Toshihiko Fukui said the central bank's monetary policy remains unchanged despite a much slower-than-expected rise in the consumer price index (CPI) for July which was calculated using a new standard and a new base year.
http://www.forbes.com/business/feeds/afx/2006/09/08/afx3002241.html
Fukui was speaking at a news conference after the central bank 's nine-member policy board voted unanimously to keep the overnight call rate target at 0.25 pct, a move that had been widely expected by the market.

[Buraku]

Japanese industrial output slows

http://news.bbc.co.uk/2/hi/business/6097774.stm

[Catoneinutica]

Stories like these tend to support Lehmann's plus-ca-change, plus-la-meme-chose view of Japan:

Japan continues to competitively devalue the yen:

http://blog.mises.org/archives/004402.asp

Japan remains one of the world's lowest recepients of FDI:

http://www.theaustralian.news.com.au/story/0,20867,20672018-36375,00.html

In short, Japan continues to pursue the same mercantilist trade policy it always has - the "1940 System." Count me in the continuity-over-change camp.

[Buraku]

Peace and Prosperity through World Trade
https://www.cambridge.org/IQ/academic/s ... 0521169004
Compiled by The Evian Group on the occasion of the 90th anniversary of the International Chamber of Commerce

Lehmann worked closely with a number of international forums and think tanks, including the World Economic Forum

The World Economic Forum’s Klaus Schwab on What Lies Ahead
https://news.yahoo.com/world-economic-f ... 42913.html