Kawari: How Japan's Economic And Cultural Transformation Will Alter The Balance Of Power Among Nations

by Milton Ezrati

Overview

At the end of the 20th century, Japan is once again at a crossroads, undergoing fundamental transformation, as it did when it opened its doors to trade in the 19th century and renounced its feudal past, or when it rose from the ashes of World War II as a mighty economic machine. Today's recession and real estate and financial crises reflect, however, a confluence of trends that are proving that its current model for economic growth is unsustainable. In Kawari (which means "change" in Japanese), noted international asset manager and Japan expert, Milton Ezrati, paints a rich and multi-dimensional picture of Japan in transition. Analyzing economic, social, political, demographic, and cultural trends, Ezrati argues that Japan is poised to recover from current crises, liberalize its economic and trade policies, and evolve into a major diplomatic power — but not without profound consequences for its people and for the world at large.

Product Details

ISBN-13:	9780738203140
Publisher:	Basic Books
Publication date:	06/01/2000
Pages:	304
Product dimensions:	6.12(w) x 9.25(h) x (d)
Lexile:	1590L (what's this?)

About the Author

Milton Ezrati has worked on Wall Street for twenty-five years, serving since 1987 as chief investment officer for Nomura Asset Management, the American investment arm of Japan's Nomura Securities, the largest securities dealer in the world. A recognized expert on Japanese finance, business, and politics, he travels regularly to Japan, and has published insights on the country in a wide range of periodicals, including the New York Times, the American Economic Review, the American Scholar, the Los Angeles Times, and Foreign Affairs.

Read an Excerpt

Chapter One

METAMORPHOSIS

TO THINK SERIOUSLY ABOUT THE GLOBAL FUTURE is to think seriously about Asia. Vast, populous, rich, and growing richer, despite its recent financial setbacks, Asia is increasingly the focus of international planners in business, finance, and government. China naturally dominates their attention. It is undergoing dramatic change, has powerful economic and military potential, and, consequently, introduces great uncertainty into all plans and prospects. Japan, though also powerful, receives less attention. Because she has remained so steady and predictable for so long—since the end of the Second World War, in fact—she tempts the planners to simplify their task by assuming constancy in her future. Such an assumption is wrong. Despite her past stability, in coming years Japan will change radically, become more volatile, less predictable, and possibly even dangerous.

    Few who know Japan can doubt her ability to surprise. More than any other people on earth, the Japanese will make themselves over whenever they sense failure in their existing practices or priorities. Witness, for example, Japan's dramatic self-transformation in the middle of the nineteenth century. Until 1853, when Commodore Matthew Perry anchored a small American war fleet in Edo Bay, she had lived, isolated and unchanged, in a feudal state for 250 years. But the Japanese saw in that fleet's superior power and technology the inadequacy of their nation's political, economic, and social structures. They responded almost immediately by rethinking their priorities, revising theirattitudes, and reversing long-revered Japanese practices. Within fifteen years of Perry's visit, Japan had overthrown her feudal government and had begun to remake herself along Western lines. Within twenty-five years of this visit, Japan had completely thrown off her medieval, isolationist patterns and was on her way to becoming a modern military and industrial power. And, after just fifty years, the island nation defeated the Czar's navy and emerged victorious in the Russo-Japanese War. Within fifty years of that remarkable victory, and less than one hundred years after Perry's visit, Japan in 1945 amazed the world again with an equally startling metamorphosis. Her utter defeat in the Second World War made it clear that the imperial-militaristic experiment into which she had flung herself had failed. Once again the Japanese responded with a radical shift. Suddenly, as if with one mind, they abandoned their ferocious devotion to militarism and began the single-minded peaceful pursuit of manufacturing, exporting, and commerce for which they are now well known.

    Today, Japan stands once more on the verge of another radical transformation. Again, the change will result from her doubt about her present political and economic practices and their capacity to meet future challenges. Unlike past transformations, which came in response to security threats, this one will come from the more impersonal forces of her maturing economy, the globalization of economic and financial arrangements, and the rapid and relentless aging of her population. Though lacking the high drama of a military confrontation, these influences are no less powerful. Fundamental and inexorable, they will force Japan to adjust or face economic decline. Japan will not choose decline.

    If history is any guide, Japan's transformation, once it gains momentum, will break completely with the past. Her economic and demographic imperatives will make it increasingly difficult for her to carry on as the world's workshop. Her huge trade surplus will shrink into deficit, and her high rate of savings will fall. But these changes will not necessarily weaken her. Japan will push out into the rest of Asia, using its ample human and economic resources to preserve her wealth and position. She will adjust her national focus from domestic manufacturing and exports to remaking herself as a regional and global center for management, finance, and design—a kind of "headquarters nation" for a regional division of labor. The change will not stop with economics. This new national emphasis will breed new politics and new policies. Japan's global diplomatic presence will rise and follow her economic march into Asia, and, because this historically unstable area lies outside her direct political control, she will, against her own instincts, rebuild her military power. Although this metamorphosis will impel Japan to shed many of the hallmarks of her former success, other elements of the transformation will offer her means for retaining her wealth and dominance. Indeed, she will gain stature on the world stage, more, in fact, than at any time since the outset of the Second World War. Japan will go from the nation that owned much but influenced little, to a nation that owns even more and influences a great deal, a full-fledged power in every sense of the word.

    The risks involved in such a tremendous change are profound, There is much room for mistakes and misunderstandings. Certainly, the rise of Japan's diplomatic and military profile will unnerve other nations, as well as the Japanese. Many still remember well Japan's last great push into Asia during the 1930s and 1940s, and the ostensibly economic "Greater East Asia Co-Prosperity Sphere" that served as the pretext for her imperial conquests. But it is easy to exaggerate the similarities to the past and its security concerns. Japan has no desire to repeat her old mistakes, even as she increasingly vies for dominance in the region with a powerful and aggressive China. Rather than resort to force first, as she did sixty years ago, this time she will rely on superior technology, organization, education, and business connections. If handled correctly by the rest of Asia—and also by the United States—Japan's change might even enhance security in the region.

    The Japanese system, which is about to change so radically, has its origins in the devastation of World War II. This system, Nihon ryu—as the Japanese would say, or Japan's "way"—emphasizes economic growth above all else. Aiming, as it did, at rebuilding the nation and eventually catching up with the West, this "way" developed around a highly regulated, closed, planned, and centralized structure. Run largely through the cooperation between big business and the nation's civil service bureaucracy, it focused almost exclusively on manufacturing and exports, even at the expense of its citizens' well-being. And until recently, the Japanese public supported this approach with a national spirit seldom seen in the West, except perhaps, in time of war. This system has been enormously successful too. It brought Japan from ruin in 1945 to the prestigious position as the world's second largest economy today.

    But the pressure for change has been building steadily. The fundamental forces of globalization and the economy's maturation were straining Japan's "way" even in the boom years of the 1980s, and have become impossible to ignore in the face of Japan's current financial and economic difficulties. Stagnant growth rates, the frailty of Japan's financial institutions, and the failures of policy correctives, which once worked so well, have highlighted the system's vulnerability. After nearly two generations of unwavering economic success, these unmistakable signs of fundamental problems have shocked the Japanese people as well as her policy makers, and seriously undermined the once strong consensus behind the system. Many of the practices that both natives and foreigners thought were part of Japan's ancient culture have begun to come unraveled. The complex and exclusive web of Japan's retail distribution system, about which American trade negotiators have complained for years, has torn. Firms have begun to abandon the much lauded system of "lifetime" employment, and given up their former eagerness to cooperate with the government and with one another. The misfortunes of the 1990s have made it clear that rather than being expressions of traditional culture, such practices were only the temporary products of a period of extraordinary economic growth that is now coming to a close.

    The lack of government success in dealing with these difficulties has intensified people's doubts about the efficacy of Japan's "way." Many Japanese, believing that their government and bureaucratic controls would prevent such problems, feel deeply betrayed by their leaders, especially the bureaucrats in whom they once put so much trust and to whom they gave so much power. The civil service bureaucracy, which once commanded great respect—particularly the Ministry of Finance—has become an object of contempt in Japan. A reform movement has sprung up among prominent business people, academics, journalists, and even some government officials. Arguing that the old way has failed, these reformers want to break the power of the bureaucrats and loosen their close, centralized control over Japan's economy and society. The movement aims to deregulate industries, liberalize markets, and open the country to foreign firms and imports. Naturally, the reform effort has faced resistance from entrenched interests, leading many Western observers to express skepticism about the prospect for any substantive change in Japan. But the fundamental pressures facing the country have stiffened the reform effort. It has begun to have an effect. The country, in fact, is well along the path of reordering its priorities and dismantling its once cherished but no longer sustainable practices and structures.

    In coming years, Japan's transformation will accelerate as her economy and social institutions begin to cope with an especially powerful agent of change: the rapid aging of her population. Every industrialized nation expects its population of elderly and retired to increase, but Japan will face the phenomenon at its most extreme. By early in the twenty-first century, one Japanese in four will be older than sixty-five years. Such a huge retired population is unprecedented in history. It will force change mostly by creating a severe labor shortage. Japan has had such a low birthrate for so long that she lacks the young people to step into the shoes of the newly retired. By the second decade of the new century, for every dependent retiree Japan will have fewer than two people working. That is almost double the present weight of retired, and a far higher proportion than is expected for the United States. Unlike the United States, or even Europe, Japan has virtually no prospect of youthful immigration to relieve the strain on her labor force. These demographic pressures, together with the influences of economic maturation and globalization, will force Japan to make a series of adjustments that will alter the face of the nation and the rest of Asia as well.

    It is primarily this burden of pensioners on her workforce that will sap Japan's ability to maintain her position as a great center of production and exportation. No nation can remain a manufacturing powerhouse, exporting a large portion of her products, when a substantial proportion of her population is retiring from active production. Her export growth will slow, and imports will have to increase in order to supplement the production of her overburdened workers as they strive to meet the legitimate economic demands of a large elderly population. Her mighty trade surplus will dwindle. At the same time, Japan's labor shortage will impel her industry to expand into the rest of Asia, where it can find cheap, abundant labor and fast-growing domestic markets. With this, she will lose more manufacturing and export capacity, and so face an even greater dependence on imports. Eventually Japan will need to liberalize her old, exclusive trade policies and her other economic controls just to facilitate the necessary flow of overseas products from her own transplanted industry and other sources. That change will, in turn, further encourage importing, eventually causing her envied trade surplus to slide into deficit.

    Under such pressure, Japan's entire domestic economy will have to reorient itself. Japanese business will shift focus from manufacturing to an un-Japanese emphasis on service industries, such as management, research, communications, design, and finance. She will need these capabilities to manage her increasingly important overseas production interests and ensure that her people enjoy the profits derived from them. The pattern is reminiscent of what happened to American industry in the 1970s and 1980s. This broad shift in Japan will, in its turn, increase the pressure to open, deregulate, and generally liberalize commerce, industry, employment, and especially finance. Japan will require extensive financial flexibility to support the "headquarters" role that she will take on for her extensive overseas interests. She will also need to attract foreign financial capital to compensate for the loss of savings as her huge elderly population ceases putting money aside and begins to live off past savings. The government will look to financial markets for help in financing the budget deficits that will rise as it attempts to keep up with ever-expanding pension obligations, which are even more poorly funded than Social Security is in the United States.

    Faced with increasing economic vulnerability to foreign sources, Japan will have to deviate even more from her past patterns. Eventually, she will have to increase her diplomatic and military profiles to serve and protect her important foreign sources of wealth. She will hesitate at first. Since World War II, Japan has followed a very reserved line with regard to diplomatic and military matters. But no nation can expose its production facilities to foreign governments (as Japan will have to in coming years) without developing enough power—both diplomatic and military—to protect those vital interests. In time, Japan's needs will force her to assert herself internationally and behave in Asia with increased independence from the "security" relationships with the United States. Diplomatic strains will inevitably develop between Japan and the United States as well as other Asian nations. Since diplomacy, by its nature, has a military component, the strains will become much more dangerous than recent trade disputes have been, especially given Japan's newness to the game. But she will develop all these capabilities quickly. Japan already has a powerful military but has downplayed this significant force because of the legacy of World War II. In time, to bolster her diplomacy, she will want the world to know of her military power. She will also want to enlarge it and, significantly, change its character from a purely defensive force to a strike force. The nature of Japan's alliance with the United States will change in this environment, as will all power relationships in Asia.

    Such transformations in any nation are fraught with risk. Japan is especially vulnerable. Her weakness, ironically, lies in one of the sources of her post-war success: her culture's powerful response to a common purpose. When, as in most of the past fifty years, national objectives are clear, Japan's group-oriented culture can produce a remarkable national spirit, great drive, industry, and discipline. But with the kind of uncertainty that the future holds, this cultural craving for great national purpose can work to the nation's—and possibly the world's—distinct disadvantage. As the Japanese lose faith in their established priorities and practices, their quest for a meaningful and successful national endeavor could prompt them to grab at almost any alternative approach that presents itself, even if it is not entirely rational—or possibly is destructive. It was, after all, this cultural trait during a previous period of uncertainty that lead Tokyo to militarism in the 1930s, and to national disaster in the 1940s. While it seems unlikely at the moment, such extremism is by no means out of the question.

    Along with all these risks (or perhaps because of them) Japan will offer great business and investment opportunities as she opens her markets, shifts the orientation of her domestic economy, and invites management and financial expertise to assist in her transition. Foreign producers will find a welcoming market in Japan, where they once met only opacity and official resistance. Financial firms and especially firms with experience in management and communications will find a much wider field of interest in Japan and a much more fluid environment than at any time since the country began rebuilding after World War II.

    These business opportunities, as well as the overall national transformation, will develop best in an environment in which leadership, inside and outside Japan, facilitates the change. By signaling future directions to business and others, huge risks may be ameliorated. Reform in Japan can help contain the dangers implicit in Japanese culture. The United States can head off friction with Japan's new diplomatic needs by loosening the structure of its alliance, allowing her the increased maneuvering room that she will need. To avoid unnecessary tension, all the nations involved in the region will need to explore alternative means to maintain Asia's power balance as these changes remove the constants of the past. This last effort will depend heavily on the United States and probably will be best served by a new or strengthened multilateral structure. Although Asian nations have always shown a reluctance to cooperate in such arrangements, the stakes certainly are high enough to warrant the effort. Left unattended, Japan's response to her economic and demographic pressures could become very dangerous indeed. When well managed, Japan will find a means to meet her challenges that will benefit both herself and Asia.

Table of Contents

Preface	ix
ONE / Metamorphosis	1
TWO /Descent from Heaven	9
THREE / The Breakdown of Old Ways	35
FOUR / The War Between Reformers and Bureaucrats	59
FIVE / Growing Old in Youthful Asia	87
SIX / Financing Change	115
SEVEN / Diplomacy, Arms, and Asian Investments	141
EIGHT / Risk in the Transition to a More Powerful Japan	173
NINE / Gaining Practical Advantage	191
TEN / Japan at the Crossroads	223
Notes	247
Acknowledgments	279
Index	281

Editorial Reviews

"Kawari" is a Japanese word for change. Ezrati, a veteran Japan observer who is chief investment officer of Nomura Asset Management, analyzes the forces for change in Japanese society and predicts that Japan will not only recover from its present economic doldrums but will also transform itself from a timid actor on the world stage to a major diplomatic and military power. Drawing on his knowledge of Japanese history, Ezrati concludes that Japan will have no choice but to shed its former reliance on manufacturing for export and transform itself into a "headquarters nation," providing service functions such as research, finance and management, and directing a workforce scattered throughout Asia. Balancing his presentation, Ezrati identifies and assesses the risks to Japan and its neighbors arising from these fundamental changes. The primary risk, and Asia's historical nightmare, is that Japan might (again) respond irrationally to pressures and perceived threats to its survival. Ezrati believes, however, that Japan will prove resilient enough to overcome the risks and emerge as a new kind of Asian powerhouse. Ezrati's occasionally awkward writing doesn't detract from the evidence he marshals or from the clarity of his analysis. While short-term thinking about Japan currently focuses on whether or not it will accede to U.S. ideas about trade liberalization and financial reform, Ezrati's book provides readers with a gracefully long view. (June) Copyright 1999 Cahners Business Information.

Publishers Weekly - Publisher's Weekly

A noted asset manager and Japan analyst describes how Japan is taking steps toward renewed economic growth and securing a place in the new world order. He predicts that recent changes such as expansion of manufacturing facilities abroad and dependence on foreign labor will necessitate an aggressive new foreign policy and an active new military. The author has served since 1987 as chief investment officer for the American investment arm of a Japanese securities firm. Annotation c. Book News, Inc., Portland, OR (booknews.com)

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