Justin Fox The Curious Capitalist
Why Japan isn't ready for a comeback
My first visit to Japan came in the sticky late summer of 1998. Fortune had sent me across the Pacific to figure out whether there was any end in sight for the island nation's long economic nightmare. That's not really the kind of question you can answer in a week of interviews in a country where you don't speak the language, but I had read Karel van Wolferen's The Enigma of Japanese Power, so I sort of had an idea going in.

Van Wolferen is a Dutch journalist-turned-professor, and his book--one of the most important written about Japan in the 20th century--described how difficult it is for Japanese society to change course. In Van Wolferen's telling, power in Japan was exercised not by individuals but by interlocking groups. And it took deeply traumatic events like the arrival of Commodore Perry's warships in 1852 and defeat in World War II to get Japan's groups to adopt new objectives.

So in 1998, I wrote that Japan wasn't going to change anytime soon, and its economy wasn't going to turn around anytime soon. It was a pretty good call: It wasn't until 2004 that Japan's economy showed real signs of life. But since then a lot of people, among them Fortune's Asia editor Clay Chandler, have been proclaiming that the country is now truly on the comeback trail.

Not everyone, however, agrees. During my 1998 visit, I got to spend a weekend at Van Wolferen's country house outside Tokyo. I met a bunch of interesting people there, among them Michael Zielenziger--then Knight-Ridder Newspapers' man in Asia--and his wife, artist Diane Abt. Now Michael, who has since moved back to the San Francisco Bay area, has written a book, Shutting out the Sun, arguing that Japan is nowhere near a real turnaround or comeback. (Similar sentiments can be found on a near-daily basis on Michael's blog.) The book is only partly an economic tract, though. Michael also spent a lot of time among the hikikomori--young male recluses whose plight, he argues, encapsulates much of what's wrong about Japan.

Because I'm too lazy to take notes, I conducted the following interview with Michael via instant message. I edited it somewhat for length and comprehension.

JF: I thought everything was turning around for Japan. The economy was growing again, the politicians were more dynamic, etc. You saying that isn't so?

MZ: The conventional wisdom is that Japan is about to "turn the corner." That has been the line for some five years now.

You say it's wrong?

It is a very l-o-n-g corner. The surge of growth in China (on the investment side) and the U.S. (on the consumption side) has masked Japan's deep structural problems. Japan is very much a HIGH COST country in a LOW COST region. Japanese firms--the 90 percent that are domestic focused--are almost uniformly unproductive (by global standards) and unprofitable. Zero interest rates hide that problem.

And consumption in Japan isn't really back?

Consumers are pessimistic, worried about the collapse of the safety net, and getting older. The only reason SPENDING grew is that so many young people are out of work...


Their parents have to help support them. There was a "modest" uptick in consumer spending last year. This was a reflection of the fact that Japanese had to dip into their enormous nest eggs because wages were no longer growing. We have 4 million PLUS young Japanese who only have part-time work. They earn about 15K a year, and their chances of getting hired mid-career are small.

Wow, you're just the gloomy gloomster. Isn't anything positive happening over there?

Positive? Well Toyota and Nissan are kicking ass...but that's overseas.

But still, there's stuff going on--in terms of foreign investment, startups, etc.--that wasn't there 15 years ago, isn't there?

Yes there is some more foreign direct investment. The corporate rules have been eased somewhat, corporate cross-ownership of shares has been reduced. But certainly there has been NO radical restructuring of the system, and the Japanese consistently demonstrate that they DON'T WANT any radical restructuring of their system. Those who say Japan is "turning the corner" also insist that Japan will "converge" and emerge like us. I say, it just ain't so. Take that, Tom Friedman. The world is not "flat."

Tell me about your hikikomori buddies.

I argue in the book that if you understand why about 1 million young men isolate themselves in their own homes, don't work or go to school, then you begin to understand why it is so hard for Japan to globalize, "play well with others," open their economy, etc.

Those are the hikikomori?

Yes, to be hikikomori is to become socially isolated, alone at home, not going out. I use the Japanese term because Japanese experts (and I, based on my research) believe this pathology does not exist in other societies. When you test these folks, they are not agoraphobic, schizo, psychotic, or anything like that. When you sit and talk to them, they are highly engaged, self-aware and creative young people. They COULD be creative if allowed to actually express their individuality and intelligence. But that is not what Japanese society wants, or expects. From infancy they have been taught to suppress their own true feelings and put on a mask to "get along with others" in Japanese group-dominated society.

So basically, they're the people who don't have many friends in high school, who in the U.S. grow up to be superwealthy software entrepreneurs...

That's one way of thinking about it. Steve Wozniak was probably not the most popular guy in h.s., but he had the courage and guts to go do his own thing. He wasn't "bashed" all the time and told to just be like everyone else. Bill Gates wasn't exactly Mr. Magnetism either as a kid.

Entrepreneurship, risk taking and critical thinking are all in very short supply in Japan. Which is why it's been hard for Japan to move from the comfortable, gradual improvement world of the industrial society, to the chaotic, turbulent, paradigm-breaking world of the post-industrial world. Continuous improvement of door hinges or even Megaflops of a semiconductor chip only gets you so far.

So is Japan just going to shrivel up and become irrelevant?

Yes, that is clearly one possible outcome. When South Korea fell apart, the IMF had to write a check and helped force the ROK [Republic of Korea] to make some big changes. But the Bank of Japan could OWN the IMF. Who has the leverage?

And there's no significant force in Japan pushing for a change in direction?

Yes, but only at the margins. Young people in Japan have very little power. The push is thru rebellion: Young women refusing to have kids, or moving to Manhattan. Young men hiding in their rooms. Rising suicide rates. Because in Japan, as opposed to the U.S., you don't "Act Out" ... you "Act In."

So basically it's Karel van Wolferen all over again?

Well yes, and no. I am very sympathetic to Karel's book, obviously. But Karel wrote about a very different time. The Japanese Model was still successful then. Now we have had FIFTEEN years of bad economics and NO Rebellion, which demands some explanation. I actually discuss some psychological and social theory to explain this. For instance, do you know the argument about the "strength of weak ties"?


This is the basis for conversations about "social capital," i.e, that we benefit from knowing many people, in many diverse fields, from different ethnic groups. etc.--having weak ties with many people.

Like u and me

Yup. The reverse is to be like a Mafia don, or a resident of North Boston. You ONLY hang out with the people you already know: from your own family, or your own "house." These sorts of people only have STRONG ties. They don't want weak ones. Japan is more like a Mafia family than two Western journalists who met at a cocktail party in Japan ten years ago, and discovered mutual interests.

As long as you are IN a Network, you are fine. That's why being a COMPANY MAN is so important. But fall out of that network, and you are toast. No one will give you the time of day. Hikikimori want to live in a world like ours, but are trapped in a Mafia family...

And so people like Ken Ohmae and Joi Ito are just totally anomalous? Or total outsiders?

Most Japanese think Ohmae is a wack job. And Joi Ito represents a new class of global Japanese who trade on their "globalness" but have little clout or influence on the domestic scene. These are smart Japanese who have been POLLUTED by living and/or studying abroad. Once they leave the "famiglia" they can't really get back in. That's why they work for foreign firms, or just leave. A guy like Ito or Masayoshi Son can do okay for themselves in Japan. Quite well, even. But I wouldn't say they can "change" Japan. What does it say about society that after 15 years of DEFLATION...there still hasn't been a change in government???

So 15 years ago, Americans were all freaked out that Japan was going to take over the world economy. Now that they so clearly aren't doing that, should we be happy about it or sad?

We should be sad, and worried. The world needs an engine of growth in Japan. We are too dependent on U.S. consumers to stimulate global expansion, and we should worry for the Japanese, who, as a society, are deeply unhappy and pessimistic.

A question about South Korea: You mentioned already that the IMF forced change there. Are there other reasons why Korean society, which is similar in some ways to Japanese, has adapted so much better to 21st century commerce and life?

YES. Of course ROK is somewhat smaller than Japan, and therefore less insulated. So when ROK gets flooded by a big wave, Japan just rolls along like a supertanker. But the HISTORY of Korea's modernization is different. Korea FOUGHT for democracy. Japan had democracy imposed by MacArthur. Korean society was constantly in upheaval because of colonization and war.

And interestingly enough, one of the most salient forces that drove Korean modernization was the Protestant Church. Protestant missionaries came to Korea in the 1880s. These missionaries taught peasants to read. They built western-style hospitals. And they told Koreans to manage their own churches.

So church groups in Korea consistently fought against Japanese occupation. They also helped build those "loose ties" that connected students and workers to protest martial law when Park was strongman. I argue that it is no accident that the Koreans were able to say "we screwed up. we have to change our system. we have to open up our country..."

So it's Hooray Protestant Missionaries, Boo Shinto Priests!?

Now that sounds like Jon Stewart... But yeah, I guess.

No, it sounds like a Red Stripe beer ad.

Sorry, we don't get them in S.F.

UPDATE: For Joi Ito's reaction, either scroll up to the next post, or click here.
Posted by Justin Fox 8:21 AM 6 Comments comment | Add a Comment

Honestly, this conversation doesn't suprise me. As an American, one thing I love about our country is that people "shout it out" so to speak when things are wrong (whether perceived or real).

I find it really sad that a society as rich in history and longevity can't seem to get it's act together. In my studies of finance, Japan's banking system is broken. Mr. Koizumi pushed it in the right direction but more reform is necessary.

With interest rates extremely low (just above zero), this country should be flourishing. However, due to extreme risk aversion and pessimism, they have deflation. Obviously, this is an over-generalization but it illustrates some significant systemic faults.

Let's hope for humanity's sake that they get their act together. A society shouldn't die because of arrogance. They have a chance with their new prime minister, Mr. Abe.
Posted By Brad Spencer, State College, Pennsylvania : 11:13 AM  

I find it quite interesting that we Americans too often are quick to make a conclusion about countries. We as a people are quite simple to understand. We are not constrained with a legacy or a storied history and its probably one of the main reasons why we have become the country that we are.

Having worked in Asia for the past 16 years, you start to understand that perspectives differ from country to country, and furthermore understand that sadly, outsiders will never fully understand the priorities and intracicies of any society.

With regards to the commment about Japan being a High Cost Country in a Low Cost region seems interesting - I would argue that the US finds itself in a similar situation with our friends to the South and their economic situations - and therfore find it difficult to make the connection.

I recently attended a Deloitte conference where it was very interesting how they highlighted the Asian economies and their role in history. We regard the region as a low-cost center with significant currency arbitrage opportunities. Deloitte highlighted how China and India are soon to become the World's largest economies, taking back a place in history they once held (1820s they were the World's largest economies). This was an interesting point that I had no heard before.

I am writing this comment simply because I am intrigued as how a Country with the land mass of similar size to that of Hawaii can command the Global Economy from its #2 spot, despite its decade recession. Furthermore, I am even more impressed about how Japan's economy continues to maintain a #3 or #4 spot even if you put it on PPP basis, forecasted out 2008 and even out to 2025. I scan the internet and libraries for research that can explain to me why despite its recent misfortunes continue to do well in comparison to the likes of Europe and the emerging giants China and India.

I attended a luncheon last week where we had the opportunity to listen to Colin Powell speak (great speaker, what a great ambassador for America!). When asked who was the absolute ally that he could count on in time of need, he responded, without a doubt Japan. Makes me think that there is more to Japan than what we normal everyday Americans are exposed to and therefore a bit short-sighted on a fascinating country and according to General Powell a great friend of our country.
Posted By Mike, Beverly Hills CA : 10:34 PM  

Your facts about Korean history is terribly misleading. First of all, there is nothing similar about Korean and Japanese culture. It is the Westerners' common misconception about Korea and Japan. Two societies have evolved rather independently for thousands of years. Although both countries are influenced culturally by Chinese in the past, they have managed to develop their own unique culture. (Compare, for example, their modernization processes) If you believe that influence of Western church is responsible for the current dynamic character of Korea, you are completely disregarding the whole Korean history and geo-politcal condition; condition in which Koreans had to constantly adapt themselves for defending their land against the Chinese, Mongolians, and Japanese. You're ethocentric views tell me that you are looking only on the surface of things about Korea. Look deeper, please.
Posted By Yang, Seoul, Korea : 1:53 AM  

I find this hikikomori personality very interesting because I myself am kind of like this... the less you socialize/work, the worse your social/work skills become and it perpetuates over time.

But I also read a long article blogging for dollars on business2.0 and wonder if this model online blogging/forums/ads can be targeted towards these people?

If all they do is sit at home on the internet then maybe they are good at researching/blogging? also, what about the market for online gaming?

has anyone investigated this?
Posted By Joe Wong, Toronto, Ontario : 2:53 PM  

I have to agree with Mr. Yang on all points. It is a very misleading view due to excessive generalization.

Myself: I was born in Korea and stayed there utill I was 21. Now I have spent equal amount of time in US and in the course of becoming a citizen. Also, I am a protestant brought up in a protestant family. The missionaries have certainly started western school in Korea(Korea's primary religion for some twenty years), but that fact can not take a big credit/responsibility for what Korea has become.
Talking of only 'dynamic character' of Korea, I personally think it came from turbulent turnovers in its recent history.
As for Japan, my knowledge is limited to words from my Japanese college friends.
Posted By Paul, Houston, texas : 7:35 PM  

I'd like to offer an alternative viewpoint. The Japanese Money Tree, due out next spring from Financial Times Press, tells the exact opposite story of Shutting Out the Sun. If you're interested in reading an advance reader's copy of the book, or even just a sample chapter, please contact me at amy.fandrei@pearsoned.com (I am the publicist for the book).
Posted By Amy, Indianapolis, IN : 4:06 PM  

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.