Patrick Smith, Japan: A Reinterpretation, (New York: Pantheon Books, 1997).
Noboru Yoshimura and Philip Anderson, Inside the Kaisha: Demystifying Japanese Business Behavior, (Boston: Harvard Business School Press, 1997>
Whatever happened to Japan? In the early 1990s, the nation lost its status as an economic juggernaut—the model to emulate in industrial policy, management techniques, and product engineering—and found itself a beleaguered nation in its worst recession since World War II. Japan’s political process now appears hopelessly stalled, its bureaucracy top-heavy and meddlesome, and its business practices entrenched and inflexible. The competitiveness debate of the 1980s has petered out as the resurgent U.S. economy leads the way into the Information Age. It is as if Japan, the eager pupil of U.S. business success, had briefly become the teacher only to be demoted after a few lectures.
In the wake of this astonishingly rapid transformation, it is time to reexamine the Japanese economic miracle. What can we learn from the country’s solid 40-year record of success? Has it exhausted its system? Can other countries adopt Japan’s system piecemeal, picking and choosing elements to enhance their own industrial performance? Or is the system a coherent whole, as many have argued, and thus difficult to emulate?
The end of the Cold War has allowed the West to get beyond what had been a confining and oversimplified view of Japan. That view took shape following the communist invasion of South Korea in 1950, when a group of U.S. academics created a sanitized picture of the nation. They portrayed Japan as a land of harmony (wa) and the wholesome values of hard work and long-term vision, and in doing so, they turned the United States’ recent enemies into allies who would lend their efforts to the anticommunist crusade. As a prelude to U.S. authorities’ reinstallation of Japan’s prewar elite, the academics helped to explain away the recent militarist past as a historical aberration.
The end of the Cold War has allowed the West to get beyond what had been a confining and oversimplified view of Japan.
As Japan’s economy began to take off in the 1970s, a series of laudatory books cemented this benign image in the American mind and created a number of management myths that persist to this day. The books developed a formula that became tediously familiar: choose some aspect of Japan’s management style or industrial policy—such as bottom-up decision making, Deming-style quality control, or diffusion-oriented technology plans—as the hidden key to Japan’s “smarter” capitalism, and then build an overarching argument around it. At their worst, the books extolled phenomena that existed only in their authors’ minds, from companies so democratic and cozy that they served as surrogate families, to prescient bureaucrats masterminding 100-year economic plans. Even when the authors got it right, they tended to focus narrowly on management innovations, neglecting the larger context of trade and industrial policies.
It was not until the late 1980s that revisionist critics effectively presented an alternative view. Their timing was good: not only was the Cold War nearly over, but Japan’s enormous trade surpluses were becoming a cause of great concern in the United States. For these critics, Japan’s success came from its adversarial trade policies and powerful industrial cartels. They claimed that the country was run by an entrenched oligarchy that sacrificed the well-being of its citizens to cold economic imperatives. Instead of playing better, they argued, Japan wasn’t playing fair.
The revisionists made many important points, but their shrill denunciations of Japan and its apologists frequently bordered on the hysteria and personal bitterness that afflict pioneers of long-ignored points of view. Now that Japan’s presence has faded somewhat from the international scene, more balanced analyses are beginning to emerge. Patrick Smith’s Japan: A Reinterpretation thoughtfully explores post-World War II cultural developments from a journalist’s standpoint. Inside the Kaisha, by Noboru Yoshimura, now at Bankers Trust in Tokyo, and Philip Anderson, a professor at Dartmouth College’s Amos Tuck School of Business Administration, offers an insider’s view of why the managers of large companies in Japan behave as they do. Both books analyze Japan’s strengths without romanticizing them; they also acknowledge its weaknesses while avoiding excessively negative judgments.
The Roots of Japan’s Success
Japan is the purest example of what has become known as a producer economic state, and many of its economic practices are now familiar. For nearly 40 years, the country subordinated other goals in favor of catching up with—and perhaps surpassing—the U.S. economy. The revisionist critics correctly emphasized the role played by Japan’s government in working toward that goal, but they neglected the other two pillars of Japanese success: large companies and a well-educated workforce. Those three pillars cooperated on an unusually focused developmental strategy that generated impressive economic efficiencies.
A key element of Japanese success was the keiretsu. By banding into keiretsu—huge business groups that link industrialists, banks, and trading companies through reciprocal ownership of stock and long-standing exclusive relationships—individual companies gained financial strength and connections that allowed them to undercut foreign and domestic rivals. Their mission was to gain market share rather than accumulate short-term profits, and they aggressively entered high-growth sectors with long-term potential. The concerns of consumers and outside stockholders, who had few other outlets for their earnings besides low-interest savings accounts, were secondary.
Although the keiretsu themselves were stable, they created a business environment of extreme competition, at least in the sectors that targeted international markets. Japanese companies (kaisha) went to great lengths to keep up with one another, copying new-product designs as well as innovative production techniques. If they fell behind, they suffered a loss of reputation, or face.
In practical terms, such competition meant that new ideas and technologies could be absorbed throughout the economy with extraordinary speed. Under the envious eyes of Western observers, Japanese managers seemed to easily integrate robots, computer chips, and “fuzzy logic” software into their manufacturing plants and products. And Japan’s competitive spirit also spawned some of the most widely imitated practices in industrial management: total quality control, lean production, and cross-functional product development.
Manning the kaisha were the elite salarymen: loyal, lifetime employees willing to work extremely long hours. Hired directly out of the country’s prestigious universities, they were cloistered in company dormitories and drilled to learn rigid rules of behavior, such as the precisely choreographed submissive posture to take before certain clients and how low to bow to various superiors. The rules constituted an entire coded language incomprehensible to outsiders. Even very young Japanese students were part of the regimen, as they submitted to a grueling examination system that prepared them to enter corporate life with dependable analytical skills and a proper attention to rules.
The Japanese government, meanwhile, acted as a business adjunct and referee, steering keiretsu into promising sectors by providing tax breaks, cheap credit, and “administrative guidance.” A variety of other policies assisted and protected companies, including trade barriers and an exchange rate that discouraged imports and promoted exports. For their part, Japanese consumers accepted high prices and scarce credit. While the kaisha grew in leaps and bounds, their employees and the rest of society made do with relatively low living standards.
How the Bubble Burst
The Japanese economy first showed signs of serious strain when the “bubble economy” of the 1980s—the speculative boom that generated hundreds of billions of dollars in bad corporate debt—burst and brought on a deep, persistent recession. But the bubble of Western enthusiasm for Japan’s business practices has popped only recently. Many of the practices acclaimed as the secrets of Japanese success—such as advancement by seniority and management by consensus—are slowly being revealed as severe impediments to needed reforms. These books are among the first to analyze clearly the costs of such practices. The limits of the Japanese business model, as the competent copier of the inventions of others, appear to have been reached.
Many of the practices acclaimed as the secrets of Japan’s success are slowly being revealed as severe obstacles to needed reforms.
Although the government’s industrial policy did succeed in shepherding Japanese companies into dynamic sectors, it was used principally to help Japan catch up. Picking winners and losers in a less developed economy is surprisingly straightforward: you adapt to and copy the leader’s high-growth industries. Once Japan achieved a leading economy, however, the choices became much less clear. As Yoshimura and Anderson observe, the Japanese government is proving no better at picking future successes than any other government. The Ministry of International Trade and Industry’s “visionary research”—its much feared projects that were supposed to catapult Japan to technological leadership—have been largely a bust. The “fifth-generation project,” which MITI officials had boasted would leapfrog U.S. capabilities in artificial intelligence, turned into an $850 million dud. Other multimillion dollar debacles include the magnetically levitated train, micromachines (robotic devices with tiny silicon gears), and high-definition analog television. Those failures make the country appear likely to remain a brilliant follower, synthesizing and improving upon the work of others but struggling to make big leaps of invention on its own.
A diminishing return from industrial policy is not the only reason for Japan’s woes. As they explain the inner workings of Japanese institutions, the books reviewed here concentrate on deeper flaws. It has been commonplace to praise the stability and continuity of Japan’s “permanent bureaucracy”—the career officials who largely ignore the parade of politicians passing through the government. But the bureaucracy also fosters rigid thinking. MITI and other agencies have a hard time terminating projects, even clear failures. What’s worse, to initiate a new project, a consensus must be wrung from the many bureaucratic players. That is a difficult and time-consuming process. Unlike the peer-reviewed research system of the United States, which is periodically shaken up by new administrations in Washington, the Japanese bureaucracy is hamstrung by stodgy “lifers” who advance exclusively by seniority. Regardless of the merit of their ideas, those bureaucrats are accustomed to waiting years for their turn to pursue a pet project, which they jealously guard.
In the kaisha, managers must work within a similar arena of formality and idiosyncrasy. Yoshimura and Anderson, who wrote their book to explain the seemingly contradictory behavior that often confuses Westerners, go on at length about the consequences of behavior based on imitation rather than established principles. While the Japanese compulsion to copy and compete has served their companies well, it has also led to some remarkably inefficient, even ruinous, behavior. What appears to be attention to customer needs, for example, can prove to be no more than extreme variety and senseless turnover of products. During the bubble economy, manufacturers put out a bewildering proliferation of products because they could not bear to think that a rival might steal a march on them—only to discover that consumers often didn’t necessarily want the new offerings.
As Inside the Kaisha describes in bleak detail, there is a blindness operating behind Japanese business imperatives. Rather than pursue a clear goal or vision, Japanese organizations often myopically focus on what they view as the correct model, process, or attitude: keeping up with rivals or maintaining market share, for example. They excel at improving efficiency but usually only with incremental steps. Obsessed with avoiding embarrassment, managers often accept repeated failure rather than risk even considering a novel solution to a problem. The characteristic Japanese tendency, the authors write, is to “wait and see, and then go with the group.” To avoid blame and save face when things go wrong, managers present a facade of harmony that Westerners have long accepted as the real thing.
Japanese managers have other ways of putting up a good front. The apparent effort to formulate a long-term vision, say the authors, is largely an empty exercise, carried out mainly to reassure customers, suppliers, and partners. When results are obviously below par—when earnings are too low or high-tech projects fail to pan out—members of a kaisha can deflect embarrassment by claiming that a visionary logic lies behind their mistakes. And the much-admired boldness that many salarymen appear to exhibit when pursuing a course that makes little sense to outsiders usually reflects the mentality of a blind follower.
Indeed, with the weight of long-established routine still controlling government and business, the Japanese economy continues to operate like an export Frankenstein—even though the logic of the rising producer state makes less and less sense. Yet politicians in Japan appear unwilling, or perhaps unable, to chart a new course. As Smith describes it, the country suffers from a “culture of irresponsibility.”
The Impetus for Reform
Nevertheless, Smith finds, Japan’s political economy is under pressure from many sides. Now that Japanese companies have become immensely rich, public opinion is beginning to demand payback for consumers. The Cold War regime, which discouraged political and cultural pluralism as well as the development of individuality, is losing favor. Political corruption scandals, tied to the government’s intimate involvement in the economy, have only heightened voters’ unease.
Even some seemingly beneficial aspects of Japanese employment have had serious human costs and finally are being questioned. The kaisha’s emphasis on the continual development of human capital can conceal harsh realities. Once a salaryman is inside a kaisha, it is almost impossible to leave the company without loss of social standing. Because advancement is rigidly correlated with seniority, there is virtually no starting over; if a salaryman makes a lateral move to another company, it is considered a step down unless he is prepared to suffer the ostracism often associated with joining a foreign-owned company. Most of the training that salarymen receive amounts to learning the corporate rituals and customs they need to become inside operators. Such training is useless outside the hermetic culture of a specific company. Bosses, repeating the way they were treated, can be browbeating bullies whose evaluations are based less on performance than on the display of an ill-defined “proper attitude.” This is a recipe for alienation, and Smith addresses it head-on.
Although these grim observations and interpretations may seem difficult to believe, they ring true to those who have lived in Japan for extended periods. Having spent almost two years there, I well remember the exhausted faces of subway riders as they returned home late in over-crowded subway cars. My Japanese friends were drained by the oppressive and often meaningless routine of their jobs. It is encouraging to see views at last emerging that balance the better-known positive aspects of Japanese life.
In the end, effective change may come only from Japan’s younger generation.
In the end, Smith suggests, effective change may come only from a new generation. Students emerging from Japanese universities, having tasted more security than their parents did and accustomed to a more cosmopolitan way of life, appear less willing to accept subordination. Like their Western counterparts, they want access to better housing, fuller and healthier family lives than the absent-father households they grew up in, and opportunities for personal growth. They despise the corrupt political elite, whose public debate rarely rises above such symbolic issues as whether Japan should apologize to its neighbors for its aggression during World War II. If this new generation can bring about a more consumer-oriented society, individuals may be encouraged to develop a healthier sense of self—which could, in turn, help the country spawn the innovative culture needed to succeed in a fast-changing global economy.
Copying Japan
Japan’s economy thrived for particular historical reasons. The country was catching up after a ruinous war, its economy was small enough to avoid undue international attention, and its rate of growth was sufficient to placate an otherwise abused workforce. The “brilliant middle” strategy emphasized large, high-value sectors such as automobiles and electronics; that strategy did not work in the highest-value markets that required risky strategic invention, such as pharmaceuticals and microprocessors. The country excelled in a world market oriented toward volume production, but market leadership today increasingly requires greater flexibility and creativity than the kaisha have traditionally encouraged.
Can other countries emulate Japan’s road to success? That path is far from smooth. To re-create the furious competitiveness of the kaisha, policy makers need to have or to foster a large, protected home market or trading zone in order to test new products; huge conglomerates that will compete for domestic customers; and an educated though malleable population willing to sacrifice its present standard of living for a more productive future. The absence of any of those components may undermine how the system as a whole functions.
Despite these challenges, several Asian candidates are attempting to inherit Japan’s mantle as the premier producer economic state. South Korea, with its keiretsu-like chaebol and Cold War discipline, is now attacking Japan’s memory-chip industry in much the same way that Japan once attacked U.S. industries. The other Asian tigers have developed their own variations of Japanese business practices. Perhaps the most promising candidate to take over from Japan is China, whose government recently encouraged the formation of huge conglomerates through mergers and acquisitions. With a vast internal market and an extremely high savings rate, China is openly protectionist, has an undervalued currency, and is absorbing strategic foreign technologies. Although Chinese entrepreneurs must still contend with a decaying and corrupt communist bureaucracy, the country’s exports account for a large share of the recent growth in the U.S. trade deficit.
As for the West, individual companies have of course already adopted a number of successful Japanese techniques. Nevertheless, the evaluation of management ideas from Japan is a murky and uncertain proposition. The Japanese custom of tatemae—painting a rosy, idealized picture of their country—is the source of a great deal of confusion. Notions about the centrality of office harmony, popularized by You Gotta Have Wa and other phrases, reflect tatemae at its silliest. As Yoshimura and Anderson emphasize, Japanese harmony springs not from a carefully nurtured atmosphere of trust and common enterprise, but from a restrictive system of internal controls. Lean manufacturing and other highly productive labor arrangements can depend heavily on a workforce willing to accept stressful conditions. When eager Western managers try to use those techniques in their own companies, they may be in for a rude awakening.
When Westerners first tried to explain the success of Japanese business, they attributed much of it to unique and innate virtues of diligence, thrift, and harmonious cooperation. In the 1980s, as Japanese manufacturers succeeded with factories in other countries, some observers argued that Western companies could imitate Japan’s political and managerial practices after all. A more balanced view is now emerging that sees much of Japan’s remarkable success coming not from intrinsic virtues but from an array of stifling constraints unlikely to be tolerated in the West.
