International -- Asian Business
Commentary: Sorry, Japan. High Tech Is No Magic Wand (int'l edition)
Japan's policymaking mandarins long ago perfected the skill of predicting that recovery was just around the corner. Don't worry, assured the men of the Finance Ministry and Economic Planning Agency: Public-works spending would kick-start growth. A flood of exports would lift all boats. The bank bailouts would restore confidence.
More often than not, these predictions have proved false. But now, the government has a new base of confidence: a spending boom on information technology that, say the bureaucrats, could finally put an end to the decade-long crisis. Sales of PCs are growing at a 30% annual clip as companies and consumers pile onto the Internet, and sales of mobile telephones are surging even faster. This has coincided with a 2.4% jump in gross domestic product in the first three months, the fastest quarterly increase in four years. Yes, the trillions of yen the government spent to prop up the economy during the recession laid the groundwork. But government economists say tech spending accounted for a hefty chunk of that growth. "This IT revolution is continuing to expand rapidly," Economic Planning Agency Director-General Taichi Sakaiya recently declared.
It's an intriguing vision: Japan finally finds economic salvation by reforming its technical prowess to fit the Internet Age, just as the U.S. high-tech sector powered the American economy to astonishing growth. There's even some truth to it--but only some. And that's why the vision of Japan's high-tech revival is so dangerous. If the Japanese embrace this idea wholeheartedly, they may avoid the painful steps needed to put the country on a true course to recovery. That would be bad not just for Japan but for the whole world economy.
Of course, IT spending is boosting Japan's economy. Trouble is, the payoff is getting blunted. Before the U.S. enjoyed the benefits of higher productivity and creation of new industries, its companies, investors, and workers spent years in a dynamic but painful struggle to restructure industry. This freed up the capital that eventually found its way into the high-tech sector.
But Japan has only recently embarked on the hard road of restructuring. Although some 500,000 Japanese, almost 1% of the workforce, lost their jobs in 1999, economists such as Peter Morgan of HSBC Securities estimate that corporations must shed five times that number to return to true health. New bank lending fell by 4.7% in May, the 44th straight monthly decline. Lawmakers are making only token efforts to revamp the commercial code to facilitate mergers, a key to U.S. restructuring. And the government is dragging its feet on telecom deregulation that could dramatically cut business costs.
There's so much that Japan still lacks. America's current expansion followed decades of regulatory reform and corporate experimentation with computers. A sophisticated venture-capital community, a flexible immigration policy, and a huge pool of entrepreneurs provided the grease. Japan is weak in all the above.ESCAPISM? What's more, Japan's tech boom may not be big enough. The Daiwa Institute of Research notes that 42% of all capital investment in the U.S. is IT-related, vs. 27% in Japan. And the Japanese don't seem to grasp yet that the Internet is a tool of destruction as well as creation. While healthy for long-term growth, it also spells more deflation and slimmer profit margins as more consumer choice pushes down prices. And it means fewer good-paying jobs for those lacking technical skills. "People in Japan are looking for hope in the future," says Robert A. Feldman, managing director at Morgan Stanley Dean Witter. But faith that the Internet will save Japan is "escapist, not analytic," he says.
So what about those signs of growth? Well, signs that the recovery is faltering already are appearing. Early second-quarter numbers show corporate investment and home starts slowing. The index of leading economic indicators in April turned negative for the first time in 14 months. "First-quarter growth was fine, but we are bracing for slower growth the rest of the year," says Kazushige Nishida, president of Matsushita Electric Works. True, high-tech spending remains strong. But not yet strong enough to change a Japan that still looks to the past.By Ken Belson; Belson Covers Japanese Industry from the Tokyo Bureau.