Shops Closing, Japan Still Asks `What Crisis?'

Shops Closing, Japan Still Asks `What Crisis?'

by Nicholas D. Kristof

OMIYA, Japan -- Aside from the fact that his beloved little business is collapsing after a life time of effort, Mitsuo Okura is rather pleased with life.

Okura, a wry 62-year-old, sits in a little office beside his four-employee factory, which spits out gobs of black plastic that eventually end up in Toyota and Honda cars. Pictures of his grandchildren decorate the wall behind him, and he smiles amiably as he mocks his own foolishness for expanding his factory eight-fold during Japan's "bubble economy" of the late 1980s. His eyes crinkle pleasantly as he acknowledges that his own son and daughter have declined to inherit the business. He accepts that in the economic competition for survival of the fittest, he will end up in a more ruthless animal's digestive tract.

"People complain about the bad economy," Okura mused here in Omiya, a little town nearly 200 miles southwest of Tokyo. "But when I look around the house, I've got everything I want. I've got three cars, and most families around here have two or three as well. I've got a couple of televisions, and so do most people. I've got a washing machine, a refrigerator, and so do all my neighbors."

"Even if no one sees a bright future," he added, "there's no feeling of crisis."

And that may be Japan's problem: life is too comfortable.

The lack of a crisis mentality means that Japan cannot summon the political will to lay off surplus workers, to extinguish insolvent banks, to snuff out the hopes of the kindly old ladies who run rice shops and futon stores. It means that there is little public pressure on Prime Minister Ryutaro Hashimoto to push for the sweeping deregulation and huge stimulus measures that the United States is urging.

Japanese and foreign economists mostly agree that such a far-reaching restructuring is necessary to invigorate the second-largest economy in the world. Japan is widely seen as caught in a bramble of regulatory barriers that stifle competition in finance, retailing, transportation, medicine, agriculture, telecommunications, and many other sectors, and critics often say that without deregulation Japan will continue to stagnate as it has for the last seven years, sapping strength from the United States and other countries.

Indeed, the Clinton administration sometimes suggests that Japan is on the verge of economic collapse, and it portrays Japan as a threat to the entire global economy. But sit on the tatami mat floor in a Japanese home like Masamisu Nishi's here in Omiya, and life still seems so secure that people feel little urgency about change.

Mr. Nishi, a former Honda worker who now runs a construction company with 40 employees, says business is terrible, but he adds that his family and neighbors have been scarcely affected by the downturn. Indeed, most people here say they do not know anyone who has ever been laid off.

Unemployment in Japan is at a record high, but that is still just 3.6 percent -- more than a percentage point below the rate in the United States. Inflation is zero. Interest rates are negligible, and business bankruptcies per capita are still one-third lower in slumping Japan than in booming America.

"There isn't much feeling of a downturn among ordinary people," Nishi said, despite Japan's slightly negative growth for the last year. As he relaxed on a cushion on the floor, nursing a coffee in the tranquil night air, he added: "Even with my family, business isn't good, but we haven't cut back on our living standard."

So although Japan is enduring its worst slump in a quarter-century, political discontent is not boiling over as it would in the United States. Indeed, the ruling Liberal Democratic Party is steadily gaining strength, and people like Nishi and his wife, Kazuho, perceive the central government as so remote that it is neither the problem nor the solution.

"As for me," Mrs. Nishi said, "I just don't see any signs of a crisis."

The Changes: Some Say Good-Bye to the Old Values

Takahiro Tanaka is one of the few casualties of the economic downturn, and his experience underscores how overwhelming a task it will be to transform Japan into a modern market economy.

Businessmen like Tanaka, a slim 37-year-old who works as a forester in Omiya because his factory went under last year, operate in an environment that is more social than economic. Tanaka sat back in a friend's home in Omiya the other day and described his failed business as based not on contracts or prices but rather on traditional values such as "giri-ninjo," or duty and empathy.

The result has been a Japanese economy whose outward facade is skyscrapers and business suits, but whose human interactions are still rooted in traditional concepts of honor. These ways of doing business are frustrating for American officials but would be immediately understandable to any 18th century samurai.

Tanaka was in charge of a 30-year-old family business making pearl souvenirs and accessories. At its peak it had several dozen employees, but it was just the kind of inefficient factory that has become un-competitive in Japan because of rising imports and increasing labor costs.

"It just got too hard to compete with imports," he recalled. "Chinese-made pearls come into Japan, and the finished product is the same price as the cost of our materials."

So the family business steadily declined, and it lost money year after year. But because of giri-ninjo, Tanaka did not take the cost-cutting steps that might have saved his business.

"What I kept thinking about most was the employees," Tanaka said. "They depended on us. I just couldn't bring myself to dismiss the inefficient ones.

"There was one person in particular that I thought I could do without. But I kept him and kept him, because I thought that his entire family would be in trouble if we dismissed him.

"I thought of offering the employees less money. I'm sure they would have accepted, if I'd offered. But I just couldn't bring myself to do such a thing."

So last year Tanaka finally had to close the factory, and the employees lost their work anyway. Tanaka readily admitted that his sense of giri-ninjo was misplaced and a bit foolish.

"I think a person with greater ability might have saved the company, but I wasn't fit for business," he admitted.

Tanaka and nearly everyone else in Omiya believe that the giri-ninjo economy is inevitably withering away, a process that is most evident in the disappearance of small shops. Japan, far more than Britain, is a nation of shop-keepers, and Japan has more than twice as many shops per capita as the United States.

These little shops are so inefficient that they mostly charge very high prices and survive on webs of giri-ninjo. The stores appeal not to the minds of customers or to their pocketbooks, but to their loyalty -- and these days, that is not enough.

"I have a friend near here, and I was thinking that since her refrigerator was getting old, maybe she would buy a new one from us," said Yachiyo Horie, who runs a little electronics shop with her husband, Nobuhiro. "Then one day I was at her house and I saw a new refrigerator! I thought, 'Hey!'

"Well, I was very curious, but of course I couldn't say a thing. So finally I casually said, 'I see you have a new refrigerator.' But she didn't want to talk about it."

Mrs. Horie shook her head sadly.

Now even my sister buys electrical things in the big stores," she said. "Like her new washing machine."

Horie looked reproachfully at his wife. "And a new television," he added.

The Trap: A Nice Warm Bath Is Hard to Leave

There is an expression in Japanese, "nurumayu," that describes the coziness of a lukewarm bath even when someone knows that it is time to step out of the tub and face the chill. Many Japanese say that their nation's economy is "nurumayu," and they realize that it is time to get out -- but that the bath is so lulling that they cannot summon the energy to do so just yet.

"Frankly, I'd just as soon stay in the bath," mused Hironori Takayama, a young banker in a town near Omiya.

"But these days, even if you try to stay in the bath, the tub will crack and the water will leak out. So if you stay in you risk getting chilly and catching cold. It's not much of a choice."

For people like Takayama, the problem with economic restructuring is the price in fairness, equality, and civility. To foreigners, Japan often seems virtually socialist in mindset, profoundly believing in social equality and relying on the most progressive income tax system of any major country in the world -- including a marginal rate of 65 percent on personal income taxes -- to achieve the equality.

"After the Soviet Union collapsed, I thought that socialism had failed and that capitalism was better," said Takayama, expressing an epiphany that seemed odd coming from a banker in a dark suit in what is usually thought of as the biggest capitalist economy outside of America. "But when I visited Singapore one time, I saw skyscrapers and then what looked like a slum next to them. I was surprised, and maybe that's because Japan is the only place where that kind of thing doesn't happen, the only place where everybody thinks of themselves as middle class."

Takayama brooded for a few minutes. Then he added: "I don't want to get out of this bath."

A cultural difference may also be behind the Japanese antipathy for unregulated markets. Americans are risk-takers who are taught to respect explorers and entrepreneurs, while Japanese are drilled to be cautious and to respect bureaucrats. Japan is so intuitively risk-averse that the Japanese language traditionally did not even have a good word for risk.

Japanese often turn to pop-sociology to account for these differences, describing themselves as a "farming people" in contrast to the "hunting peoples" of the West. In effect, Japanese tend to see themselves as economic herbivores, in contrast to the carnivores from Wall Street and the West.

To be sure, the image of peace-loving herbivores does not carry much weight in countries like China or Korea that were invaded and terrorized by Japanese soldiers, nor does the image resonate with American or European companies that were mauled by Japanese manufacturers in the 1980s. But within Japan, the image seems a natural one -- Japanese businesses are indeed extremely reluctant to hurt their own -- and the consequence is disdain for the economic carnage of free markets.

Shinji Hashikura, 42, who runs a five-employee factory making electrical parts in Omiya, sat at his kitchen table and expressed his feelings with a common Japanese saying, "jaku niku, kyo shoku" -- "the strong gobble up the meat of the weak." That, he complained, is a worrisome trend.

" 'Meat of the weak' -- that's me!" Hashikura said morosely. "I'm the one who's going to be gobbled up. And 80 percent of Japanese are weak meat, too. So when the gobbling begins, we'll all be dead."

Hashikura paused and exchanged a look with his wife, who sat beside him at the kitchen table.

"But that's the way of the future," he said. "There's nothing we can do."

The Competition: Imports Now Push the Weak Aside

As Hashikura's comment suggests, there is broad agreement in Omiya that sweeping change is coming to create an economy based more on the concept of "the strong gobble up the meat of the weak." Indeed, many people favor it, saying that even if they themselves are consumed, economic Darwinism is in the interests of the nation.

They say this even though Omiya, which has 5,700 people, could be a loser in a more open system. As in most rural areas, Omiya's economy is largely dependent on government spending, infrastructure projects and on inefficient little retail shops and factories -- all supplemented by farming and forestry that cannot easily compete with imports.

Kihachiro Nishimura, a silver-haired retired salary man, sat on the tatami floor of his living room, keeping an eye out for any customers who might walk into the liquor shop that fills the front of his house. Deregulation and the rise of large markets are killing his store, he mused, but the change is still worthwhile.

"I once heard a scholar say that the mass media are very unfair to typhoons," he said. "The media always report about the damage caused, but never about the benefits of all that rain. I feel sorry for the typhoons."

An economic typhoon might destroy his store and other businesses, he said, but Japan as a whole would still benefit.

To be sure, an economic typhoon still is not on the horizon, but Japan's economic structure is clearly changing nonetheless -- not suddenly, not as much as the United States wants, but still profoundly. The change is evident in almost every conversation in Omiya, as people talk about the new supermarkets, about the decline of giri-ninjo business relationships, about the struggle to cut costs and compete with increasing imports.

The word "ability-ism" is the rage now in Japan, and, sure enough, the local bank says it is introducing "ability-ism" in evaluating employees. In other words, workers will be promoted and rewarded according to their merit, and that marks a change in a country where salaries have always risen according to seniority and a Confucian respect for the elderly.

In the nearby city of Matsusaka, a tailor named Eiichi Hashimoto has cut costs by turning to computerized custom tailoring -- the cloth is all cut by computers using Japanese software. Hashimoto is trying in every way he can to become more competitive, and he says he was particularly struck by what he heard from a friend who runs a car dealership.

"He told the mechanic, 'if you don't work harder, we won't be able to pay you so much!"' Hashimoto recalled. "I was very impressed with that attitude. I thought my friend was soft in his business management, but now we're all reaching the stage where we have to face international competition."

The Challenge: What Will Become of the Obsolete?

As Japan's economic structure changes, the challenge is what to do with people like Yasuo Murata.

Murata runs a sawmill in Omiya, and he has been hard-hit by the opening up of Japan's economy. He has gone from five employees to three, and he stood glumly in a drizzle the other day in the midst of the logs.

"Unless the government changes its policy, it'll be impossible for me to survive here," he said. "The problem is the imports."

Murata has eight children -- he wanted a son, and kept trying until he got one the eighth time around -- and he figures he can find some job to support them if his mill goes bankrupt. But he fears that it would be a job like a janitor, in a big city somewhere.

"I want the government to stop imports of logs, but I know that it can't do that," he reflected in a bittersweet tone as he looked out over his sawmill. "Japan is selling hi-tech products to other countries, and I understand that if our government stops the log imports then the other countries won't buy Japanese cars or hi-tech goods. I understand that the weak are eliminated.

"I'm really against deregulation. But ultimately, I have to accept it. There's no other way."

In a sense, Murata is facing what the economist Joseph Schumpeter called "creative destruction." This is something that Japan used to be very good at, for one of the secrets to its success in this century was its economic adaptability, its willingness to allow industrial euthanasia: un-competitive industries were extinguished, and the capital and labor was reallocated to rising industries.

In 1950, 45 percent of the labor force engaged in farming; now it is 3 percent. In the 1950s and '60s, Japanese workers labored in coal mines or churned out cheap clothing and shoes; now those mines and garment factories have closed down, and the children of the miners and shirt-makers have shifted to making automobiles and selling stocks.

Over the last few decades, that economic flexibility eroded sharply as the government intervened with regulations to protect people from the destruction of inefficient shops and factories. The economy became arthritic and rigid, and the resulting misallocation of resources accounts in part for the stagnation in recent years.

But these days, flexibility is returning to Japan's economy, and the cycle of business destruction and creation seems to be starting up again. A good deal of the economic pain in places like Omiya seems to arise from that process of creative destruction, and it may eventually lead to renewed economic growth.

Take Okura, the man whose little factory churns out black plastic parts for cars and who cheerfully admits that his factory is a loser. His family underscores the cycle of economic change that is taking place in Japan.

Okura's parents were farmers, just as most Japanese were when he was born in the 1930s. Then farming became un-competitive, and so he started his little factory in the 1960s just as the entire nation was riding a manufacturing boom to prosperity.

Now Okura's factory is likely to fade away before long, but his children have already taken the generational baton in new directions: his daughter is an interior designer and his son is a software engineer who is developing "electronic money" for a credit card company. His children's success has comforted him and reassured him that economic change, however painful and scary, is worthwhile.

"Deregulation is inevitable," Okura said. "The challenge is to figure out what to do with people like me. But if we just say that new things are no good, then Japan itself will be no good."