Japan as Number Three

The year was 1979, the year Sony introduced the Walkman. China established the first experimental economic zone in Shenzhen opposite Hong Kong. And Harvard Professor Ezra Vogel published his surprise best-selling book: Japan As Number One.

It is fair to say that of the latter two events, the publication of Vogel's book gained considerably more attention in Japan. Everyone likes to be flattered, and no one knew at the time what would become of Chinese leader Deng Xiaoping's market opening initiative.

The book by an American economist, or the title of the book at least, put the final stamp of approval on Japan Inc. It seemed to validate the Japanese economic juggernaut and underlined growing anxiety in America that the Japanese were poised to buy up the whole economy.

Fast forward to 2010 and, in retrospect, it is clear that the opening of the special economic zone in Shenzhen and more generally the landmark 1979 decision of the Communist Party to eschew class struggle and open the economy to market forces was the truly seminal event.

That was underscored this summer when China displaced Japan as the world's second largest economy, hurried along, no doubt, by the especially anemic 0.1 percent gross domestic product growth recorded in the second quarter. During those 30-plus years China's annual GDP grew 100-fold to reach US$1.335 trillion, with Japan's just behind it at $1.286 trillion.

The reaction in Japan has been fairly muted. "Everyone was resigned to our fate. It just came a little earlier than people expected," says Takatoshi Ito, professor at the graduate school of economics at the University of Tokyo. "People just shrug and say ‘shou ga nai.'" "It can't be helped."

Of course, the Japan of 2010 is not the same Japan that Professor Vogel wrote about. It is a country currently entering its third "lost" decade of low growth. At the moment, the Japanese economy is barely in positive growth territory with an annualized pace of .4 percent (below a modest projection of 2 percent).

Why is the reaction in Japan so low-key? According to Professor Ito the Japanese have felt lost because of the endemic low growth of the past and don't want to take risks. That observation is borne out by statistics that enumerate the career choices graduates make, the age of marriage and even curiosity about the world outside Japan.

The irony is that more and more college graduates are seeking security in life-time employment in large corporations exactly at a time when Japanese corporations are turning away from lifetime employment, have begun cutting back on hiring new recruits and have started replacing them with temporary and part-time workers.

Fewer Japanese young people seem interested in joining or starting new business ventures. The Japan Productivity Center surveyed student attitudes in 2000 and found that a healthy 31 percent would like to start up a business and become independent. A similar survey in 2009 found that this number had been halved to 14 percent.

Fewer and fewer Japanese young adults are going abroad, either to study or for pleasure. Last year China sent about 100,000 students to study in the US, South Korea sent 70,000 and Japan only about 30,000. It prompted the Asahi newspaper to scold these seemly inward-looking students with an editorial: "The World is Waiting for You."

Some forward-looking corporations in Japan are trying to buck this inward trend. Rakuten, an Internet shopping mall, recently announced that it would require all of its employees to learn to speak English by 2012. Many of its internal conferences are done using English now, whether or not any foreign employees are present.

Of course, China has moved ahead of Japan in just one criterion, albeit one that makes headlines. This is not surprising considering China is 10 times bigger than Japan in terms of population. By many other measurements, such as per capita income ($39,700 versus $3,600), China lags Japan by a wide margin. After all, any figure divided by 1.3 billion people is likely to be small.

"By most indicators, China is where Japan was about 40 years ago," says Chi Hung Kwan, a senior fellow Nomura Institute of capital markets research. This includes such criterion as life-expectancy, electricity usage and many more, he said.

And China's growing prosperity is hardly bad news for Japan, as it represents an increasing market for Japanese products. In many ways the two economies complement each other. Where Japan is strong, China is relatively weak and vice versa. "It's a win-win situation," Kwan said.

In more intangible ways China is approximately where Japan was 40 years ago. Beijing just hosted the Olympic Games, and Shanghai has a major world's fair going this summer. Japan held a world's fair in Osaka in 1970 and hosted the Olympics a few years before. Last year local indifference helped to scuttle the Tokyo governor's ambition to hold the Games there once more.

In 2000 Vogel wrote a short sequel to his famous book called Is Japan Still Number One? He was still optimistic about Japan's prospects. Among other things Vogel predicted that the "Japanese will surely structure the economy to meet global demands." It is questionable whether he could support that view 10 years on.

During Prime Minister Junichiro Koizumi's administration in the early part of the decade, the impulse to reform and open the Japanese economy did seem to be moving forward. But it petered out after Koizumi stepped down and was replaced by a revolving door of premiers. The election of the Democratic Party last summer did not seem to change things either.

Vogel never meant for the title of his book to be taken literally. No economy of 127 million people can overtake one with 300 million people no matter how industrious or well managed it might be. That is not the case with China however.

Estimates as to when China will supplant the United States as the world's largest economy range from 2026 to 2039 depending on such factors as annual growth rates and how fast the currency appreciates. But it is only a matter of time.