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Japan’s Self-Inflicted Decline

In the 1980s, Japan boasted a dynamic consumer-electronics sector that served as a cornerstone of its robust export industry. But soon, new digital technologies began to replace the analogue devices on which Japan had a near-monopoly – and both producers and the government failed to adapt.

MILAN – Japan should be doing well. It boasts a well-educated and disciplined workforce, and outdoes most other industrialized countries on both investment and spending on research and development. In fact, at 3.3% of GDP, Japanese R&D expenditure was higher even than that of the United States until recently. And yet, Japan’s relative decline continues.

In the 1980s and 1990s, Japan was the world’s second-largest economy, not least because of its seemingly unbeatable industrial sector. Today, however, it is the world’s fourth-largest economy, with data showing that it recently fell behind Germany, a country with a much smaller population – 83 million, compared to 123 million – that is subject to unfavorable demographic trends, much like those seen in Japan.

To understand Japan’s economic decline, consider the story of the videocassette recorder (VCR). Requiring very small and reliable mechanical elements, these technological marvels were once the pride of Japanese precision manufacturing. Japan had a near-monopoly in the global VCR market, as there were no American producers, and European firms could not compete with Japan on quality-to-price ratio. In their heyday – the mid-1980s – many millions of units were produced and exported, with Japanese exporters charging relatively high prices and earning a good margin.