Opening Up Japan

After a dozen years of stagnation, Japan's economy seems to be looking up. But appearances can deceive. Despite improvements and reforms, many of Japan's fundamentals remain woeful.

Japan's decline has been palpable. In the late 1980's, it was fashionable in some Japanese policy circles to argue that the Pax Americana was over, to be replaced in Asia by Pax Japonica. America's economy seemed to be tanking, Japan's was soaring, and projections favored 2005 as the date when it would overtake the United States. That things have turned out far differently reflects Japan's inertia.

The problems underlying Japan's decline are legion. Japanese policymakers and business leaders do not understand the concept of "creative destruction." Too many industrial dinosaurs are kept on life support. So, although some firms do extremely well - say, Toyota and Canon - there is little space for new ventures and entrepreneurs. If Japan's economy were a computer, it would have a hard disk full of obsolescent programs and a "delete" button that doesn't work.

No matter what criterion one uses, Japan's economy remains the most closed among OECD countries and one of the most closed in the world. Not only is foreign capital conspicuously absent, but so are foreign managers, workers, intellectuals, and ideas. Universities, think tanks, and the media are for the most part insular institutions.