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INTRODUCTION

Bookends

Ifirst saw Japan on the cold, gray morning of February 5, 1965, as SS President Cleveland steamed into Tokyo Bay toward Yokohama after a storm-tossed six-day voyage from Honolulu. Accompanied by my American-Chinese wife Carol, our four-month-old daughter Anne-Noelani, and my wife’s Chinese uncle, who ran the ship’s laundry, I looked down from an upper deck at the totally unfamiliar scene below as the tugs nudged our great vessel into its berth.

As we marched down the gangway carrying luggage and baby, and passed through passport and customs control, I quickly realized that the year of Japanese language study I had just completed at the East-West Center in Honolulu was not going to get me very far. The passport and customs officers seemed determined to speak with the cadence and speed of machine gun fire, and I could read only a very few of the Japanese words on the signs and instruction posters around us. Carol’s uncle helped us get a cab to Yokohama’s Sakuragicho station, where we boarded the train to Tokyo. Our car was full of women, many of them wearing colorful kimonos; and of men, some of whom were wearing boots or shoes with a separate section for the big toe—like a mitten, but for feet rather than hands. I remember thinking, “Well, you wanted something different. Looks like this is it.”

This trip had originated two years previously as I was trying to figure out my expected graduation from Swarthmore College in June, 1963. I had been an exchange student to Switzerland in high school and had been bitten by the travel bug. I wanted to see the world upon graduation from college, but I had a small problem: money; or rather, the lack thereof. So I looked for grants, and while doing so, stumbled upon the East-West Center, at the University of Hawaii. It was offering a super deal—a two-year grant with tuition, room, board, books, and travel all paid, along with two hundred dollars a month for spending money. Grantees were required to spend a year studying any subject they desired at the university. They were also required to study an Asian language; the second year of the two-year grant period would be spent studying or working in the country of the language that had been chosen. It all sounded like a good deal to me. I applied, was fortunate enough to receive a grant, and set out for a year under the waving palms of Honolulu. Hey, somebody had to do it.

I had initially thought I would study Chinese, but my father was a chemist and metallurgist who worked in the welding and steel industry. Now remember, this was 1963, and China—then under Mao—was one of the poorest countries in the world, while Japan’s economic miracle of postwar recovery was about to be announced in the January 1964 cover story of the Economist. My dad said, “Look, son, why do you want to study Chinese? They don’t make anything. You should study Japanese. They make stuff.” So that’s how I came to register for Japanese when I first enrolled at the East-West Center and the University of Hawaii in September of 1963.

Although the Economist had hailed Japan’s rapid economic development, to a twenty-three-year-old American kid the country didn’t seem all that developed. Most people rode bicycles and buses or walked to their destinations. There were few traffic jams in Tokyo, because there was little auto traffic. I remember marveling at the delivery boys on bicycles who balanced bowls of steaming noodle soup without spilling a drop as they ferried them to customers’ homes. While our Japanese friends described it as a luxury dwelling, the apartment my wife and I managed to find had no hot running water, no bath (remember that our daughter was four months old), no stove, no central heat, no dishwasher, no washer or dryer for clothing, and only two electric bulbs. (We did, however, have a Western toilet.) These were the days before disposable diapers, so we had to boil diaper-washing water every day, and there was no such thing as washing your hands and face with warm water.

We cooked over two small gas devices that looked like the Bunsen burners in my high school chemistry class. We had one four-tatami-mat room in which we lived and slept, and one two-tatami room where we kept the baby’s crib. We heated the rooms with a kerosene stove that had to be turned off at night because of the ever-present danger of earthquakes tipping the stove over in the middle of the night and burning the whole neighborhood down. We bathed at the sento, the public bath where the dividing wall between the women’s and men’s baths was shorter than the average American. After undressing, the men handed their baskets of clothing to young female attendants, who returned them when the men had finished their soak in the public pool. In the streets on winter nights, one could always recognize those who had just been to the bath because they would be enveloped in the white cloud precipitated by the action of the cold air on their moist, warm skin and clothing. Upon returning home from the sento, we went to bed on futons rolled out on our tatami floor and dropped off to sleep as the exhalation of our warm breath formed clouds in the cold of the unheated room.

Luxury it was not. Yet we did not feel deprived by the experience. Rather, we felt greatly enriched by it and privileged to have had it. This was a last glimpse of a less Westernized, less modernized Japan that has vanished forever. That magical time was the first bookend of my ensuing life and career, and nostalgia for that era has been part of the impetus for this book.

I left Japan in late 1965 and entered the US Foreign Service, first as vice-consul at the US Consulate General in Rotterdam and then as third secretary of the US Embassy in the Hague. Later I became a business executive with the Scott Paper Company in Philadelphia and Brussels. But I returned to Japan in 1976 as vice president of the Swiss consulting company Egon Zehnder International. I discovered that in the decade that I had been away, Japan had become a rich, developed country. The bicycles had not only yielded to automobiles, but the automobiles were causing endless traffic jams. Indeed, jutai (traffic jam) became one of my wife’s favorite Japanese words. And the sento were mostly gone also, having been replaced by the o-furo (hot tub) now routinely included as part of the Japanese home or apartment. Of course, this modernization also had its downside. The air quality of Tokyo had become so poor that face masks were routinely worn by a large number of Japanese.

This was the heyday of Japan, Inc., the market-based but government-guided system of capitalism that had accomplished the postwar economic miracle and that now, in the late 1970s, was conquering the world’s markets in steel, textiles, and consumer electronics. It might have been called capitalism with Japanese characteristics. Those special characteristics included lifetime employment for a cadre of “regular” employees; extreme company loyalty on the part of employees who considered themselves part of a corporate family and who would almost never consider changing employers; enterprise unions rather than industry-wide unions; and protection of the domestic market from imports by a variety of means. Japanese businesses also featured a corporate structure dominated by quasi-cartels of interlocking firms known as keiretsu; just-in-time delivery; kaizen (continuous improvement); six-sigma quality control; government targeting of and subsidies for the development of so-called strategic industries (machinery, semiconductors, computers, steel, etc.); and a policy of keeping the yen undervalued versus the dollar as a way of indirectly subsidizing exports and imposing a tariff on imports.

First as a consultant primarily to foreign companies trying to crack the Japanese market, and then as the CEO of the Japan branch of a US medical equipment manufacturer, I learned how the system worked through tough experience in the school of hard knocks, but also through the patient explanations of a few friendly Japanese and American tutors. In the late 1970s, the Japan, Inc. system appeared to be unbeatable: Japan’s automakers were using it to begin attacking the Detroit automakers, while its semiconductor producers started aiming at Silicon Valley. By 1980, both the US semiconductor companies in the Valley and the US auto makers in Detroit had joined representatives from the steel, textile, machine tool, consumer electronics, and other industries in a pilgrimage to Washington, DC to demand that the US government take some action against Japan’s “unfair” trade practices.

Of course, it was in 1980 that Ronald Reagan was elected president, which meant that a whole new set of senior officials would be taking the reins of the US government. In September, 1981 I was appointed to the US Department of Commerce, first as deputy assistant secretary of commerce, then becoming acting assistant secretary, and finally counselor to the secretary. In these positions, one of my main responsibilities was to help lead what had become an endless series of trade negotiations with Japan.

Indeed, it seemed that there were negotiations in virtually every sector of the economy. Semiconductors, television sets, autos, almonds, rice, tobacco, telecommunications equipment and services, insurance—you name the industry, and we had a negotiation going either to open the Japanese market or to stop predatory Japanese practices in the US market. It all looked very complex, and if you tried to absorb all the details, it was. But in essence it boiled down to two competing claims. US industry and the US government negotiators continually complained that Japan was “cheating” by not playing by the rules of free trade and free-market capitalism. They said its industry was being subsidized, and was dumping (selling below cost or below the price in the home market) products into the US market while its home markets were protected like the impregnable castles of feudal Yamato by a variety of means. Japanese industry and Japan’s negotiators responded by essentially saying, “What are you talking about? Our markets are more open than yours. We have fewer and lower tariffs than you do. The problem is that you don’t try hard enough. In fact, you hardly try at all. Your quality is atrocious, your labor relations are adversarial, your delivery is always late, your service is non-existent, and you put the steering wheel on the wrong side of the car [Japan is right-hand drive, like Britain]. You should stop whining and mau-mauing us and pull your socks up with that legendary American ‘can do’ spirit you’re always talking about.”

Between 1980 and 1985, the US trade deficit with Japan grew from US$10 billion to US$50 billion, which could be translated into about 500,000–800,000 lost jobs during a period of recession. My mission was to stop this sudden flooding away of American production, jobs, and technology in a manner that would also maintain free-trade rules and US competitiveness. In particular, my task was to open the Japanese market to American and other foreign imports and investment.

As noted above, the debate was kind of a standoff, with the US side arguing that Japan was acting unfairly, and Japan saying the problem was simply a matter of incompetence by US business and its US government champions (namely me). In fact, there was truth in the Japanese argument. For instance, it was often the case that US companies had fallen down on quality. In the auto industry, independent quality analysts like Consumers Union consistently found the reliability and quality of Japanese autos to be superior to that of the cars made by the “Big Three” Detroit-based US producers. Similarly, Hewlett Packard unleashed a firestorm in the early 1980s when it released a quality comparison study showing that Japanese semiconductors were of better quality, on average, than semiconductors made by US producers.

But this was far from the complete truth. For it was also the case that the Japanese economic miracle system that I had come to know so well had been specifically designed to keep foreigners out, and to promote production in and exports from Japan. While it was true that Japan had tariffs that were generally lower than US tariffs, it had huge tariff spikes on products like rice for whose production it was not competitive. Even more importantly, it kept the yen undervalued versus the dollar and maintained an intricate web of non-tariff procedural, regulatory, and structural barriers to market access. The keiretsu structure of interlocking shareholdings and directorships among companies itself had been constructed to prevent takeovers of Japanese corporations by foreign companies.

Distribution chains presented another formidable barrier. For example, in the United States, auto dealers are by law established as independent businesses whose sales cannot be controlled by the auto producers. Thus, a dealer can sell Fords, Hondas, Volkswagens, and any other brand that appears attractive. This structure meant that when the Japanese auto companies entered the US market, they did not have to build their own dealership networks from scratch. They just piggybacked on the existing Ford, GM, and Chrysler networks. Not so, however, in Japan; there Toyota dealers sell only Toyotas, and woe to the renegade dealer who tries to break suit. This structural difference in the two markets made it much more difficult to enter the Japanese auto market than to sell into the US market.

I could go on, but I’m sure you get the idea. The task of opening the Japanese market, which the White House had assigned to its trade negotiators like me, essentially meant restructuring the economic system that had produced the miracle and that seemed to be conquering all before it. Trying to change what all Japanese were convinced was a winning system was not our only handicap; many in Japan were certain that their economic system was a product of their culture and thus uniquely Japanese, and my colleagues and I were therefore perceived by many as attacking and trying to change that culture. Our final handicap was that many American economists and commentators didn’t understand the nature and structure of the Japanese economy and assumed that because it had low tariffs, and because Japanese officials insisted that theirs was a capitalist-market economy just like that of the United States, that it indeed was just like the US economy—with, to be sure, a few quirky Japanese elements.

As a result, many Japanese and American commentators criticized us for unduly trying to open a market that was already open. As lead negotiator, I, in particular, was branded as a “Japan-basher” by Hobart Rowen of the Washington Post, and that moniker stuck for a long time in both the Japanese and American press. It was a very troubling term for me because it implicitly tagged me as a racist. Consider for a moment that Rowen could have called me a critic of Japan. But criticism is intellectually and morally legitimate. “Bashing,” on the other hand, is emotional and irrational, full of hate, and with intent to harm for no good reason. Because it was a handy bit of shorthand, journalists thoughtlessly bandied the term about and it gained great currency, but it was deeply and fundamentally dishonest and misleading. It was intended to—and did—deflect the discussion of US-Japan trade from legitimate complaints about Japan to personal defamation.

This was a painful period for me both professionally and personally. Professionally, while I managed, along with other US negotiators, to drive a few deals like the US-Japan Semiconductor Agreement and the Telecommunications Agreement, which did actually open a couple of Japanese markets at least to some extent, most of our effort seemed to be in vain. On a personal level, it was extremely unpleasant to be personally subjected—and to have my family (especially my adopted Japanese son) subjected—to a constant stream of media stories calling me anti-Japanese or even anti-Asian. Some good friends in Japan attempted to rebut this line by writing letters to the editors of leading Japanese newspapers, but their passion was not sufficient to counter the bad image of me being fostered by media commentary.

I left the Reagan administration in 1986 and wrote the book Trading Places: How America Is Giving Its Future to Japan, in which I tried to explain the major insight I had gained from my years of working in and negotiating with Japan. It was that Japan wasn’t cheating and the United States wasn’t falling down on the job. Rather, the two sides were simply playing different games. The US was playing baseball while Japan was playing football. Japan wasn’t cheating or playing bad football, and the US was playing good baseball. The difficulty was that the Americans kept acting as if and insisting that both sides were playing baseball. Because they weren’t, and because the Americans (for reasons both of economic orthodoxy and geopolitical convenience) refused to admit that, and because football is a rougher game than baseball, the Americans were taking a beating.

Upon completion of Trading Places, I moved on to writing about other issues such as the creation of the World Trade Organization and the North American Free Trade Agreement, and became more and more detached from Japan. Indeed, the term “Japan passing” came to be used in the 1990s to describe the phenomenon of people passing by Japan on their way to China, Korea, and Southeast Asia, overlooking the Japanese market in favor of greener pastures elsewhere. I became one of the passers.

Ironically, despite appearances to the contrary, Japan would have been wise to have listened to the small band of “revisionists” (in addition to myself, these included Jim Fallows of the Atlantic, Chalmers Johnson of the University of California at Berkeley, and Karel van Wolferen of the Dutch newspaper NRC Handelsblad) who were calling for reform and opening in Japan. As things turned out, Japan’s waves of exports and huge trade surpluses were not so much signs of success as of trouble. The Japan, Inc. catch-up formula for achieving the “miracle” had worked. But it is sometimes possible to have too much of a good thing. The miracle had been based on high savings, high investment in manufacturing, relatively low domestic consumption, and ever-rising trade surpluses of manufactured goods. By the early 1980s, constant repetition of this formula was already creating overinvestment in excess production capacity in Japan.

The economy was becoming seriously unbalanced. Japanese consumers were falling further behind their peers in the United States and Europe as the country continued to expand its huge, modern manufacturing sector while neglecting its increasingly inefficient and outdated services and new business development capabilities.

The big trade surpluses were creating pressure on Japan to strengthen the yen versus the dollar, and eventually it did so in 1985. This should have resulted in a restructuring and rebalancing of the economy. But the Japanese government and industry pulled out all the stops to keep the old miracle machine going. The central bank flooded the markets with cheap money, and investment became easier than it had ever been. Indeed, for major companies like Toyota in 1989–1991, the cost of capital became negative. That’s right—the markets paid Toyota to take the money. Of course, that made it easy for the manufacturers to add yet more capacity. On top of that, the easy money aimed at keeping Japanese manufacturers competitive despite the rising yen also created a huge real estate and stock market bubble. It was the bursting of that bubble in 1992 that set the stage for the ensuing two “lost decades” that have left Japan in its present crisis.

In 2011, I became engaged in a project comparing some key Korean industries to their Japanese competitors. While doing this project, I realized more and more that Korea was eating Japan’s lunch. At first, I couldn’t believe it. Hyundai was taking market share from Toyota in the US and European markets? Samsung was treating Sony like a ninety-pound weakling? And looking beyond Korea, Apple was acting as we used to expect Sony to act. Samsung and Apple were battling it out in the smart-phone market, but there were no serious Japanese contenders. Sony had only a single-digit market share. What was going on, I asked myself.

To answer my own question, I began spending more time in Japan talking to old friends and new acquaintances in business, government, academia, labor, and the media. What I found was disturbing. The old cooperation and communication between government and business seemed to be mostly dead. Despite lots of talk and some efforts, the economy had not taken many steps toward becoming rebalanced. There was also a kind of “nothing can be done” mood in place of what I remembered as the old Japanese spirit of optimism and perseverance summed up in the much-used rallying cry of “Gambatte!” Particularly among young people, pessimism was rampant. I found myself worried for their future, for the future of the children of my Japanese friends, and for the future of the country that had so much been a major part of my life. I was also approaching my seventy-second birthday, and was increasingly conscious of the passage of time and the fact that I had been watching and working in or on Japan for fifty years. What could I do to warn the country and help it reverse course?

I decided to write this book—in some ways a second bookend to my long involvement with Japan—in the hope that my experience might produce some insights and suggestions that Japan could use to restore its former vitality. The story opens in the year 2050, when Japan has, in fact, been fully restored. It is the world’s leading country in a wide variety of technologies and arts, as well as in business, innovation, and clean energy. Students around the world no longer want to go to Harvard or Stanford; rather, they want to study at Tokyo University or Kyoto University. Patients around the world no longer flock to the Mayo Clinic; rather, they go to the Meguro Clinic in Tokyo. This is very different from the way things looked in 2015. Of course, the question is: What happened?

The rest of the book tells the story of “what happened.” But first it emphasizes the point that “what happened” is potentially possible and fully believable. After all, Japan has reinvented itself twice in the past century and a half—once in the Meiji Restoration of 1868, when Japan opened itself to Western influences after centuries of isolation, and again after World War II. So we know that Japan is capable of revolutionary change. Japan can do it. The question now is only how to do it again.

The previous reinventions took place after moments of great crisis. So it is logical to conclude that the third reinvention will also require one or more crises. As it happens, Japan is already facing several severe crises, which are outlined in chapter 2. Most important in the short run is the threatening collapse of the economy in the wake of the failure of Abenomics. In addition, chapter 2 also introduces some conjectured crises, such as an Israeli attack on Iran and the withdrawal of the US Seventh Fleet from Japan, which are easily possible to imagine. These and other crises result in a national emergency and the creation of an Extraordinary National Revitalization Commission representing all sectors of the society, and which is charged with the task of once again reinventing the country.

Chapter 3 turns to the question of Japan and the international scene. For many years Japan has become accustomed to being sheltered under the American security wing, and many Japanese cannot imagine that this situation would change. But the fact is that it will. So it is important to understand that Japan’s major problems will have to be faced in the context of a world in which the US security assurance will be more limited than it has been since 1945. In this chapter, America adopts a policy of withdrawing its military forces from Japan to the second island chain, and Japan is forced to become a much more substantial geopolitical and diplomatic power, although the US does not entirely disappear from the scene.

Chapter 4 begins to deal with Japan’s key problems as I see them. The first is not the economy. That, of course, is a major issue and the most immediately palpable, but the truly existential issue facing Japan is its demographics. The country is dying; I cannot even add the qualifying adverb slowly, because the rate of population aging and shrinkage is rather rapid. Today’s 124 million Japanese could become as few as 88 million in the thirty-five years it will take to reach 2050. It is not too late to turn this around. Other countries like Sweden and France have done it. But in just a few years it will be too late. So Japan must very quickly take the steps that other countries have already shown can work. Mainly this will require a dramatic change in the role of women and the attitudes of men, as well as in immigration policies.

Chapter 5 deals with Japan becoming a bilingual nation with English-speaking ability similar to that of countries like Finland, Poland, and Germany. At first glance this may not seem to be a high-priority issue like demographics, but it has a huge bearing on demographics, which in turn has a huge influence on other issues facing Japan. If Japan could speak English well, the country would attract highly talented people from abroad as long-term residents and even, perhaps, as citizens. It could easily stay up-to-date on the latest developments in science, technology, business, finance, and everything else. Thus it is essential that Japan become highly capable in English.

Chapter 6 attacks the need for Japan to promote and become a global leader in innovation by reducing the high risk attached to entrepreneurial activity in Japan. Chapter 7 looks at how Japan could become energy-independent by means of developing its many potentially inexpensive domestic energy sources. Chapter 8 suggests how Japan might modernize its corporate structures and systems with particular emphasis on equal status and treatment for all employees, and Chapter 9 reinvents the structure of the Japanese economy to get rid of the monopolies, barriers to competition, regulatory roadblocks, and powerful interest groups like the farm cooperatives and the medical association. Finally, chapter 10 foresees a fundamentally decentralized and democratized Japan organized along federal lines like Germany and the United States.

It is my hope that future Japanese will remember me as a friend who offered some small but useful suggestions.

In closing, I should emphasize that this book was completed in April, 2015. All events described until that date are real and actually occurred. After that time, all events mentioned are entirely my own forecasts and conjecture based on my experience and understanding of history and of global trends.