Japan: The Modernization of an Ancient Culture
by Lawrence C. Wolken
For Japan, the 70s proved to be a mixture of the economic success of the previous decade and some potentially serious economic problems. On the positive side, the steel and automobile industries continued to gain a larger share of the world market. The real growth rate slowed somewhat but still remained far above that of most other industrialized nations. The standard of living improved for the majority of the Japanese people. On the negative side, OPEC’s oil embargo in 1973 gave Japan’s economy a severe shock. The rate of inflation hit 11 percent in 1974. By the end of the decade Japan’s once prosperous shipbuilding industry was operating at only 70 percent of its capacity. The government’s budget deficits were increasing at an alarming rate. Many Japanese were beginning to wonder whether or not Japan’s economic success could offset these new economic problems.
Matters were made worse as the world economy moved into a recession during the early 80s-economic activity slowed and unemployment climbed worldwide. Each nation blamed someone else for their economic woes; sentiments increased for a wide variety of protectionist actions by governments. In the United States, for example, Detroit’s high unemployment rate was blamed on Japanese imports. A slumping steel industry claimed it could not compete with Japanese and European producers because of the subsidies they allegedly received from their governments. The solutions seemed obvious-import quotas on Japanese automobiles and trigger prices on foreign steel. As Americans heard more and more about domestic economic problems in contrast to the successes of the Japanese economy, economic and political relations between the United States and Japan became increasingly strained. What few Americans realize is that, in spite of the economic progress made since the war, Japan faces some very serious economic problems.
A key factor in Japan’s economic success has been the development of its major industries. As it had done twice before during its history, Japan assimilated what it felt were the best aspects of another society. In this instance, its businesses were patterned after American industries. The result has been Japanese industries which are simultaneously the same and different from their American counterparts. From the Japanese point of view, they have merely improved upon the basic American model of business organization. It is only natural then for them to be somewhat surprised at America’s sudden interest in how Japanese industries are run. Japanese businessmen are quick to point out that they are merely applying the basic principles which made America the world economic power that it is today.
A good example of this phenomenon is the recent interest by Americans in the high quality of Japanese products-particularly automobiles, cameras, and television sets. Quality control was first introduced in Japan during 1951. Dr. W. E. Deming, an American expert on statistical quality control, was invited to Japan to share his ideas with the leaders of the then struggling Japanese industries. The philosophy which gradually emerged after Dr. Deming’s visit focused on the worker as a valuable individual whose opinions can make important contributions to improving the production process. The Japanese feel that allowing workers to apply their ideas and rely on their own experiences results in increased productivity and higher motivation to excel at every stage in the production process. This view contrasts sharply with many American businesses where workers are commonly viewed as cogs in the assembly line who quickly become alienated from their work. It is ironic that the main effect of Dr. Deming’s ideas on American businesses has been the suggestion box which, for the most part, is ignored.
Worker participation in Japanese industry is exemplified by the Quality Control Circle-a group of approximately ten coworkers. The QC circles meet regularly either before or after work to discuss ways of improving product quality and reducing production costs. This system tries to reduce the distinctions between manager and worker in an effort to encourage the mutual exchange of information. For the QC circles to be effective, management must be willing to listen to and implement suggestions made by the workers. If allowed to operate properly, both management and labor benefit from this arrangement. Increased quality and lower costs make the company’s product more competitive on the world market and helps to improve the company’s profit picture. Workers feel they are making a real contribution to the daily operation of the company and are therefore less likely to become alienated or bored by their work. Perhaps of more importance, a profitable company can keep its workers employed.
The QC circles are just one of the ways the relationship between management and labor in Japanese firms differs from their American counterparts. In recent years Americans have heard a lot about the lifetime employment of Japanese workers. When a major Japanese firm hires a new employee, it does so with the idea that the person will remain with the company during his or her entire working lifetime. One of the benefits of this arrangement is the strengthening of the bond between firms and their employees. Under this system, the firm assumes an almost paternal role with a genuine interest in the well-being of its workers. For example, firms conduct continuing education programs on an annual basis for their employees and provide recreational facilities for the workers and their families. In return, Japanese workers are extremely loyal to their employers and clearly realize they have a vested interest in the company’s success. Only a few American companies, like IBM, have anything similar to the lifetime employment practiced in Japan.
‘The positive aspects of this system are also accompanied by some problems. Only one third of the Japanese workforce is covered by this system-those working either for the government or for Japan’s major industrial groups. The other two thirds of the workforce is subject to rising unemployment during a general economic slowdown. One way major firms try to insulate themselves from the problem of layoffs during a recession is by contracting out much of their work to smaller companies. They then simply reduce their orders when a slowdown hits the economy. For the nation as a whole, this does not solve the problem of unemployment; it merely shifts the burden of the unemployment problem from the major industrial groups to the other sectors of the economy. It should also be noted that lifetime employment means retirement at age 55 on a pension that is much smaller than those commonly enjoyed by American workers. This may partially explain the high savings rate of Japanese workers and the existence of extended families where children take care of their retired parents.
Because the major firms make a lifetime commitment to their employees, they are very selective in their hiring practices. This places a tremendous amount of pressure on Japanese youth to do well in school to enhance their chances of receiving one of these highly prized jobs. This is particularly true for those who wish to enter any of the large industrial groups at the management level because this requires a degree from one of Japan’s best universities. Since acceptance to all universities is determined by highly competitive national entrance examinations, the third year of the upper secondary schools is devoted almost entirely to preparing students for these exams. It is not uncommon for high school seniors to attend their regular school during the day and spend several hours each evening in a private school receiving extra instruction. Because a person’s score on these exams will essentially determine his or her economic position for life, there is tremendous pressure to do well. The recent rise in the suicide rate among Japanese youth resulting from this pressure has become a concern of people at all levels of Japanese society.
Labor Unions and Management
Japan also differs significantly from America in the structure of its unions. Instead of being industry wide, they are organized within an individual company. This tends to create an atmosphere of cooperation between labor and management because if a strike is called, only that company is shut down. This would place the firm at a disadvantage compared to its competitors and may result in it losing some of its share of the market. Both management and labor would be adversely affected. This creates incentives for both sides to work together to make the company as successful as possible and thereby benefiting everyone involved. This contrasts sharply with the American view that management and labor are adversaries where a gain by one side comes only at the other’s expense. For the most part, then, the Japanese feel that unions have been a positive factor in the private sector. However, some are beginning to question the value of unions in the public sector because much of their activities have recently focused more on influencing government policies than on resolving economic issues affecting their members.
The Japanese have also developed a somewhat different approach to managing their companies. In the United States, a person commonly specializes in a particular field-accounting, sales, personnel, advertising, etc.-and works in that department during his entire career, gaining promotions within the company or by switching companies. In Japan, a university graduate is hired for life and typically spends his first two years with the company in a variety of on the job training programs. This may include, for example, several months working on the assembly line to become familiar with this phase of the company’s operations. When this initial training period is completed, he is assigned to a specific department within the company. Every two or three years, management personnel are transferred to a different part of the company. In addition, they participate in annual seminars at the company’s training facilities. The concept that education is a lifetime process has become an integral part of Japan’s culture. The Japanese feel a diversity of assignments produces managers who have a much broader understanding of the company as a whole and can therefore be more effective in improving the firm’s operations. Contacts made during these assignments, for example, make it easier for the different divisions within a company to coordinate their activities because the people involved frequently already know each other. This makes the group’s efforts much more effective.
The Japanese emphasis on working together as a group rather than as individuals is clearly visible in the way their offices are arranged. In American firms, management personnel at all levels aspire to have their own private offices. In Japan, only the top executives have a private office. Everyone else works in large rooms filled with desks-not unlike the secretarial pools common to American companies. The major difference is that the desks are pushed together in groups including both secretarial and management personnel. (Picture) This encourages workers to be friendly with each other and to discuss the various projects on which they are working. The simple act of answering someone else’s phone when they are not at their desk keeps everyone informed concerning the work that person is doing. Having a desk in a large group near the center of the room is a symbol of success. In contrast, a single desk near a window is an indication of an individual who does not work well in a group and reflects badly on his or her chances for a promotion.
During the rapid industrialization Japan has experienced since the war, Japanese industries have done more than simply copy American industries. They have taken American concepts and improved upon them to the point where many U.S. businessmen are now studying Japanese plants in the hopes of being able to improve their own operations. This situation is clearly evident in Japan’s steel industry which is highly automated and in the automobile industry which makes extensive use of robots. In the newest steel plants, for example, computer aided systems control the operation of the blast furnaces. This system uses TV cameras to allow the operators to visually follow the entire production process while the computer continuously keeps the operators informed of the chemical and metallurgical reactions taking place inside the blast furnace. This has eliminated much of the guesswork involved in making steel and has reduced costs by lowering energy consumption and by increasing the length of time before the furnace must be relined. (Picture)
In addition to reducing costs, these technological innovations reduce the number of workers needed to operate the blast furnaces and rolling mills. Because they realize this new technology makes the company more competitive, the unions are working closely with management to find new jobs for their members rather than resist these changes. Some workers are being shifted to jobs with other divisions within the corporation while others are trained for the new jobs created by the technological innovations. This type of retraining program is an integral part of the Japanese philosophy that education is a continuing process which does not end when one graduates from school.
Another innovation Americans find intriguing is Kanban a new method of minimizing inventory costs. Under this system, inventories for a factory never exceed the parts needed for a very short period of time, usually one day or less. In a Toyota assembly plant, for example, there may be only enough engine blocks on hand to last one hour. A small truck from the manufacturer delivers 60 engines to the final assembly line. The driver then takes a computer card authorizing the production of 60 more engines back with him. This steady stream of trucks delivering engine blocks directly to the assembly line essentially eliminates inventory costs. It also greatly reduces the cost of changing over to new parts or introducing new technology. For Kanban to work properly, however, the suppliers must be located close to the plant and the delivery system must operate smoothly. Many American companies are horrified by such a system because of the problems which would arise if the assembly line stopped or if the delivery of any of the wide variety of needed parts was late. The Japanese take a more positive view of Kanban, feeling it simply forces them to eliminate any bugs in the production process or the delivery system.
As the Japanese economy moved into the 70s, it soon became evident that the rapid growth rates experienced during the 60s could not be continued indefinitely into the future. The gains of the 60s had been accomplished by expanding Japanese markets around the world and by developing industries which had relatively low costs compared to their returns. During the 70s it became evident that finding new markets or developing any further technological innovations would be more expensive and promised smaller returns. To complicate matters, the government had begun instituting a variety of social programs during the late 60s designed to assist those who had not benefited fully from the economic prosperity of the previous decade. At the same time the Japanese economy was trying to adjust to slower growth rates. This resulted in much greater pressures on the government’s budget.
These problems began to surface in 1973 when OPEC suddenly increased the price of its crude oil four-fold. To fully understand the impact this had on Japan’s economy, Americans need only realize that the United States was importing only one-third of its crude oil at that time. In contrast, imports represented more than 90 percent of Japan’s consumption. Thus, finding a solution to the energy crisis was far more crucial to Japan than it was to the U.S. In spite of the public outcry for protection from higher energy prices, the Japanese government chose to allow the market to operate. The higher prices which resulted from this policy encouraged Japanese consumers and businesses alike to conserve energy and to develop alternative energy sources. The adjustment process was painful, but the Japanese government felt this was the only sensible way to approach the problem. In contrast, the United States chose to regulate the oil industry and tried to keep prices low to protect consumers. Although the rate of inflation was initially higher in Japan, by 1979 its rate had fallen to 3.6 percent while the United States was experiencing an inflation rate of 11.3 percent. One would have expected the opposite to have occurred if rising crude oil prices were, as Americans heard so often during the 70s, the cause of inflation.
Environmental and Social Issues
In spite of the economic problems brought on by OPEC’s actions, during the early 70s public attention in Japan began to focus on social and environmental issues. Many felt the economic gains of the 60s had come at the expense of the environment and that certain segments of society had been forgotten. In response to this concern, a variety of programs, both public and private, evolved in an effort to improve the standard of living of the poorer segments of society and to clean up the water and the air. Automobiles, for example, must now comply with very strict emission standards. Some cities have even taken steps specifically designed to reduce the rate of increase in automobile traffic. Osaka, for example, is decreasing the number of lanes on the major boulevards and zigzagging other streets in an effort to simultaneously discourage people from driving cars and improve the safety of pedestrians by slowing down the flow of traffic.
Private industries are also making an effort to reduce any adverse effects they may have on the environment. This includes recycling gases and water in many of Japan’s modern steel plants. In addition to a cleaner environment, this recycling helps lower energy consumption and therefore decreases the cost of production. To demonstrate that factories can be a clean and healthy place in which to work and live near, Kawasaki Steel Corporation has set aside 10 percent of the land at its Mizushima Ironworks (Pictures) for planting pine trees and other shrubbery. The results of this combined environmental and beautification program contrast sharply with the typical American steel mill.
The economic growth of the 60s provided the government with an opportunity to establish a wide variety of social programs for the less fortunate members of society. As long as the high growth rates continued, these public works programs could be financed without placing an undue burden on the taxpayers or the economy. However, as the real growth rate declined from in excess of 10 percent in the 60s to the 3 percent range in the early 80s, the government faced ever increasing budgetary problems in its attempt to fund these programs. It soon discovered that once such programs are begun, they become very difficult to scale down, much less eliminate, even if they have already accomplished their initial objectives. Over the years, many people have come to regard these programs as a right for all Japanese citizens and expect the benefits of these programs not only to continue but to increase in the future. As a result, many Japanese are becoming increasingly dependent on the government and correspondingly less self-reliant. Politicians are currently finding it very difficult to control government spending in the face of this type of pressure from their constituents. Only time will tell whether or not they will be able to make the adjustments in social programs required by the lower growth rates of the 80s.
The Japanese National Railways (JNR) and Japanese public pension system are just two examples of the magnitude of this problem. Almost 80 percent of the 17,000 miles of railways in Japan is owned by JNR; the remainder is owned by private companies. The speed of the Shinkansen (bullet train) and the precision of Japanese trains is known the world over. However, few people are aware that JNR is an economic disaster with a deficit of almost $5 billion a year. In contrast, the private railways run just as precisely but are making a profit. A contributing factor to this difference in financial condition is the fact that the typical JNR train is operated by a crew of 14 or 15 while a crew of 10 runs the private trains. Because many Japanese have come to look upon JNR’s services as a birthright, recent efforts to eliminate routes which are losing money and raise fares have experienced stiff opposition. A major political battle occurred in 1983 over the recommendation by the Provisional Commission for Administrative Reform to put under private management Japan’s three major public corporations JNR, the Nippon Telegraph and Telephone Public Corporation, and the Japan Tobacco and Salt Public Corporation.
Japan’s public pension system is a good example of the future financial problems which frequently result from governmental decisions made in the past. This system consists of several programs supported by contributions from the employer, the employee, and the government. In one of these programs, for example, it was estimated in 1982 that the present value of the lifetime benefits the average worker would receive was $140,000. In contrast, the present value of the contributions paid by the employee and his employer was only $40,000. Clearly, the benefits far exceeded the contributions. If these estimates are correct, future generations face a tremendous burden if the pension system is to continue operating as it is currently structured. The only reason the system is currently viable is the fact that only 2 million people are receiving benefits while 25 million are contributing. This situation will change drastically as the percentage of elderly people in Japan slowly increases. None of the three solutions increasing taxes on employees and employers, increasing the government’s contribution which means increasing general revenue taxes, or reducing benefits-is politically popular. In addition, the future tax increases necessary to continue current increases in benefits will severely reduce the economy’s ability to achieve sustained economic growth.
Another major problem which must be dealt with by Japan’s government is the agricultural sector. In the early 80s, Japanese farmers paid less than $80 million in taxes each year and yet received almost $12 billion in support from the government. In other words, they received 150 times as much from the government as they paid in taxes.
This government support comes in a variety of forms, some of which are being questioned by other segments of Japanese society. Each summer, for instance, the farm lobby goes to the Diet to ask for an increase in the support price of rice even though they are already receiving three times the world price. So far, the political power of farmers has remained strong enough to successfully combat efforts to reduce the level of support they receive.
The favorable tax treatment given Japanese farmers has resulted in some interesting situations. While traveling through Tokyo, one sees vacant lots being used to grow a variety of crops. This seems strange considering the crowded conditions and the high cost of land in all major Japanese cities. The explanation is really quite simple. During the early 80s, while Japan experienced a low rate of inflation, the value of land increased at a much higher rate. A small lot for a home rose in value to more than $60,000. The tax rates are quite high on commercial and residential property and on other forms of wealth. In contrast, the rates are quite low on agricultural land. Land in the city used for agricultural purposes is taxed at this lower rate and has therefore proven to be a very good investment.
In recent years, Japan’s budget has become the focal point of conflict between those who want to expand social programs and to stimulate the economy by increasing government spending and those who want to lessen government’s impact on the economy by reducing the budget. Those who wish to reduce government spending point to the alarming budget deficits of recent years. In 1973, the deficit represented less than 12 percent of the budget. This percentage gradually increased until it hit a peak of almost 36 percent of government spending in 1979, and then slowly declined to just over 20 percent in 1982. Borrowing 20¢ out of each dollar the government spends would have been unthinkable during the 60s. Deficits of this magnitude have created tremendous inflationary pressures within the Japanese economy and placed an additional strain on the government’s budget. In 1982 almost 16¢ out of each dollar the government spent went to pay the interest on the money it had borrowed in previous years. Servicing the national debt has thus become the third largest category in the government’s annual budget, closely behind aid for local governments and social welfare. Many Japanese feel this is a clear indication that the budgeting process has gotten completely out of control.
Only time will tell who will win out-those who want the government to stimulate the economy and expand social programs or those who want to restrain government spending and reduce government’s impact on the economy.