Japan faces transformation in world economy

As work force, productivity shrink, so may influence

August 01, 1999|By NEW YORK TIMES NEWS SERVICE

TOKYO -- After a dazzling century in which Japan emerged on the globe first as a feared military power and then as a formidable economic one, its influence may be on the wane.

The problem is not the economic crisis that dominates the headlines, but a pair of intertwined long-run concerns: The work force is shrinking fast, and Japan undermines its economy's productivity by squandering money on life support for moribund industries and backward regions.

In the next few decades, unless Japan manages to arrest current trends, it may find that its share of global economic output has shrunk considerably.

Japan's working-age population peaked in 1995 and is falling quickly. The overall Japanese population will rise a bit until 2007, because of the long life expectancy of today's retirees. But after that, the Japanese government's official projections show the country's population tumbling rapidly, from 126 million today to 100 million in 2050 and 67 million in 2100.

"If influence is measured by GDP, then Japan's influence will decline," said Chikashi Moriguchi, a prominent Japanese economist who has studied the aging of Japan, referring to the gross domestic product.

While other industrialized countries face low fertility rates and aging societies, Japan is in a bind because for cultural and sentimental reasons, it cannot easily avail itself of the two obvious solutions: easier immigration to shore up the population and ruthless restructuring to boost productivity.

Japan has some tremendous underlying economic strengths, ranging from well-trained and committed workers to huge private savings. Companies such as Sony and Toyota may continue to expand and become more titanic global businesses while their home market becomes relatively smaller.

Of course, the link between population size and global economic influence is far from absolute, as India demonstrates at one extreme and Hong Kong at the other. Even if Japan's share of the world economy continues to decline, ordinary Japanese may live more enjoyable lives in a less crowded country.

"Japan will be more of a middling power, less important than it is now in the scheme of things, and it may be more comfortable with that," said Hugh Patrick, director of the center on Japanese Economy and Business at Columbia University.

Japan's shrinking population, many economists argue, makes it difficult to see how Japan can continue to play the role of Asia's leading power. Historically, the world has usually adjusted more easily to the ripples from a declining power like Japan than to those of a rising power like China, but the economic and political ramifications will be far-reaching.

What will Japan look like in a few decades?

No one knows, of course, but the late-night horror television scenario might be something based on life today in the little island of Akashima, in the Goto chain in southern Japan.

Yoshie Kokou, a friendly 70-year-old fisherman, stood on a bluff on Akashima the other day, smiling shyly and speaking lovingly of the throngs of friends and family members who surrounded him.

Kokou was standing in the cemetery. Akashima's hospital, school, stores and most of its homes are abandoned, and aside from Kokou only four people live on the 128-acre island.

Akashima, its seaside cliffs jutting out of a blue-black ocean that is hospitable mostly to the passing whales, has lost people (it had 300 inhabitants at its peak a few decades ago) not so much because women had fewer babies as because people moved to the cities. But Akashima offers a glimpse of Japan's difficulties in generating the kind of boom in productivity that might help make up for a shrinking work force.

From the 1950s through the 1980s, productivity grew much more quickly in Japan than in the West. But Japan's total factor productivity, the broadest measure, is now growing by about 0.5 percent per year, much less than half the level of the United States.

Fundamentally, the reason is that Japan steadily lost its capacity for what economist Joseph Schumpeter called "creative destruction." Japan never built a huge public welfare system, but it has instituted safety nets and subsidies to create a welfare state for companies and towns and declining industries.

The result is welfare dependency among inefficient corporations and moribund economic sectors and fading islands and villages. Instead of "picking winners," Japan is picking losers and subsidizing them on a huge scale.

Why does Japan so obstinately subsidize its past at the expense of its future?

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