THE NIKKEI WEEKI.Y

JA.NUARY 12, 1998

History in the 21st century will reveal whether the last 10 years of the 20th century will have been to Japan a lost decade or merely a necessary run-up to a new era. Japan’s government policy choices in the remaining three years of the century will impact decisively on that question.

Viewing the 20th century in its entirety, Japan’s economic development was a success story unmatched in the annals of world history. The Soviet Union disappeared in 1991 after being defeated in the Cold War, and an aide of its president said Russia had lost its 20th century entirely. Yet the luster of the Japanese miracle faded suddenly in the 1990s, after the bubble economy of the late 1980s burst with devastating consequences. Every government policy seemed to backfire. Necessary reforms have been slow in coming, and society’s forward progress now seems indefinitely checked.

Japan’s economy has been in a slump for most of the 1990s, growing at a paltry average annual clip of 1% in real terms, while the U.S. economy has chugged along in an unprecedented lengthy and vigorous expansion. A decade ago, the U.S. was awash in pessimism but has since regained its confidence. having overtaken the Japanese and restored its past. glory. Prognosticators of a dangerous Japan are nowhere in sight.

The reversal of fates in the past decade is due to none other than the difference in the way the two countries set about reforming. Japan wasted the past 10 years, while the U.S. was reinventing itself with a vengeance.

Japan is clear on its direction of reform. With the end of the Cold War, a global race to develop market economies is being waged while Japan remains entrenched in a bureaucratically engineered style of government that excessively regulates its markets and stifles market potential.

The command-and-control political economy in which bureaucrats decide economic priorities and distribute resources worked well when Japan was trying to catch up with the West. As long as the economic goals and models for industrial growth gleamed powerfully overseas, this unilateral method ’or mobilizing the nation’s resources proved the most effective means for closing the gap on Europe and America.

The scheme worked beyond expectations and completed its role by the latter half of the 1980s. Japan since has fallen victim to its own success. It stuck to the formula that was successful in the past, which then played havoc with the nation’s economy and society.

The Nihon Keizai Shimbun has since the first day of 1992 run editorials calling for Japan to move from "bureaucracy to democracy," continually pointing out the ills of an excessive concentration of central authority and bureaucratic control. In these editorials, we urged reforms in the administration and the Diet as well as changes in the prevailing mind-set of the private sector, where companies depend too much on the government and where a convoy mentality is dominant.

We have since made repeated calls for decentralization, deregulation and reorganization of the government with a strong sense of urgency.

Japan is done playing catch-up to the West, but the entire world has already undergone dramatic change. In the past decade, Japan has insulated itself from the world to an exceptional degree for the latter half of this century, putting it further out of step with the rest of the world. This gap has been exacerbated by a dazzling succession of domestic problems ranging from a sharp economic downturn to a killer earthquake to political turmoil and many other scandals, all of which have led to Japan’s disorientation and failed reform efforts.

The late Shiba Ryotaro, the renowned author of many insightful historical novels, once termed the Japanese government "a heavy government."

It is not an extraordinarily large government, at least at the moment, in terms of the ratio of the combined burden of taxes, social-security contributions and the government deficit to the overall economy.

But the government actually meddles in every aspect of business and individual affairs through a thicket of regulations and instructions, most of which are unclear and arbitrary. The heavy hand of government regulation saps the market of its vigor and represses individual creativity.

Japanese bureaucrats often talk about a failure of the market. But with so many regulations, the market is not a real market. Most of the failures are caused by bad policies.

The key to invigorating the society and economy is to utilize the force of the market. Failures of bureaucrats are primarily a product of flaws in a system that lets them call the shots on practically everything while allowing very little information to he disclosed.

nless Japan makes effective use of the market’s power, it could face the possibility of losing not just another decade but the entire 21st century.