Prepared for the IIPS Symposium on

Upcoming Changes in Japanese Society and the
Future Shape of the Nation
Tuesday, 6 December 2005
Tokyo

Session 2

Sources of Competitiveness:
Globalization and Japanese Strengths

Glen S. Fukushima
President & CEO
Airbus Japan

Sources of Competitiveness:
Globalization and Japanese Strengths
Glen S. Fukushima
President & CEO, Airbus Japan
Few nations in recent history have seen such wide swings in the perception of its
competitiveness than Japan. In this short paper, I propose to (1) trace the shifts in theperception of Japan’s competitiveness over the past 60 years; (2) examine the sources ofJapan’s competitiveness; and (3) assess how globalization has affected Japan’scompetitiveness.
(1) Perceptions of Japan’s Competitiveness
From the end of the Second World War through the 1960s, most of the world paid little
attention to Japan economically, since it was regarded to have little consequence for theworld’s economic future. But, beginning with the textile dispute in the late 1960s, a large
number of contentious trade issues emerged in quick succession through the 1970s and 1980s
that attracted growing concern among especially Americans and Europeans, but also
Asians—including consumer electronics, steel, automobiles, automobile parts, machine tools,
semiconductors, supercomputers, beef, citrus, rice, tobacco, soda ash, flat glass, paper
products, construction services, legal services, financial services, telecommunications
equipment and services, etc. At the same time, Japan had by 1964 joined the OECD and hadby 1965 surpassed Germany to become the world’s second largest economy, as measured by
GDP, next only to the United States.
In 1979, Professor Ezra Vogel of Harvard University published Japan As Number
One: Lessons for America, and by the mid-1980s, many viewed Japan as the mostcompetitive economy in the world. This was reflected in the results of annual surveys ofnational competitiveness taken by such organizations as IMD and the World Economic
Forum, which found that Japan ranked at or near the top of the list of the most competitive
nations in the world from the early 1980s to the bursting of the bubble economy in the early
1990s.
When I attended the MBA program at the Harvard Business School in the late 1970s,
half of the cases in the required first-year course “Business, Government, and theInternational Economy” were devoted to Japan, with “industrial policy” and “Japanese-style
management” being cited as the primary reasons why Japan had been able to achieve its
postwar “economic miracle.” When Business Week conducted a public opinion poll in 1989
asking the American public, “Between the Soviet military threat and the Japanese economic
challenge, which poses a greater threat to the United States?” 68% responded, “Japan.” This
was a time when reputable economists were predicting that Japan’s GDP might surpass thatof the United States by the year 2000.
Then, just as Japan’s star had risen meteorically in the 1970s and 1980s and had
become vastly overrated, by the late 1990s its status had plummeted to such an extent thatmany dismissed the idea that Japan would ever again recover. In the midst of the Asianfinancial crisis of 1997-1998, not a few Western observers—including economists, financial
institution analysts, and economic journalists—publicly warned that Japan’s banking sector,
saddled with huge nonperforming loans, could experience a “meltdown,” leading to thecollapse of the entire Japanese economy.

1This new perception of Japan’s economy was typified by the following observation by
a former senior economic official in the Clinton Administration when asked by a Japanesebusinessman in summer 2001 how Americans viewed Japan:“When I joined the Administration in 1993, most of us considered Japan to be a major
economic rival. Now, I would say that most Americans look at Japan with a certain sense ofpity.”(2) Sources of Japan’s Competitiveness
It is curious that the two factors used at the Harvard Business School in the 1970s and 1980s
to explain Japan’s postwar economic growth—“industrial policy” and “Japanese-style
management”—were, by the late 1990s, becoming increasingly cited as the causes forJapan’s economic stagnation and decline in competitiveness.
Whereas industrial policy (government-business cooperation, especially the “guidance” toindustry provided by the Ministry of International Trade and Industry and the Ministry of
Finance) had been viewed in the 1970s and 1980s as a prime reason for Japan’s success, thestrong recovery of the U.S. economy in the 1990s, spurred by the IT revolution, led many toconclude that the suppression of market forces in Japan was the root cause of Japan’s
economic decline.
Japanese management practices such as “lifetime” (actually, long-term) employment,
seniority-based wages, consensus decision-making, generalists rather than specialists as
leaders, and avoidance of the judicial system for dispute resolution had been viewed ascontributing to creating harmonious, cohesive, and competitive Japanese companies.
However, by the late 1990s these aspects of the so-called “Japanese style of management”
were increasingly dismissed by Western observers as outmoded and seriously limiting theflexibility of Japanese companies to respond to competitive challenges.
Perhaps the two factors cited above were not the real (or only) reasons for Japan’s
remarkable growth in the postwar period. Some of the other factors that might be cited are as
follows: (1) the political environment provided by the Cold War, in which Japan was viewed
as an indispensable political and security ally of the United States, leading to a “grandbargain” of Japan’s political allegiance to the United States in return for U.S. cooperation toallow virtually unimpeded access to the U.S. market; (2) the provision of Japan’s military
security by the United States, allowing Japan to focus single-mindedly on economic recovery
and growth; (3) Japanese efforts to keep the yen relatively weak versus the dollar in order tosupport export industries; (4) a relatively corruption-free government; (5) a plentiful andhighly educated and disciplined workforce; (6) an educational system that emphasized
relatively uniform achievement, especially in applied mathematics and the natural sciences;(7) extensive on-the-job training in companies; (8) a relatively cohesive family structure; (9)curiosity about the outside world and a historical legacy of active efforts to benchmark andlearn from the experience of other (especially industrialized) countries; (10) high attention
given to technology and technological innovation and application; (11) a relatively long time
horizon that allows for investment in human, financial, and product resources; (12) capital
markets (including stock market) that support the long-term focus of companies; (13)“kaizen” (continuous improvement) and the attempt to achieve zero defects; (14) the
management philosophy of putting the customer first; and (15) a strong sense of national
identity and pride that have allowed the Japanese leadership to spur the public to strive forworld-class achievements, whether in the economy, technology, or cultural pursuits.

2(3) The Impact of Globalization
It could be argued that Japan’s economic decline in the 1990s was in large part a result of thedelay in its response to globalization. That is, the structures, processes, and behaviors thatserved Japan well in the 1950s through the 1980s were not necessarily those needed to win in
the 1990s and beyond, when the use of IT had led to the “death of distance” and the need torespond quickly and decisively to events around the world, rather than relying on the slow,
cumbersome consensus-style decisionmaking that is still so common in Japan.
Most countries find it hard to embrace change, and Japan is no exception. In someways, Japan is an extreme example of a country that would like to cling to the orderly, certain,
consistent, predictable and known past unless there is an overwhelming requirement forchange (as in the Meiji Restoration of 1868 or the defeat in the Second World War in 1945).
The forces of globalization that have swept the world since the collapse of the Berlin Wall in
November 1989 are slowly but surely having an impact on the Japanese economy. This isreflected, over the past 10 years, in more instances of mergers and acquisitions than in thepast; greater foreign direct investment into Japan; more foreign executives joining the ranksof the top management and boards of directors of Japanese companies; greater transparency
in government processes and procedures and in corporate governance; increased job mobility
among elite Japanese males; etc.
As these recent trends indicate, Japan possesses certain underlying strengths thatallow it to continue to adapt to changes in the world environment, especially responding in a
pragmatic and effective way to ensure its economic survival and even prosperity. In thiscontext, it is remarkable that the problem of non-performing loans in the Japanese banking
sector, thought by many outside observers as a potential time bomb that threatened not only
Japan but the world economy, has essentially been resolved over the past four years. The
major economic problems that Japan now faces—aging population, low birth rate,
government debt, pension, health care system, etc.—are essentially issues that require apolitical, rather than an economic, solution.
In contrast to the economic challenges faced by Japan, which I believe the Japanese
government, companies, and citizens are capable of surmounting, I am increasingly
concerned about Japan’s ability to deal effectively with the political and security challenges it
faces. Japan’s chilly relations with virtually all of its neighboring countries—China, Russia,
South Korea, and North Korea—is troubling, and an indication that there are somefundamental issues that need to be confronted and resolved before Japan can play the positiveand constructive role it has the potential to do in the future of Asia and the world. But this is a
topic for another session of this conference, so I will close my comments here. I hope that I
have provided enough food for thought to stimulate active discussion and debate.

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