How Japan Can Grow

Japan’s economy has been in the doldrums for so long that many Japanese seem to have adopted a resigned attitude ofSho ga nai (“That’s life”) toward it. But Japan, of course, can become competitive again, provided its political and corporate leaders take on four difficult but essential tasks.

The first task is to instill a commitment to growth. Since Japan’s economy grew on average by only 1% in the 10 years from 1992 to 2002, many Japanese have come to see “no growth” as the norm. This self-defeating view must be overcome, and specific reforms can help. For example, Japan’s corporate tax rate is simply too high to induce firms from other countries to invest in the country. Given the unique abilities of Japanese workers in such industries as microelectronics and robotics, the government should create an investment climate and offer tax incentives that encourage corporations to set up shop in Japan.

In addition to foreign direct investment, another crucial element of growth is consumer spending. Younger Japanese in particular are in need of help. A reform of inheritance taxes —which have a top rate of 70% — would put more spending money in the pockets of younger consumers. Similarly, housing policy should be revised so that younger people can buy their own homes more easily. Such changes would stimulate the economy and begin to reverse the no-growth attitude.

A second task of Japan’s leadership is to push for more and faster change. Many Japanese still believe in the value of the present system, which for decades generated great economic power and strong social cohesion — as can be seen, for example, in low unemployment, crime and divorce rates. But several aspects of that system are not serving the Japanese people well. Deregulation has helped make some parts of the economy more dynamic, but much more is needed in sectors that have been highly protected by politicians and bureaucrats —agriculture, finance, banking, transportation and construction. Civil servants who strongly resist change should be replaced, and the media should push firmly for the dismantling of needless bureaucracy. In the private sector, Japanese CEOs should spend less time on external activities and more time acting as change agents in their own organizations.

The third task is to rethink Japan’s relationship with the rest of the world. Consider that only 0.1