Japan’s Meltdown: Creative Destruction at Work?

A s Japan picks up the pieces from its earthquake, tsunami, and nuclear crises, the cold, hard numbers are rolling in. A recent Barron ’s article reported that industrial production dropped around fifteen percent in March from February, and the economy lost more than three million jobs that same month. Retail sales dropped almost eight percent. Barron ’s predicted further drops in production and industrial output, and pointed out that future growth should not be mistaken for prosperity. Millions could remain jobless and homeless, the article warned, government debt sky-high, and consumer goods in short supply. The article concluded that “there is no silver lining to this cloud.”

And yet, despite these grim numbers there is something, dare we say it, that sounds like hope. In both Japan and abroad, people are asking: Is this it? Will this be the twenty-first-century crisis that gets Japan back on its feet? These questions are so prevalent in the current discourse that it is worth examining the assumptions behind them. Why do people imagine that the recent horrors will somehow revive Japan, rather than knock it out once and for all? To be sure, some are just repeating the well-worn trope about crisis breeding opportunity, an idea that is hardly particular to Japan. There is also a sense of eagerness, particularly in the Western media, for a new Japanese narrative that evokes vitality rather than stagnancy.

And of course there is Japan’s own history, throughout which exogenous shocks have sparked dramatic renewal. Think back to 1853, when Commodore Matthew Perry arrived with his “black ships” and demanded that the closed-off feudal state open its doors to trade. The Japanese rose to the challenge. In the Meiji Restoration that began in 1868, young samurai took power and overhauled the nation in a few short decades. In Japan Rising , the historian Kenneth Pyle describes the Meiji leaders as being tired of Japan’s economic backwardness and sense of inferiority to the West. They were thus ready and willing to sacrifice time-honored institutions to achieve their goals. The Meiji leaders adopted European legal codes, imported thousands of advisers, and built the most centralized state in Japanese history.

An even more well-known example of rebirth is the economic miracle that rose from the wreckage of Japan’s World War II defeat. John Dower’s Embracing Defeat describes the crushing years that followed the war: “Despair took root and flourished in such a milieu; so did cynicism and opportunism—as well as marvelous expressions of resilience, creativity, and idealism of a sort possible only among people who have seen an old world destroyed and are being forced to imagine a new one.”

There is also a general impression of the Japanese as remarkably hard-working and resilient, and even this cliché contains a few grains of truth. Look at the Japanese language, for example. This is a country where people don’t say “good luck,” but rather ganbatte , which roughly translates as “try your best.” Where we in America say “I’m sorry,” the Japanese say moshiwake arimasen , which is closer to “there’s no excuse.” Recent stories about the dignity, civility, and stoicism of ordinary Japanese only reinforce this image of a people that respond bravely to crisis.

I have some personal experience with the indefatigable Japanese spirit, thanks to two years of training in a martial-arts dojo in Kyoto. We ran barefoot through the city streets, were thrown down on wooden floors, and wore short-sleeved cotton uniforms throughout the bone-cold winter. As our skills increased, so did the dojo master’s expectations: with a higher belt came public humiliations and harsher scoldings. There were no excuses. And so we all demonstrated gaman , endurance, through the physical pain and the cold and the tongue-lashings. As a result, our progress, both individually and as a dojo, was extraordinary.

T he Japanese have been known to respond boldly to hardship, which may be why in recent years various people in Japan have suggested to me that the country needed a greater “sense of crisis.” The bursting of the Japanese bubble in the early 1990s and the lost decade that followed were dramatic, but they didn’t leave the nation in tatters. Early on, decisionmakers tried to stem panic: banks weren’t allowed to fail; bad loans were swept under the rug. Some economists later said that if Japan had allowed itself a harder fall, a short period of intense suffering might have prevented years of lost growth.

We may never know for sure. What we do know is that even after the bubble burst, a visitor to Tokyo might be struck by all the well-dressed girls in Tokyo, gossiping with their friends over coffee and cake. Cities were clean and efficient, people polite. Those brown leather handbags were ubiquitous. A kind of “Louis Vuitton recession.”

Occasionally the Western media would decide that Japan was back, and would wax poetic about the “lion-haired” Prime Minister Junichiro Koizumi, with his post office reform and attempts to crush the “dinosaurs” in his own Liberal Democratic Party. And yet, if you visited Japan during those periods you did not get the sense of a country on the move. I would constantly hear sentiments along the lines of kibo ga nai  —there’s no hope.

From a distance, Japan still looked slick and shiny, with a luxury handbag dangling from one arm. But there were shadows everywhere, and they weren’t always visible to the naked eye. Most looming was Japan’s rapidly aging society, and the related problems of an impending labor shortage and overburdened pension system. Some of the more obvious responses to this problem, such as opening Japan’s doors to foreign labor, seemed culturally abhorrent. There was an almost visceral feeling of impending doom, yet people appeared to be frozen in place, waiting for the curtain to fall. Young people didn’t want to get married or have kids, they were deciding to live at home, or even, quite literally, to never leave the house.

Japan’s younger generation seemed utterly disinterested in politics, as if there was simply no point. And after Koizumi’s star-studded run, a series of Japanese prime ministers rose and fell in rapid succession while the people waited for a true leader to emerge. There was a sense of bleakness—but not necessarily crisis. It was what my dear friend Kazuo Noda would call hyogen dekinai fuan , or “inexpressible uneasiness.” Noda-san, who had lived through World War II and vividly remembered the agony that followed, referred to the lost decade of the 1990s as “the second defeat.” The second defeat was worse than the first, he once told me, because “there was no enemy, we lost to ourselves. When you’ve lost to yourself, it’s very hard to rebuild.”

W hile some Japanese may have yearned for a sense of crisis to shake people out of their stupor, nobody would have wished for a human tragedy or the scale of the nuclear disaster. Yet here it is. So now people are starting to ask if—and how—this crisis might somehow, over the long term, revitalize Japan. While it’s hard to determine the probability of such an outcome, we can look at the possibilities for future silver linings.

First of all, we may start to see more vigorous public debates about energy policy. A Japanese journalist, who asked not to be named in this article, told me that previously people blindly adhered to the government’s nuclear policies and their belief in the safety of Japan’s nuclear plants. Now there is more soul-searching over the best ways to pursue safe energy, as well as over proper oversight of the power industry. Regardless of what the answer turns out to be, he adds, “It is good for an economy to have a more thinking population, which could lead to more innovations, more unique ideas, more diverse opinions.”

There may be other opportunities as well. Paul Sheard, chief economist at Nomura, suggests this crisis could offer an opportunity for Japan to finally emerge from the deflationary cycle that has plagued the country since the mid-1990s. Because of capital destruction and the need for reconstruction spending, supply-demand conditions are likely to tighten. Ending deflation, Sheard adds, would also require more aggressive economic stimulus in the form of expansionary fiscal and monetary policies.

Sheard also explained that the need for large-scale construction could force Japan to open its doors to more foreign labor. Yoichi Funabashi, the editor in chief of the Asahi Shimbun , told me that there could be other immigration opportunities as well. “We are now witnessing tremendous downward pressure in terms of production and consumption,” Funabashi told me. “Once it starts to recover and get into the creative destruction stage, I think the demand for labor will increase. The only way for Japan to revitalize is for it to be more integrated into the global economy. For that to happen, Japan will have to recruit more globally competitive people, even in manufacturing, automobile, and electronics industries.”

New uncertainties—about the availability of electricity, for example—could lead manufacturing companies to shift production overseas. While some would argue that Japan should respond by focusing on new industries, others have a different take. “What they need is not so much new industries, but to make old industries more productive,” says Richard Katz, editor of the Oriental Economist Report . Temple University’s Robert Dujarric says that there is certainly room for improvement in services, for instance. “The hospitality industry, retailing, transportation, education, etc., could all become more efficient if the regulatory environment changed,” Dujarric says. “For example, JAL and ANA enjoy a de facto duopoly in the airline market.”

Then there is the political question. Now more than ever, Japan needs a strong new leadership, it needs vision, and the people need to be engaged and involved. In a positive scenario, this crisis would put an end to the infighting that has plagued both the Democratic Party of Japan and the Liberal Democratic Party. Then, leaders could focus on the issues that really matter—reconstruction, nuclear safety, social security reform, to name just a few.

Something, clearly, has to give. After years of subtle disappointment and “inexpressible uneasiness,” Japan must now decide the kind of country that it wants to be. For too long Japan has been suspended between two paradigms. The era of government-led growth and lifetime employment has drawn to a close, but a new model has yet to set in. Today’s young inherited a country whose economic glory days were over. There was reason to fear that many would never be as affluent as their parents, and that the nation had essentially peaked.

Many of these young people are now hoarding their money, scared about their future security in an aging society with a weak social security system. “Their prospects for their future seem to be dark right now,” Hiromichi Shirakawa, chief economist at Credit Suisse Japan, says of the country’s younger generation. “My undergraduate daughter is more conservative than ourselves. She doesn’t buy anything. She knows that the demographic situation will weigh on them, so she’s saving.” Shirakawa adds that he fears this crisis may lead well-educated Japanese to move overseas.

That would be unfortunate. Japan has enormous potential, talent, and skill. The missing ingredient over the last few years, as trite as it sounds, has been hope. Now there seem to be glimmers of this long-missing sentiment, even if sometimes laced with a deep sense of dismay. You can find strains of national pride, and, for better or for worse, Japan is back on the map.

Opportunities will rise from this wreckage, even if they come at a price that no one would ever want to pay. Japan’s youth now have a chance to build a future that looks nothing like the past.


Emily  Parker is a member of the State Department's policy planning staff, where she covers innovation, technology, and 21st-century statecraft. She has worked as an op-ed editor for the New York Times and Wall Street Journal and written extensively about China and Japan. These views are her own and do not represent those of the US State Department.

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