9

Life After Growth

It was actually a Japanese health minister who raised the spectre of the Japanese people one day disappearing altogether. ‘If we go on this way, the Japanese race will become extinct,’ Chikara Sakaguchi said melodramatically in 2002.1 Sakaguchi was basing his alarmist prediction on extrapolation. If you continue any downward-moving graph far enough into the future it will eventually reach zero. Japan’s fertility rate fell below 2.1, the level needed to maintain a population, in the 1980s.2 Between 2005 and 2010, it averaged just 1.27.3 Although it has edged back up again, not nearly enough babies are being born to replenish the population. Japan’s case is particularly stark since it is more resistant to immigration than most countries in its less-than-fecund position. Britain’s population would be at risk of falling too were it not for a steady influx of outsiders.4

Part of the ‘problem’ is that people are living too long. Japan’s life expectancy has risen dramatically. It is now the highest in the world, with men living to an average age of eighty and women to a remarkable eighty-six. In 1947, the average was fifty and fifty-four respectively. As a result, Japan’s population is ageing rapidly. In 1950, only 5 per cent of the population was over sixty-five. Today that figure is 25 per cent. By 2035, one in three could be that age. As people retire and fewer youngsters enter the job market, the workforce is shrinking, by roughly 0.6 per cent a year. In 1960, there were eleven people of working age to support every person over sixty-five. By 2010, that number had dwindled to 2.8. On current trends, by 2055, there will be only 1.3 people of working age for every person theoretically retired.5

The seemingly inexorable maths leads many to depict Japan as a ticking time bomb. It implies there will be fewer workers paying taxes to fund the pension payments and medical bills of an increasing number of retirees. That is true so far as it goes, though as people grow older, they also tend to work longer, thus lowering the notional ‘dependency ratio’. Still, in modern times, we have become accustomed to ever-rising populations. George Magnus, an economist who has written extensively about demographics, describes Japan, and other similarly placed countries, as being on what he calls a ‘demographics death row’. By that he means that, barring a dramatic reversal, Japan’s population will continue to shrink. On current trends, by 2050, there will be 25 million fewer Japanese, cutting the population to 102 million.6 Under the most pessimistic assumptions, the population will drop to 45 million by 2100, the same as in 1910 Meiji Japan.7 The proportion of Japanese in a still rising global population will also fall. In 2005, Japanese made up 2 per cent of the world’s inhabitants. By 2050, they are likely to account for just 1.1 per cent. If population equals power, then Japan’s national vigour is waning.

Before we proceed too far down the path of ‘demographics equals destiny’, it’s worth peering a little below the surface gloom. For a start, and to state the obvious, longevity should be counted as a success not a failure. By 2050, according to some projections, there could be as many as 1 million Japanese over 100 years of age.8 Doubtless this will present numerous challenges. Old people tend to fall sick and need caring for. Some are very poor. But the underlying reason for the existence of so many elderly people is that Japan is rich and medically advanced. Whether for reasons of diet, the quality and availability of healthcare, a sense of social wellbeing or some other factor, Japan does a better job of keeping its citizens alive and healthy than any other large nation. Life expectancy in the United States (fortieth in the list of nations to Japan’s first) is a full five years below Japan, at seventy-five for men and eighty-one for women.9

Similarly, low birth rates, though not always desirable, are often a direct consequence of higher standards of development as women take greater control of their fertility. In Japan’s case, one can certainly argue that women would be more inclined to have children if they felt more economically secure and if society did a better job of helping them juggle work and family. ‘If you ask a married couple what is the ideal number of children, they would tend to say two,’ says Takatoshi Ito of Tokyo University. ‘They are somehow being discouraged from having families of an ideal size.’10 Women are also postponing marriage. The average age for a woman to get married has risen steadily from twenty-three six decades ago to twenty-eight.11 Another reason for the low birth rate may be the widespread availability of higher education. One British study found that 40 per cent of female graduates remained childless at the age of thirty-five.12 Unless our remedy for Japan is to stop educating its women – and no doubt there are a few Japanese traditionalists who would advocate just that – we shouldn’t spring too readily to the conclusion that a low birth rate is a sign of society gone wrong.

To present ageing in wholly negative terms can border on the absurd. One well-known Japanese sociologist told me a possible ‘solution’ to demographic problems might be ‘to lower life expectancy’. He didn’t specify how this happy outcome might be achieved.13 That he mentioned it at all suggests we might be looking at the problem backwards.14 Nor is Japan the absolute outlier it is sometimes made out to be. In fact, the world’s lowest fertility rates are to be found not in Japan but in more than ten other countries, including South Korea, Poland, Belarus, Hong Kong and Singapore. Most of East Asia has sub-replacement fertility rates, as do many countries in South and Central America. In the Muslim world, Algeria, Tunisia, Lebanon and Turkey all have birth rates insufficient to maintain their populations over the long run. The fastest ageing societies turn out to be not in Japan or Italy, another country often placed in the category of ‘demographic doom’, but rather South Korea, Singapore and, because of its one-child policy, China.15

Japan then is not alone. Though some countries will have ‘better’ demographics than Japan for many decades and others will import people from abroad, the long-run global tendency is in the same direction. By 2050, there will be roughly 2 billion people aged over 60, three times the 673 million in 2010.16 ‘Some countries will age more slowly than others, but, one by one, we are all moving into the third stage of ageing,’ says Magnus.17

It would be foolish to suggest that rapid ageing doesn’t present big challenges. Most pension and healthcare systems have not been designed with such large elderly populations in mind. ‘A declining population is a negative for economic growth and a negative for any institution which is built on the assumption of increasing population or increasing GDP,’ says Ito. ‘You can live with a declining population [only] if all the institutions are built to cope with it.’18 In the end, Japanese taxpayers will have to decide what kind of safety net they are willing to provide. That is bound to cause pain and will mean some people are not as well taken care of as they expect.19 We should, however, put such problems in perspective. In 1920, the normal retirement age in advanced societies was seventy to seventy-four, hardly a burden on pension systems given that the average life expectancy was then fifty-five to sixty. Even in 1960, the average retirement age was sixty-five.20 The pension problem, then, is relatively recent, born of over-optimistic assumptions when post-war welfare systems were being designed. Fixing it will require a combination of raising the retirement age and getting individuals to save more for their old age. It will mean adapting the healthcare system. It should not be beyond the wit of man.

Japan has taken tentative, though insufficient, steps. It has pushed through reform to link rising national life expectancy with an automatic reduction in pension benefits. It also mandated a steady increase in contributions to state pensions from 13.6 per cent of wages to 18.4 per cent. On the negative side – from a sustainability point of view, that is – it has not insisted that supposedly indexed pensions fall in line with deflation. The retirement age is, however, gradually being raised from sixty to sixty-five, with further rises expected.21

Those measures are enough to keep the existing pension system going, at least for now. Perhaps a bigger concern is that a large slice of the workforce has no pension coverage at all. Many part-time workers, a rising share of the labour force, are opting out of paying pension contributions entirely. That is partly, surveys show, because they do not believe the system will last long enough to pay them back. Savings rates are falling. Those in their thirties save only about 5–7 per cent of their income compared with the 25–28 per cent put away by today’s retirees.22 The huge nest egg on which Japan is now pleasantly slumbering is not likely to be around indefinitely.23

In general, there are three things societies can do to mitigate the effects of ageing, says Atsushi Seike, a labour expert at Keio University. They can raise fertility, productivity or labour participation. Japan has done poorly at increasing fertility compared with countries like France, which has successfully used incentives to reverse the long-term decline. (That, of course, is expensive. France’s state sector is much bigger than Japan’s.) Japan has been slow to establish affordable childcare for children up to five, essential if working women are to consider having babies. That is partly due to bureaucrats’ anachronistic views about women and work and to pointless turf wars between ministries with overlapping responsibilities.24 More could be done on productivity too, though in spite of Japan’s image as an economic laggard, since the mid-1990s improvements in productivity per hour have not been significantly far behind those in the US.25 Productivity in the service sector is still poor by some measures, suggesting there is some low-hanging fruit if Japan needs to harvest it.

As for participation rates, one way is to encourage people to work longer. ‘The motivation and willingness of older Japanese to continue working is pretty high,’ says Seike. Three-quarters of Japanese men aged sixty to sixty-five are still working, the highest level of any advanced country. Still, most large companies have traditionally forced their employees to retire at sixty. The seniority pay system, in which wages rise with length of service, means older workers are expensive. As a result, companies have opposed government efforts to raise the mandatory retirement age to sixty-five. Many have got around the problem by rehiring workers over sixty on contracts at lower wages.

More women are working as they delay marriage and childbirth. Still, a lower proportion of women work in Japan than in many advanced countries. The rate, at 48 per cent according to the World Bank, is higher than Italy, at 38 per cent, but much lower than Britain, at 55 per cent, the US, at 58 per cent, and Norway, at 63 per cent.26 Even the increase in Japan is not all good news. Many women take low-paid, part-time work, either to supplement falling household wages or to provide for children as head of a growing number of one-parent families. Higher female participation is thus as much a sign of rising hardship as of women’s emancipation.27 Still, by one calculation, if women’s participation in the workforce could be raised to the same level as men’s, Japan could increase its workforce by 8.2 million and expand the size of the economy by 15 per cent.28

Another potential source of labour is immigration. The Keidanren, the main business lobby, has periodically come up with eye-catching estimates suggesting Japan needs to import millions of workers if it is to make up a labour shortfall of 6 million people by 2025. Given that Japan is home to only around 2 million ‘non-Japanese’, many of them long-term Korean residents, it is impossible to imagine it opening the floodgates to that extent. Some years ago, I asked a senior Japanese official, urbane in the extreme, about the latest Keidanren report urging mass immigration. He visibly shuddered. ‘For the rewards you get in terms of economic rejuvenation the costs are simply too high,’ he said without explanation, though he was clearly alluding to the perceived social problems in multicultural western societies. ‘We’ve seen what has happened in the US and Europe.’29 After the Lehman shock, when the economy contracted, the Japanese government actually went the other way. It began a scheme to pay Japanese workers of Brazilian descent, many of whom were encouraged to come to Japan in the 1990s, to go back home. The stipulation of accepting a one-way ticket plus cash was that they never returned.30

There is a compelling case for opening up Japan to more immigration in order to spark fresh ideas, innovation and more fluid links with the outside world. Without big doses of youthful infusion, Japan’s economic vigour could slowly seep away. In the absence of sufficient young people of its own, an influx of young immigrants might bring the economic vitality it lacks. ‘The importation of labour would not be for the labour per se, but to bring in people with different mindsets, to shake things up a bit,’ says Hugh Patrick, who has been studying the Japanese economy at Columbia University for half a century.31

The case for immigration, on purely numerical grounds, isn’t always as compelling as it is sometimes made out to be. As we have seen, a little over 4 per cent of Japanese are unemployed, a figure that, as in other countries, underestimates the true number of those out of work. Youth unemployment is around double that.32 That doesn’t immediately suggest a serious labour shortage, although there are certain dirty, dangerous and low-paid jobs in construction and other industries many Japanese are not prepared to do. If manufacturing companies are looking for cheaper foreign labour they can get it in one of two ways. They can bring people to Japan or they can set up factories abroad. Japanese manufacturers have done both. At home, many have operated in grey areas of the law to employ foreign workers who sometimes lack the appropriate visas. More still have established factories abroad, in Southeast Asia, China, the US and Europe. By 2014, more than three-quarters of Japanese cars will be built outside Japan.33

In the services sector, Japanese companies employ less foreign labour, but still some. A few companies operate call centres based in China and some back office work is done in places such as India and the Philippines. In Japan itself, many of the ubiquitous convenience stores, such as Lawson and Family Mart, are staffed by Chinese workers with near-impeccable Japanese and an appreciation of the ultra-demanding service culture. Japan’s service sector remains more ‘inefficient’ than that of other advanced countries, meaning there are more people to help the customer – wrapping items, pressing lift buttons and bowing graciously. This is the sort of thing that gets visiting time-and-motion consultants in a rage. If they are right that this is a hopeless waste of human capital – rather than part of one of the world’s most pleasant service experiences – then Japan’s much vaunted coming labour scarcity is surely exaggerated. Perhaps Japan won’t need 6 million foreign workers after all. It can simply redeploy to other industries the hordes of lift girls and night-stick-wielding building site workers (who warn passing cars of construction ahead). ‘Right now, I don’t think we have a very serious labour shortage,’ says Seike, who believes the real problem is a mismatch between jobs and skills and the precipitous growth of poorly paid work.

An obvious exception is the health sector, particularly when it comes to care for the elderly, where low wages make it hard to attract Japanese workers and there may be a shortage of up to 700,000 staff.34 One option, if the money could be found, would be to raise salaries. For society as a whole that would be a way of transferring the excess savings of the elderly to younger generations who are being squeezed – through low wages, higher pension payments and so on – as part of Japan’s adjustment to lower growth. Another way to solve the problem would be to allow in more nurses and care workers from countries such as the Philippines and Indonesia. Pilot schemes have been introduced, but numbers are pathetically small, restricted to a few hundred each year. Even then, care workers who want to stay have been subject to overly stringent language requirements, justified on the grounds of patient safety. I once watched a television documentary about an Indonesian healthcare worker who appeared to be devoted to her job in a nursing home where she was adored by her elderly patients with whom she communicated perfectly well. However, she was unable to pass the strict exam in written Japanese, since there weren’t enough hours in the day to study the formidable lists of required characters, vocabulary and grammatical formulations. She was sent home.

Hiroshi Mikitani is a great believer in encouraging Japan to look outward. A successful financier at the Industrial Bank of Japan, he was exposed to new ways of thinking when the bank sent him to study at Harvard Business School. There he learned a new word, so unfamiliar he was forced to spell it out in the phonetic Japanese alphabet used for imported concepts: ‘entrepreneurship’. He founded an internet company that evolved into Rakuten, today Japan’s Amazon and eBay rolled into one. In 2012, Forbes put his wealth at $6.5 billion. Rakuten has expanded aggressively in countries such as Brazil, Indonesia, France and Russia. But Mikitani also wants to bring foreign influence to Japan. His boldest initiative, one that has attracted ridicule as well as praise at home, is to insist that his staff become proficient in English. His campaign bears the rather unfortunate name of ‘Englishization’. Even the menu at the staff canteen is printed in English. Mikitani, who wears open-neck shirts and polo sweaters, told me that learning English and being more open to the outside world was vital for Japan’s economic rejuvenation. ‘If all the employees of Panasonic or Sony could communicate in English, they could be far better than Samsung,’ he told me of the South Korean company that has left its Japanese rivals in the dust. ‘A language will open your eyes to the “global”, and you will break free from this conventional wisdom of a pure Japan. English is a tool to globalize you, to make you change.’35

Being open may be just as important as being fertile. Equating ageing with a dying economy implies that only countries with growing populations can be healthy. The late James Abegglen pointed out that, when Japan’s population nearly tripled in the twentieth century, critics complained about its overcrowded islands where people had to live in ‘rabbit hutches’. Now the prospect of a declining populace filled everyone with alarm. One need only consider Pakistan, a country whose population has nearly quadrupled to 190 million since 1960, to realize that we cannot draw any neat correlations between population growth and prosperity.

Yet unless we expect the population of the world to keep growing indefinitely, all economies will one day face the problems now confronting Japan. The idea that richer countries should simply import labour from poorer ones implies an endless supply of people from somewhere else. That proposition must also eventually run out of road. If we are not to argue for an ever-larger global population – or, perhaps, the importation of guest-labour from some far-off galaxy – societies will one day have to find a way of prospering without the impetus of ever-greater numbers. Japan is a stark example since its population is not merely stagnant, but on the verge of rapid decline. Much of the slowdown in headline growth over the past twenty years is the result of less favourable demographics. As the population shrinks, there will undoubtedly be severe strains as the country seeks to balance competing generational needs. Japan will need to come up with a serious policy and societal response. However, I’m willing to place a little wager with Sakaguchi, the doomsday former health minister. The Japanese will be around for a little while longer yet.

•   •   •

I was to imagine a grain of rice. Ippei Takeda, the avuncular chief executive of Nichicon, sat in his office in Kyoto, where the high-tech components maker has its sleek and rather daring offices. The spacious lobby looked more like an avant-garde art gallery than a corporate headquarters. I’d been escorted to the lift and along the corridor by one of his assistants to a large office on an upper floor. An immaculately dressed female attendant had just brought us both tea. She bowed as she entered the room, bowed as she silently set the little bowls of green liquid before us and bowed again at the doorway as she left. Takeda, engrossed in his story, appeared not to notice. He was blinking behind his silver-rimmed glasses and chuckling. The rice, he was saying, should be Japanese short-grained, about half the size of longer-grained foreign varieties. Now, he said, to make one of the aluminium capacitors that his company produced, I must imagine drilling 300,000 holes into that single grain, flipping it over and doing the same on the other side. It was vital that the holes didn’t meet in the middle. An oxide layer, about eight to ten angstroms thick, must then be applied. He checked a little book with columns of figures before writing down the numerator, 1, followed by a denominator of 10,000,000. The thickness of the layer should be measured in ten-millionths of a millimetre. I must have looked nonplussed. ‘It’s very thin,’ he clarified.

The point of Takeda’s story was that there were still some things Japan did well. Making very small things was one of them. Nichicon’s energy-storing capacitors went into almost every conceivable electronic device from air conditioners to mobile phones. Though his company had many foreign factories, including in China, where it made some capacitors at three-quarters of the Japanese price, the really complicated stuff was still produced at home. The quality and consistency were superior in Japan, he said, better even than in South Korea. Some capacitors cost only a few cents each but, if they went wrong, they could disable devices worth hundreds, even thousands of dollars. Manufacturers paid a premium for quality. ‘If you’re asking me can Japan survive as a manufacturing nation, my answer is, yes, without a doubt.’

That view is not shared by everyone. Japan is even more paranoid than other advanced countries about what it calls the ‘hollowing out’ of its industrial base. The proportion of Japanese workers employed in manufacturing has been steadily declining for years, from 27 per cent in 1970 to 17 per cent today. That makes manufacturing more important than in Britain or the US, where about 10 per cent of workers are engaged in industry, but slightly less important than in Germany and Italy with about 20 per cent.36 Japan has been pressured by the emergence of lower-cost manufacturers in places such as China and by a strong rising yen. Since the tsunami, the drift of manufacturing abroad has accelerated, as companies worry about the safety of their supply chain and the reliability and cost of non-nuclear energy after the Fukushima disaster. ‘If you look at it logically, it doesn’t make sense to manufacture in Japan,’ says Akio Toyoda, president of Toyota Motor Corporation, still a symbol of Japanese manufacturing excellence.37

For a nation that prides itself on monozukuri, an almost mystical belief in the art of making things, this is a shocking conclusion for the boss of Toyota to arrive at. In feudal times, artisans came above merchants in the pecking order. Even today, the Japanese hold a residual suspicion of finance – ‘money made from money’ in the words of one economy minister, who told me that Edo Japan outlawed usurious interest rates.38 The Japanese still consider making things to be more honourable. Some Japanese business leaders, perhaps remembering the disastrous forays abroad of banks, worry that the service industry is not cut out to compete internationally. Japanese standards of service are rightly legendary but not easily transferred abroad. When they have made bold gambits overseas, for example in banking in the 1980s, Japanese companies have tended to overpay for acquisitions and to struggle to convey a global vision to an international workforce. ‘Japan’s whole identity is tied to manufacturing,’ says Yoshikazu Tanaka, founder of Gree, an online gaming company and one of the most prominent recent success stories outside traditional industry.39

Few companies epitomize the decline of manufacturing like Sony, a byword for Japanese quality and innovation after the war. The company that invented the Walkman, the world’s first portable music player, and the Trinitron TV, with its revolutionary bright picture, has become shorthand for the dismal slide of manufacturing prowess. By 2012, Sony had not turned a profit in five years and, in that year, announced the sidelining of Sir Howard Stringer, the razor-sharp Welshman it had hoped could turn its fortunes around. For years, Sony has been outflanked by rivals such as Apple and Samsung. Though it has shed jobs by the tens of thousands, shipped out production to China and come up with device after unmemorable device, it has only fallen further behind. By mid-2012, its market value had dwindled to one-thirtieth of Apple’s. Samsung, a company from the former Japanese colony of South Korea, now regularly makes more profits than the top fifteen Japanese electronics companies combined.40

Sony’s biggest failing was its inability to navigate the industry’s transformation from analogue to digital, or from ‘knobs’ to ‘menus’ in Sir Howard’s clever phrase.41 That was more a question of lack of imagination than of technical knowhow. Akio Morita, Sony’s legendary co-founder, had thought hard about digitalization early on and Sony had a library of music that had come with its acquisition of CBS records. But Sony’s engineers, the mainstay of its early success, resisted what they saw as flighty ideas about networks and convergence. As late as 2004, the company’s devices did not support the standard MP3 format. Sony’s PlayStation video console was more successful. But even that lost its lead, failing to stave off the challenge from cheaper rivals and online games.

Yasuchika Hasegawa, boss of a pharmaceutical company and chairman of the Keizai Doyukai business lobby, says Sony illuminates a broader Japanese failing. ‘We continue to excel at developing and manufacturing the parts that go into machines and devices, but we miss the larger opportunities that developing new product concepts would bring,’42 he says. Japanese companies knew how to make more than two-thirds of the parts that went into both the iPod and the iPhone. But they were so focused on ‘partial optimization’ that they missed out on what really mattered: creating and marketing a digital ecosystem. Where, in the commonly heard cry, is Japan’s Google, its Twitter or its Apple?43 Where is the Japanese Steve Jobs? For Hasegawa it comes as only mild consolation that many devices still contain Japanese components of the sort made by Nichicon. In his view, Japan has downgraded from ‘Made in Japan’ to ‘Japan Inside’.

Manufacturers do still excel at making niche components as well as specialist equipment such as robots – in which Japan continues to be a world leader – and steppers, the machines used to produce silicon wafers for the electronics industry. Japanese companies manufacture all kinds of specialist chemicals, machine tools, automated systems, lenses, micro-controllers, tiny motors and dozens of other components and inputs indispensable for modern existence. Japanese car-makers, including Toyota, Nissan and Honda, continue to innovate and to excel. Japan, unlike Britain, whose manufacturing industry has shrivelled, is still good at making things you can drop on your foot. The decline of its electronics industry has been highly visible, since the brands that have faded – Sony, Sharp, Hitachi, Panasonic and many others – were once standard features in many middle-class homes around the world. That dramatic slide, though, has obscured the more enduring performance of companies that are less well known to consumers, whether they make industrial machinery, materials or tiny components. Take the case of South Korea’s Samsung, whose success has caused so much damage to its Japanese rivals. Yet Samsung remains a huge importer of Japanese manufactured inputs, the quality of which it still cannot match itself or buy from other South Korean companies. For all its industrial success, South Korea still runs a big trade deficit with Japan, strong evidence of Japan’s enduring competitiveness in certain fields. Japan, after all, continues to head the global league table of granted patents, beating even the US, though it trails in Nobel prizes and academic citations, suggesting perhaps that more of its innovations are incremental improvements rather than revolutionary breakthroughs.44

If, as Hasegawa suggests, the Japanese are somehow better at perfecting existing manufacturing techniques than inventing entirely new concepts, Japan’s best days could indeed be behind it. That would fit the theory of those who argue that the country’s rigid social structure and strong work ethic were better suited to the catch-up phase of industrial development than to the post-industrial era. I once visited a Canon factory on the outskirts of Tokyo where workers in identical jumpsuits perfected techniques to keep their movements to a minimum, the more efficiently to assemble complex devices such as colour photocopiers. There was something of the discipline of karate about the way they moved. So skilled had they become at eradicating both temporal and spatial ‘waste’ – muda, they called it – that the workers were now huddled together in smaller and smaller working zones. Whole areas of the factory floor had been ‘liberated’ by their perfection of techniques to build photocopiers in ever tighter spaces. One rather wondered to what avail. These were the sort of obsessions suited to the production age, when Japan was chasing the world’s leading manufacturers by making incremental improvements to existing techniques. These skills may be less useful in a post-industrial era where the goal is to invent whole new ways of doing things. ‘You need a different mentality to fend off the guy coming from behind. You need different talents, a different organization of society,’ says the economist Richard Koo. Japan, he argues, lacks people who can think independently and ‘not just regurgitate what the professor says’.45

Part of Japan’s problem, say some, is what Yoichi Funabashi had referred to as the ‘Galapagos syndrome’. Named after Charles Darwin’s observations about how animals adapt to specific environments, in Japan it had come to mean the development of technology too narrowly catered to the obsessively finicky home market. Mobile phones are Exhibit A. Japan had phones capable of surfing the internet nearly a decade before the iPhone. Sharp was the first company to attach a camera to a mobile phone. But producers failed to market their innovations abroad or radically rethink their designs. As a result, Japan was eventually invaded by smartphones made by Apple and Samsung. Similarly, Sony invented an e-reader several years before Amazon’s Kindle, but failed to commercialize its invention, which never caught on in the US or Europe.46 ‘Nuts and bolts are Japan’s past, not its future,’ says Masayoshi Son, the founder of Softbank, an internet company, and the man most often mentioned as an entrepreneur suited to the post-industrial age.47 Son argues that Japan should give up on labour-intensive manufacturing altogether and focus instead on capital-intensive, high-tech industries such as information technology, alternative energy and pharmaceuticals. It should emulate Apple by concentrating on designing software as well as hardware, and by developing new business and marketing models, he says. Manufacturing can be done elsewhere.

Son’s analysis suggests that a certain degree of ‘hollowing out’ may be inevitable, even a sign that industry is adapting as it should to a new era. Increasingly, companies locate routine manufacturing abroad but keep their ‘black box’ technology in Japan. They are also buying companies in what they hope are high-growth markets such as India, Brazil and Indonesia. That may not be good for employment, although, since Japan’s labour force is shrinking anyway, this may not matter as much as it once did. It may not be good for tax collection either. Yet the fact that Japanese companies are buying more and more companies abroad – in record numbers in recent years – may be a sign that they are putting their capital to use where it has a better chance of counting. In 2012, Japanese companies spent $113 billion on foreign acquisitions, buying healthcare, telecoms and food companies among others. That was second only to the US, whose companies splashed out $174 billion in the same year. Japanese companies spent nearly twice the amount laid out by Chinese ones, perhaps surprising given the headlines about moribund corporate Japan and aggressive Chinese companies intent on snapping up assets around the world. Japan also outspent British companies by two to one.48 To those who believe Japan’s great strength is monozukuri, these trends are worrying. But in a world where more countries are getting better at making things and the domestic economy is flat, going abroad in search of profits and innovation may be just about the smartest thing Japanese companies can do.

•   •   •

A few years ago, an opinion piece in the New York Times caught my attention. Written by Norihiro Kato, professor of Japanese literature at Waseda University, it was titled ‘Japan and the Ancient Art of Shrugging’.49 It was a celebration of slow growth. Kato had written his essay just as China had overtaken Japan as the world’s second-largest economy.50 For the first time in more than four decades, Japan was back at Number Three. Rather than fretting about it, as the country’s old economic warriors did, Kato said the national levelling off was something to celebrate. ‘Japan doesn’t need to be No. 2 in the world, or No. 5 or 15. It’s time to look to more important things,’ he wrote. Kato called it the end of the ‘right-shoulder-up’ era, a Japanese term for a graph that keeps ascending. Well before the burst of the bubble in 1990, there had been signs of a tapering off, he said. The population had risen by more than 1 per cent each year from 1910 to 1977, at which point it began to slow – until 2005 when it actually shrank.51 Right shoulder down. Similarly, a graph of rice production between 1878 and 1980 showed a slowdown from the 1960s after nearly a century of steady expansion. ‘Decades before China overtook Japan, the country had started downsizing, preparing for a smooth landing.’

Of course, the old guard would never let go of their dreams of endless expansion, Kato said. But Japan’s youth seemed quite content with the new state of affairs. They had become, he said, ‘non-consumers’. Japanese in their late teens and early twenties, ‘did not have cars. They didn’t drink alcohol. They didn’t spend Christmas Eve with their boyfriends or girlfriends at fancy hotels downtown the way earlier generations did.’ They worked hard at part-time jobs, and spent hours at McDonald’s sipping cheap coffee. They ate fast-food lunches at Yoshinoya, a restaurant chain of good quality but very low prices, serving grilled beef over rice for as little as $3 a bowl. The Japanese, he suggested, were pioneering a new sort of high-quality, low-energy, low-growth existence.

I thought Kato’s was a brave article. It was certainly open to ridicule. It challenged one of the unspoken tenets of the modern age – that an economy, like a shark, has to keep moving forward if it is to stay alive. But it broached a subject that was too often ignored. Was growth the be all and end all? Did decline have to mean death? After all, Britain was overtaken by the US as the world’s biggest manufacturer in 1900, just as Japan had been pushed behind China in 2010. Yet most British citizens live far more comfortably today than their ancestors at the turn of the last century. Japan too was in relative decline, but according to Kato, it was learning how to live better.

Kato’s was also an expression of something I had heard many times in Japan. Typical was a friend of mine, the photographer Toshiki Senoue, who travelled with me to the battered northeast coast in the days after the tsunami. ‘They talk about Japan’s decline,’ he said once when we were driving up to the same coast another time. ‘But there’s no potholes on the street, there’s good quality cars, no violence, clean air. It’s OK.’ Japanese food was the best and healthiest in the world, he said. Life was pretty comfortable. He paused. Decline wasn’t too bad. ‘And if you decline, maybe one day you can go up again.’ Machiko Satonaka, a well-known illustrator of manga comics, had said something similar. ‘People talk of Japan as losing its economic power. But that’s OK. We don’t care. We don’t want to be a superpower,’ she said. ‘Our values are evolving. Now our dreams should be how to create a safe society and a clean environment.’ Such views can sound almost like heresy, but they are a powerful undercurrent of Japanese thinking. Growth was not all it was cracked up to be, these people were saying. There was more to life than the endless pursuit of GDP.

I arranged to have coffee with Kato. We met, suitably enough, in the lobby of a hotel built during the bubble years. It was a little too garish for its own good, and looked dated in a Japan where the understated is once more a sign of good taste. Kato’s hair, slightly tinged with grey, was sticking up as if responding to an unseen magnet hovering above his head. He was wearing blue jeans and a purple shirt. His face was animated, an ironic smile never far from his lips. His brain seemed to work faster than his mouth, and he occasionally struggled to order his thoughts properly.

Kato likened modern economies to the Hollywood action movie Speed, starring Sandra Bullock, in which a bomb is put on a bus full of passengers. The hijacker warns that, if the speed of the bus drops below fifty miles an hour, the bomb will go off. It was an interesting twist, Kato said. In a normal action movie, everything went faster and faster until the climax. In Speed it was the opposite. If the bus slowed down there would be an almighty explosion. ‘It’s the same with economies. We can’t slow down without provoking a disaster,’ he said. Speed was influenced by a script written by Akira Kurosawa (1910–98), one of Japan’s most celebrated directors. His film, shelved for lack of finance, was to have been called Shinkansen Explosion. In the plot, a bullet train was set to explode if its speed dropped below 80 kilometres or rose above 120. ‘But why do we have to stay between 80 kilometres and 120 kilometres an hour?’ Kato asked. ‘We understand what it is to maintain a certain sustainable growth speed, not above, nor below. Our growth was based on production. The post-growth period is about how to make better use of what we have. Rather than being larger our economy needs to be fitter.’

Kato reached for another metaphor. ‘In the plant world, you can’t constantly pursue growth. A plant can’t bear fruit until it has finished growing and reaches maturity.’ Growth in Japan’s heyday was skewed. ‘It was only growth if you excluded many things,’ he said, referring to what economists call ‘externalities’, the unmeasured spillover effects of actions, for example on the environment or on people’s health. ‘Capitalism speaks in terms of limitless growth, but there are finite resources. What seemed possible in the 1960s and 70s is clearly no longer possible.’ Kato reminded me of Walter Berglund, the heroic crank of Jonathan Franzen’s Freedom, who argues that growth in a mature economy – as in a mature organism – is not healthy. It is cancerous. Kato is a professor of literature, not of economics. But even some economists are questioning how we should measure economic performance. At its crudest, people confuse growth with wealth. Bankers and investors tend to be more enthusiastic about a poor country, say China or India, which is growing rapidly than they are about a wealthy one that is maintaining a high standard of living. That viewpoint, in turn, gets reflected in the business pages of newspapers.

Kenneth Rogoff, professor of public policy at Harvard, has written about the best ways of measuring growth. In an essay called ‘Rethinking the Growth Imperative’, he says standard economic statistics do not measure life expectancy, literacy and so on. The United Nations Human Development Report ranks nations according to these broader measures of quality of life. In its 2011 report, Japan comes in at number 12. Norway is number 1, with the US at 4, Germany at 9, France at 20, Singapore at 26 and Britain at 28. As with rankings of the most ‘livable cities’, these exercises can be subjective, but the aim is to correct what Rogoff calls the ‘statistical narrowness’ of GDP.52

In his essay Rogoff argues that ‘people are fundamentally social creatures [who] evaluate their welfare based on what they see around them’. Imagine, for example, the fabulous wealth of Nelson Rockefeller, the American businessman and philanthropist who died in 1979. For all his riches, Rockefeller could never have bought a laptop or an iPhone, items that have become standard fare for pimply teenagers in Tokyo and elsewhere. Rockefeller didn’t feel cheated because none of his associates had an iPhone either. Yet such advances in technology are not captured in standard growth statistics. One only needs to think what kind of television set, computer or mobile phone an average Japanese of today owns compared with her supposedly more prosperous counterpart in the roaring 1980s. If you can buy higher-quality items with the same amount of money then you have become better off. In any case, Rogoff asks, how much we should care whether it takes 100 years or 200 years for an economy to grow eight-fold. An economy growing at 1 per cent would double in size in seventy years and grow eight-fold after 200, he says. One growing at 2 per cent would double in thirty-five years and increase eight-fold in just 100. But, Rogoff wonders, does that matter? ‘There is a certain absurdity to the obsession with maximizing long-term average income growth in perpetuity.’

One can take such arguments too far. One objection is that, even if growth isn’t desirable in itself, it may be necessary. Without growth, institutions such as pension systems are in danger of collapse. Without growth, it is hard to see how Japan can get out of its current debt trap. For Japan, the alternative to growth could be some sort of financial crisis that would deal living standards a further blow. Perhaps national economies, like sharks, really do have to keep moving forward. The search for measures of economic success beyond GDP is also open to abuse. Governments may be tempted to employ such definitions to justify their own lousy performance. Gross National Happiness was a term coined in the Bhutan of the 1970s. It was supposedly a measure of broader spiritual, as well as material, happiness. When it comes to things we can actually measure, however, Bhutan doesn’t do so well. Today, it remains a poor country with a per capita income of $6,000, a life expectancy of sixty-six – a hardly creditable 134th in the world – and a literacy rate below that of Togo or Bangladesh.53 Gross domestic product may be imperfect. But at least it means something.

In the case of Japan, one could argue that talk of ‘life after growth’ is defeatist nonsense, the result of failed public policies and national drift. Only a fool would embrace decline as a desired outcome. That is certainly the opinion of many. Takeda, the man who had taught me about the manufacturing prowess behind the capacitor, regarded such talk as revealing a national character flaw. ‘To become Number One you have to have the will,’ he said. ‘But Japan never had that. Right now people say, “Why do you need to be Number One?” Unfortunately a lot of people have that attitude.’ I understood Takeda’s impatience. But I also thought that some Japanese were casting around for something important. The post-war period had been characterized by a national effort to increase GDP as much in the name of national pride as of the wellbeing of its people. Kato and others wanted Japan to find a more humanistic goal.

In recent years, it has become clearer that Japan’s economic crisis, though prolonged, has not been unique. Nor has Japan, for all the mistakes, been uniquely incompetent in dealing with the litany of problems that followed the bursting of its bubble. ‘Its historic experience – high economic growth, bubble economy, and subsequent economic stagnation, deflation and falling birth rates – will inevitably be replicated by countries around the world,’ says the author Natsumi Iwasaki.54 Japan may not look pretty. But it could be a taste of things to come.

James Abegglen, who was among the first to recognize Japan’s industrial strengths in the 1950s, also warned against writing the country off too quickly. The 1990s, the so-called ‘lost decade’, he told me, had in fact been ‘a decade of redesign’, when many companies began to grapple with changed circumstances by paring their costs, paying down their debts and increasing their productivity. They had merged and moved some manufacturing abroad. They had ditched some lines of business and switched to others. That restructuring had carried on into the twenty-first century, he said. To call those years lost was ‘simple nonsense’. Even so, Japan’s most exhilarating days were behind it. ‘In my era, Japan was a very exciting place. In the next era, it’s going to be a very dull place. Very wealthy and very dull. It’s going to be like a very large Switzerland – and that’s not such a bad thing.’55