Can Japan Change?

One of the more frustrating tasks I regularly face in my job as an economics correspondent in Asia is explaining (or attempting to explain) what goes on in the Japanese economy. In many ways, the place seems to simply defy logic, or the basic laws of human nature. How can a society watch its economic fortunes deteriorate for two decades and do almost nothing about it?

I’ve explored this subject before and have tossed out a few possible explanations. The bureaucrats who shape economic policy are insular and self-interested and won’t reform Japan since that would undercut their own power. Corporate managers who rose to the top in a bureaucratic, consensus-based system have no interest in changing it to make their firms more entrepreneurial. Politicians cater to the narrow demands of their constituents, not the greater needs of the nation. Political and business leaders fear globalization and have limited the degree of integration Japan has forged with high-growth developing Asia.

There is another reason, though, that might explain the situation best, which I hear from my friends in South Korea. I covered the Asian financial crisis in 1997 from Seoul, and I can tell you that the Koreans know something about crisis management. At the time, the economy seemed to plunge off a cliff. Koreans truly worried that their three-decade economic miracle had come to a sudden, devastating end. Yet in the aftermath, a stronger, healthier, more innovative economy emerged.

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Many Koreans I have spoken to believe that their country’s postcrisis success could never have happened without the crisis itself. The collapse showed everyone just how out-of-date and flawed their economic model had become and washed away the opposition to change. In fact, the reforms South Korea eventually adopted, at both the national and corporate level, broke through many of the same hurdles now blocking Japan’s way. South Korea, too, suffered from cozy ties between government and business, too much bureaucratic interference and a lack of entrepreneurship. Seoul addressed these issues after the Asian crisis (though not completely); Japan never has.

That could be because Japan has never stared into the abyss. Sure, recessions have come with depressing frequency, young people can’t find the solid jobs they used to, corporate Japan is retreating from industries like consumer electronics, which it once dominated. But Japan’s fate has been something more like that story about boiling a frog. If you put the poor amphibian into cold water and turn up the heat, it doesn’t realize it’s being cooked to death. I’ve never actually tried this with a real frog, but if it is true, it explains the situation in Japan. While South Korea got tossed directly into hot water, Japan has been poached slowly. If Japan faced a South Korea–like crisis, my friends in Seoul say, that would finally force Japan to change.

It would be a tragedy if Japan had to experience such a destructive crisis in order to turn itself around. But perhaps it won’t have to. I just spent some time in Japan (an excursion that resulted in my latest TIME magazine story, which you can read here), and I was surprised to find how much the frustration level of the country has increased. Many people I spoke to have really become fed up with the current system — the inaction of the political elite, the lack of opportunity for young people, the failings of corporate Japan. In the past, Japanese have usually watched the ineptitude of their political and corporate leadership with apparent apathy, but that seems to be changing.

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You can see that in how people are reacting to the debate over the future of nuclear power in the country in the wake of the scary meltdown at the Fukushima nuclear reactors last year. Tens of thousands have taken to the streets to demand the government eliminate nuclear power altogether. Mamoru Yamamoto, one gentleman I spoke to at a protest outside the Prime Minister’s office, made the point that the anti-nuke movement was different from public campaigns in the past in Japan. Instead of being organized by specific interest groups, the nuclear protests have been driven by individuals, deciding to join on their own. “We are taking action,” Yamamoto told me. “Some change is really going on.”

Another sign of that desire for change is the career of Osaka Mayor Toru Hashimoto. Here’s a young (by the standards of Japanese politics), blunt-talking lawyer who has never held office outside of Osaka prefecture but is already one of the nation’s most popular political figures. Sure, he’s won himself attention by making some right-wing nationalistic statements that have shocked many. But he’s also followed a directed agenda in Osaka, where he is trying to tackle the government’s perennial deficit problem by cutting state expenditure and taking on powerful public-sector workers. Basically, he has an image in Japan of a guy who actually makes decisions and follows through on them, unlike the aimless cast of characters in Tokyo, and that’s been enough to propel him onto the national stage. Now that he’s decided to take his political movement national, we’ll have to see how he competes with the old entrenched parties. He may not have the grassroots organization to do that right away. But with elections around the corner, Hashimoto could win himself a big chunk of protest votes, and that could really shake up Japanese national politics.

There is change afoot in the business world as well. There are a bunch of people, many of them quite young, who are trying to persuade the youth of Japan to ditch the usual career path — into the government bureaucracy or a big company bureaucracy — to start their own firms. One of them, William Saito, started a company himself in the U.S., which he later sold to Microsoft. Now he wears several hats in Tokyo — venture capitalist, college lecturer, government adviser — all of which are aimed at pushing the idea that entrepreneurship is the answer to Japan’s woes. He has spent a lot of time dissecting the hurdles to entrepreneurship in Japan and has focused on the exam-based education system, which he feels stifles creativity and deprives young people of critical life experience. He also says the way that Japanese stigmatize failure prevents people from taking risks and starting up new firms. Still, he feels that there is a growing group of go-getters who are willing to think outside the box and persuading others to follow them. “There is a new perfect storm where we have students, entrepreneurs, even people in their middle age that are saying: I realize that there is a better world outside of this rat race,” he says.

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In any country of 128 million people, there will always be pockets of change. The question for Japan is: Are these pockets having any greater impact on the course of Japanese society? Here we run into trouble. Even though the term salaryman — those suit-wearing middle managers clogging the subways of Tokyo — have for years had a negative image among many young Japanese, it seems that most of them want to be salarymen anyway. A 2011 study showed that the share of start-ups founded by young people has declined since the 1990s. That’s the problem with Japan. Old practices aren’t being reformed even though many can see they aren’t working.

Yet if Japan is ever going to emerge from its 20 years of malaise, the unusual is going to have to become usual. Otherwise, Japan could well be facing a South Korea–style crisis. As Yuka Hayashi of the Wall Street Journal reported, there was concern at IMF meetings in Tokyo earlier this month about Japan’s worsening fiscal situation. The fear is that Japan, with the largest government debt burden (relative to its GDP) in the industrialized world, could end up facing a euro-zone-style debt meltdown. “There are worries about the ability of the Japanese policymakers to reduce sufficiently their budget deficit,” IMF economist Olivier Blanchard said at the Tokyo meetings.

This is serious stuff. Japan has the ability to reform and avert a debt crisis, and people willing to lead the way to that change — if, that is, they are allowed to do so. I wish I could be more optimistic.