Sinking Feeling

Is the once-unstoppable U.S. economy following Japan's into the depths?
Magazine Contributor
4 min read

This story appears in the November 2002 issue of Entrepreneur. Subscribe »

The similarities are eerie. In 1990, the United States envied . After decades of rapid economic expansion, the Nikkei average of Japanese stocks reached a new high of 38,915 on New Year's Eve 1989. Japanese real estate had appreciated so much during the 1980s that, at one point, the city of was said to be worth more than the state of California. Japanese companies were thrashing U.S. rivals in semiconductors, automobiles, consumer electronics and other industries, while cash-rich Japanese investors purchased American icons like Rockefeller Center and the Pebble Beach golf course. Japanese business was held up as a model to the world, and readers snapped up tomes on Japanese management practices.

The year 1990 marked the end of Japan's ascendancy. Over the next two years, the Nikkei plummeted 60 percent. Real estate values were cut in half by 1996. The long-booming entered equally persistent and stagnation. A decade later, Japan's situation has changed little, with few prospects for the country or its style of business returning to dominance soon, if ever.

Ten years later, the United States found itself in a position much like Japan's in 1990. In January 2000, the Dow closed at a record 11,722. The United States led all comers economically and technologically-it could even claim to have invented the most important business playing field of the day: the Internet. The American way of business, a mix of aggressive entrepreneurship and conservative accounting, was the new model.

The question is: Given the Dow's fall since early 2000, given the bursting of the dotcom bubble, given the accounting scandals rocking U.S. companies-could Japan's fate happen here?

Perhaps the most important difference between current U.S. problems and Japan's downward spiral is the willingness of government policymakers to tackle unpleasant but necessary tasks.

"Unlike Japan, the U.S. has been more willing to recognize reality more quickly," says Gregory P. Wilson, a principal with consulting firm McKinsey & Co. and co-author of Dangerous Markets: Managing in Financial Crises (Wiley), a manual on running companies during economic meltdowns. Wilson points to the 1980s savings and loan scandal, when Washington-based regulators moved relatively quickly to close insolvent institutions and sell off their assets. In Japan, where loans secured by land and securities are now worth a fraction of the debt, regulators have failed to deal similarly with the nation's bank crisis.

U.S. enthusiasm for problem solving continues today, says Wilson. Just months after accounting shenanigans at Enron and Adelphia Communications came to light, stock exchanges tightened listing requirements, Congress passed a corporate-oversight law, and some high-profile businesspeople were led away in handcuffs.

Other differences suggest America won't slide into a Japan-type stagnation. The U.S. lacks the system of interlocking corporate directorates and cross-ownership of stock that characterizes the Japanese keiretsu business consortiums, notes Dennis Laurie, a Fullerton, California, business author whose 1992 book Yankee Samurai (HarperCollins) explored Japanese business. Such practices, says Laurie, keep Japanese companies rigid and unable to react to changes.

U.S. businesses tend to be more nimble and more competitive because they're more likely to specialize and focus on core competencies, Laurie adds. Japanese companies pursue both vertical and horizontal integration in a wide variety of industries. Companies like Hitachi and Mitsubishi produce thousands of products in fields ranging from semiconductors to jet engines. Practically the only U.S. company that does this is GE. "The Japanese situation is that almost everybody looks like GE," Laurie says.

Sluggish is another obstacle Japan can't seem to overcome. U.S. consumers, meanwhile, spent briskly throughout the 2001 recession. Even if spending does slow, it's unlikely to reach Japan's level of restraint, Laurie says. The cultural bias is toward consumption in the United States, as opposed to frugality in Japan.

There's more. Japan's economy continues to be controlled by government policymakers, while the United States possesses a much more market-dictated economy. Efforts to jolt Japan's economy with public spending have only resulted in unnecessary road- and bridge-building projects. More of Washington's new spending goes toward high-tech defense research and development, the same type of investment that produced the Internet.

Does the fact that we're not like Japan mean we're safe? Probably not. "The world is always changing," Laurie notes. "It can be very difficult to draw conclusions from what happened in the past."


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