The impact will eventually spread to Europe and Asia, including Japan. But this revolution comes with many uncertainties. The transition to the New Economy will generate new sources of volatility, such as momentum trading in the markets. On the other hand, the efficiency of new IT systems may reduce the inventory buildups that have dragged out downturns in the past. The United States has taken, and will continue to take, the lead in this transition. But Europeans and Asians will attempt to catch up and, in some areas, to overtake the United States.
Japan is in the first phase of the revolution. The government is deregulating Nippon Telegraph & Telephone and the rest of the telecommunications industry fairly quickly. Pressure is growing on NTT to break up its old monopoly more rapidly. NTT has significantly reduced charges for connections to the Internet. Big corporations such as Sony, NTT DoCoMo, NEC, Hitachi and others are quickly reorganizing their operations to make the transition to the New Economy. They are investing in new technologies to catch up with or overtake their counterparts and going digital in many areas.
Japan can build on its traditional strengths. One key advantage is in wireless technologies, like mobile phones and digital TV. With the fusion of telecommunications and broadcasting, digital TV could replace personal computers, at least partially. Everything from personal computers to mobile phones, gameware and even automobiles will become interconnected. Japan’s competitive edge in this kind of hardware may re-emerge as the strength of Japanese companies.
What Japan needs to watch carefully are mergers like that of Time Warner Inc. and America Online–linking companies that provide hardware with those that provide content. These types of alliances have hit some roadblocks, and the broader trend has only begun to emerge. But they could progress quickly behind the scenes. This will contribute to improving the quality of Japanese content and its global distribution.
Of course, the American dot-bomb phenomenon has its counterpart in Japan, where venture-capital firms like Softbank and Rakuten have been hit hard. These companies helped ignite the IT revolution in Japan by nurturing start-ups. But unlike the United States, Japan is still hostile to the idea of allowing companies the “freedom to fail,” even in a downturn. Thus, the major thrust for the New Economy will continue to come from big corporations, such as Sony, or their spinoffs, such as NTT DoCoMo.
The major problem in Japan, however, is not the absence of an entrepreneurial culture. It is the existence of the highly regulated and subsidized Old Economy, which accounts for about 85 percent of GDP and 90 percent of all jobs. The Japanese economy has both a highly competitive international manufacturing sector and a deeply stagnant domestic sector. According to a study recently completed by the McKinsey Global Institute, the international sector, including autos, steel, machine tools and consumer electronics, is on average 20 percent more productive than U.S. business, but accounts for only 10 percent of Japanese employment. Domestic manufacturing, including food processing, textiles and furniture, is 37 percent less productive than in the United States, and comprises 15 percent of employment. The remaining 75 percent of all Japanese jobs are in domestic services like retailing, construction and health care, which are as unproductive as domestic manufacturing.
It is these old enterprises that would benefit most from adopting IT technology. The average productivity of retail stores and hospitals would increase very significantly. But a sea of government regulations and subsidies stands between Japan’s Old Economy and technological progress. These underperforming businesses also are highly politicized: in the past they have been the bastion of conservative parties.
For the IT revolution to have a significant impact in Japan, we need to shake up our domestic sector. Start by breaking the iron triangle of ties between businessmen, politicians and bureaucrats. To make technological progress, we need political reform. The reform, for example, would involve dramatic reduction of public works and subsidies to retailers. That sounds difficult, but the change seems to be taking place already. Reformers have done well in local elections. And though the November revolt of Liberal Democratic Party faction leader Koichi Kato against the ruling factions has failed, it rattled the existing power structure. So the prospect for political change is not that dim. The ruling parties are under strong pressure from public opinion and the markets. Japan is on the road to a New Economy, though there may be political and economic turmoil along the way.
