Why Japan finds it So Hard to Change

Andreas Seibert for TIME
Up against it Salarymen in the town of Sendai take a cigarette break. Many Japanese companies are no longer as competitive as before

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The Japanese people are paying the price. Though Japan is still the richest in Asia, on a per capita basis, it is not getting any wealthier. A distorted, overprotected labor market, much like those in Western Europe, forces 1 in 3 workers into temporary or contract jobs, denying them proper security, wages, benefits or training, and dampening the consumer spending the country needs to restart growth. The average wage, at $3,400 a month, was roughly the same last year as it was in the mid-1990s, while the household income of a worker's family, at $5,300 a month, fell 4.6% in 2009 from the year before.

Stumbling in Sendai
Sendai is a microcosm of what ails Japan. The modest town of 1 million people is the capital of the prefecture of Miyagi, where unemployment, at 6.4% in 2009, was well above the national rate of 5.1%. Sendai's young graduates are forced to relocate to bigger cities like Tokyo or Osaka since they are unable to find good jobs at home. Yet local government officials and business leaders display a distinct lack of creativity in addressing the region's economic woes.

Take the local economic development plan. The government intends to create jobs by attracting factories to Miyagi in three industries automobiles, food processing and electronics with special tax breaks and other financial incentives. Yoshinobu Ikuta, an assistant manager at the prefecture's New Industry Promotion Division, explains that the goal is to turn Miyagi into a major industrial hub, on par with the area around Nagoya. As a sign of the potential promise, he points to the construction of a car-assembly plant in Miyagi by Toyota subsidiary Central Motor, due to open in 2011. "We want autos to create more jobs so young people stay in the area instead of getting jobs outside," says Ikuta.

Such a plan might have worked if the date were 1975. Back then, Japan was a rapid-growth economy with high rates of industrial investment. But the Japan of today is a high-cost economy suffering from excess capacity, in which companies have less incentive to invest heavily. Investment as a percentage of GDP was 20% in 2009, down steeply from 33% in 1990. Many manufacturers in industries like carmaking prefer to build plants overseas, where costs are lower or markets are expanding. The Central Motor plant is the first new assembly factory Toyota or one of its subsidiaries has opened in Japan since 1993. As a result, the essence of Miyagi's development plan is effectively to steal jobs from other parts of Japan, not create entirely new industries that could increase overall employment.

Ikuta is aware of such facts, but dismisses them. He and his colleagues and their overlords in Tokyo, who still call most of the shots are stuck on the decades-old idea to equate economic progress with physical factories. He defends the Miyagi plan, saying that technological changes in the auto industry, such as a potential shift to electric cars, will provide opportunities for Miyagi. "We hope that the whole industry will change and merge with other industries," Ikuta says. But what about targeting more cutting-edge sectors? Maybe IT services or R&D; centers? Sendai, after all, is home to Tohoku University, one of the nation's top science and technology schools. Ikuta and his colleague Hiroo Sato, who oversees efforts to woo electronics makers to Miyagi, say any investment is welcome, but the government's focus is still on factories. Nor do they seem interested in having foreigners create jobs for Miyagi's unemployed. Ikuta and Sato both say Miyagi is open to foreign investors, but, unlike competing cities and provinces in China, Taiwan and elsewhere in Asia, the local government is doing little to attract them.

Sendai's business leaders don't seem to have any better ideas. At the city's Chamber of Commerce, Morio Sato, the secretary general, simply repeats the exact same government development plan. Autos. Electronics. Factories. When pressed for their own ideas for creating jobs in the region, Sato and his colleagues go mum. What can the government do to help businessmen in Sendai? More squirming and nervous giggles, but no clear answers. Perhaps Sato and the other chamber members have bold ideas for fixing the economy, but were uncomfortable speaking out due to their sense of politeness, a common trait among Japan's older generation. But that, too, is telling it shows the lack of public debate on economic reform. Eventually Sato works up the nerve to express an opinion, muttering that more state subsidies for small businessmen would help.

The desire for government handouts is a constant theme in Sendai. Kazunori Chiba, director of the Miyagi branch of the National Federation of Agricultural Cooperative Associations, says that the region's tillers have come under strain from past liberalization policies and require continued government support to survive. He not only wants continued subsidies for farmers, but also state efforts to control food supply to support prices. Farmers had traditionally been loyal supporters of Kan's political rivals in the Liberal Democratic Party, he not very delicately points out, but many switched to the DPJ. Now, Chiba suggests, it's time for the payoff, whatever fiscal problems Tokyo might be facing. "We are all aware of the government budget situation, and we are not demanding a great amount," says Chiba.

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