In the late 1970s and 1980s, before it plunged into an economic recession, Japan was big news in the United States. As Japanese manufacturers ate into America’s market share, our producers whined that the Japanese were not playing fair. Yet American executives made regular trips to Japan to learn about quality production, just-in-time delivery and a host of other management practices. Harvard Professor Ezra Vogel captured the mood in his best-selling book, Japan As Number One: Lessons for America.

Japan is now back on the American radar screen. Toyota is on track to overtake General Motors as the world’s largest automotive producer. Along with other Japanese auto firms, it has steadily gained market share in the United States and abroad. GM and Ford are in a quagmire, their credit ratings at junk-bond levels. You might think the Japanese are celebrating, but they are, in fact, worried about a protectionist backlash. “We need to give some time for American companies to take a breath,” Toyota Chairman Hiroshi Okuda told reporters last April.

Today’s Japan is clearly not the same “Japan Inc.” of the 1980s. Its economy is less regulated than before, even though its core economic institutions — in business and in government — have changed only modestly. Trade with China is one reason that the news out of Japan these days is positive. Last year China displaced the United States as Japan’s major trading partner. Japan has the advantage over U.S. and European manufacturers of proximity to the booming Chinese market. Another reason is that Japan has finally found the right set of policies to clean up its banking mess. During the Japanese recession, American investors and politicians told the Japanese that if they wanted growth, they would have to become more like us. In the 1990s that meant less government, more entrepreneurship and greater attention to shareholders. Yet corporate leaders like Toyota’s Okuda and Fujio Mitarai of Canon Inc. have refused to accept the claim that there is one best way — the American way — of running a company. Most large Japanese companies continue to staff corporate boards with insiders, pay executives modestly and bend over backward to minimize layoffs.

So Japan is back, this time with China, another country whose institutions are different from ours. Despite recent anti-Japanese riots, the future will bring China and Japan closer: Japan has technology; China has resources and skilled labor. As Japan’s Asian ties keep spreading (most recently to India), it has less incentive to placate American interests, whether in Washington or on Wall Street.

China and Japan share features that are an irritant to the United States: huge trade surpluses and undervalued currencies. Yet by investing their trade surpluses in dollars, both countries are funding America’s budget deficits and keeping our interest rates down. Because of this, and because of Japan’s ties to China, future U.S. trade friction with Japan (as is likely in automobiles) will be more difficult to resolve than in the past. One thing is clear: It was wrong to write the Japanese economy off in the 1990s; it is foolhardy to do so now.”

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Sanford Jacoby is Howard Noble Professor of Management. His most recent book is The Embedded Corporation: Corporate Governance and Employment Relations in Japan and the United States (Princeton University Press, 2005). His research focuses on employment and labor policy, social welfare policy and the political economy of business-government relations. This excerpt was published in the June 28, 2005 edition of UCLA Today.

Published: Friday, July 1, 2005