U.S. May Still Face Japan’s Biggest Challenge : Trade: A respected Japan specialist predicts that the nation’s GNP will nearly double by the year 2000. That’s 85% of America’s.

Undaunted by a plunge in the value of the yen and shares on the stock exchange, and by new theories that Japan may have passed its prime, Kenneth S. Courtis believes that Japan’s most serious challenge to the United States is just taking shape.

Courtis, a strategist and senior economist with Deutsche Bank Capital Markets in Tokyo, sticks by a prediction he made before the plunge of stocks, bonds and the yen. By the year 2000, he says, Japan’s gross national product will nearly double in dollar terms and amount to 80% to 85% of the U.S. GNP after inflation is discounted. This would bring Japan’s per-capita GNP to a level about 50% above the United States’.

Courtis, a Canadian, is one of the most closely watched Japan specialists. He has developed a reputation, like that of the late Herman Kahn, who headed the Hudson Institute, for stubbornly optimistic predictions about Japan.

In the early 1960s, Kahn was the first to predict that Japan would surpass the United States in per-capita income--a prediction that came true in 1987. He was also the first to forecast that the Japanese GNP would surpass America’s in the 21st Century.

Like Kahn, Courtis warns that Japan will become an even more formidable force in the future, and this view is supported by two Japanese research institutes in recent projections for 2000.

Japan, once the “factory to the world,” will become the “new product laboratory to the world,” Courtis said, and added, “New products will be increasingly developed and launched first in Japan and then introduced worldwide.” He expects to see:

* “Just-in-time design and development systems” for cars designed to meet tiny niches of demand, with Japan developing and producing them from scratch in just two years instead of five as in the United States.

* A “modular car” with only a few hundred parts, instead of the 30,000 elements now used. Customers will be able to select the design of their cars by choosing from modules in catalogues.

“Just-in-time” design and development will be even more powerful, Courtis said, than today’s “just-in-time manufacturing,” which brings parts to the assembly line as they are needed.

Already, a surge of capital investment that in 1988 and 1989 exceeded the absolute amount of American spending on equipment and facilities has laid the foundation for what Courtis calls “Japan’s third economic miracle.” This, he said, is “a strategic repositioning of the entire economy . . . emphasizing new, innovative, increasingly high value-added products and services for new markets.”

Trade issues involving Japan that consume so much energy and attract major attention today, Courtis said, “will look quaint by the end of the 1990s; we’re going to be dealing with a completely new set of dynamics.”

By 2000, Courtis predicted, Japanese firms will produce the equivalent of 15% of the nation’s GNP in Japanese-owned factories overseas. Net external assets will rise to more than $1 trillion, he said.

The upshot, Courtis said, is that “Japan’s international presence will be four to five times what it is today.”

Rather than trade, he said, Japan’s economic power will present a new challenge to the United States in which global decisions on technology and finance are taken outside its control. National security, he said, will become a question of economics.

The Mitsui Bank Research Institute and the Nomura Research Institute both backed Courtis’ prediction for a narrowing of the gap between the GNPs of Japan and the United States.

Mitsui predicted that Japan’s GNP in nominal terms in 2000 will amount to $7.6 trillion, or 73% of America’s $10.4 trillion. Nomura predicted that a Japanese GNP of $7 trillion will equal 67% of a U.S. GNP of $10.3 trillion in 2000.

In 1989, Japan’s GNP was $2.8 trillion, or 54% of America’s $5.2 trillion, while Japan’s per capita GNP was about 12% larger than the United States’.

Courtis does not underrate the doldrums on Tokyo’s stock and foreign exchange markets. Indeed, he predicts that the dollar will rise in value against the yen until it reaches a rate of 180-to-1 and then start falling again, probably between March and June, 1991. The Nikkei stock average, he adds, could fall to around 28,000 yen.

But by 2000, he said, the exchange rate should be around 100-to-1 or 110-to-1, accounting for about 30% of the gains Japan’s GNP will show in dollar terms in the next 10 years. Japan’s inflation rate is expected to run between 2% and 3% a year lower than that of the United States, pushing up the value of the yen in the long term.

The biggest gains, however, will come from growth in the real economy.

“A very conservative estimate for the 10 years would be 45%,” he said, and added that Japan’s economy will remain capable of at least 4.2% real growth for the next 10 years.

Critics often exaggerate weaknesses, he said. While Japan’s population is aging, the country will still have the third youngest population structure among advanced nations in 2000. And of the so-called leisure-seeking youths in their 20s, he said, “They are just as serious as any group.”

“They are more open, more flexible and more ambitious than their elders,” he went on. “They don’t want to be just the best in Japan but the best in the world. If anything, they will be more formidable competitors than their elders.”

The most important push for future growth involves no predictions. It has already occurred.

About 60% of the capital investment Japan has made since 1988, Courtis said, has been devoted to research and development of new products and services, and to the creation of new processes of design and development.

As a result, he said, “even if Japanese corporations were suddenly to stop all capital investment right now, the momentum would carry through well into the 1990s.” The momentum, he said, is making Japan “the world’s premier new-product laboratory.”

In its report, Nomura says the same thing, though with more bureaucratic phrasing: “The United States can only hope to break the relative decline in its competitive position in technology-related fields.”

Already, a shift away from old industries that emphasized “heavy, thick, long and big” toward higher value-added products that are “light, thin, short and small,” has enabled Japan to earn more dollars with fewer exports. From 1985 to 1988, the volume of Japan’s exports fell by 16% but the dollar value grew by 49%.

The question all this poses for the United States, he said, is this: Does America “have the strength of leadership, will and resources to reverse the course?”

And this, he said, is also the central issue confronting the world economy.