Japan Seems Ready to Let Go of Status Quo, Leaders Say : Politics: Hosokawa’s successor will still have to deal with economic frustrations, business executives suggest.

In all the biting American criticisms of Japan’s economic practices, nothing matches the bitter language of Ichiro Ozawa in his book “Blueprint for a New Japan.”

“Workers are owned like pets by their companies, and housing is offered as the equivalent of dog food,” Ozawa declared. “Workers receive notices of transfers to distant places in a single memo; families are divided. . . . Promises of shorter working hours never materialize . . . people even die from overwork. . . . An economic and social framework that emphasizes cooperative, long-term relationships seems nothing more than a closed society, one that bars foreign companies or any other outsiders from entering.”

These words come not from a cynic on the fringes of Japanese society but rather from the heavyweight leader who helped bring Prime Minister Morihiro Hosokawa’s reformist coalition to power last August after 38 years of conservative rule.

On Friday, Hosokawa, embroiled in a personal scandal, suddenly announced that he will resign.

But the frustration that precipitated Ozawa’s outburst in the book he wrote a year ago remains. Not only trading partners abroad--especially the United States--but also business leaders and the general public here are growing increasingly aggravated with the Japanese status quo. And not since the post-World War II U.S. occupation has Japan appeared so ripe for reform--which Hosokawa’s successor will have to tackle.

“The reform of Japan is a general idea of the Japanese people, not just Hosokawa,” said Kenji Mizutani, vice president of Tokai Research & Consulting Inc.

Kunio Miyamoto, chief economist at Sumitomo Life Research Institute, added, “Nobody can go against this movement for reform if they want to survive as a political leader.”

The vision offered by Ozawa is of a Japan that would put more value on individuals and innovation; the economy would be freed of the shackles of bureaucratic controls and would grow not through exports but by providing the Japanese with bigger homes and higher living standards. This is also a Japan that the Clinton Administration would like to see.

Ozawa drew his vision, however, not merely in response to the huge Japanese trade surpluses that the United States wants reduced. Instead, he was reacting to his nation’s own situation: Battered by the country’s worst postwar recession, Japan’s entire system is groaning under multiple strains.

Corporations face plummeting profits or even losses. Stocks have recovered only half of their peak value in 1989. Banks are loaded down with bad loans that are still climbing. Real estate prices, already slashed in half, are still falling. The aging of the population is undermining this nation’s lifetime employment and seniority pay systems as companies become overloaded with highly paid older workers.

Meantime, the yen is so strong that an export-based recovery is virtually impossible. Last year, despite a record global trade surplus of $120 billion, the economy went flat with a bare 0.1% growth. And almost $300 billion worth of pump-priming measures have failed to get Japan moving again. Only faint signs of a recovery in consumer spending have appeared.

Worse yet, many economists warn that a cyclical recovery may be incapable of resurrecting the healthy growth of the past. The Industrial Bank of Japan recently warned that potential growth through the rest of the century would barely exceed 2% a year if business investment remained at current levels. By comparison, between 1985 and 1990, the economy grew by an average of nearly 5% a year in real terms.

What is needed, Ozawa and many economists insist, is a sweeping overhaul of government regulations that prevent new entries into established industries, restrain competition, stifle innovation and even block development of entirely new businesses. Unleashing pent-up demand is the key.

U.S. demands for an opening of Japan’s markets, backed up by threats of retaliation, spurred Hosokawa into setting a June deadline for developing a plan to accomplish that task.

That pledge will remain in place no matter who becomes the next prime minister.

The plan, due to be presented to President Clinton when he meets with the Japanese prime minister at the Naples summit of advanced industrialized democracies in July, promises to set the course of future U.S.-Japan economic relations--either toward cooperation or collision.

Last month, U.S. Trade Representative Mickey Kantor scorned the first-stage, market-opening plan that Hosokawa’s government announced. Kantor called it a “half-finished work” that did not satisfy U.S. concerns.

But the real battle in Japan over reform lies between now and June, and “it’s going to be a bloody fight,” predicted Yoshiji Nogami, deputy of the Foreign Ministry’s policy division. “Housing, regulation of land, telecommunications, the distribution system, transport--these are the major areas” for deregulation, he said.

“We know what to do, but no one is daring to do it,” Nogami added.

Removing government regulations that preserve price-gouging, for example, could slash by about half the differential that Japanese pay in higher prices compared to the United States, said Iwao Nakatani, a professor at Hitotsubashi University outside Tokyo who is a member of a government commission to promote deregulation.

The savings from lower prices could add a consumption-led expansion of 2% to Japan’s GNP over a five-year period, he said. But the Catch-22 would be a loss of 6.88 million jobs in industries stripped of regulation, Nakatani admitted.

Radical restructuring is difficult because many of the good things about Japanese society are the flip side of its problems, said T. W. Kang, a business consultant here.

“A fundamental shift in Japan’s tightly coupled ‘village society’--where everyone shares the pains and the fruits--must occur if the Japanese economy is to be globalized,” he said.

Last summer, a major crack appeared in the village as the end of 38 years of rule by the Liberal Democratic Party brought to power Hosokawa’s coalition. That shattered the cozy relations in which LDP powerbrokers acted as lobbyists with the bureaucracy on behalf of interest groups.

Keidanren (Federation of Economic Organizations), the nation’s most powerful business group, which supported only the Liberal Democrats for nearly four decades, no longer collects funds for them.

Masaya Miyoshi, Keidanren president, even described their fall as “part of necessary social reform. Excessive political stability held back necessary social change and was politically, economically and socially stifling,” Miyoshi said.

Moreover, a new electoral system enacted under Hosokawa will reduce the inflated clout that rural voters have enjoyed until now. Eventually, new single-seat districts in the lower house could force the 10 parties, which the former multi-seat constituencies had nurtured, to merge into two groups.

Ozawa, for one, envisions that Japanese politics in the future will be marked less by pork-barrel promises than real debate over policies and the reins of government passing back and forth between two major parties.

While political reform has enjoyed strong public support, many Japanese are uneasy about letting deregulation go so far that individual and corporate competition becomes as harsh as it is in the United States. Japanese must not “let American criticism blind ourselves to the system’s basic strengths,” warned commentator Yusuke Fukada.

Firms should maintain their employee-first philosophy, rejecting the shareholder-first principle of the United States as “hopelessly unstable,” he wrote in the magazine Sansara. They also should not only preserve but strengthen long-term keiretsu (business group) ties with suppliers, he argued.

The recession and fears about unemployment have stirred unprecedented uncertainty about the future and uneasiness about change. A government poll released last month found that a record 46.4% of the people surveyed feared that Japan was heading in “a bad direction.”

For every 100 people looking for work, only 60 jobs are available. Unemployment is still below 3%, but if the number of “excessive” workers carried on payrolls for the sake of maintaining lifetime employment is counted, potential unemployment is about 6%.

Bloated payrolls are blamed, in part, for spurring manufacturers to increase exports during periods of sluggishness to keep factories operating.

While the high growth in the past sustained a seniority pay system, now, with an outlook for only stable or reduced production, “we can’t help but revise our seniority system,” said Kazuhide Watanabe, Mazda’s director of personnel and human development.

Even a labor federation that includes department store workers has proposed dropping seniority pay in favor of merit-based wages and “revising” lifetime employment by increasing part-time staff.

And Honda has announced a program under which managers who are not promoted will be transferred to non-managerial jobs and suffer pay cuts of up to 30%. Junior managers will be permitted to stay in their jobs no longer than 12 years; senior managers for up to nine years.

Most corporations are actively paring payrolls by dismissing temporary workers, reducing the regular work force through attrition, cutting recruitment, encouraging early retirement, dispatching surplus workers to affiliated firms with low pay scales and slashing bonuses and overtime.

Belt-tightening has taken a toll on workers’ income. At Mazda, workers won a 3.8% pay increase for 1993 but actually wound up with 6.6% less income than in 1992 because of cuts in overtime and bonuses.

Meantime, Japanese consumer habits are changing in ways that help boost imports. The old quality-at-any-price consciousness is giving way to bargain-hunting. Discount stores such as Aoyama Trading Co. are buying men’s suits made in China and selling them for as little as $95, compared to prices eight times as high at department stores.

Last year, price cuts by U.S. firms produced an upheaval in the personal computer market. Apple gained a 13.4% share, consolidating its position as Japan’s No. 2 best-seller. Overall, U.S. makers held a 23.8% share, up from 15.1% in 1992.

Yen appreciation, which lowers the cost of imports, is forcing manufacturers to seek their own form of bargain-hunting overseas.

In a historic turnabout, Japan for the first time last year imported more television sets than it exported, thanks in large part to “reverse imports,” or purchases from Japanese plants overseas. Similarly, Japanese auto makers were importing from their own plants in the United States more American-built cars than all of Detroit’s Big Three put together.

Overseas investment in manufacturing, although down from an annual peak of $16.3 billion in 1990, is still running at about $10 billion a year. Yet manufacturing still accounts for 28% of Japan’s economy--10% higher than in the United States--and Japan’s biggest industries remain heavily structured toward exports.

The biggest problem, however, continues to lie in the mind-set of bureaucrats, businessmen and even ordinary Japanese. The people here know that change is needed to revitalize their system. But their fundamental instincts still gravitate toward the status quo.

Despite more than a decade of administrative reforms, the number of national government regulations actually has grown--to about 11,300, with 300 added just last year. And even now the Fair Trade Commission allows 159 cartels to exist.

Japanese are taught from childhood that Japan lacks natural resources and must export to survive by adding value to imported raw materials through manufacturing. Even the tiny number of grass-roots movements that have developed under the name of “consumer organizations” seldom question prices.

“Of course, there are market rigidities in Japan that work against the interests of the consumers, but there are no real consumers. They are producers because they are employed by producer companies . . . and they are most concerned about their jobs,” said Kazuo Nukazawa, managing director of Keidanren. “When they are buying things, they want to buy cheaply. But when they are afraid of keener competition and the probability of bankruptcy, they resist (deregulation) along with the companies.”

Even if a stronger leader emerges as Hosokawa’s successor, implementation of reforms will be “very difficult, because the obstacles come from Japanese society itself,” Mizutani said. “Every society has its own habits and customs coming from its long history.”