NEWS ANALYSIS : Kobe Is Watched for Clues to a New Japanese Direction : Rebuilding: Will the country’s rigid bureaucracy break the mold and undertake a people-oriented reconstruction?

KOBE, Japan — It’s been a little over two weeks since the great Kobe earthquake, and already 100 massive cranes have broken up and removed the quarter-mile stretch of toppled roadway that had come to symbolize the fallen city. Damaged factories are quickly being repaired and put back in production; key roads are being patched together to carry traffic while more permanent structures are built.

The swiftness of the cleanup and rebuilding effort in Kobe, a sharp contrast to the incompetence of the emergency relief effort, is an example of how quickly Japan can move when economic demands point in a clear direction.

But Japan has no easy answers on how to help Kobe’s hundreds of thousands of homeless--and the newly displaced are not the only ones interested. The entire industrialized world is watching closely, because how Japan deals with this and other post-quake issues will offer a glimpse of how the nation is likely to guide its economy and society into the next century.

After the catastrophic 1923 Kanto earthquake, the government used the opportunity to transform Japan from a light-industry economy to a heavy-industry machine.

Today, in the rubble of Kobe, will Japan--which has for two decades given lip service to the need for better living standards for its people--seize the opportunity to build safer and more spacious homes, roads and parks? Or will reconstruction focus once again on improving industrial efficiency?

Will Kobe be a symbol of a new, international-minded Japan or a model of the old, insular Japan? Will the decisions be made by bureaucratic fiat or by democratic initiative?

The Kobe disaster comes at a pivotal point for Japan’s fabled bureaucracy, and it has worsened an already dark public mood. In a survey taken shortly before the earthquake and published soon afterward, 60% of the respondents expected their lives to get worse over the next 20 years. That’s a stunning admission for a country that regularly runs $110-billion trade surpluses and whose national savings exceed $10 trillion.

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It is a shift in attitude that has been long in the making. Confidence in the government, and particularly in its bureaucratic power brokers, has fallen as a result of the sharp plunge in land and stock prices over the last six years. Rapid changes in party rule have undercut a sense of political stability.

Now the collapse of supposedly quake-proof roads and rails has further lowered the credibility of the central government.

Its resurrection may depend in part on the handling of Kobe’s recovery.

But an effective long-term response to the quake’s devastation may require the government to go beyond its traditional approach of supporting small industry and financing public works projects. Many economists argue that the revival of Kobe and, indeed, of the Japanese economy, requires nothing less than a transition to a consumer-led economy of the American or European variety.

“With overall exports slow, unless consumer spending in Kobe rises, Kobe’s economy can’t be supported,” says Akio Mikuni, president of his own credit-rating agency here. “Consumer spending and housing have to come first. The system will be tested by how individuals (in Kobe) can rebuild their lives.”

The government’s role in Kobe will be particularly important, because consumer attitudes across the nation are already being affected by doubts about the fate of the star-crossed city.

“People see what is happening in Kobe and are pulling back on spending,” says Masaki Masuda, analyst at NLI Research. “We have to help people (in Kobe) that can’t help themselves or there will be social anxiety. You never know when the same thing might happen to you.”

Despite the urgency of the moment, inertia is strong. Bureaucrats are still chiefly worried about finding ways to keep manufacturing firms from moving production offshore. For many, the earthquake is just another excuse to call for more diligence. The traditional notion that the road to recovery lies in more savings, harder work and further belt-tightening remains a popular one.

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“We don’t have to be more prosperous,” says Kenji Mizutani, president of Tokai Research & Consulting, a Nagoya-based think tank and a critic of government deficit spending. “We are eating enough. We should raise taxes and use that money to build better roads and train lines.”

Mizutani suggests rebuilding Kobe the traditional way, by taxing people “even if it means a lower standard of living (for the rest of the nation).” Rebuilding Kobe, he estimates, will cost $150 billion over two years and provide a boost to a national economy that is being dragged down by overcapacity.

But even Mizutani, whose own hometown of Nagoya was partly reinvented as a “planned” city following a devastating 1959 typhoon, admits that Kobe’s destruction offers a rare opportunity to build a modern and more livable metropolis.

Land that was covered with thousands of tiny single-family homes--destroyed by the quake--can now be given over to larger apartment complexes allowing for wider roads, more parks and greater living space.

“You don’t have to destroy the old homes; you can just start building. It’s like Schumpeter--’creative destruction,’ ” says Minoru Tada, general manager of the Osaka office of Nomura Securities, quoting the late Harvard economist Joseph Schumpeter, who saw new economic systems arising from the ruins of the old.

Larger buildings with more spacious apartments will help house the displaced and spur a cycle of domestic growth beginning with purchases of furniture and appliances. And psychologically, it will reassure the Japanese that they will be cared for in future disasters and make them feel freer to spend some of their savings to live better. Broader roads and more parks will create the ambience of a developed country that is missing from most Japanese cities.

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But that will require making some private land public, and such efforts will run into laws that make it difficult for the government to force citizens to sell their land for the public good. The Japanese parliament is currently debating the need for such a law and the development of such policies.

The change will require greater political participation and some unpalatable choices. “In the past everything was determined at the top. At some stage, the citizens have to decide,” says Mikuni. “Without local support, it won’t work.”

While it would be costly, Japan might also invest some of its huge store of capital to heed the Kobe lesson and rebuild hundreds of thousands of public housing units across the country that are the same vintage as those that collapsed in Kobe--and could prove to be similar deathtraps.

Among other things, however, the creation of a new Kobe that favors consumer interests would require scaling back other bureaucratic priorities. That doesn’t seem likely to happen soon.

It was the Japanese bureaucracy that proved slow in implementing quake relief efforts. In a recent survey by the Asahi Shimbun newspaper, 53% criticized the government effort. Television programs and newspapers have been unusually critical of the bureaucracy’s slow and rigid handling of the relief effort.

Japanese supermarkets reported that the day after the earthquake, with Kobe in ruins and the stores struggling to serve their customers, the Ministry of International Trade and Industry reminded them that a law designed to protect small stores required the large stores to notify the ministry of any changes in operating hours.

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“Even in emergency situations, when a law is relaxed, the ministry must be notified. Rules are rules,” an official told the Japanese daily Mainichi Shimbun.

Such rigidity causes more than mere frustration. It is part of a web of policies that has served to limit foreign participation--and thus the prospect of lower consumer prices--in Japan’s economy. The continuation of such rigidity could make it difficult, for example, for large American retail chains to join in developing an efficient, low-cost distribution system as Kobe rebuilds.

Other, less-visible forces will also keep foreign firms from exploiting new opportunities in the rebuilding of Kobe. In times of crisis, such as this one, companies show their loyalty by continuing to order from traditional suppliers even if they are late in supplying goods. Suppliers, in turn, hold down prices in the interest of maintaining the long-term relationships for which Japanese industry is noted.

When the earthquake damaged production facilities at Sumitomo Denko, a key Kobe supplier of automotive brake components, Mazda and other car makers that rely on its production sent in teams of engineers to get the factory running again. There was little thought of looking for alternative supplies.

Similarly, although South Korea would be the obvious place to turn for low-priced steel and cement to help rebuild Kobe, any orders for Korean firms will likely be short-term.

“If you were to go overseas for supplies, you would be murahachibu (exiled from the village),” says one industrialist.