Lagging Readiness Could Disrupt U.S. Trade, Bank Systems

TOKYO

A Japanese variety show recently sent camera crews out to see what the average person on the street here thought about the year 2000 computer problem. In Japanese, however, the expression for Y2K sounds a lot like “juvenile delinquency.”

“It’s a huge problem,” several people said intently. “All these young people nowadays just hang out without jobs and make trouble all day.”

Anecdotes like these, backed by international surveys and Japanese government research, suggest Japan still lags the United States and some other industrialized nations in the race to recognize, find and fix the Y2K problem before Jan. 1.

Last year, a GartnerGroup survey placed Y2K readiness in Japan, the world’s second-largest economy, among the ranks of Egypt, India and Poland.

Over the last few months, however, Japan has worked overtime to narrow the gap,perhaps embarrassed by the bad press it’s received. The most recent GartnerGroup survey promoted Japan to the top category as many Japanese industries improve their readiness.

“Compared with last year, we’ve made significant progress,” said Seeichi Kondo, deputy director general with the Foreign Affairs Ministry and Japan’s Y2K point person. “Overall, our private sector is probably behind the U.S. by three months” compared with six to nine months last year.

This reduces--but doesn’t eliminate--the risk that Y2K weakness in Japan will disrupt U.S. banking, transportation and trading systems.

“If the international trading system broke down and there was no shipping service, it could cause huge problems affecting America’s trade and create traffic nightmares in giant ports like Los Angeles and Long Beach,” said Yasushi Obata, general manager of the Japan Shipowners’ Assn. “We think it’s essential to deal with Y2K as soon as possible.”

One reason that Japan--a nation that supplies cutting-edge technology to the world--was slow to take the Y2K problem seriously may be its generation gap, analysts say. In this tradition-bound nation, many senior posts are still filled by sixtysomethings who are not computer-literate. “Many top executives didn’t use computers when they were younger, so they really can’t understand the problem,” said Yuji Nakahara, information systems manager at Asahi Glass.

Another factor has been Japan’s system of recording dates--which is based on the emperor’s reign rather than the Gregorian calendar. This lulled many Japanese into thinking they didn’t have a problem, analysts said. Thus this year is Heisei 11 in Japan, not 1999. “A lot of Japanese people and banks think Japanese dating is going to save them,” said Brian Walker, product manager for Gateway Japan. Unfortunately, software using these dates still depends on underlying operating systems tied to the Western calendar.

A third factor may reflect Japan’s weaker emphasis on contingency planning and risk assessment relative to the West, some analysts say. “Maybe Japanese are not good at simulating problems ahead of time,” said Asahi’s Nakahara. “Once we have the picture, though, we’re the type of people that deal with it really well.”

Giant companies such as Honda, Toshiba and Toyota have the resources and motivation to fix Y2K problems. Of greater concern are smaller, recession-battered firms. “Most small companies are riding a bicycle with two flat tires and a chain about to come off,” said Darrell Whitten, a strategist with ABN Amro.

While smaller companies tend to lag everywhere, the potential for a chain reaction in Japan appears greater. Driven by space constraints, Japanese manufacturers have pioneered just-in-time delivery systems that are the envy of the world. Although these keep inventory to an absolute minimum, even a small glitch can shut the system down.

Japan got a taste of this in early 1997, when a fire at a brake valve plant shut down all 14 Toyota factories in Japan for four days. Foreign diplomats worry that a worst-case scenario could further undermine the Japanese economy and even cripple sectors of U.S. industry that depend on Japanese components.

But Japan has kicked its compliance efforts into gear. Its financial and civil aviation systems have been tested successfully, about $320 billion in reserve bank notes has been printed and many industries expect to be fully ready by June, under prodding from powerful bureaucrats.

“Japan was in denial for a while but is now aware it has a problem,” Whitten said.

That said, the deep-seated rivalry between ministries could hurt coordination, and resources also are limited. A survey by the Japan Information Service Industry Assn. projects a shortfall of 150,000 systems engineers nationwide.

Japan’s recent whitewashing of its bad-loan problems and its poor track record on disclosure also leaves some analysts wondering if official Y2K readiness surveys can be trusted. “One [chemical] company said they were 50% of the way to solving Y2K,” said Nicholas Smith, an analyst with Jardine Fleming Securities. “I think that’s 50% of the way toward having computers.”

Although Japan has unique problems, it also has advantages to make up for lost time.

One is its robust industry association system, which spread the word quickly once the problem was recognized. Another, somewhat paradoxically, is Japan’s comparatively low level of computerization. “Even now, the number of people with PCs on their desks is relatively limited,” said Garry Evans, a strategist with HSBC Securities.

Finally, because only a few long-dominant companies with lifetime-employment policies shape the computer sector, they tend to remember where the embedded chips and other problems are buried. “The Japanese system has been criticized by market economists,” said the Foreign Ministry’s Kondo. “But some aspects are quite helpful in the Y2K problem.”

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As the World Turns 2000

When the internal time clocks of automated systems worldwide turn over to year 2000, the consequences seem dire for countries that have not prepared. Even those that have done their Y2k homework may suffer minor disruptions, but the less ready could experience widespread and severe interruption of vital services. This map shows the Y2K readiness of various countries, based on a survey released in March.

Level 1: Mostly isolated cases, minor severity

Level 2: Mostly isolated cases, moderate severity

Level 3: A mixture of isolated and regional problems of generally moderate severity

Level 4: A full range of problems, from those that are isolated and minor to those that are widespread and severe

Level 5: No information available

Potential Year 2000 Problems

Power loss/brownouts

Telephone operation disruptions

Natural gas disruptions

Air transportation disruptions

Oil shortages

Shortages of certain foods

Water shortages or service disruptions

Government service disruptions

Bank disruptions or panics

Unrest

Import/export disruptions

Source: GartnerGroup survey of nearly 15,000 companies in 87 countries.