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What Ever Happened to Japan?

Once poised to pass the U.S. as the world's economic superpower, Japan is now suffering from a two-decade-long slump that shows no sign of ending

By Martin Fackler and Steve Lohr

Kento Nosaka, a 17-year-old high school junior in Sapporo, is like many Japanese these days. He steers clear of expensive brand names, shopping instead at the popular Japanese clothing retailer Uniqlo. He rents movies rather than seeing them in theaters. And he streams music from free online radio stations instead of paying for downloads.

"The economy is in decline," says Kento. "People are spending less money, they don't go to foreign countries, they don't buy expensive things like houses and cars."

Few nations in recent history have seen such a striking reversal of economic fortune as Japan has in the last two decades.

Following the devastation it suffered in World War II—when the U.S. dropped atomic bombs on Hiroshima and Nagasaki to end the war in 1945—Japan's economy exploded. From the 1950s to the 90s, economists marveled at the "great postwar economic miracle," and Japan became the first Asian country to challenge the long dominance of the West. It built a manufacturing empire, with brands like Sony, Toyota, and Nissan turning out innovative electronics and cars year after year that Americans and Europeans couldn't live without and couldn't seem to build themselves.

In the 1980s, Japan's growing middle class lived large, flying by the planeload on flashy shopping trips to Paris and snapping up luxury condominiums in New York and Hawaii. While today the U.S. is concerned about the challenge from China, 20 years ago it was Japan that had Americans nervous. Economists predicted that Japan would replace the U.S. as the world's largest economy by 2010.

Disappearing Jobs

But nothing like that has happened. In the late 1980s, Japan's real estate and stock market bubbles burst, and its economy went into a slow but relentless decline. For a generation now, Japan has been plagued by "deflation"—a decrease in the prices of goods and services. Because of fewer available jobs and lower salaries, Japanese are holding on to their cash instead of spending it, causing the economy to slump further.

A real frugality has developed among a generation of young Japanese, who have never known anything but economic stagnation and deflation. Struggling companies looking for ways to cut costs are offering recent graduates only temp work, low pay, no job security, and little on-the-job training—if they're hiring at all.

"Most college students cannot find a job," says Kento, so they take jobs in restaurants, convenience stores, or as telemarketers.

Another factor that has kept Japan's economy from rebounding is its demographics. Japan's life expectancy, 83, is among the world's highest, and its birth rate, 1.4 per woman, is among the lowest.

The result: Japan has the oldest population on earth (30 percent of Japanese are over 65, compared with 13 percent of Americans) and a shrinking population and workforce, which will mean lower productivity and weaker demand over time.

'Survival Generation'

Immigration could help ease some of these problems, as it has in the U.S., but Japan lets in very few immigrants. "America manages to stay vibrant because it attracts people from all over the world," says Hidenori Sakanaka of the Japan Immigration Policy Institute. "On the other hand, Japan is content to all but shut out people from overseas."

While unemployment in Japan is relatively low, at 4 percent compared with 10 percent in the U.S., good jobs are scarce and wages are falling.

Yukari Higaki, 24, says that although her generation still lives comfortably, she and her peers are in a defensive posture, always ready for the worst." We are the survival generation," says Higaki, who works part-time at a furniture store.

Hisakazu Matsuda of the Japan Consumer Marketing Research Institute has his own name for Japanese in their 20s: consumption-haters. He estimates that by the time this generation hits their 60s, their thrifty ways will have cost the Japanese economy $420 billion in lost consumption.

"There is no generation like this in the world," says Matsuda. "These guys think it's stupid to spend."

Many young Japanese recognize that their generation is less driven than previous ones. In an online survey of 18- to 22-year-old Japanese, two-thirds said young people had become "introverts," resigned to a life without ambition.

For many people under 40, it is hard to grasp just how different this is from the 1980s, when a mighty—and threatening—"Japan Inc." seemed ready to obliterate entire American industries, from automakers to computer companies.

"What are our kids supposed to do?" asked Walter Mondale, the Vice President under President Jimmy Carter (1977-81). "Sweep up around the Japanese computers?" His comment captured the economic pessimism of the time, even if today it's ironic on a few levels. First, most Americans no longer think of Japan—which has produced no rivals to Microsoft, Apple, Google, or Facebook—as technologically ahead of the U.S. And second, it's China's economic power, not Japan's, that has Americans worried today.

Will the U.S. Be Next?

Though Japan remains in many ways a relatively prosperous society—it's still a world leader in autos, machine tools, flat-panel displays, and other parts of the consumer electronics industry—it faces an increasingly grim situation, particularly outside of Tokyo. Last year, China overtook Japan as the world's No. 2 economy, a distinction Japan had held since 1968. And some economists predict that by 2050, Japan will be edged out by others, like India, Brazil, and Mexico.

As the U.S. and other Western nations struggle to recover from the economic crisis that started in 2007 and the recession that followed, some economists point to Japan as a dark vision of the future. "The U.S., the U.K., Spain, Ireland, they are all going through what Japan went through a decade or so ago," says Richard Koo, chief economist at Nomura Securities in Tokyo.

Other experts remain confident that the U.S. will avoid the stagnation of Japan.

"We're not Japan," says Robert Hall, a professor of economics at Stanford University in California. "In America, the bet is still that we will somehow find ways to get people spending and investing again."

As for Kento Nosaka, the high school student in Sapporo, he says he isn't bothered by the fact that China's economy has overtaken Japan's. But he does think Japan has to make some changes to get back in the game. "We need to be more international to improve," says Kento.

That, he says, will include maintaining good relations with other countries and admitting more immigrants. He also thinks more Japanese should learn English and study abroad. Next year, when Kento graduates from high school, he hopes to study psychology in England or Germany, then build his future in Europe.

"I'm not sure what kind of work I will find," he says. "But I'm interested in seeing how people who are different from us think about the world."

(The New York Times Upfront, Vol. 143, February 21, 2011)