Toyota problems with recalls can lead to a new Japan

The Prius recall by Toyota is another wake-up call for the Japanese to shift their corporations, government, and society to a new economic strategy.

For the Japanese, the Toyota recalls have reinforced their worries about the long-term decline of Japan’s leadership in making things for the world – especially innovative products, like the Prius.

Yet, the Toyota problems could finally force all of “Japan Inc.” to make the necessary shift to a new economic strategy – one that relies less on manufacturing and export giants like Toyota. 

Whether Japan likes it or not, that shift is already under way. 

The share of manufacturing in its economy has dropped from 28 percent to nearly 20 percent over the last two decades, which follows a similar decline in America. Then, during the recent deep recession in the United States, Japan suffered a huge drop in exports.

That only persuaded more Japanese of the need for fundamental reform of their society and government.

As a result, an election last fall saw the ouster of the Liberal Democratic Party. The LDP had been in power for decades largely because of its success in backing civil servants who designed a mercantile industrial policy that turned postwar Japan into the world’s second-largest economy. 

With the decline of that economic model since 1990 and with record unemployment, voters turned to the relatively new and untested Democratic Party of Japan to rule. The DPJ promised to end Japan’s dependence on exports, starting with an attempt to take away control over the economy from the nation’s powerful bureaucracy. 

The DPJ’s internal problems and resistance from civil servants have made that task difficult. Compounding the challenge is the fact that the Japanese population is rapidly aging – a function of a low birthrate. And Japan’s official debt is twice the size of its economy, a result of overspending by the LDP to win votes and stay in power.

But the biggest challenge for Japan is making a cultural shift that will open its society more to the world and push the economy into a postindustrial model. 

Some changes are obvious. Japan needs to be more welcoming to foreign investors, relax rules on its workforce, and end its subsidies to its farmers and businesses. With 127 million people, it must develop a stronger domestic market and find ways to export its service industries, from finance to management consulting. 

Other changes are more cultural. The Japanese, while very innovative in product development and craftsmanship, need to allow more freedom for inventors and for entrepreneurs. Very few Japanese win Nobel prizes in science. A mind-set that focuses on making material objects must now be complemented with developing big ideas, such as innovative software.

Toyota’s woes reveal a Japanese focus on excellence in products that neglects other, less visible problems, such as a corporate climate in which workers were afraid to challenge managers and a company attitude that shows little regard for complaints from customers.

Japan’s rigid structure in government, corporations, and society needs a shake-up if more problems like economic stagnation and major product recalls are to be avoided.

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