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JAMES FLANIGAN

Japan Won't Retreat From World Markets

April 15, 1986

Does the fact that Japan is going to devote more of its considerable energies to building up its domestic economy, as Prime Minister Nakasone has just pledged in Washington, mean that the island nation will become less of a competitor internationally? No, it doesn't.

Well, then, is this another case of Japan--which exported more than $70 billion worth of goods to the United States last year--talking one way and acting another, following a talk-talk, ship-ship policy? No, it is not.

What lies ahead is a period in which exports to the United States will cease to be virtually the sole engine of Japan's economic growth, as they have been for the last five years. But that will be no reason for American companies to delude themselves that their Japanese rivals have retreated from the field. The likes of Hitachi, Matsushita and NEC will give U.S. firms a fierce fight in other world markets--and will take the game away in some giant markets just beginning to open up--unless U.S. firms wake up to the realities of the global economy.

A few significant statistics give us a glimmering of what is happening at the moment, and why. Domestic buildup is overdue in Japan. Although they live in the second-richest country in the world, the Japanese have 37% less housing space per person than the West Germans and British, and 57% less than the Americans--and half of the houses in Japan lack flush toilets.

Yet home building has actually declined since 1978 because builders were not favored with the low interest rates that exporters get. As a result, prices for existing houses, and land, skyrocketed while the people's savings piled up, causing an unhealthy lag in the domestic economy.

Japan's recent record in world trade has been lopsided, too. Its exports to countries other than the United States have scarcely grown at all--up 19% over five years to other nations of Asia, for example. But its exports to the United States are a different story, up 128% since 1981--while U.S. exports to Japan grew only 10%. Another unhealthy imbalance.

So the Japanese economy is about to undergo a major shift, the rough equivalent of economic deregulation in our own economy. There will be pain for some: Subsidies to agriculture may be cut so that U.S. produce can be imported. Tax policies will be changed, home building encouraged. Export subsidies and tax benefits will be trimmed for some small manufacturers.

But Japan is not retreating from international competition. On the contrary. The large firms that have made it an industrial power will build on the strength of the international networks that they have put in place in the last five years. Here's another significant statistic: Japan's electrical and electronics industries have doubled their capacity in the last half-decade.

While the world questioned such seeming overexpansion, the Japanese were building with the world market in mind. Japanese companies have built parts plants and distribution centers in both developed and developing countries. At least in part, the expansion was paid for out of profits earned in the U.S. market, which was flooded with product in recent years.

Now competition will be tougher for U.S. firms in European markets and in those of Latin America, too. In developing Asia, Japanese companies have built factories in countries such as India that promise immense markets in the next decade. What the Japanese are doing, of course, is fertilizing new markets with profits from old ones. It is what U.S. companies did when they turned this country into a national market from a series of regional ones. Curiously, and ominously, however, one finds only a few U.S. companies--IBM for one, the banking company Citicorp for another--building today with an understanding of the global market.

Most U.S. companies, unfortunately, have been pulling back from overseas investment, particularly investment in developing country markets. It is both hard to predict, and hard to earn, a rate of return on investment in such markets--at least within the time horizons of American corporate planners. Several companies, notably General Electric, have pulled out of India, for example, within the last decade. Conditions are difficult there, profitability hard to come by. But the Indias of this world represent business in the next decade. And if you're not sowing seeds there today, you're likely to reap a scant harvest when the 1990s roll around.

Maybe we should focus less on the short-term problem, the trade deficit that will soon diminish, and more on the continuing challenge: retaining U.S. industrial leadership in the world.

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