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Japan's Lost Decades: Could They Happen in the US?

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By Luke Ho-Hyung Lee and Jess Parmer

When the Japanese economy prospered in the 1980s, every country in the world was envious. But when Japan's Great Recession hit in 1990 with collapses in land and stock prices, people were surprised but immediately thought that it was just a correction in the regular economic cycle, and that Japan would resolve it soon.

The Japanese government and experts worldwide have tried to figure out the real cause for over 20 years, but to no avail. Moreover, it seems the United States is following a similar path: it doesn't look as if it was only Japan's problem any longer but every advanced economy's problem. What was wrong with Japan's economy? Why didn't the remedies work? Was the real cause of Japan's Great Recession the same as that of the current world-wide economic crisis? If this is so, why did Japan have it much earlier than elsewhere?

To answer these questions, let's imagine a situation: It is today well known that diabetic disease occurs either because the pancreas does not produce enough insulin, or because cells do not respond to the insulin that is produced, an overall body function failure. Was there a market function failure something like diabetic disease in Japan's economy? That is, weren't there several failed market functions, like a failing pancreas and failed cell functions?

We suggest you carefully examine Japan's exclusive, privately owned supply chain networks.

These worked very well in the Industrial Age, with its limited number of products and services, by protecting Japan's domestic industries, just as a healthy pancreas or robust body cells work well. However, the market situation abruptly changed in the Modern information Age. The number of products and services has increased explosively, and ways of doing business have become more complex.

Especially during the 1980s, Japan's prosperous period, many Japanese companies developed new products and services and at the same time created supply chain networks for higher profit and greater efficiency. That is, though more effectiveness-oriented activities (such as securing new customers) were required in its modern information-based market following the 1980s, only supply chain systems for efficiency-oriented activities developed and advanced in Japan. So, its markets became much more efficiency-driven just at the moment when large efficiencies became hard to find. And tooling up these electronic supply chains had cost a lot, while making lower prices and more jobs seem impossible, even silly, goals.

Due to this changed market environment, many Japanese companies off-shored or outsourced their manufacturing to lower labor-cost countries, mostly to China, and adopted full automation processes in their remaining domestic manufacturing. The disease was to be cured by making all healthy customers go on a diet; easy money in the form of lower borrowing costs was to make this palatable.

In this situation, Japanese companies couldn't expand their customer bases enough (or create enough jobs) to keep consumer spending at the desired level. Profit maximization, rather than lower prices, was the irresistible reward; customer bases refused to grow. That is, something like diabetic disease emerged in Japan's economy. Let's call that something the Efficiency Disease.

To keep the level of consumer spending up, Japan's government adopted a series of excessive expansionary economic policies, and accordingly many abnormal phenomena were created and accumulated in the market -- and finally, the asset bubble burst in 1990.

Then, what caused the occurrence of the Efficiency Disease in Japan's economy at that time? Wasn't it the failed function of Japan's privately owned supply chain networks? Clearly, they failed to effectively handle all market requirements in Japan's changed economic situation in the Modern Information Age. They were no longer suitable to Japan's modern information-based market.

Nevertheless, strangely, Japan has never tried to treat its Efficiency Disease, that is, to fix its failed supply chain networks, over the last two decades of its Great Recession. Many Japanese companies continue to develop advanced electronic supply networks. It seems Japan has simply tried to solve its economic problems without knowing what was causing them, and has added to its problems with a series of ineffective economic policies and stimuli.

Ultimately, Japan is not an isolated case: without being aware of the economic impacts, almost all Western countries, including the United States, have also developed massive private supply chain networks in their markets and have induced similar Efficiency Diseases in their economies. At a minimum, a lost decade of growth will also be unavoidable in these countries.

Strangely, even if it was possible with our advanced IT and networking capability, no open and public supply chain system as an electronic infrastructure has been developed at all--not a single one in the whole world! This is the "tragic flaw" of the modern IT-based economy, and We strongly believe it is the real cause of Japan's Great Recession -- and the current worldwide economic crisis as well.

Japan was like a rich man with a lot of savings, but it has spent too much over the last 20 years. The United States is still a reserve currency country, but its deficits pose a threat as the national debt becomes a serious issue for its economy.

If this Great Recession persists for the next decade, what will happen to the U.S.? The short answer: "Catastrophe!"

Then, what should we do?

We should immediately replace our outdated, closed, and private supply chains with a new open and public electronic infrastructure that is better suited to modern IT-based markets. We believe this is the most effective way to treat the Efficiency Disease in our markets and save our economy.

To suffer through a Lost Decade or to build effective economic revitalization - it depends on our choice.