Japan's R&D Remains Strong as Economy Struggles to Turn Corner

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PERSPECTIVES

News and Views of the Current Research * Technology Management Scene

Japanese economists are speculating that Japan's decade-long recession might finally have begun to bottom out. But when it does turn the corner, will Japan's world-class capabilities in research and the new vitality among some major companies be sufficient to reinvigorate the economy? This question sits at the center of debate on the future of the Japanese economy.

Despite the September stock market decline, it should be noted that Japan's economy is not in decline. It remains the world's second largest economy, with significant levels of investment and trade, and R&D spending second only to the United States. Rather, the Japanese economy remains stagnated from the fallout of the bubble in the real estate and stock markets of the 1980s, and the three resulting recessions in the 1990s. While unemployment is higher than in the past, it still is below that of Western Europe. New construction is occurring.

Many Japanese companies remain world leaders in many sectors. Not surprisingly, recent spending increases in Japanese R&D have been highest in the electronics, machinery and automotive sectors. For example, in JFY 2001, the Japanese automotive industry spent a greater percentage of revenue on R&D than ever before (6.8 percent of estimated sales). Japanese and U.S. affiliates continue to invest large amounts in each other's countries: Japanese affiliates nearly $2.6 billion in R&D in the United States, and U.S. affiliates over $1 billion in Japan. Also, in terms of sales, Japan has eight of the world's 50 largest companies, more than any country except the United States. Toyota and Sony rank third in their respective sectors. Mitsubishi and Mitsui Corporations are, respectively, the world's second and third largest diversified companies.

However, the fallout from the bubble has left Japan with issues that are not adequately resolved. Japanese banks still have enormous amounts in non-performing loans, estimated by some between Y100 trillion to Y250 trillion. There is still a large overcapacity in its manufacturing sector. Many of the rules and regulations that led to poor business decisions during the 1980s (e.g., lack of transparency, lax accounting, over-regulation) remain. Deflation exists. The bubble fallout also created a crisis of confidence that helped further weaken capital investment by corporations and undermined consumer spending.

The government's slow, and sometimes vacillating, pace in implementing reforms has not helped. The non-performing loan problem has not been addressed adequately or rapidly enough due to political difficulties in implementing many of the needed structural reforms; hope that renewed economic growth was just around the corner tempered the need for them. The 1997 tax increase was badly timed and helped lead to the recession of 1997-98 by prematurely cutting off a recovery. Political leadership, while stronger under current Prime Minister Koizumi than under his predecessors, has been weak. There has been mixed success in attempts to increase the power of the Prime Minister's Office and the accountability of politicians and the bureaucracy.

Reorganizing S&T

It is within the context of its lackluster economy and weak political leadership that Japan completed most of its reorganization of government science and technology in 2001. In 1995, the Diet passed the Science and Technology Basic Law, which has been implemented through two successive five-year plans. The plans have sought far-reaching structural changes in organization and laws related to S&T management, and greater strategic planning at the national level. The reforms seek to reduce redundancy among government research entities, and enhance cooperation among the various S&T players.

Japan's policy-makers also have enacted changes that should enhance pioneering and creative basic research capabilities and continue to provide support for those emerging technologies with a potentially wide and enabling impact (e. …