Japan exposes its sense of insecurity

SUDDENLY Japan no longer seems the all-conquering global economic superpower. Honda is miserable about the sale of Rover to BMW, the one car company in the world it probably fears most. Yesterday it emerged that Japan would abandon its 30-year effort to develop a world standard for high definition television and use the more advanced US one - an astonishing reverse for a country that has led the consumer electronics revolution.

At the same time, the recession has cut Japanese manufacturing production more sharply than British or American - forcing it to accept that it must de-industrialise faster and build up service industries instead. Worst of all, the Americans refused to accept Japanese excuses for the trade gap between the two countries. After the breakdown of the trade talks earlier this month, the US is now preparing to impose sanctions on Japanese exports.

The jury is out on whether this is the beginning of Japan's eclipse as economic top dog, or merely a blip on its progress. My own guess is that it marks a stage in Japan's development through which its performance will come to be much more like that of other developed countries. It will continue to grow, but much more slowly than in the past. It will continue to be admired, but we will become more aware of its weaknesses as well as its strengths.

But to note the weaknesses would actually come as much less of a surprise to people in Japan than it would to people here or in North America. Viewed from Japan, the success is a triumph against adversity: it is a tiny and crowded set of islands, frequently subjected to foreign bullying, desperately vulnerable on account of its lack of natural resources, and open to the vagaries of international trade and financial flows. We tend to see Japanese protectionism - or the aggressive pursuit of its commercial interests - as arrogance; actually, it reflects their deep sense of insecurity.

If one accepts that, suddenly the 'disappointment' of Honda about the sale of Rover to BMW becomes explicable. On the face of it, it should matter little whether Rover is owned by a British aircraft manufacturer or a German car firm. The co-operation has been useful in that Honda has been able to sell its technology, but Honda did not really need Rover. It has its own plant here in the UK and is a very strong brand name in its own right. Yet Honda will wind down the relationship as quickly as is practicable.

Seen from Honda's perspective, the deal with Rover offered access without threat. Rover was a client. It gave low-risk access to the European market but depended completely on Honda technology for developing new cars. Honda was happy to sell its technology on this basis, for Rover could never become a threat in world markets.

BMW, by contrast, is feared. In terms of design and development (though probably not production), it is even marginally ahead of Honda. The Japanese firm could not stomach a relationship in which it would no longer be the dominant partner. Add in the fact that one of its most feared competitors would gain detailed knowledge of its technology and you can appreciate the sense of being cheated, too.

But surely this is pretty much what Japanese companies do: they enter a partnership with a foreign firm in a new venture and, when they have learnt all they can, they pull out. A senior executive at one of the largest US investment banks told me a few months ago that they would never again have a joint venture with a Japanese company. They did have one on the Continent with a large Japanese securities house that wanted to get into other EC markets. As soon as the Japanese staff had built up relationships with customers, the company pulled out and established its own subsidiary.

Why is it all right for the Japanese to behave like this but not for foreigners? Answer: because the Japanese perceive themselves as underdogs. Many top managers of large Japanese firms will have spent their early working life taking foreign goods to bits and producing exact copies of them. We regard that as stealing; they saw it as justified because the West was economically so much stronger.

The perception of Japan as underdog explains a further element of Honda's shock. It might just have understood if Rover had wanted to go it alone without Honda now that it is once again on its feet. It had protected itself against that by complex licensing agreements. It was much harder to understand the business being sold to a company in another country. Japanese companies cannot be sold to foreign interests in the way that Japanese firms can buy companies abroad. But that is because they think that Japanese companies, being weak, need protection from foreign predators. The barriers to overseas takeovers are thus a necessary protection against foreigners who would otherwise steal Japan's best assets.

The breakdown of the trade talks with the United States can also be seen as a result of Japan's sense of insecurity but could have much more serious consequences. From the US point of view, Japan has long used a raft of bureaucratic controls to keep out US goods. US rice was banned; its meat was deemed unsuitable for Japanese intestines; its apples were alleged to carry dangerous bugs; and its skis were rejected because Japanese snow conditions were different to American ones. (I heard an eminent Japanese explain at a seminar at the London School of Economics that this caution was justified on safety grounds: the snow, he admitted, might be much the same, but conditions were different because their pistes were more crowded and Japanese skiers were less expert.)

Now the US has insisted that Japan should have specific targets for imports from the United States, for example, for cars. Japan felt that this was both unreasonable and impracticable: how could it ensure that US cars accounted for a specific proportion of the Japanese market when most US manufacturers could not even supply right-hand-drive models? They saw this as bullying at its worst.

Any imposition of trade restrictions would be very serious for Japan, especially as it would hit the country at the bottom of the economic cycle. It would also be a shock to Japan because it had never equated its own bureaucratic efforts to restrict imports with US bureaucratic efforts to increase them. Put unkindly, it did not expect to be given a taste of its own medicine. Japan, in its own view, was allowed to behave that way because it was a small and vulnerable island; the US was not allowed to behave like that because it was rich and powerful. Underdog status justifies cheating in trade, as it justifies cheating by copying other people's technology.

Japan's fragility is easy to explain. Anyone over 50 will remember the poverty, pollution and sheer grind of life in the Fifties and Sixties - just as older people in Britain will remember jokes about cheap Japanese imitations. It was only in the Seventies that its industry started to pull ahead, and only in the Eighties that its great overseas commercial empire was being assembled.

But there is a big message in what is happening now. Japan's perception of itself is going to change; it will have to change. And in as far as the West has any influence on Japan, it is in our interest to assist this change.