What Japan Got Right.(International Edition)

Byline: Robert Alan Feldman; Feldman is a Managing Director of Morgan Stanley Japan Securities Co., Ltd.

The economic news isn't all bad.

Interest in Japan among global investors and policymakers is abysmal. Indeed, in many discussions, Japan is regarded as a museum piece or even a "failed economic state." High national debt, low returns on capital, high vulnerability to energy and agricultural shocks, a growing class of the permanently poor?.?.?.?the list of reasons to ignore Japan is well known. This attitude is dangerous. The lessons from Japan's failures are clear. However, there are also things that Japan has done right economically--things that other nations would do well to emulate. Below are three important ones.

First, Japan has had huge success in inventory management. The country invented the idea of just-in-time production and delivery, but it has now taken the concept to another new level. The benefits of this are helping Japan avoid what might have been an even steeper downturn. Until the 1990s, any sharp drop in production would result in a sharp growth of inventories, which would in turn make it more difficult for factories to start producing again quickly when the economy improved. Now firms can adjust production very quickly, so that inventories do not pile up.

For example, as global demand collapsed last year, production in Japan was cut by 33apercent between September 2008 and February 2009, but inventories rose by only 3apercent by December, and subsequently fell. Had such a downturn in demand happened prior to better inventory control, the country would have faced many years of excess product in warehouses. The strict control of inventories will help Japan going forward. Low global demand may well hold production down, but inventory adjustment will not prolong the pain. Indeed, once begun, the pace of recovery in Japan may exceed expectations--at least until inventories are back to normal.

Second, Japanese firms tend to have strong balance sheets. At one time, these firms were notorious for holding too much cash. However, in light of the recent global disturbances, the benefits of having cash on the balance sheet are -clearer---especially when financial contagion reduces the reliability of both banks and capital markets as sources of cash. Darwin's metaphor is apt: even though long necks seem like a waste in normal times, giraffes have an advantage in a drought; they can eat the leaves on the tops of trees that are out of reach for other animals. In an economic downturn, ...