No. 30 — August 4, 2000

Feature Article

JAPAN: LEADING OR FOLLOWING ASIA
INTO THE INFORMATION AGE?

Marc Castaellano

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Summary

Tokyo believes that information technology is the key to economic growth, both at home and abroad. To be sure, computers, electronics and communication products will play a central role in the future development of Asia. However, the "digital divide," the gap between the nations — or parts of nations — that have technology and those that do not, is a problem that must be addressed when considering the long-term prospects for growth in the region. Tokyo has made the proliferation of IT a global priority and is keen to lead its neighbors into the information age.

Asian leaders are actively pursuing their own IT development strategies, but they also welcome support from Japan. The Association of Southeast Asian Nations, for example, has encouraged Tokyo to take on a leadership role in the efforts to bridge the digital divide. Japanese policymakers have responded by introducing an aid initiative worth $15 billion and by taking steps to foster the development of IT at home.

Some observers note, though, that Japan is not considered a shining example of a New Economy — that is, one powered by technological innovation and characterized by rapid productivity gains — and is not exactly a trailblazer of the Information Age. However, business leaders and government officials are optimistic about Japan's potential. Indeed, corporations are increasing their investments in technology, and legislative changes to foster such investments are in the works. Moreover, Tokyo has launched a vigorous campaign aimed at "digitizing" the Japanese economy.

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Visions Of An "Asian New Economy"

In its annual report on Asian economies, the Economic Planning Agency hailed the power of information technology, suggesting that it could spur the development of an "Asian New Economy."1 IT already is proliferating rapidly in the region, as is evidenced by the explosion in the use of cellular telephones and the Internet. The number of mobile-phone subscribers in Asian countries outside Japan increased annually by an average of 75 percent from 1995 to 1999, while on the average, the number of Internet users in the region more than doubled each year from 1995 to 1998. Because many Asian countries produce IT-related products for export to industrialized nations — mainly to the United States — a large manufacturing base already exists that could be tapped to meet local needs as well. Intraregional demand for computers and consumer electronics is growing at a fast clip, and soon the dominant commercial interest may shift away from American markets to home markets.

According to the EPA, the spread of IT can result in a much faster pace of development than is possible with industrialization without the use of the technology. The advancement of this new technology is characterized by rapid innovation, inexpensive training costs and, at least for the moment, high profitability. Moreover, IT diffusion facilitates organizational restructuring and can help create new jobs, improved services, increased competition and lower prices. Of course, not every Asian country is equipped to take advantage of the IT revolution. Inadequate infrastructure and poor socioeconomic conditions will hamper the development of an Asian New Economy in many areas, aggravating the "digital divide" and widening income gaps. Nevertheless, IT may enable some countries to develop — jumping from a capital-intensive economy to a knowledge-intensive economy — without undergoing conventional industrialization. For example, the growth of gross domestic product per capita in Hong Kong and Singapore was linked more to the development of advanced service industries than to the growth of heavy industry. Thus, Asian economic development in the 21st century may not follow the traditional model of geese flying in formation; instead, it may better resemble an unorganized game of leapfrog.

Officials at the EPA caution that before technology can be leveraged effectively on a broad scale, significant challenges must be overcome. Inadequate communications infrastructure and shortages of intellectual capital — that is, people who know how to use or build IT — and venture capital may create crippling bottlenecks. In addition, legislation facilitating electronic commerce will have to be introduced. Success or failure in the Information Age will be determined by several factors, including the quality and quantity of infrastructure and skilled labor, cultural biases and social attitudes toward technology, and government IT-promotion policies and strategies. Despite the fact that many Asian countries have prioritized the development of the IT sector since the early 1990s, much more work still needs to be done.

Given these challenges and potential opportunities, EPA has made three key recommendations. First, Asian governments should promote the development of IT expertise through the Internet, training centers, and national awareness campaigns. Second, local information and communication network markets should be deregulated and liberalized. Privatizing telecommunications, for example, would spur competition and allow a key industry to develop more efficiently. Finally, Asian governments should outsource their IT operations to ensure they are employing the most advanced technologies available.

The EPA report concludes that if Asian economies can leverage the power of IT, a "New Asian Miracle" even may be born. Such good fortune may or may not be realized, but Tokyo is firmly convinced that IT proliferation will lead to stronger growth not only for the region but also at home. Indeed, EPA estimates that if the spread of IT can improve productivity to the degree that it has in the United States, Japan's gross domestic product could increase by as much as 4.2 percent annually. Tokyo is keen to help Asia realize the benefits of a new economy and has launched a major effort, focused both domestically and abroad, to achieve this goal.

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Japan As The Voice Of Asia

Tokyo had promised, as the host of the July summit of the leaders of the Group of Seven industrialized nations plus Russia, held on Okinawa, to make Asian voices heard at that international forum. Japanese officials particularly were concerned with Asia's views on IT, a top summit agenda item. In the months leading up to the event, Tokyo actively solicited the opinions of regional leaders.

In January, then-Prime Minister Keizo Obuchi traveled to Cambodia, Laos and Thailand to discuss summit-related issues (see JEI Report No. 3B, January 21, 2000). He also spoke with the leaders of the Association of Southeast Asian Nations — Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (formerly Burma), the Philippines, Singapore, Thailand and Vietnam — and other developing economies at the quadrennial meeting of the United Nations Conference on Trade and Development in Bangkok (see JEI Report No. 7B, February 18, 2000).

Prime Minister Yoshiro Mori continued such outreach efforts during his meeting with leaders of the 16 nations of the South Pacific Forum at the second Pacific Islander's meeting, held in April (see JEI Report No. 17B, April 28, 2000). Foreign Minister Yohei Kono also played an important role, addressing bilateral issues and agenda items for the G-8 summit with his counterparts in Asia during various meetings, for example, traveling to Southeast Asia this past spring (see JEI Report No. 18B, May 5, 2000).

Many Asian leaders took the opportunity to express their concerns, highlighting the issue of the digital divide. Thai Prime Minister Chuan Leekpai, who currently holds the rotating chairmanship of Asean, told Mr. Mori in an early June meeting that the effects of the IT revolution on developing countries was a key issue that Southeast Asian nations wanted to have taken up at the summit. Moreover, he encouraged Tokyo to dutifully fulfill its promise to speak for Asia at the summit. A senior Thai Foreign Ministry official indicated that Asean members also wanted G-8 leaders to set policy guidelines and tackle regulatory issues associated with IT. In addition, he was keen to have summit participants address the impact of the new economy on the old economy.

In June, other Asean leaders spoke for themselves during a series of bilateral meetings, held on the sidelines of Mr. Obuchi's funeral. Philippine Foreign Secretary Domingo Siazon requested of his counterpart that Japan take up electronic commerce as part of IT discussions at the summit. Mr. Siazon also emphasized the importance of addressing problems associated with the digital divide.

Asian leaders highlighted the need for support from Japan in other venues as well. At a March technology conference in Kuala Lumpur, Malaysian Prime Minister Mahathir Mohamad urged Tokyo to assist in the development of the region's small and midsize IT industries, by supporting enhanced capacity-building through training programs and technology transfer. More generally, he suggested that Japan could help with Malaysia's great need to build knowledge and IT-related human resources. Mr. Mahathir also called on Japan to participate in the development of Malaysia's Multimedia Super Corridor, a technology center established in Kuala Lumpur in 1995. For their part, Japanese business representatives indicated a willingness to work with Malaysia and other Asean member countries and to help them face the challenges associated with the Information Age.

In response to Asia's concerns, Tokyo began to draw up a plan aimed at helping its poorer neighbors bridge the digital divide. Eyeing the G-8 summit as the optimal time to announce the new initiative, policymakers considered a range of support measures. The Ministry of Education, for example, proposed that Japan promote education in developing countries by offering educational programs over the Internet and by providing IT training to school teachers and engineers. Tokyo's central objective was to devise a plan that not only would help launch an Asian New Economy but that also would highlight the role of Japanese leadership in the Information Age.

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Japan: IT-Growth Engine Of Asia?

As Asia's largest economy, Japan long has been committed to supporting regional growth and development. To underscore its dedication to this philosophy, Tokyo spearheaded an effort to tackle IT-related development issues at the Okinawa summit. Drawing attention to the problems associated with the digital divide produced two key results. First, the G-8 adopted the Okinawa Charter on Global Information Society, an international policy statement aimed primarily at promoting e-commerce and increasing access to technology worldwide. Most significantly, the charter called for the establishment of a Digital Opportunity Taskforce — the "DOT Force" — composed of high-level officials to study such concrete measures as deregulation and report progress to next year's G-8 summit in Genoa, Italy.

Second, Tokyo formally introduced a $15 billion aid package geared toward helping Asia enter the new economy (see JEI Report No. 28B, July 21, 2000). Elements of the generous plan had been foreshadowed as it was being formed in the months leading up to the summit. In May, Tokyo announced that it would unveil a host of new assistance measures to promote IT development, including an IT-training program for 10,000 workers from poor countries. Japanese officials also said that a satellite-based education program would be launched in FY 2000. They revealed a plan to build an inexpensive communications system in the Asia-Pacific region, using existing satellites where sufficient infrastructure is lacking. The system is expected to be launched on a trial basis in Vietnam this year.

In July, Mr. Mori formally announced "Japan's Comprehensive Cooperation Package to Address the International Digital Divide."2 The aid plan will focus on four priority areas and disburse funds under both official development assistance programs and non-ODA programs over the next five years. First, it will increase public awareness of IT opportunities and assist government policymaking and institution-building. Efforts to improve legal systems and install structures to prevent crime in cyberspace, for example, may fall under this directive. Second, the aid plan will target the development of human resources. Tokyo will help poor countries train more than 10,000 engineers and policymaking experts, mainly through technical cooperation. The third area of focus will be communications infrastructure. This includes the establishment of inter- and intraregional networks as well as the development of wireless and traditional line systems. Finally, Tokyo will promote the use of IT in a broad range of aid projects. Such efforts will involve, for example, using technology to provide remote services, including distance training, learning and medical care.

To implement the new assistance plan, Tokyo will build 30 core IT centers in developing countries to provide training and information. The Japan International Cooperation Agency, the technical-assistance arm of Tokyo's aid establishment, will convert its office in Okinawa into a base for disseminating development-related information and conducting distance-education programs over the Internet. Moreover, Tokyo will cooperate with such international organizations as the Geneva-based International Telecommunication Union, the United Nations Development Program and the World Bank, participating in IT initiatives where appropriate.

Ministry of Foreign Affairs officials admit that it is too early to say whether the aid initiative will lead to an overall increase in Japan's ODA budget or will be financed by reshuffling and repackaging existing aid programs. Because the government's fiscal plans are decided on an annual basis, the five-year project cannot yet be described in terms of specific spending figures. Indeed, the details regarding funding for FY 2001 will be decided late this fall, while budgets for FY 2002 through FY 2005 will follow in coming years.

Against a background of waning public support for overseas aid programs and increasingly tight budget constraints, how the actual IT package will shape up is not clear. Moreover, in recent years, Tokyo has introduced a series of very generous assistance measures, including the $30-billion Miyazawa Plan, that were geared mainly toward rescuing East Asia from the 1997-99 economic and financial crisis.3 Thus, securing funding for another huge aid effort may prove difficult.

IT-focused assistance programs are not entirely new. In FY 1999, Tokyo provided four yen loans and one grant in the IT sector. In January, Japanese officials expanded the list of special yen loans to include a new category called "info-communications." The addition is expected to play a major role in assisting poor countries develop IT-related infrastructures.

In June, Tokyo announced plans to send technology experts to Laos and the Philippines in the fall. They will assist with IT policymaking, offering advice on regulations and systems in the communications sector. JICA will send one expert to each country and plans to run similar programs in other nations, mainly in Southeast Asia. Manila also has requested Japanese assistance in developing satellite-based emergency communications systems and planning distance-education systems to serve isolated areas. Vientiane has asked for help in developing IT regulations and network planning and training.

In May, a seven-year Sino-Japanese project to upgrade the information processing system of the People's Republic of China's State Flood Control and Drought Relief Headquarters was completed. Japanese aid workers provided equipment, technology and expertise to help Chinese headquarters set up a database for flood forecast and control. Japan also helped to develop a flood forecast system along the Zhangwei Canal in vicinity of the Hai He River in Northern China. The program was a success according to Chinese officials, who said that the program made a contribution to China's flood-control and disaster-relief technology.

In an summit meeting in April with the leaders of 16 South Pacific nations, Mr. Mori pledged to provide $4 million in aid. This assistance package, dubbed the Miyazaki Initiative after the prefecture that hosted the summit, was crafted in part to help the islands of the South Pacific narrow the digital divide and cope with the rigors of globalization. Accordingly, Tokyo will contribute $1 million to the U. N. Development Program to promote the diffusion of information and communication technologies in the South Pacific. The Pacific IT Promoting Project is aimed at helping island nations benefit from the advance of IT by developing human resources, building Web sites and installing equipment for remote education, medical services and environmental preservation.

Recent unofficial Japanese efforts also have played a role in developing IT in Asia. In June, Tokyo hosted the Asian Science and Technology Conference, an annual gathering aimed at facilitating international cooperation in the scientific and technological fields, sponsored by leading daily Nihon Keizai Shimbun and the University of Tokyo Research Center for Advanced Science and Technology. Experts who addressed the theme of ASTC 2000 — using IT in Asia to promote sustainable growth — theorized that creating an entrepreneurial environment would be crucial.

Japanese businesses also have forged links with Asian partners to foster the spread of IT in Asia. For example, Mitsui Marine — Fire Insurance Co., Ltd. set up in June an investment fund worth $12.8 million to target IT-related start-up companies in China. The fund is expected to invest in at least 10 new Chinese firms over the next five years.

In May, JAFCO Co., Ltd., Japan's largest venture capital company, announced plans to team up with International Business Machines Corp. to invest in Southeast Asian IT start-up companies. Nomura Jafco Investment Ltd., JAFCO's Singaporean subsidiary, will establish an investment fund and buy stock in IBM's corporate clients. Potential targets include software developers and companies managing e-commerce and Internet portal sites.

Digital Hollywood Corp., a Japanese vocational school for multimedia designers, set up a joint venture with South Korea's Yonsei University and the Hyundai Electronics Industries Co. in April. The new company will offer classes at the university to train developers of computer- game software and IT engineers in South Korea. In January, Softbank Corp., one of Japan's flagship New Economy companies, announced plans to invest in 100 IT companies in Asia. The Internet giant will focus on wireless or e-commerce firms operating in China and other nearby countries.

Finally, Japan's leading business group has been involved in facilitating the development of IT in Asia. In June, some 150 executives participated in the annual meeting between Keidanren (Japan Federation of Economic Organizations) and its Indonesian counterpart, the Indonesian Chamber of Commerce and Industry. The two organizations agreed to bolster cooperation in IT and work toward narrowing the digital divide.

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Japan: Fit To Lead An Asian IT Revolution?

Some observers may consider it odd that Tokyo has stepped forward to lead an IT revolution in Asia when, by some measures, Japan is a technological laggard. For example, in 1998, Internet proliferation rates were higher in Hong Kong, Singapore and Taiwan than in Japan (see Figure 1). According to Nielsen//Net Ratings, an Internet media and market-research company, Japan had a 13-percent household Internet penetration rate at the end of 1999, compared with 14 percent in Taiwan, 16 percent in Hong Kong and nearly 30 percent in Singapore.4

Critics also have raised concerns that ironically, certain aspects of the Japanese system parallel characteristics that the EPA report recommends be changed in other Asian countries. They point out that many Japanese laws and regulations stand in the way of the birth of a new economy. For example, tax structures are not favorable to start-up businesses and complicated and costly bankruptcy procedures discourage risk-taking. Most observers attribute the success of the IT revolution in the United States to a vigorous entrepreneurial spirit that has flourished in a relatively liberal regulatory climate.

Tokyo also has come under international criticism for its reluctance to open its telecommunications market, now dominated by Nippon Telegraph and Telephone Corp., a majority government-owned former monopoly. Washington has accused NTT of charging excessively high rates for access to its local networks and, thus, limiting outside competition. This makes communication expensive in an era when the efficient transfer of information is critical. Many observers have suggested that Tokyo fully privatize and break up its government-controlled telecommunications firm; EPA officials have made the same recommendation in reference to monopolies in other Asian countries.

Indeed, Japan must overcome many challenges before an IT revolution can deliver its myriad benefits to the economy. A key hurdle will be creating and maintaining an environment for IT-related businesses to flourish. Not only must policies be changed, but cultural traditions also must be reexamined. Entrepreneurs, by definition, operate in innovative ways, which often run contrary to established norms. Such activity is rare in Japan, where consensus decisionmaking and conformity generally are preferred to individualism.

Moreover, the shame associated with business failure and debt is much greater in Japan than in the United States. By one estimate, Japan has the lowest level of entrepreneurial activity of the major industrialized nations.5 In short, aversion to risk is a Japanese cultural factor that may prove a significant handicap in the race to be the technology leader.

The market can be a useful if sometimes harsh tool to judge IT-related prospects. The rapid rise and fall of Hikari Tsushin, Inc., a successful mobile phone company that leapt into the Internet investment business in September 1999, provides an example. The company was once a paragon of Japan's New Economy, growing rapidly as the popularity of cell phones continued skyward. Hikari's market capitalization grew at a phenomenal rate, but in mid-February 2000, the stock plummeted following an unexpected profit warning from the chief executive officer. By mid-June, the stock was off its peak by a remarkable 98 percent. This spectacular crash left many investors concerned about the prospects for Japan's adjustment to an entrepreneurial, share-holder and IT-driven corporate culture.

Finally, comparisons of mobile phone usage rates contest Japan's status as an IT leader. In relative terms, cell phone usage is greater in Hong Kong, South Korea, Singapore and Taiwan than in Japan (see Figure 2). Moreover, the absolute number of mobile phone subscribers in China is expected to outpace that of Japan by the end of the year.

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On A Mission

Shortly after being reelected prime minister in mid-July, Mr. Mori reaffirmed his determination to revive the still-struggling economy and carry out structural reforms that would create an environment more conducive to IT diffusion in Japan. To emphasize the importance of this objective, he instructed his new cabinet to prioritize IT development. In addition, Mr. Mori set up an IT advisory panel, a special task force aimed at turning Japan into a high-tech society. It was commissioned to conduct a comprehensive study of IT and, highlighting the urgency that Tokyo had given to the issue, tasked to implement plans swiftly and according to specific schedules. Mr. Mori also set up the Industrial Rebirth Council, a panel that will look for ways to bring technology into the workplace.

In a similar vein, Finance Minister Kiichi Miyazawa suggested that later this year, the government create an extra budget focused on IT and public projects. Legislators already favor IT-related spending and have pushed through new bills targeting related increases. In July, Tokyo decided to boost its 2001 budget for science and technology to 1 percent of GDP from 0.7 percent in FY 1998. IT and the life sciences are key areas the government will emphasize in its FY 2001-FY 2005 investment program.

The Ministry of International Trade and Industry is set to play a role as well. As a first step, MITI will set up an advanced technology research center in April 2001 to gather information on sophisticated production technology, then distribute it to small manufacturers. Officials expect that the center will help small firms cut costs in developing new products and enhance overall competitiveness. More specifically, the center will create manuals describing and analyzing cutting-edge technologies and make them available to small manufacturers over the Internet. MITI also will promote cooperation between smaller firms and public universities. It will work to abolish legislation that reduces the retirement pay of professors who take leave of absence to work on joint research with companies. Tokyo already has approved regulatory changes that will allow researchers at government-funded universities to retain their academic positions while participating in private-sector research.

MITI also plans to allow technical high schools to extend regular education terms from three years to four because the majority of small manufacturers recruit engineers directly from such schools. Students who complete an extra year of studies will qualify for a monthly grant of ¥50,000 ($454 at ¥110=$1.00) that will be paid by local manufacturers. MITI's proposal will be submitted to next year's regular Diet session for approval.

In its annual white paper, the Ministry of Posts and Telecommunications highlighted the importance of IT in Japan and urged the government to take action at the national and international levels.6 For example, Tokyo should develop a comprehensive plan to ensure that the benefits of IT will reach the entire population by 2010. In addition, Japanese officials should participate in discussions held by the Internet Corporation for Assigned Names and Numbers, ICANN for short, the private, nonprofit entity that manages the allocation of domain names.

Mr. Mori's IT panels already seem to have made progress. The advisory groups conducted a series of meetings around the Okinawa summit and concluded that before legislation aimed at developing new technologies is introduced, Tokyo should revise outmoded regulations that hinder the development of IT. Accordingly, the governing coalition — the Liberal Democratic Party, the New Conservative Party and the New Komeito — announced that it would begin drafting legislation to amend restrictive laws as soon as possible. Moreover, the LDP acknowledged the necessity of a comprehensive law aimed at promoting IT.

Politicians also have moved with uncharacteristic speed to address the issue of telecommunications reform. Leaders have called for a fundamental reexamination of NTT, and support for drastic change is growing. In July, the LDP outlined a plan to relax the 20-percent limit on foreign ownership of the giant phone monopoly. A parliamentary group also is considering a significant reduction of the government's 53 percent share.

The private sector, of course, also is getting involved. In July, an 18-member IT panel was established, composed of the heads of such corporations as Sony Corp. and Softbank. The group already has met and released a set of recommendations. In addition to the usual calls for more investment in technology, the proposals emphasized government expediency. The group recommended that Tokyo set a timetable for completing structural reforms aimed at adjusting to IT, and that bills be submitted in one package to an extraordinary Diet session this fall.

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Conclusion

Although Japan is not the undisputed technological leader in Asia, it is on a mission to join the IT revolution. A sense of urgency is evident in the government agencies and business groups that have led the campaign to "digitize" the economy. Moreover, Tokyo is keen to help its neighbors reap the benefits of the information age — regional tech-led boom would give Japan's economy a shot in the arm as well. It will take time to overcome the challenges, but Japan could be on its way to leading an IT revolution at home and abroad.

Jason Russell provided research assistance.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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Notes
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1aa Economic Planning Agency, "Annual Report on the Asian Economies 2000 (Summary)" (Tokyo: June 21, 2000). Available at http://www.epa.go.jp/2000/f/ 0621f-asia/0621f-asia-e.html. Return to Text

2aa Ministry of Foreign Affairs, "Japan's Comprehensive Cooperation Package to Address the International Digital Divide" (Tokyo: July 2000). Available at http://www.mofa.go.jp/policy/oda/ summit/it.html. Return to Text

3aa See Marc Castellano, "Two Years On: Evaluating Tokyo's Response To The East Asian Financial Crisis," JEI Report No. 30A, August 6, 1999. Return to Text

4aa Data available at Nielsen//Net Ratings at http:// 63.140.238.20/default.asp. Return to Text

5aa Paul D. Reynolds, Michael Hay, S. Michael Camp, "Global Entrepreneurship Monitor 1999 Executive Report" (Babson College, London Business School, Kauffman Center for Entrepreneurial Leadership: 1999). Available at http://www.entreworld.org/bookstore. Return to Text

6aa Ministry of Posts and Telecommunications, White Paper 2000 "Communications in Japan Expanding Frontiers: IT in the 21st Century" (Tokyo: June 2000). Return to Text

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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