FORTUNE. August 19, 1996



With the world's No. 2 economic power revving up its motor and a new generation of corporate managers taking the wheel, that's the $ 5 trillion question




long the boardwalk at the Odaiba Seaside Park, on one of the artificial islands in Tokyo Bay, one sees a scene that would have been unimaginable five years ago. People in business suits are pausing to take in a stunning sunset against the backdrop of the graceful spans of the new Rainbow Bridge. Crowds are relaxing at trendy open-air cafes on Sunset Row. This on a Monday evening, in a city that ordinarily assails the eye with sterile gray vistas and where the waterfront was once desolate and inaccessible. What can this mean? If Japan's workaholic warriors are finally taking time to linger over sunsets, perhaps the culture is unwinding in other ways--freeing up consumers, say, or opening its $ 5-trillion-a-year domestic market to more imports?  

   A constant gush of earnest news dispatches from Tokyo informs the world that Japan is no longer the uptight, conformist, rule-bound society it once was. Elevator girls and female news anchors are lowering their high, squeaky voices. Baseball players are defying conformity by grandstanding to the crowds--one pitcher even dyed his hair bright red. Recently Japan's prudish film censors extended the frontiers of artistic expression by okaying the display of pubic hair in the sexy Italian-German production Al Di La Delle Nuvole (Beyond the Clouds). The political scene has been altered by the fall from grace of the Liberal Democratic Party, the scandal-tainted party that controlled Parliament for most of the postwar years, and the shift of power to reformist parties. 

   In some markets Japan no longer appears to be the impenetrable fortress it once was. Imports of personal computers, cell phones, and semiconductors have jumped--last year, for instance, Japan increased its purchases of foreign-made computers 70%. And even in corporate Japan, change seems to be in the air. Rigid rules of seniority appear to be breaking down as a new generation of executives nears the top. Jesper Koll, an economist at J.P. Morgan in Tokyo, notes that while executives in big Japanese companies traditionally have not been considered powerful until they reach their late 50s, giants like Toyota, Sumitomo, and Mitsubishi have been putting middle managers in their 40s on the fast track for seats on the corporate board. More experienced than their elders in the ways other nations conduct business and toughened by years of recession, the new leaders have moved away from the single-minded pursuit of market share to concentrate at least as much on balance sheets and earnings. Says Kenneth S. Courtis, senior economist for Deutsche Bank Capital Markets (Asia): "My guess is that we'll look back at the early 1990s in Japan and see it as a massive forest fire--a lot of the deadwood has been burned out, allowing some of the new trees to see the sunshine for the first time." 

   The sharp resurgence of Japan's economy makes such whiffs of change powerfully enticing. After three years of abject recession, GDP grew 2.3% in the fiscal year ended in March. This year GDP is swelling at a 3.3% rate. That additional percentage point of annual growth translates into $ 50 billion in goods and services produced by Japan's 125 million people. As growth slows elsewhere in the world, this newly robust market is starting to look like a tempting target again. 

   This is, after all, the world's second-largest economy, seven times the size of trendy China's. Japan's GDP makes up a whopping 73% of the total gross domestic product of all the countries in East Asia. Even a razor-thin sliver of the Japanese market is potentially far more lucrative than a thick slice of another country's. 



ut for those tempted, there is a warning: Japan can be as treacherous as it is tantalizing. Companies hoping to crack its markets should not forget harsh lessons learned in previous boom times by pioneering--and ultimately bloodied--foreign executives. Things here aren't necessarily what they seem. Consider that despite all the changes taking place in Japan, foreign direct investment in that country remains abysmally low--just $ 18 billion, vs. $ 565 billion in the U.S.That such a gap still looms so large is a potent reminder of what hasn't changed. 

   That's not to say that there are no true opportunities for successful investment in Japan, only that investors must learn to distinguish real transformation from wishful thinking. Remember that Japan, for all its superficial changes, is still run by the bureaucrats of the powerful economic ministries. Many of these bureaucrats, while professing to be "international" in their thinking, cling to notions that "excess competition" is an inherent evil that must be controlled lest it give rise to "market confusion." Japan is also still an economy in which giant groups of companies with related interests and interlocking ownership dominate. The power of the keiretsu is hard to overstate: They and other alliances tie up 62% of the value of shares on the Tokyo stock exchange, or $ 2.1 trillion in capital. 

   Politically, too, less has changed than meets the eye. The LDP, despite its disgrace, still wields substantial power in the coalition government and is likely to hold its ground in elections that must be completed by next June. In government, as in many other sectors, Japan has an eerie, gyroscopic equilibrium: It changes so that it may stay the same. 

   So where in this eternally xenophobic nation are the new opportunities for foreigners? What is becoming increasingly apparent is that these opportunities are not to be found but forged. A visitor who returned recently after a five-year absence discovered the most meaningful change not in the heart of Japan's corporate establishment but in the accomplishments of some talented outsiders. All have created opportunities by prying open cracks in the monolithic corporate edifice that were caused by Japan's recent economic distress. Even for these mavericks, success entails being chameleon as well as dragon: They perform complicated balancing acts, bowing to tradition as they aggressively pioneer new ways of doing things. 

   Take Henry Wallace. The Scot became the first foreigner ever to run a major Japanese corporation when he was named president this summer of $ 19-billion-a-year Mazda Motor Corp. His promotion came after Ford increased its stake in the ailing carmaker to a controlling 33.4%. The appointment of a veteran Ford executive to head Japan's No. 5 automaker suggests that even Japan's notoriously conservative business culture can tolerate some change: Japanese shareholders could have banded together to block his rise. 

   The fact that Wallace is even in his job is unprecedented but not precedent-setting. In fact, the whole alliance between Ford and Mazda is an aberration, brokered by Sumitomo Bank, Mazda's principal creditor and 3.1% shareholder, in an effort not to be left holding the bag should the company crumble. Tall, thin Wallace--who understands only a few phrases of Japanese--still draws stares on the streets of Hiroshima, Mazda's company town. He's not mingling much with his peers, either. Though he has been running Mazda's daily operations for two years as executive vice president, he met high officials in Tokyo's powerful economic bureaucracies for the first time only weeks ago. He also won't be joining the clubby Japan Automobile Manufacturers Association; Mazda is sending instead its Japanese chairman. Says CEO Wallace: "Without a doubt I'm breaking a barrier. But I don't know how quickly this will be followed." 

   Wallace has fought hard to put Ford's stamp on Mazda. Two years ago he led a team of four Ford executives charged with turning around the troubled company by instilling greater discipline in its management, particularly in the areas of marketing and strategic planning. Mazda had long excelled in design and manufacturing technology but was tarnishing its brand by making cars consumers didn't really want. Wallace says that at first he met resistance from Mazda's proud engineers, but that the changes are now starting to produce results. In May, Mazda reported that its operating loss had narrowed and that its Japanese parent company had made its first annual pretax profit in three years. The Ford brand, meanwhile, is making inroads in Japan: It now has the largest market share of any foreign carmaker, thanks in large part to the 28,000 Ford cars Mazda makes in Japan. 



r look to another agent of change in Japan today--Masayoshi Son. A self-made billionaire at 38, he is fawned upon in the national press as "Japan's Bill Gates." The rise of this maverick entrepreneur is all the more remarkable because Son, while a Japanese citizen, is a member of the ethnic Korean minority, a group perennially discriminated against in a society that treasures homogeneity. Son's computer software distribution company, Softbank, has built up a U.S. media empire at a breathtaking pace: Over the past two years it has bought the trade-magazine publisher Ziff-Davis, the organizers of the huge Comdex computer trade show, and a stake in Yahoo, one of the hot Internet search-engine companies. 

   No less a worldly wise investor than Rupert Murdoch decided that the young entrepreneur presented an opportunity. The two men met this summer and less than two weeks later scored a major business coup: a successful $ 385 million bid for a 21.4% stake in Asahi National Broadcasting, Japan's fourth-largest commercial television station and an affiliate of the respected Asahi Shimbun newspaper. Exulted Son of the deal: "This will open up the communications industry." 

   That such a big block of shares was for sale is something of a fluke; it happened only because the owner, the publishing company Obunsha, desperately needed cash. Son and Murdoch clinched the deal by acting with alacrity: They pieced together the joint venture and offer in a matter of days--far faster than it would have taken any big Japanese corporation to decide to make a competing bid. 

   Without a Japanese partner, Murdoch might have had trouble getting an offer accepted. As it was, he and Son drew polite but reserved reactions from Asahi, a major producer of news, documentaries, and entertainment programming. At the back of many people's minds lurked the sacrilege perpetrated by corporate raider T. Boone Pickens, who in 1989 bought a 20% stake in a Toyota-affiliated auto parts supplier and demanded, in vain, seats on the board. It was only after Murdoch promised that he had no intention of claiming a board seat or otherwise meddling in management that the tension subsided. 

   Murdoch, who this spring launched a Japanese-language cable version of his pan-Asian satellite broadcast system, Star TV, and has plans to offer 100 additional channels in Japanese, said he was merely looking for a source of Japanese programming. "People were skeptical at first," says Yoichi Hamawaki, chairman of DEC Japan and an adviser to the Japanese government on foreign investment. "But what Murdoch is saying is very smart. He's buying good access to the market." 

   Son insists that the deal, and his own success, are evidence that the closed world of Japanese business is opening up. "The Japanese government and people are talking about opening up the market. People have a better understanding now. Things are changing, and we're at the right spot," he says. Yet Son is the exception rather than the rule. In large part he has succeeded in building his own empire at Softbank because he is in a brand-new industry, where there are fewer entrenched interests to keep him from forging ahead. 

   For such opportunities to be more than isolated exceptions, Japan's culture has to undergo fundamental change. That hasn't happened yet, but there are some promising signs. The wellspring of Japan's bureaucracy is its crusty educational system, but nowadays change can be detected in academia's stale air. Leo Esaki gets much of the credit. Esaki became a folk hero in Japan after winning the 1973 Nobel Prize in physics, one of only five Japanese ever to win a Nobel for science (compare that with 183 Americans). The irony was, Esaki did not win it entirely in Japan. To earn recognition for his pioneering work in transistors, done while he was a young research scientist at Sony, he left the nation's rigid scientific community in 1960 for a job with IBM in New York. After a 32-year career with Big Blue, he returned home on a mission to change the way Japanese society deals with creativity and innovation. 

   Esaki's pulpit is science-oriented Tsukuba University outside Tokyo, where he was elected president in 1992. Junior faculty championed him because he stood for greater openness and academic freedom. But even this folk hero had a hard time winning over his senior colleagues. Opposition to this reformist outsider was so strong that he didn't get enough votes from Tsukuba faculty to win the presidency until the third round of balloting. 

   Since then he has pushed hard to loosen up the national university system and make it more accessible to international students. At Tsukuba he's taken the lead in breaking down barriers between government, corporate, and academic laboratories, and has advocated the need for Japan to do more basic research. Today 7% of the students at Tsukuba are foreign, about double the national average, and up 20% since Esaki took over. 

   Educational reform is essential, Esaki believes, if Japan is ever going to behave responsibly as a great nation. Says he: "What's missing in Japan is farsighted and creative leadership. Generally, the Japanese are becoming more confident and optimistic, and that's a good sign. But whether we like it or not, we have to change from a small-nation mentality to a big-nation mentality." 

   One major problem, he says, is that Japanese undergraduates burrow too deeply into their specialties, missing out on the exposure to humanities that a liberal arts education affords elsewhere. "Broad-mindedness is good for creativity," maintains Esaki. "But the Japanese educational system is narrow and deep." 

   It seems implausible that a 71-year-old Nobelist can singlehandedly reform the rigid seniority system that quashes innovation at Japanese universities. Change in Japan comes slowly, when it comes at all. Yet it does start with individuals. Despite predictions to the contrary, the faculty at Tsukuba elected Esaki to a second three-year term this year.