Image: Office workers head for a train station in Tokyo
Shizuo Kambayashi  /  AP
For once-confident Japan, 2010 may well mark a symbolic milestone in its slide from economic giant to what experts see as its likely destiny: a second-tier power with some standout companies but limited global influence.
By
updated 12/28/2010 7:44:14 AM ET 2010-12-28T12:44:14

Japan has been overtaken by China as the world's No. 2 economy. Its flagship company, Toyota, recalled more than 10 million vehicles in an embarrassing safety crisis. Its fourth prime minister resigned in three years, and the government remains unable to jolt an economy entering its third decade of stagnation.

For once-confident Japan, 2010 may well mark a symbolic milestone in its slide from economic giant to what experts see as its likely destiny: a second-tier power with some standout companies but limited global influence.

As Japanese drink up at year-end parties known as "bonen-kai," or "forget-the-year gatherings," this is one many will be happy to forget.

Problem is, there's little to look forward to. With a rapidly aging population, bulging national debt, political gridlock and a risk-averse culture slow to embrace change, Japan's prospects aren't promising. And a tense, high-seas spat with China has intensified fears of its neighbor as a military as well as economic threat.

A few optimists hope Japan can harness its strength in technology and its "Cool Japan" cultural appeal — from fashion and art to "anime" cartoons. The country needs to shed its reliance on manufacturing, they argue, and find new growth areas such as green energy, software engineering and health care for its elderly.

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But talk to university students, and their outlook is bleak.

Many worry about finding steady jobs and whether they can support families — concerns that have contributed to Japan's low fertility rate of 1.3 children per woman. Average household income has fallen 9 percent since 1993.

Makoto Miyazaki, a 22-year-old student at prestigious Keio University in Tokyo, senses forces outside his control — and Japan's — are going to dictate his future.

"Internationally, Japan is between big countries like China and the U.S. And Korea is becoming a major competitor — that's a big threat to Japan," he said. "I feel like we have fewer choices."

It's a startling contrast with the 1980s, when Japan was flush with cash and some experts believed its economy was poised to dominate the world.

Millions have given up the goal of lifetime employment at a major corporation and become "freeters," flitting among temporary jobs with few if any benefits. As companies cut costs, temporary workers have grown to a third of the work force, up from 16 percent in the mid-1980s.

Further, the population is projected to fall from 127 million to 90 million by 2055 — 40 percent of them over the age of 65. That's going to place a heavy tax burden on workers.

Economic difficulty is a chief reason more than 30,000 Japanese have committed suicide every year for the past 12 years.

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Hopes for change from the Democratic Party, which toppled the long-ruling conservatives last year, have fizzled. The Democrats lost control of the upper house of parliament in July elections, setting the stage for political gridlock.

Prime Minister Naoto Kan has acknowledged Japan's declining status.

His prescription: "Open up the country." He advocates reducing trade barriers, loosening regulations and making the country a more attractive place to invest.

His Cabinet recently approved cutting the corporate tax rate by 5 percentage points to 35 percent and is weighing whether Japan should join a U.S.-led free trade zone, the Trans-Pacific Partnership, that would slash tariffs on everything from electronics to food.

Business leaders say doing so is vital, but farmers fear a flood of cheaper imports would ruin them. Analysts say it could be a vehicle for economic revival but also lead to job losses and social dislocation, especially in rural areas.

"Merely unleashing the forces of competition and the free market isn't going to do the trick because people who feel vulnerable will crawl back into whatever they have," said Koichi Nakano, a political science professor at Sophia University in Tokyo.

Nakano and others say sweeping changes are needed in both policy and mindset, from expanding the social safety net to overcoming a deep fear of failure that has constrained entrepreneurship and risk-taking — and Japan's economic potential.

About 77 percent of Japan's jobless aren't getting unemployment benefits, according to International Labor Organization data, in part because temporary workers don't qualify.

Shizuo Kambayashi  /  AP
Japanese will drink up at year-end parties known as "bonen-kai," or "forget-the-year gatherings," noting 2010 is one year many will be happy to forget.

Japan can be innovative: It is the world leader in hybrid vehicles and industrial robots. Nintendo's Wii gaming console is a hit in living rooms around the world. Entrepreneur Tadashi Yanai, Japan's richest person, built Fast Retailing Co. and its low-cost Uniqlo brand into one of Asia's biggest clothing retailers.

But Japan sometimes undermines itself by being insular. Its sophisticated mobile phone industry, for example, has failed to grow overseas because it operates on a network hardly used anywhere else — earning it the nickname "Galapagos Syndrome."

One optimist is Michael Alfant, an American who has worked in Japan for 20 years. He sees the country becoming more entrepreneurial and focusing on opportunities in service industries.

"Japan is reinventing itself," said Alfant, CEO of Fusion Systems, a startup software company, and the incoming president of the American Chamber of Commerce in Japan. "I'm very confident Japan will get there."

Any change is likely to come gradually.

A conformist, consensus-based culture means Japan is generally slow to make changes or respond to crises — as seen in Toyota Motor Corp.'s handling of its safety woes.

"One would think there would be more of a sense of urgency here," said Jeff Kingston, director of Asian Studies at Temple University's Tokyo campus. "At best, Japan will muddle through, meaning it will avert catastrophe, but it is hard to see anything but bleak prospects in a country that should be doing better given its enormous strengths."

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Explainer: The top 10 business stories of 2010

  • Image: BP CEO Tony Hayward surveys gulf spill repair work
    AP

    In 2010, the economy rebounded fitfully from the Great Recession — starting strong, wobbling at midyear but showing enough vigor by year's end to quell fears of a second recession. Yet Americans hardly felt relief under the weight of high unemployment, which began the year at 9.7 percent and is now 9.8 percent.

    An oil spill devastated the economy and environment along the Gulf Coast and hammered energy giant BP's stock price and reputation.

    China muscled past Japan to become the world's No. 2 economy, a reminder that the global economic order is shifting and America's supremacy is diminishing.

    It was a year of job shortages and swollen budget deficits that disheartened Americans and caused deep losses for incumbent Democrats on Election Day. The Federal Reserve tried with scant success to jolt the economy with record-low interest rates.

    The struggling economy was voted the top business story of the year by U.S. newspaper editors surveyed by The Associated Press. The oil spill in the Gulf came in second, followed by China's economic rise.

  • 1. Economy struggles

    Image: Unemployment brochures are seen on display at the employment training facility, JobTrain, in Menlo Park, Calif.,
    AP

    Climbing out of the deepest recession since the 1930s, the economy grows at a healthy rate in the January-March quarter. Still, the gain comes mainly from companies refilling stockpiles they had let shrink during the recession. The economy can't sustain the pace. The lingering effects of the recession slow growth.

    The benefits of an $814 billion government stimulus program fade. Consumers cut spending in favor of building savings and slashing debt. Businesses hesitate to hire. Cities and states lay off workers. Growth slows through spring and summer.

    Unemployment stays chronically high. In May, the number of people unemployed for at least six months hits 6.8 million — a record 46 percent of all the unemployed.

    Pointing to the deficits, Congress resists backing more spending to stimulate the economy. The Federal Reserve seeks to fill the void by announcing it will buy $600 billion in Treasury bonds to try to further lower interest rates, lift stocks and coax consumers to spend.

    As the year closes, the economy makes broad gains. Factories produce more. Consumers — the backbone of the economy — return to the malls. Congress passes $858 billion in tax cuts and aid to the long-term unemployed. Yet more than 15 million Americans are still unemployed. Economists say a full economic recovery remains years away.

  • 2. Gulf oil spill

    Image: Plaquemines Parish coastal zone director P.J. Hahn lifts his boot out of thick beached oil at Queen Bess Island.
    AP

    An explosion at a rig used by BP kills 11 workers and sends crude oil gushing into the Gulf of Mexico. The spill devastates the fishing and tourism industries along the Gulf Coast and causes environmental damage that may last for decades. BP sets up a $20 billion fund to compensate fishermen, restaurateurs and others whose livelihoods were damaged.

    The oil giant still faces civil charges and a criminal investigation by the Justice Department and lawsuits from hundreds of individuals and businesses. BP's stock market value shrinks by more than $100 billion after the April 20 disaster before bouncing about halfway back.

  • 3. China's rise

    Image: Workers install scaffolding at a construction site as a Chinese national flag flies near by in central Beijing.
    Reuters

    China passes Japan as the world's second-biggest economy. The World Bank says it could surpass the United States by 2020. China's gross domestic product is spread out over 1.3 billion people — amounting to about $3,600 per person. That compares with GDP in the U.S. of about $42,000 per person. In Japan, it's about $38,000 per person. China's thirst for raw materials and other products helps the rest of the world recover from the recession. Still, the U.S. and Europe complain that China gives its exporters an unfair competitive edge by keeping its currency artificially low.

  • 4. Real estate crisis

    Image: Home for sale
    AP

    Housing remains depressed despite super-low mortgage rates. The average rate on a 30-year fixed mortgage dips to 4.17 percent in November, the lowest in decades. But home sales and prices sink further. Nearly one in four homeowners owe more on their mortgages than their homes are worth, making it all but impossible for them to sell their home and buy another.

    An estimated 1 million households lose their homes to foreclosure, even though the pace slows after evidence that lenders mishandled foreclosure documents. Some did so by hiring "robo-signers" to sign paperwork without checking their accuracy.

  • 5. Toyota recall

    Image: Toyota Master Service Technician Mike Blomberg inspects a gas pedal assembly.
    AP

    Toyota's reputation for making high-quality cars is tarnished after the Japanese automaker recalls 10 million vehicles for sudden acceleration and other problems. Toyota faces hundreds of lawsuits alleging that some models can speed up suddenly, causing crashes, injuries and deaths. Toyota blames driver error, faulty floor mats and sticky accelerator pedals for the unintended acceleration. The uproar damages its business. Toyota's U.S. sales rise just 0.2 percent through November in a year when the industry's overall sales climb more than 11 percent.

  • 6. GM's comeback

    Image: GM headquarters
    AP

    General Motors stock begins trading again. It signals the rebirth of a corporate icon that fell into bankruptcy and required a $50 billion bailout from taxpayers. GM uses some proceeds from its November initial public offering to repay a portion of its bailout. (Washington still holds about a third of GM's stock.) GM's recovery helps rejuvenate the industry. Sales of cars and light trucks rise 11 percent through November compared with the same period in 2009. Shoppers who had put off replacing their old cars return to showrooms.

  • 7. Financial overhaul

    Image: Barack Obama, Christina Romer, Timothy Geithner, Barney Frank, Paul Volcker
    AP

    Congress passes the biggest rewrite of financial rules since the 1930s. The law targets the risky banking practices and lax oversight that led to the 2008 financial crisis. The law creates an agency to protect consumers from predatory loans and other abuses, empowers regulators to shut down big firms that threaten the entire system and shines more light into markets that have eluded oversight. Republican critics say the law goes too far, imposing burdensome rules that will restrict lending to consumers and small businesses.

  • 8. European bailouts

    Image: Athenians walks behind a board showing exchange rates at a foreign currency exchange shop in Athens on Wednesday.
    AP

    Greece and Ireland require emergency bailouts, raising fears that debt problems will spread and destabilize global markets. European governments and the International Monetary Fund agree to a $145 billion rescue of Greece in May and a $90 billion bailout of Ireland in November. The bailouts require both countries to slash spending, triggering protests by workers. Investors fear that debt troubles will spread to Spain, Portugal and other countries, weaken the European Union and threaten the future of the euro as its common currency.

  • 9. 500 million Facebook users

    Image: Mark Zuckerberg
    AP

    Facebook tops the 500-million-user mark. It expands its dominance of social media and further transforms how the world communicates. If it were a country, Facebook would be the world's third-largest. Facebook tightens its privacy settings after criticism that personal information is being disseminated without users' knowledge or permission. Founder Mark Zuckerberg is named Time magazine's "Person of the Year" and is the subject of a high-profile movie about Facebook's creation.

  • 10. iPad mania

    Image: Customer uses an Apple iPad
    AP file

    Apple Inc. unveils the iPad, bringing "tablet" computing into the mainstream and eroding laptop sales. Apple is expected to sell more than 13 million iPads this year. The iPads sell about twice as fast as iPhones did after their 2007 introduction. The price of Apple stock rockets more than 50 percent in 2010. Competitors scramble to try to catch up. They include the Dell Streak, BlackBerry PlayBook, the Samsung Galaxy Tag and HP Slate.

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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.71%
$30K home equity loan FICO 5.26%
$75K home equity loan FICO 4.70%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.42%
13.42%
Cash Back Cards 17.94%
17.94%
Rewards Cards 17.14%
17.14%
Source: Bankrate.com