What if Japan really is No. 1?

In 1979, Harvard professor and East Asia expert Ezra Vogel published Japan as Number One, a book that not only became an influential bestseller in the United States but also raced to the top of the all-time nonfiction bestseller list in Japan.

Appearing at a moment when Japan’s economy was surging with a 10 percent annual growth rate and when Japanese auto, steel, textile, electronics, and semiconductor producers were decimating their U.S. competitors and garnering huge shares of the U.S. market, the book was a wake-up call for Americans. It demonstrated how the close cooperation between industry and government known as Japan, Inc. had many advantages over the more laissez-faire, adversarial U.S. economic system. Although the title was meant metaphorically rather than literally, Vogel did suggest that without significant changes in U.S. policies and practices, Japan would become the dominant leader in a wide range of key industries and technologies.

As the Japanese economy waxed in the 1980s and the Nikkei stock average soared while the value of the Imperial Palace in Tokyo was calculated to be more than that of the entire state of California, Vogel appeared to have been the most prescient of prophets. With the collapse of the Japanese asset bubble in the early 1990s, however, Japan entered what is now often described as two lost decades of stagnating economic growth and deflation. And over that time, a river of ink has been spilled in expressing the schadenfreude of triumphalist Western economic analysts who kept asking why anyone was ever concerned about competition from Japan.

Looking at the scene today, however, I have to wonder whether Vogel wasn’t right after all. Over the weekend I discussed with some Japanese friends the idea of spending an extended stay in Japan for purposes of research on a new book. I was quite excited until we started talking prices and living expenses. When I lived in Japan in the 1960s and 1970s, the yen-dollar exchange rate varied from ¥360/$ to ¥270/$. At today’s rate of ¥75/$, I can’t even afford the bus ride from Narita airport to downtown Tokyo, let alone the monthly rent for a modest apartment and the prices of food, transportation, and other amenities. The yen has become, like the Swiss franc and gold, a safe haven for investors rushing to escape the risk of dollar devaluation.

Japan continues to accumulate substantial trade and current account surpluses and its rate of unemployment is about half that of the United States while its gap between rich and poor also remains much less. The dollar is in trouble in part because U.S. national debt is approaching the 100 percent of GDP level which is seen by economists as the point at which economic recovery becomes a painful, long term affair. Yet Japan’s national debt is approaching 200 percent of GDP. A big difference, however, is that Japan’s debt is almost entirely self-funded. Unlike the United States, Japan does not borrow from China or any other country. Japan has the longest average life expectancy of the major countries and the highest average household wealth. The recent nuclear power disaster has been a severe blow, but Japan has responded with its typical cooperative, can-do spirit. Moreover, it is moving decisively to abandon nuclear power and to focus on developing wind, solar, and other green energy sources. That will be costly in the short run, but Japan has never been a short run country, and in the long run it may well become the global leader in green energy technology.

Amazingly, in view of the weakness of the Japanese prime minister and the ineptness with which Japan’s government has handled the recent tsunami and nuclear crises, Tokyo is apparently perceived by the world’s investors to be more reliable and effective at governing than Washington.

This is, of course, not to say that Japan is without problems. It has plenty of those. But for the moment, the markets seem to be confirming Vogel’s original view of Japan as Number One.