Letter from Japan: Hard Medicine

While Japan was busy recently with Upper House elections, I was at the epicenter of the Internet crash -- San Francisco. And nowhere are the stark differences between how Japan and the United States cope with economic adversity more apparent than the Bay Area. In Japan, "No pain, no gain" is simply campaign rhetoric that no one, particularly voters, really believe will ever happen. In San Francisco and across the U.S., the pain in recent months has been very real indeed. So to, however, will be the gain that follows. And there lies the difference between future economic prosperity in the U.S. and Japan.

Today, the Bay Area is staggering from the savage economic 'blowoff' of perhaps the greatest boom ever -- the rise and fall of dotcom mania at the end of the millennium. Evidence of Internet roadkill is everywhere. "Bad Day in the Valley," screamed "The San Francisco Chronicle" last week after JDS Uniphase and Hewlett Packard announced billions of dollars of losses and thousands of new layoffs. Coffee shops are jammed with the newly unemployed -- they are the soup kitchens of our era. Repossessors are doing a booming business hauling away new Porsche Targas and other trophies of former dotcom millionaires. And the most popular commercial sites on the Internet now focus on auctions and job postings.

The depth and severity of this brutal economic crash -- and let's all admit this downturn can only be described in the most severe terms -- is just sinking in throughout America. Where just months ago investment bankers and analysts confidently predicted a return to normal times by the last quarter of 2001, today they grimly admit that we may not see a return to prosperity for at least a year. The blunt admission about the Internet and telecom disaster is perhaps the most optimistic element of this scary story. It's also why America will not follow in the footsteps of Japan and mimic the decade-long slide into economic oblivion.

As macroeconomic incidents, the collapse of Japan and America's bubble economies are roughly on par. Trillions of dollars of wealth have evaporated as fast as you can say Mary Meeker (of Morgan Stanley Dean Witter fame). Both economies face massive debt overhangs, overcapacity, and bloated workforces. But here the similarities end. It took Japan almost 10 years to begin to admit it had a problem. Even now it is impossible to believe a word a Japanese official says about its economy; no one wants to admit the true value of the nation's property and bank loans.

The same is not true in the U.S. Corporate America and its bankers are reacting to the collapse with breathtaking speed. Never in the history of capitalism have so many people been laid off and so much debt, assets and corporate goodwill written off with such speed. And, there's much more to come, as every corporation in America will "right-size" to a pre-bubble economy. Hundreds of thousands of once prosperous Americans will find themselves unemployed. Families, schools, cultural institutions are sure to suffer through the crushing burden of re-adjusting to life on the slow lane. This process will be brutal on the social fabric of the country, but it positions the nation well for the eventual economic rebound.

The speed and robustness that America is entering this new era of painful economic contractions is incomprehensible to most Japanese. For Japan is a nation that is still living in what some call the 'time capsule' economy of the 1980s. With Americans picking through the smoldering rubble of the Internet crash, Japan continues to live in a pretend world of suspended economic animation.

Whether to confront the future, or live in the past, will decide the future economic directions of the two countries. With the economic gloom that has spread across America from sea to shining sea, comes an individual determination to do something about it. Not that there is much choice. With a minimal social safety net, Americans have little choice but to sink or swim. The good news is that the pace of technological development and innovation will continue to create new opportunity. In New York, unemployed dotcommers gather at so-called 'coffee raves' to network like mad and exchange new and cooler websites. In Silicon Valley, engineering labs and assembly lines are producing faster, smarter and more complex chips. On Wall Street old investments are being written down and new opportunities sought. Fear and greed continue to guide the economy.

Across the U.S., the stench of the rotting carcasses that once led the charge of the Internet revolution is everywhere. But as former U.S. Secretary of Treasury Lawrence Summers once said, the price for a technologically driven, high-flying market economy is that when it crashes, it will be spectacular. So too will be the recovery. It's a lesson Japan refuses to learn.