Crossposted from Clyde V. Prestowitz on Trade.

An elderly couple wait to cross a street in Japan.

Japan faces a crisis caused by its aging population (photo: Imagesbyk2 photography / flickr).

As one of Washington’s leading trade negotiators during the 1980s period of intense U.S.-Japan economic friction, I was sometimes labeled a “Japan basher” because of my analysis of how Japan’s industrial policies were distorting global trade and undermining key U.S. industries.

After recently attending several conferences in Tokyo and interviewing a variety of business, academic, political, and media leaders, I am now urging a comeback of the old Japan. As it faces increasingly difficult prospects, Tokyo needs an effective industrial policy and would do well to consult its old playbook on the route back to its future.

At the moment, the country is drifting dangerously with neither a clear understanding of what has gone wrong nor a clear strategy for fixing the problems. All the talk of “two lost decades” is mostly misleading and beside the point. Over those two decades, visitors to Japan have not found Japanese living standards dropping compared to those of Europe and the United States and investment in critical Japanese infrastructure and R&D has outpaced that of America. Moreover, the truth is that if you compare U.S and Japanese average annual GDP growth from 1990 through 2011 and adjust for differentials in inflation and population growth, the results are about the same. The United States had higher ups, but it also had lower downs that evened out close to Japan’s average. Of course, the United States had positive population growth while Japan’s population was shrinking. So in terms of absolute, unadjusted GDP growth, America comes out ahead. On the other hand, in terms of per capita GDP growth, Japan comes out ahead, and in terms of productivity growth per capita, Japan also comes out a bit ahead.

Much is also made of Japan’s national debt at over 200 percent of GDP being far above that of Greece. But Japan’s interest rates are close to zero because money is flooding into Japan as a safe haven. Investors don’t seem to think of Japan and Greece as being in the same boat for the very good reason that it is not. More than 90 percent of Japan’s debt is funded from within Japan as compared to, say the United States, which funds more than half its national debt from foreign sources.

But Japan has been suffering dramatic reverses in two critical areas – population and cutting edge industries. With nearly a quarter of its people already over 65, Japan is aging more rapidly than any other major country and will see 40 percent of its people at the age of 65 or older by 2050. Also, by 2050, the total population will drop from today’s 128 million to only 95 million. That will make achieving any kind of growth and paying the retirement and health costs of the elderly extremely difficult. Meanwhile, on the industrial scene, much of the Japanese semiconductor industry that nearly killed off Silicon Valley in the 1980s recently declared bankruptcy in the face of aggressive competition from the likes of Korea’s Samsung and Hynix and Taiwan’s Taiwan Semiconductor Manufacturing Company. Similarly, Korea’s Samsung and LG are running away with the flat panel electronic display market once the preserve of Japan’s Sony and Sharp. Finally, Korea’s Hyundai/Kia Motors is taking great chunks of market share away from the Japanese auto companies in the North American, European, South American, and Chinese markets while the Korea ship builders have pushed the Japanese into only a small share of the high end ship building business.

In discussions with senior Japanese government officials over the past month, I noted that Japan seems to be losing out in the industries in which it has been especially noted for competitiveness and asked what plans there are to reverse the trends and what their vision of the future is. They replied that the vision is one of a “Cool Japan” and that the plan is to focus on promoting activities in which Japan seems to have particular aptitude such as cooking, manga (cartoons), and anime (animation). When I heard this from the institutions that fashioned what used to be known as Japan,Inc. I nearly fell off my chair.

It is clear that a shift has taken place in Japan with power moving away from the bureaucracy toward the politicians and traditional lines of communication between industry, bureaucracy, and politicians severed. The result is that the politicians have power but no ideas. The bureaucrats have ideas but not necessarily good ones because they no longer know what’s happening in industry. In contrast to this, Korea, Taiwan, China, Singapore, and many others have adopted good old fashioned Japanese style industrial policies to promote their own industries. Without their traditional support from government, the Japanese industries are hunkered down and facing the onslaught of the former students of Japanese industrial policy in lonely isolation.

At last week’s Japan Roundtable conference in Tokyo, there was emphasis on the need to change traditional attitudes toward the role of women and to make it easier for women to have children and to enter, leave, and re-enter the work force.

As I sometimes advise the United States, Japan must also reconstitute its industrial policy at least to the extent of responding to the targeting policies of its trading partners and competitors. For instance, one hears much of China’s currency manipulation, but many others such as Korea, Taiwan, Brazil, and Singapore also manipulate their currencies. Japan may have to respond to this more actively and may also have to counter more actively the special tax incentives, subsidies, and other benefits provided by many countries to their special targeted industries either by matching these programs or challenging them in the World Trade Organization.

It all worked for Japan once. Why not again?