Introduction

It is well known that the development of a strong indigenous technological capability has established Japan as a leading exporter in several strategically important industries. It is less widely recognized that changes in technology elsewhere, as well as changes in international factor prices, have rendered some Japanese industries noncompetitive in world markets and even caused some to struggle for survival in the domestic market against the pressure of import competition. Like all modern economies, Japan has its share of “lower” industries, but these have received far less attention in the United States than Japan's conspicuous “winners.” In this chapter we describe and evaluate Japan's recent experience with public policy measures directed specifically at its declining industries. These policies differ markedly from those commonly employed in both Western Europe and the United States.

National industries that are suddenly thrust into a position of comparative disadvantage tend to be eliminated or scaled down by the working of the free market. Because adjustment to a decline is costly and may involve externalities, market forces do not necessarily guide the adjustment process efficiently. Recent studies by Neary and Mussa show that intervention in the adjustment processes of competitive industries can be justified on efficiency grounds under a variety of circumstances. For example, intervention may be warranted when capital is not perfectly mobile, when factor prices are sticky, when income from capital is subject to taxation, or when private and social discount rates are unequal.