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This column originally appeared in Forbes

Would you buy a Toyota (NYSE:TM) car right now? Neither would I. Neither would more and more Americans, judging from last month's 16% drop in U.S. sales. And I've been a loyal Toyota customer. In my life I have only bought Toyotas and Lexuses. For me, safety and good gas mileage have been more important than style and prestige, but every time I drive now, I fear my gas pedal will get stuck.

Toyota's problems are spiraling out of control and are going global. From the U.S. to China, consumers are fleeing to its competitors. The company's problems might help save General Motors and Ford the way no taxpayer bailout ever could. Inexplicably, the president of Toyota, Akio Toyoda, grandson of the founder, made no public announcement until after a full week of terrible headlines. Business school case studies will make this a classic example of what not to do during a crisis.

Toyota's problems could quickly extend to all of Japan Inc. For decades, Japanese firms from Sony (NYSE:SNE) to Komatsu (OTCPK:KMTUY) marketed their way around the world, convincing consumers that Japanese innovation and premium quality should command higher prices. But now Toyota's quality control problems will likely hurt Japan Inc.'s entire image. Japanese firms need to prepare for the fallout. Not only are consumers paring back, but Toyota's quality-control problems shatter the myth that Japanese businesses are all much better than the competition.

Innovation and style have been replaced by fear and longing for the days when Harvard professor Ezra Vogel's book Japan Is Number One was a bestseller.

Japan Inc. should not underestimate its increasingly tough competition from Korean firms like LG Electronics (OTC:LGERF), Samsung (OTC:SSNLF) and Hyundai. Because the South Korean won has dropped against the dollar while the yen has appreciated too much in the past year, Korean firms have been able to cut prices while maintaining their margins. LG has posted record sales in markets like China, where their flat-screen TVs can be half the price of Sony's Bravia line. Korean firms are gaining market share by positioning themselves as well-branded but cost-effective choices. And not only Koreans threaten. Chinese construction equipment makers like Xugong and SANY are pushing hard to take market share away from industrial stalwarts like Komatsu. On the premium level, Apple is taking away share.

What can the government and Japanese companies do to get Japan Inc. out of its funk? Here are three things that will help Japan get its mojo back:

The first thing Japanese companies must do is reduce their operating costs. They need to localize their overseas management teams and get rid of glass ceilings for non-Japanese workers, while conducting more production in lower-cost markets outside Japan. Right now too much production is kept at home because of domestic pressure and a perception that quality control will be better, and companies are pricing themselves out of the market. Cutting jobs in the home market is tough politically, but more Japanese companies need to do it to reduce costs.

The insistence on native Japanese for jobs overseas tends to cost too much and push away talent from elsewhere. In interviews that my firm, the China Market Research Group, conducted with young Chinese and American professionals, few mentioned working for a Japanese brand as a dream job. They like some brands, but they know they wouldn't be able to move up in a Japanese organization. Why work for Toyota when you can work for China's Warren Buffett-backed BYD auto?

Typical jobs for Japanese executives abroad cost $500,000 to $1 million once housing, taxes and education costs are factored in. Companies need to localize their teams whenever possible, not only to reduce costs but also to get executives who really know their local markets. Also, outsized pay packages for Japanese executives demoralize local employees.

Second, the Japanese government needs to stop wasting money on stimulus.

One thing we have learned from the financial crisis is that stimulus for stimulus' sake does not work. Japan has spent way too much money building bridges to nowhere and propping up local economies that should have been left to fend for themselves.

What is important is building business confidence. That means getting profits up to where companies are comfortable hiring people for good jobs. Putting people to work digging trenches gets them a meal ticket, but it doesn't build optimism or give them the confidence to go out and spend. You need to create jobs that are comparable to the ones they used to have, jobs they can be proud of doing.

Japan should learn from the stimulus package experiences of China and the U.S. China's stimulus efforts have worked better than America's because China found equal if not better jobs for workers and made them feel the government had a plan. Building airports has been suitable work for laid-off Chinese factory workers, while masters of the universe on Wall Street couldn't find appropriate jobs. The whole point of a stimulus should be to get the business world ready to invest again and get the credit markets running normally, not just pump money into the system forever.

There is a reason luxury companies like Versace and Ralph Lauren are cutting back their Japan operations and moving to China. Younger Japanese are so depressed about their future prospects that they don't want to spend money. Japan should be using all its stimulus money to help Japanese citizens set up their own firms and to show that entrepreneurship is a respected career choice. Too many Japanese still look down on entrepreneurs and assume that the best career path always leads through large companies.

Entrepreneurship has a great way of building confidence and increasing the multiplier effect in the money system, and startups are better than large companies at creating new jobs. More than 60% of the jobs created in the U.S. in the last two decades arose at companies with fewer than 50 people.

Finally, Japan is stuck in a funk also because prices there are still way too high. Last year I spent $30 on a four-minute taxi ride while there. Costs are so high that it's impossible for Japanese firms to produce anything in the country for export and make a profit. It has been estimated that Sony's Bravia line of TVs loses billions, and Sony still loses money on every PlayStation 3 sold.

The government must intervene to reduce the value of the yen. Right now it's too high. Nothing that Japanese firms sell abroad helps profits at home enough, and a depressed home market means that domestic sales won't pick up the slack for the high-priced exports few can afford to buy. Discounting by 10% doesn't help you when the yen rises by 10%.

Japan's economy has been slumping for years, and now holes have been blown in Japanese companies' once-sterling reputation for quality as well. Excessively rigid economic policies and business practices led to this state of affairs. Japanese companies and Japanese policymakers alike will have to become much more flexible if they are to bounce back in the face of not only their own self-inflicted wounds but also competition from Korea and, increasingly, China.

Disclosure: None

Source: The Toyota Crisis: How to Get Japan Out of Its Funk