Japan's fake funk: the truth about a nation that won't import
Japan was widely criticized in the 1980s for its mercantilist approach to trade. In recent years, however, American exporters' continuing problems in Japan have come to be blamed not on mercantilism but on Japan's supposed decade-long "slump." In this article in the current (November 2002) issue of the London intellectual magazine Prospect, I explode the myth of Japan's "slump." All Western press comment to the contrary, Japan has continued quietly to boom in the last decade. It suits Japanese spokesmen, however, to pretend that things are terrible. That way, they have the perfect excuse for Japan's failure to import. EF
TOKYO. For a decade now, the western consensus has been that Japan is an economic basket case. But this is a dramatic misreading of a perennially secretive society. It could, indeed, come to be seen as one of most significant misreadings in economic history.
The geopolitical implications of this misunderstanding go far beyond Japan or east Asia. The point is that the myth of Japan's "collapse" has encouraged the west to imagine that the east Asian economic model (largely an extension of the Japanese model) is inherently constrained.
Beyond a certain point, the argument runs, a nation must embrace the Anglo-American free-market model or flounder. Among other things, this view has fostered a dangerous degree of complacency towards the rise of the overtly authoritarian Chinese economic system. (Incomes in China are still only a fraction of Japan's, but if ever China comes close to matching Japan's success it will be bigger than the EU, the US and Japan combined.) Any summary of my case against the consensus must start by acknowledging that Japan has, of course, suffered serious financial strains in the last decade. But these strains have been confined to the financial sector and have done little if any damage to other areas of the economy. On the contrary, the wider Japanese economy has quietly thrived -- so much so that, in many of the ways that matter to Japanese policy-makers, Japan has actually now surpassed the US to become the world's leading economy. In particular, measured in terms of its ability to project economic power abroad, it is Japan not the US that is arguably the world's leading superpower.
As generally recounted, Japan's story in the last 20 years is a morality tale of the perils of overarching ambition. It begins in the mid 1980s when Japan suddenly seemed to be sweeping all before it. But just as this New Sparta was on the verge of vanquishing the freedom-loving west, fate -- in the form of the Tokyo stock market crash of 1990 -- intervened. The wheels came off the Japanese economic pantechnicon. And, ever since, Japanese leaders have been engaged in increasingly comical efforts to get them back on.
This story has enormous appeal in the west -- not least for the free-marketeers who edit the business pages on both sides of the Atlantic. But the key reason why this hoax has been so successful is because various vested interests want it to be believed. The most important such vested interest is the Japanese economic establishment. For Japanese economic planners the most obvious benefit of the basket case story has been its effect in cooling the west's once dangerous anger over Japanese trade policies.
But the truth is that dozens of unarguable facts contradict the gloomy consensus. Here are just a few.
1. Living standards increased markedly in Japan during the so-called "lost decade" of the 1990s. So much so that the Japanese people are now among the world's richest consumers. (See separate article below.)
2. Japan's trade has continued to expand. Japan's current account surpluses totalled $987 billion in the "disastrous" 1990s. This was nearly 2.4 times the total recorded in the 1980s (when the surpluses were already so large that Japan was regarded as the "unstoppable juggernaut" of world trade).
3. Although you would expect the Japanese yen to have declined sharply against, for instance, the US dollar in recent years, the reverse is the case: the yen's dollar value has increased 19 per cent since the beginning of the Tokyo financial crash.
4. At last count, the all-important Japanese savings rate, which has been the main driver of the country's success, was 14.9 per cent of GDP. This is one of the highest rates in the developed world. (The rate for Britain is 7.7 per cent.) It means that Japan has recently been accounting for nearly 30 per cent of all new savings in the OECD group of rich nations. It is sometimes suggested that Japan's high savings rate is a problem.
If so it is a problem that most of the world's nations would be delighted to have. (To the extent that there are excess savings in Japan, these can be easily and -- in national power terms -- highly efficaciously deployed in buying foreign assets.) 5. Japan has continued to invest heavily in its industries and infrastructure. Investment per job in manufacturing, for instance, has consistently run at about twice the rate of the US over the last decade.
6. Although the eagerness with which Japanese investors snapped up foreign assets in the 1980s was a major reason why Japanese expansionism came to be eyed so suspiciously in the west, Japan's net foreign assets have continued to mushroom. As measured by the IMF, they have nearly quadrupled in the last 12 years. How do we reconcile this with reports that the Japanese banks' problems have been forcing a wholesale retreat by Japanese finance from foreign markets? The reports are nonsense. A nation's ability to export capital is a function not of its banks' financial health but rather of its trade performance: each dollar of current account surplus creates a dollar of capital exports. So long as Japan continues to run the world's largest current account surpluses, it will remain the world's largest capital exporter.
7. As a glance at Tokyo's crane-filled skyline confirms, even in the hard-hit real estate sector the pace of investment has continued at an astonishing rate. An all-time record of more than 2.2m square metres of new office space will be completed in Tokyo next year. On the site of a disused railyard near the Ginza shopping area, no less than 12 major buildings and many smaller ones are being erected in a single huge development which will create more space than was contained in the New York twin towers.
8. Japan passed the US in the early 1990s to become the world's largest foreign aid donor and as of 1999 it was paying out 67 per cent more in aid than the US. The UN is just the most prominent of many international bodies that depend heavily on Japanese money. (Japan accounted for nearly 20 per cent the UN's budget in 2001). Tokyo is reaping a rich reward in terms of rising influence in everything from the International Whaling Commission to FIFA.
9. Corporate Japan's worldwide spending on sponsorship -- on everything from motor racing to university education -- has grown by leaps and bounds. In the latter half of the 1990s, Japan's sponsorship budget in the US alone increased by about 80 per cent. In Britain, a particularly interesting recent instance of Japanese sponsorship is the Asahi Shimbun newspaper's multimillion pound funding of improvements at the British Museum. It is hard to imagine, say, the Guardian, which is roughly the Asahi's British counterpart, doing anything similar in Tokyo. In fact the Guardian can1t even afford a staff correspondent there. By contrast, on the strength of big increases in advertising paging in the last decade, not only can Japanese newspapers like the Asahi afford large bureaus in Britain but they can undertake extensive worldwide goodwill programmes.
Focusing on a litany of supposed problems
Not only do many western analysts manage to overlook the above achievements, they also focus on various alleged crises for Japan that in reality are no such thing. First, consider the claim that Japan's manufacturing industries are being driven to the wall by China. The mistake analysts make here is to assume that the Japanese economy is still highly labour-intensive. In fact, Japan is now probably the world's most capital-intensive economy.
Capital-intensive Japanese companies supply the sophisticated components, materials, and machines without which labour-intensive Chinese factories would have no exports. Japanese exports these days are not television sets and pocket calculators but machine tools, electricity generating plant, railway rolling stock, broadcasting equipment, telephone switching equipment, and internet routers.
Of course, capital goods industries are invisible to the consumer, and thus Japan's dominance in many of them is easy to overlook. But capital goods are the ultimate fount of the world's wealth and historically the nation that dominates their manufacture -- Britain in the 19th century, America in the first 75 years of the 20th century -- has been ipso facto the world's leading economy. Capital goods industries are the toughest to break into because they require not only heavy investments of capital but large reservoirs of highly sophisticated proprietary know-how -- usually know-how that takes decades of learning-by-doing to acquire. It is no surprise that in many of the capital goods industries in which they are strong, Japanese companies face no significant competition from anywhere, let alone from third world nations like China.
Second, what about the claim that the Japanese economy is in the grip of a deflationary spiral? Actually, what Japan has been experiencing is similar to the persistent deflation the US experienced in the late 19th century.
This was when the US went from rural backwater to the world's most powerful economy.
In Japan today, as in the US then, monetary policy has been so effective in maintaining the currency's domestic purchasing power that the economy's rapid productivity improvements translate into a steadily falling price level. This is hardly a recipe for large profit margins. The result is a feel-bad feeling in corporate Japan. Similarly, as described by the historian Walter LaFeber, the productivity-induced deflation experienced in the US in the 25-year period to 1897 was "economic hell." But it was thanks to US industry's market-glutting productivity improvements in that period that the US succeeded Britain as the world's greatest economy.
Third, it is claimed that Japan has been eclipsed in high technology by a resurgent US. This mantra of the 1990s has admittedly been less often heard in the wake of the bursting of the American internet stock bubble in 2000.
But actually it was never true. In fact all the evidence is that Japan has greatly lengthened its lead in the last decade. Take, for instance, the crucial area of supercomputers. Japan and the US ran neck and neck in this industry for many years but Japan has now clearly broken ahead.
At last count the title of the world's fastest computer was held by a weather-forecasting computer made by Tokyo-based NEC. By contrast, the fastest American supercomputer, an IBM-built machine used for designing nuclear weapons, is little more than one-third as fast.
Japan's lead in supercomputers is hardly surprising given its clear dominance of most of the fundamental enabling technologies driving the global electronic revolution. The world now depends on Japan for virtually all of the many highly purified materials needed to make computer chips.
Just the most obvious of these materials is silicon. To make today's ultra-powerful chips, you need ultra-pure silicon. American companies like Monsanto led the industry into the 1980s but they have long since fallen by the wayside. In the race to develop ever purer silicon, such unsung Japanese technology leaders as Shin-Etsu, Sumitomo Sitix, and Mitsubishi Materials have now prevailed.
Japan leads the world also in the production of countless high-tech components such as laser diodes (the enabling components in the CD family of digital devices) as well as in the optical fibre networks that have transformed the world communications industry. Meanwhile Japan dominates in the supply of all nine major enabling components in mobile phones. A study by Deutsche Bank Securities found that of 36 suppliers of these components, no less than 29 were Japanese. Most of the non-Japanese players have their main factories in Japan.
The story is similar in the advanced machinery used to make electronic components. Take so-called steppers -- the minutely precise optical devices that print circuit lines on computer chips. Broadly speaking, a chip's power is a function of how much circuitry can be packed onto it. So the technological imperative is to develop ever more precise steppers that print ever finer lines. American companies once dominated the stepper industry but Japanese companies like Nikon and Canon have now taken their place. The only other significant producer is ASM, a Netherlands-based company which sources its optical technology from Zeiss of Germany.
Japan's high technology dominance has been sealed by several key high-technology acquisitions in the US in recent years -- acquisitions that would have created a political firestorm in Washington in the "Japan-bashing" 1980s. Take Furukawa Electric's bargain-basement purchase last year of an advanced optical fibre business from financially distressed Lucent Technologies. At a stroke this gave Japan clear control of a crucial industry formerly dominated by the US. (Of course, the optical fibre business has been in a slump for the last two years -- but this is a short-term factor that hardly bothers Japanese corporate leaders.) Another example is Tokyo-based Hitachi's announcement earlier this year that it was buying IBM's path-breaking disk-drive business. The deal includes IBM's Almaden Research Centre in California, which was described by the New York Times as one of America's "science and technology jewels." Fourth, even the west's understanding of Japan's financial trauma has been wrong-headed. If the western press is to be believed, bad loan problems have threatened an uncontrollable wave of banking collapses. Yes, the Japanese banks have suffered huge bad debts from their ill-considered late-1980s lending binge. But there is no risk of a domino effect. And the banks' problems peaked as far back as 1996 -- reflecting the fact that virtually all the problems are ultimately traceable to Japanese real estate and shares, whose prices generally bottomed in the mid-1990s. Since then, the banks have been progressively restoring their balance sheet strength thanks to the extremely generous "spreads" they enjoy between their lending and deposit rates.
Moreover, the financial malaise has not starved Japanese industry of investment capital. Far from it; faithful Japanese savers have continued to save, thereby producing the wherewithal for the financial system as a whole to maintain and indeed expand its financing of Japanese industry.
One of the most remarkable aspects of the basket case story is how it keeps changing. As in a Harrison Ford movie, no sooner does Japan despatch one problem than another even more daunting one emerges from the deep. At first the problem was supposed to be the stock market collapse. Then it was the banks's real estate loan problems. Then other problems surfaced in rapid succession: the bank's accounting for these loan losses, a consumer spending funk, and a corporate investment strike.
Is Japan's public spending "out of control"?
The latest "disaster" is Japan's allegedly out-of-control government spending. But all the evidence suggests that Japan's budget problems are grossly exaggerated. From 1993 to 1998 inclusive, far from running budget deficits as indicated at the time by Japan's financial bureaucrats, (and as reported by the western press) Japan ran budget surpluses every year. These surpluses ran respectively at 6.0, 5.1, 3.5, 3.3, 2.9, and 1.6 of GDP -- according to OECD figures -- which means that in most years, Japan had the strongest budget performance of any OECD nation.
Japanese government debt supposedly represented 120 per cent of GNP in 2000.
This does seem shockingly high -- but, unbeknownst to most western observers, it is a gross figure that should properly be netted for the Japanese government's huge and continually increasing financial assets.
These include not only the world's largest foreign exchange reserves but extensive holdings of its own bonds. On a net basis, Japan's national debt represents just 51 per cent of annual GDP -- a fraction higher than the US's 43 per cent but better than that of most other developed countries.
As Adam Posen of the Institute of International Economics in Washington has pointed out, the Japanese debt scare is a storm in a teacup.
"Savings, public and private in Japan, is a vast multiple of the government debt, so there is no solvency problem." Crucially, as Posen notes, when the Japanese government borrows, it borrows almost entirely from its own citizens -- only 6 per cent of Japanese government debt is owed to foreigners. By contrast, the US depends heavily on foreign investors, notably the Japanese, to fund its national debt.
Press suggestions that Japanese public spending is inordinately wasteful are equally unfounded. Typical of such suggestions is a now notorious comment by The Economist on the opening of the Akashi Kaikyo bridge in the mid-1990s.
The Economist dismissed the new engineering marvel -- at 2.5 miles long, it is the world's longest suspension bridge -- with the headline, "The bridge to nowhere in particular." Thus began a media myth that much of Japan's public spending is squandered on "bridges to nowhere." In reality, in ultra-densely populated Japan, it would take a truly perverse genius to build a bridge to nowhere. Some bridges, it is true, lead to what are (by Japanese standards) relatively underpopulated areas. But such projects are hardly wasted in a nation where so few citizens enjoy easy access to the countryside. In any case, the Akashi Kaikyo bridge links the Osaka region to Awaji Island. Awaji's 160,000 residents hardly think of themselves as living "nowhere." For them indeed, the bridge is their only road connection to the mainland and as such it promises to pay large social dividends for centuries to come. Perhaps more important in the long run is that the bridge promises to induce a more equitable distribution of population in the congested Osaka region.
No one would suggest that every yen of the Japanese budget is well spent.
The point merely is that the abuses seem small in relation to the many badly needed projects that have been undertaken in recent years. In my own immediate area in inner Tokyo, for instance, we have seen two new underground railway lines open in the last two years. The area has also been the recipient of, yes, a new bridge, the so-called Rainbow Bridge. It is a huge suspension bridge that has greatly eased traffic in central Tokyo.
Further south we have the new Aqua Line, which by dint of a 5-mile tunnel -- the world's longest road tunnel -- offers millions of cramped Tokyoites for the first time rapid access to recreation areas across Tokyo bay in Chiba. Another improvement in central Tokyo is in the sewage system, which has been transformed in the last decade. Each of these projects accounted for a large chunk of the national budget (construction work is expensive in no-immigration Japan, where even the least skilled male worker is paid a full breadwinner's wage). But anyone who knows Tokyo would find it hard to argue that such improvements are unnecessary.
As the story of Japan's alleged public spending profligacy indicates, much of the responsibility for the west's misunderstandings must be put down to superficial reporting by the western press. Few correspondents speak or read Japanese. Moreover they are blinded by western ideas that do not apply in Japan. They assume, for instance, that the stock market plays as prominent a role in Japanese finance as it does in say British or American finance. So when the Tokyo stock market crashed, this was seen as comparable to the 1929 Wall Street crash. In fact the stock market is regarded by the Japanese establishment as a largely irrelevant -- and rather dirty -- sideshow that can with impunity be neglected for years on end.
Similarly, westerners assume that in common with nations like Britain and the US, Japan is avidly competing in some sort of financial beauty contest for the favours of the world's investors. That this is nonsense should be apparent from the fact that for decades Tokyo fiercely resisted American attempts for even a token opening of Japanese financial markets.
In the end, whether or not foreign investors consider Japan an attractive place to invest is irrelevant because, in contrast with Britain and America, Japan is a capital exporter, not a capital importer.
Whatever the western media's responsibility, the lion's share of the blame for the misunderstandings rests with the Japanese establishment.
From the home of grand kabuki, a cast-of-thousands production
The impression of dysfunctional economic management in Tokyo is no more than grand kabuki -- a thespian exercise in mock distress acted out by a Japanese elite that has always believed in cloaking its true agenda. Such theatrics are fundamental to Japan's administrative culture -- a culture whose father-knows-best ethos imposes no obligation on leaders to speak frankly to their own people, let alone to outsiders.
That the Japanese establishment is engaged in a bad-news propaganda campaign is undeniable. Official press packs distributed to visiting journalists, for instance, routinely describe the economy as being in a "slump." (The word connotes among other things massive levels of unemployment -- several times anything Japan has suffered in the last decade.) In April 1998, Sony Corporation chairman Norio Ohga went on record saying, "The Japanese economy is on the verge of collapsing." A few months later Toyota president Hiroshi Okuda weighed in with a suggestion that Japan's problems could trigger a "worldwide financial crash." When corporate chiefs talk like this, we have a right to assume their comments reflect their own corporations' experience.
In fact, profits in 1998 for both corporations were much higher than in 1989, the last year of the Japanese boom. In Sony's case the growth relative to 1989 was 131 per cent, in Toyota's 56 per cent. If the latter figure seems modest, it compares favourably with the performance of Ford and General Motors in the same period.
One thing is clear: given the country's success in boosting both its consumers' living standards and its exports, its economic growth numbers have clearly been understated in recent years. (Official statisticians can readily manipulate the figures by varying assumptions about, for instance, qualitative improvements in economic output.) None of this subterfuge is new. Japanese leaders have a long tradition of artfully understating their country's strengths. In the late 1930s, for instance, the Japanese military let it be known that Japanese soldiers couldn1t shoot straight and that Japanese tanks were made of paper. In the event, Japan's opening gambit in second world war, the Pearl Harbor offensive, proved a masterpiece of military planning.
Business leaders play the same game. When I arrived in Tokyo in 1985, the car industry conceded it was good at making small cars but was somehow incapable of making anything the size of a Mercedes-Benz or a Cadillac. In quick succession, however, in the late 1980s, Japanese car makers launched the Lexus, the Infiniti and other superbly built top-of-the-line limousines.
Somebody had learned fast.
Why would the world's most proficient car makers affect such humility? In retrospect their motive is obvious: they were concerned to calm the fears of western competitors (who in the event proved all too willing to take Japanese false modesty at face value).
The basket case myth serves many propaganda purposes, of which trade diplomacy is merely the most obvious. The myth has proved serviceable as an excuse for, for instance, not compensating victims of Japan's second world war atrocities. It has also proved useful in batting down unsolicited requests from poor countries for development aid. (Japan's aid programme strongly favours east Asian nations; other nations are politely refused with an excuse about the state of the Japanese economy.) Even foreigners in Japan have an interest in fostering the myth.
Business executives, for instance, find that sob stories about the Japanese "slump" are the perfect excuse for a sub-par business performance. And for foreign diplomats who once had to spend most of their time trying to tear down Japan's trade barriers life is now much easier. Now that the Japanese people have come to be universally seen as too poor or too scared to consume, western diplomats in Tokyo can go back to the status quo ante of exchanging elaborate pleasantries with top Japanese officials.
For foreign correspondents too, the basket case story is heaven sent. It not only guarantees them a regular position on page one but, in a country where covering other forms of news is virtually impossible, it offers an excuse to stay in Tokyo and pick up news from the British and American securities analysts.
All this might seem like merely an interesting sidelight on how large this "globalising" world truly still is, except that that the geopolitical consequences are so important. Apart from the obvious point that the "collapsing Japan" myth has bought Tokyo's trade bureaucrats a full decade of undeserved peace, there is the larger point that it is clearly facilitating the transformation of China into a true superpower.
Certainly if westerners in general -- and Americans in particular -- had understood how well the Asian economic system has been doing in the last decade, they would have been far more wary about welcoming China into the world trading system.
But surely if Japan's fake funk has facilitated the rise of an unpleasant new superpower on the east Asian continent, Japan would be the first to be concerned. After all, as portrayed in the western press at least, few nations are as wary of China as Japan -- and vice versa. In reality, however, Japan and China are far from daggers drawn. They share much common ground, most obviously a centuries-old aspiration to rid east Asia of western influence.
As seen by Japanese leaders, the task of ridding east Asia of western influence is already half complete. By dint of decades of Japanese mercantilism, America's once world-dominating export industries have been almost completely gutted -- and with them America's ability to project economic influence abroad. To put it at its most basic, whenever Washington wants to project economic power abroad these days, it must first phone Tokyo for the money.
Moreover, Japanese leaders are already planning for the day when China will be by far the world's most powerful economy. Although measured at market exchange rates China is still today no more than one-quarter the size of the Japanese economy, it is closing the gap rapidly. Given their uniquely clear-sighted insight into the wealth-creating potential of the east Asian economic system, the Japanese expect China to become the world's largest economy in less than 20 years. And with economic success will surely come commensurate military power.
For Japan the strategy is obvious: it must keep the US sweet as long as possible while quietly advancing China's cause. This is particularly evident in the field of trade. Although Japan has never had any compunction about erecting barriers to US exports, it has welcomed many of China's exports with open arms (including exports even of electronic goods which it generally does not accept from the US). Even more significantly, Japan has permitted its leading companies to transfer important technologies to China -- something that it has generally opposed in the case of other nations, including the US.
But all this has to remain sub rosa for now if the Japanese -- and of course the Chinese -- are to retain privileged access to the US market. By propagating the myth of its economic collapse, Japan has pulled off the near impossible: it has retained excellent relations with the US while tipping the global balance of power in China's favour.
Japan's consumers: richer than ever
TOKYO. Conducting an on-the-spot review of the Japanese economy recently, the Washington-based economic scholar James Glassman professed himself astonished. He had arrived expecting the worst. After all the Western press has long presented the Japanese economy as a disaster zone. What Glassman found on the ground, however, could hardly have been more different from the �slumping Japan� of the press reports.
�A visitor to Tokyo just can't believe that this is what a decade of stagnation looks like,� he reported. �Restaurants are full. Shops are bustling, construction cranes are all over the place.�
The truth is that with the exception of a few speculators devastated by the financial crash, most Japanese citizens enjoy considerably higher living standards than a decade ago.
Travelling in from Tokyo�s Narita airport, visitors immediately notice the affluence on Japanese roads. About 2.2 million more Japanese households now own a car than a decade ago. In many cases cars in Japan these days come not only with CD players and television reception but with GPS-based navigation equipment: domestic sales of such equipment soared 17.6 percent to total 770,000 units in 2000.
Indeed during the supposedly depressed 1990s, Japanese executives migrated en masse to such luxury offerings as Toyota�s Lexus. Previously, the stereotypical executive car in Japan had been the ultra-staid Toyota Century, which in its essentials had not changed since its launch in 1967. Like the ZIL-class limos of the old Soviet Union, it was such an embarrassment that it was more or less unsaleable in export markets.
The Japanese consumer has put in a particularly impressive performance in acquiring the latest electronic gadgets. In the eleven years to 2001, household ownership of video cameras, for instance, grew 136 percent. In personal computers, the growth was more than 370 percent.
The number of mobile phone subscribers in Japan increased from little more than zero in 1993 to 67 million in 2000. Thus Japan now boasts one of the higher mobile phone penetration rates in the world. Moreover Japan runs years ahead of Europe and even further ahead of the United States in the sophistication of its mobile phones.
The number of Japanese citizens holidaying abroad rose from 8,107,000 in 1989 to 14,582,000 in 2000 � an increase of 79.9 percent.
As for that ultimate yardstick of consumer welfare, life expectancy, Japan has now passed Sweden and Switzerland to lead the world. In the decade of the 1990s alone, the Japanese added about 1.5 years to their life expectancy. A long life expectancy, it should be noted, is more closely correlated with ultra-high living standards than almost any other indicator. Although Japan's high life expectancy is sometimes erroneously attributed merely to a healthy diet, the truth is that the Japanese people lived much shorter lives in former days when their diet was far more distinctively �healthy� than it is today.
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