The CELI Debate: The Contradictions of the "Basket Case" Story
In advance of my participation next month in a debate on the state of the Japanese economy before the Congressional Economic Leadership Institute, I hope this note helps focus the issues for attendees. EF
Although it is widely believed that the Japanese economy is a basket case, the truth is surprisingly different: in reality on many of the criteria that matter most to Japanese policymakers, Japan has clearly made rapid progress in the last decade. Just the most obvious case in point is Japan's continuing enormous success in building its foreign assets. Japan's net foreign assets were already so large in 1989 that they were widely considered to have unbalanced the global financial system. Yet, as measured by the IMF, Japanese financial policymakers somehow succeeded in boosting Japan's net foreign assets from an already huge $295 billion in 1989 to $827 billion in 1999. Needless to say, the total has continued to increase in the years since 1999. The key point is that for Japan's mercantilist financial bureaucrats, few policies have higher priority than the effort to build the country's overseas assets.
Countless other examples could be cited of the impressive progress the supposed "basket case" economy has made since the Tokyo financial bubble burst in the early 1990s. Just two will suffice here: (1) consumers in "slumping Japan" are now clearly among the world's richest, having enjoyed broadly as large an increase in their living standards in the last thirteen years as consumers in the United States, and (2) Japanese industry has established monopolistic control of more and more areas of advanced manufacturing (capital equipment, new materials, and high-tech components). [For more information on Japan's hidden strengths, see several other articles at this site, in particular "Japan's Fake Funk," a paper I published in the London-based journal Prospect in November 2002. The URL is http://www.unsustainable.org/view_art_un.asp?AID=279]
In view of the impressive evidence to the contrary, why has the Japanese economy been so consistently presented in the American press as a basket case in recent years? The explanation in part is that the sort of free-market ideologues who edit the business pages in the United States want to believe the basket-case story. But a key reason why the story has been so widely accepted is because various vested interests want it to be believed. The most important such vested interest is the Japanese establishment. For Japanese planners, the most obvious benefit of the story has been its powerful effect in cooling American anger over Japanese trade policies. Chivalrously believing that it should not kick a man while he is down, Washington has for many years essentially given up trying to open the Japanese market.
For whatever reason, top securities analysts in Tokyo have powerfully promoted the basket case story. Of course, given how badly the Tokyo stock market has performed in the meantime, you might think they have had good reason to be down on the economy. But actually the Tokyo stock market is no guide to the state of the Japanese economy. It never has been. In fact, the Tokyo stock market has always been a highly manipulated sideshow whose machinations are largely irrelevant to the larger economy (in the 1960s and early 1970s, for instance, the Tokyo stock market was consistently depressed -- even more so than in recent years -- yet it was at this time that Japan clocked the fastest growth in world economic history).
It should be noted that Tokyo-based stock analysts have not only been wrong on the economy in the 1990s but they were wrong on the Tokyo stock market in the 1980s. With essentially no exceptions, they bulled the Tokyo stock market to the skies in the late 1980s. At least they did so in their published commentaries (some of them took a different line in private and were clearly aware, as some of the rest of us were, that the boom was a bubble). Their sales pitches induced Western fund managers to lose many tens of billions of dollars on highly overpriced Japanese securities. The analysts were particularly effective in promoting the "virtues" of the countless huge warrants issues made by corporate Japan at the time. These warrants were highly contrived instruments that promised huge rewards if the bubble kept inflating -- but total loss if the stock market fell. Virtually without exception these warrants expired worthless. The ultimate losers were the savers and retirees of the United States and Europe who, unbeknownst to themselves, provided most of the money gambled on these self-evidently ludicrous securities. The big winner was corporate Japan, which raked in many tens of billions of essentially free capital while the bubble lasted.
Now for my own record on the Tokyo bubble. Beginning in 1987, I wrote a series of articles that predicted the coming crash in Japanese real estate, the consequent banking problems, and the long slump in the stock market. For my warnings about the banks' unwise real estate lending, see in particular "Why the Japanese banks are shaky," a seven-page article I wrote in the September 1987 issue of Euromoney magazine. My warnings elicited fury from the Tokyo analyst community at the time. Their mantra, repeated constantly to anyone who would listen, was that "Japanese asset values never fall." That mantra was never based on fact. In reality, Japanese asset values had crashed on several occasions before the 1990s, most notably the mid-1970s.
In all this it should be emphasized that though my debate opponent next month is a prominent Tokyo-based securities analyst, he is guiltless in the matter of the bulling of the Tokyo stock market in the 1980s. In fact he started as an analyst only in the early 1990s, after the Tokyo stock market crash had begun. He has, however, been prominent in the effort to present the 1990s as Japan's "lost decade." I am looking forward to putting him right.
Eamonn Fingleton is the author most recently of In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (Houghton Mifflin, 1999).
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