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| The Fast Education of Paul O'Neill |
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Friday, March 30th, 2001
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TOKYO. Two cheers for Treasury Secretary Paul O�Neill. Although in the eyes of long-time Japan-watchers, he made a rocky start with some notably naive comments about U.S.-Japan policy in February, he now seems to be learning fast.
At least he gives reason for qualified optimism. In particular he has shown an unusual degree of commonsense (by the standards of top Washington policymakers) in opposing a recent proposal for a major devaluation of the yen. As reported by David Sanger (New York Times, March 17), a cheap yen policy is being pushed strongly by Secretary of State Colin Powell in a sort of Good Samaritan effort to help a supposedly disaster-prone Japan.
O'Neill rightly opposes any further weakening of the yen. As a former top executive of the U.S. aluminum industry, he knows what he is talking about. In particular he understands the profound misgivings the U.S. auto industry has about a cheap yen. Although Japan's major corporations have come to be regarded in recent years in the American press as humbled ex-juggernauts, the auto industry knows different. All doomsday talk about Japan's financial problems to the contrary, most of these corporations -- and not least Japan's giant automotive players -- are actually stronger than ever. This should not come as too much of a surprise given that in the last decade Japan's main manufacturing industries have quietly continued to invest about twice as heavily per worker as their American counterparts.
Not only would they be highly competitive in world markets even if the yen were much higher than today�s rate of 123 yen to the dollar but they have already demonstrated this several times in the last decade. Remember that the dollar as low as 79 yen in the summer of 1995. The Japanese export sector generally withstood that rate very well -- and certainly there was not even the slightest hint at the time that the super-high yen exchange rate threatened any major exporter with serious financial difficulties, let alone bankruptcy. Now after six years further years of heavy investment in both plant and R&D, Japan's export corporations today boast even more efficient labor productivity levels than ever before. Yet with the yen about 35 percent lower than in 1995, Colin Powell somehow sees reasons to feel sorry for Japan Inc.
It is interesting to see how far O�Neill has progressed in less than two months. Back in early February he was talking earnestly about joining hands with like-minded executives in the Japanese business community in an effort to fix Washington's Japan problem. While that strategy might seem sensible to anyone unfamiliar with Japan, it contained an elementary error -- the false assumption that Japanese executives think like their American counterparts. Nothing could be further from the truth. Whereas executives in the U.S. offend act as effective counterweights to government power, their Japanese opposite numbers see themselves as junior partners in a Hobbesian government-business colossus quite unlike anything in American experience. That colossus was, of course, long ago labeled Japan Inc. Although in recent years, both Japanese government officials and Japanese business executives have tried to deny that Japan Inc exists (and indeed that it ever existed), Japan Inc. is still the best short-hand description of how the Japanese economy works. Although it would, of course, be an exaggeration to suggest that the interests of business executives and government bureaucrats in Japan are always perfectly aligned (there is, of course, often occasion for infighting in even the most effectively structured human organizations), the idea that Japanese businessmen would dare to join forces with their American counterparts to topple Japan's authoritarian bureaucrats betrays total blindness to the reality of how Japan is organized. Basically in facing off against foreigners, Japanese citizens are united by a profound society-wide xenophobia that for centuries has consistently frustrated Western efforts to open the country to Western individualism.
Certainly O'Neill�s idea of a "Business Men of the World Unite" approach to America�s Japan problem was always at best utterly quixotic.
One word of advice for the New Treasury Secretary. In formulating policy towards Japan, he should discount the latest wave of scare stories about how the Japanese banking industry is teetering -- yet again -- on the brink of systemic collapse. These stories -- and several variants of them -- have been around for nearly a decade and the only purpose they seem to have served so far has been to stay Washington�s hand in addressing Japan's mercantilist trade policies. Certainly although the Japanese government has had on occasion to mount rescues of a few individual banks, there has never been the slightest evidence on the ground in Japan of systemic collapse. The stunning truth is that no Japanese bank customer has been inconvenienced for a single minute, let alone lost any money, because of the problems.
How bad are Japan's banking problems really? As Japanese accounting is designed to conceal rather reveal, no one outside the higher reaches of Japan Inc. can know for sure. But what can be said with certainty is that in peddling scare stories about supposedly imminent systematic collapse the American media are overlooking some crucial facts:
1. Japanese banks' stock portfolios are worth more than almost any foreign commentator realizes. The point is Japanese stocks have fallen far less in the last year than would appear from a cursory look at the Nikkei index. The Nikkei index was rebased last year to include lots of frothy Internet-related stocks. These stocks have now collapsed and their falls account for much of the index's decline since. But calculated using its original components (which are what matter in gauging the
value of the banks' large holdings of shares in keiretsu affiliates), the index would be above 14,000 today -- thus far from reaching its lowest level since 1985 (as the media have reported), the index on an apples-to-apples basis is more than 10 percent above its October 1998 low.
2. The Japanese real estate market has generally risen since 1998. This is good news for the banks, whose loan problems are almost entirely driven by the big fall in real estate values which occurred after values reached an all-time peak in 1987.
3. The Japanese banks' margin between lending and deposits rates is one of the richest in the world.
4. The banks' industrial customers are generally strong and enjoy far healthier export markets in East Asia than in 1998.
Net net most Japanese banks are considerably stronger now than they were in 1998. Thus if O'Neill wants to pursue a realistic policy towards Japan, he should
remember what Franklin Delano Roosevelt said in a somewhat different context nearly seventy years ago: "We have nothing to fear except fear itself."
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Contact Eamonn Fingleton |
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