is japan faking it?

[Alypius Skinner]

Eamonn Fingleton, Is Japan Faking It? The Australian Financial Review, Friday 22 November 2002, in the Review section: 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. ... The truth is that dozens of facts contradict the gloomy consensus. Here are just a few: * Living standards increased markedly in Japan in the so-called "lost decade" of the 199Os, so much so that the Japanese people are now among the world's richest consumers. * Japan's trade has continued to expand. Its current account surpluses totalled $US987 billion in the "disastrous" 1990s. This was nearly 2.4 times the total recorded in the 1980s when Japan was already seen as the "unstoppable juggernaut" of world trade. * 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 17 per cent since the beginning of the Tokyo financial crash. * At last count, the all-important Japanese savings rate, which has been the main driver of the country's success, was 8.7 per cent of GDP. By comparison, the rate for the US was 5.7 per cent and for Britain only 4.5 percent. ... * 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 past decade. * ... Japan's net foreign assets have continued to mushroom. As measured by the International Monetary Fund, they nearly quadrupled in the 11 years to 2000. ...  As long as Japan runs the world's largest current account surpluses, it will remain the world's largest capital exporter.  ... * Japan passed the US in the early 1990s to become the world's largest foreign aid donor and, as of 1999 ,was paying out 67 per cent more in aid than the US. The UN is only the most prominent of many international bodies that depend heavily on Japanese money. (Japan accounted for nearly 20 per cent of 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. * Corporate Japan's worldwide spending on sponsorship - from motor racing to universities - has grown by leaps and bounds. In the latter half of the 1990s, its sponsorship budget in the US alone increased by about 80 per cent In Britain, an interesting instance of recent Japanese sponsorship is the Asahi Shimbun newspaper's donation for the British Museum's Great Court. 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 can't afford a staff correspondent there. By contrast, thanks to big increases in advertising in the past decade, not only can Japanese newspapers like the Asahi afford large bureaeus in Britain but they can undertake extensive goodwill programs. ... 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. But Japan is probably the world's most capital-intensive economy at present. 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 rather machine tools, electricity-generating plants, railway rolling stock, broadcasting equipment, telephone switching equipment and internet routers. 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. ...  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. ... Third, it is claimed that Japan has been eclipsed in high technology by a resurgent US. ... All the evidence is that Japan has greatly lengthened its lead in the past decade. ... . 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. ... The world now depends on Japan for virtually all of the many highly purified materials needed to make computer chips. To make today's ultra-powerful chips, you need ultra-pure silicon, for instance. US companies led the industry into the 1980s but they have long since fallen by the wayside. ... 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 communications industry. Meanwhile, Japan dominates in the supply of all nine major enabling components in mobile phones. A Deutsche Bank Securities study found that 29 out of 36 suppliers of these components were Japanese. 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. US 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 ... Take Furukawa Electric's 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. ... Another example is Hitachi's announcement earlier this year that it was buying IBM's path-breaking disk drive business. ... 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. ...  the banks' problems peaked as far back as 1997 - reflecting the fact that virtually all the problems are ultimately traceable to Japanese real estate and shares, whose prices have fallen little from their mid-1990s lows. Since then, the banks have been progressively restoring their balance sheet strength thanks to the generous "spreads" between 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 mutating. ... The latest "disaster" is Japan's allegedly out-of-control government spending. But Japan's budget problems are grossly exaggerated. OECD figures show that in the first eight years of the 1990s, Japan ran large surpluses. Since then the government's position has deteriorated somewhat but is still no worse than many other nations. It is often pointed out that Japanese government debt supposedly represented 120 per cent of GNP in 2000. This does seem shockingly high - but, unbeknown 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 - higher than the US's 43 per cent but lower than that of most other developed countries. ... Press suggestions that Japanese public spending is inordinately wasteful are equally unfounded. ... much of the responsibility for the West's misunderstandings must be put down to the Western press. Relatively 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 stockmarket plays as prominent a role in Japanese finance as it does in British or American finance. When the Tokyo stockmarket crashed, this was seen as comparable to the Wall Street crash. In reality the stockmarket is regarded by the Japanese establishment as a rather dirty sideshow that can be neglected for years on end with impunity. Similarly, Westerners assume that Japan, in common with nations like Britain and the US, 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 requests for even a token opening of Japanese financial markets. In the end, whether foreign investors consider Japan an attractive place to invest is irrelevant because, in contrast with Britain and the US, 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. 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. ... 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 it was somehow incapable of making anything the size of a Mercedes-Benz or a Cadillac. In the late 1980s, however, Japanese car-makers launched the Lexus, the Infiniti and other superbly built top-of-the-line limousines. 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. {end} Fingleton's website is http://www.unsustainable.org