My view is that the Japanese economy has outgrown its post war role as an export
engine. With the end of the Cold War, Japan no longer enjoys geo-politically
induced special trade concessions from the US. The continuing trade surplus with
the US is contingent on its being recycled into dollar assets.
Not only will the continue expansion of export to the US not sustainable at a rate
that will help the Japanese doomed domestic economy, but even successful
stimulation of domestic consumption cannot bail out the Japanese dilemma because
the domestic economy is too small to sustain the enormous and growing over
capacity of its export engine. The Japanese economy cannot be revived by domestic
restructuring unless it is prepared to shrink drastically. No monetary or fiscal
measures can overcome this structural problem which is the legacy of General
MacArthur's occupation policy. The Japanese problem is not a purely economic
problem. It is a political economy problem. What Japan needs is to restructure
its international economic relationships away from its unnatural partner: the US,
toward its natural partner: China; and to shift from an export economy to an
regional development economy.
The anchor of US policy in Asia is the US's "special relationship" to Japan. The
intensity and bitterness of the historical conflict between Japan and the US for
their separate interests in Asia have not been eliminated by the post-WWII facade
of "special relationship" or the Mutual Defense Treaty. Before WWII, Japan, not
China, was seen by most American leaders as America's chief rival in Asia. They
squeezed Japan's access to vital raw material and oil, and so destroyed Japan's
plan of becoming a great regional power. While the targets of Japanese attack in
WWII were mostly the colonies of the British Empire, the sole exception being the
Philippines, the Pacific War was won mainly by US efforts. It was Pearl Harbor
that forced Hitler to declare War on the US, thus saving Britain from imminent
defeat. Britain, in winning the war against Germany with US help, lost both
empire and greatness. Together with Britain, supposedly the winner, Japan and
Germany, the vanquished, were thrown by WWII into the arms of America as
suppliants, in a subordination masked by the euphemism of 'special relationships'.
Post War Germany, divided into socialist East and capitalist West, benefited
economically from the Cold War by the need of the US to subsidize West Germany to
keep it safely in the Western Camp. Outside of imposed anti-Sovietism and
anti-communism, Western Germany enjoyed enviable autonomy from US
policy domination. Japan enjoyed much less autonomy than Western Germany, a fact
many Japanese
resented as part of American racism. Further, Germany had a real historical
phobia against a Russia pushing westward, while Japan had less real reason to fear
China, or an USSR that was fundamentally Europe oriented.
After Japanese surrender, MacArthur at first aimed at restructuring Japanese
politics and economics to
prevent a return to militarism. For this purpose, MacArthur�s occupation regime
purged from politics many wartime leaders, instituted land reform, and began
breaking down Japanese large corporate conglomerates (zaibatsu or keiretsu), in
favor of populist if not socialist forces. This strategy would change beginning in
the early months of 1948 with what would be labeled in diplomatic history as "the
reverse course." As fears of the Soviet Union grew in Washington, concerns also
grew that MacArthur�s reform program was making Japan geo-politically unreliable,
ideologically unstable, economically weak, and vulnerable to subversive political
infiltration or, in the longer-run, perhaps even military invasion. As China
liberated itself by establishing a socialist state in 1949, MacArthur was ordered
to abruptly turn US
occupation policy into a strategy to keep Japan from turning toward socialist
paths. Since Japan was viewed as a "strong point" by key American grand
strategists, such as George Kennan, George Marshall, and Dean Acheson, a more
politically and economically conservative program was put into place. It was a
program designed to stabilize the Japanese political economy and to set the stage,
it was hoped, for increased Japanese military strength in the future. This
military power, it was argued, would assist American efforts in countering
international communism in Japan and the rest of East Asia. To support this
military power, a US trade subsidy regime for Japan was instituted.
The decision to adopt "the reverse course" was made in Washington, which of course
meant that it was treated as highly suspect by MacArthur, who had all but set
himself up as the emperor of Japan and who had built a postwar image criticizing
the State Department for shortcomings ranging from Eurocentrism to excessive
meddling in the Pacific. He would not only argue against reversing the
antizaibatsu program, but also against strengthening the Japanese military from
whom he had suffered well pubicized defeat with deep embarassment. Ironically, it
was left to the Supreme Military Commander/Occupier to argue that economic growth
and a stable, liberal political order were the most important weapons in the
struggle for containment of threat for Japan, not the creation of military might.
Nobody doubted the General�s argument about the importance of economic strength
and political stability, but many at the Defense Department and some even at the
State Department insisted that they wanted a major portion of the fruits of
economic revival to be channeled into Japanese military strengthening. In their
minds, Japan should have accepted a significant share of the burden of defending
itself and containing communism in the region more generally. This position would
win the debate in Washington and would be presented to Japanese authorities in
1950-51 by Truman�s special envoy, John Foster Dulles.
In the 1950s, the Truman and Eisenhower Administrations both believed that open
Japanese resistance to American imports, the systematic undervaluation of the yen,
and the total reliance on American military protection were necessary to strengthe
Japan domestically and internationally as an anti-communist ally. After a good
deal of persuasion by Yoshida Shigeru, American leaders also decided that pushing
the Japanese government to build up its military significantly, and thereby reduce
the American defense burden, could lead to a popular backlash in Japan that might
threaten the budding alliance and, by association, the maintenance of American
bases in Japan. Japan, a recent and very bitter enemy, was clearly not sharing
much of the cost burden of the anti-communist alliance in the early Cold War. In
fact,
it worked to benefit economically from it. The kernel of this dilemma is still
alive in the developing relationship of new US-Japan relationship under the new
Bush Administration. While the Bush Team claims a continuation of the strong
dollar policy, there is much talk of coordinated government intervention against a
yen devaluation beyond 120.
Concerned about the domestic acceptance of the US-Japan alliance in America,
American leaders decided they must maintain US dominance of the political alliance
in exchange for generous American aid, trade, and military policies Washington had
already granted to Tokyo. As the sole economic power that had profited from WWII,
the US had the resources and the confidence to buy Japanese support with economic
carrots. In particular, Yoshida would be pushed to accept Washington�s pro-KMT
(Nationalist)
and tough, anti-CCP (Communist) China policies. American elites worried that if
Yoshida diverged too strongly from the anti-communist strategies being advocated
by the United States, the Congress and the public would demand a fundamental
reconsideration of the already controversial one-way economic relationship. The
same argument was presented to foreign leaders around the world as a reason for
them to reconsider independent national policy lines toward the Communist world.
The geo-political foundation of the Marshall Plan was obvious, but the US domestic
politics argument was the mantra.
The cost for Japan of compliance with American geo-political leadership demands
was very high because America had adopted such a tough policy toward China, with
whom Japan would have preferred to have closer economic and diplomatic ties than
the American policy would allow. This problem exists even today, albeit under
different geo-political conditions. The Truman Administration�s need to guarantee
domestic consensus for its domestically controversial early Cold War grand
strategy often compelled it to abandon its privately preferred economic and
diplomatic strategies toward China. In 1949-50, the US refused to abandon Chiang
Kai-shek and recognize the new PRC, despite Truman's personal disdain for Chiang
and KMT corrunption. At the outbreak of the Korean War, the Truman Administration
reversed earlier ssatements to the contrary and sent the Seventh Fleet to protect
Taiwan from potential CCP attack. This locked the United States into an exclusive
diplomatic relationship with Chiang�s regime until the 1970s, and the Seven Fleet
continues to be active in the Taiwan Strait today. The Taiwan issue remains the
main obstacle to normal US-China relations. After the late 1950 escalation of the
Korean War, a desperate Truman Administration applied total embargo on China, and
policies more hostile than those applied to the Soviet Union (this imbalance in
the CoCom regime would come to be known as the "China Differential"). Many of the
diplomatic and trade policies were often viewed by top presidential advisors as
ineffective or even counterproductive on geo-political grounds, but politically
unavoidable on
domestic grounds, particularly after the outbreak and escalation of the Korean War
from June-November 1950.
To understand the sacrifice Tokyo had to make in order to grant the United States
a firm leadership role
on the budding alliance�s China policy, it is critical to note just how important
the Chinese economy had
been to Japan in modern history. It was the search for for a preferred economic
relationship with China
that fueled Japanese aggression on the mainland in the 1930s. Japanese leadership
was actually obsessed
first and foremost with the threat from the Soviet Union and the lessons of World
War I about the need
for an autarkic economy to provide staying power in war. The quest for Japanese
autarky on the Asian
mainland helped drive Japan deeper and deeper into a quagmire in China and,
eventually, into war with
the United States over the control of oil supply. In the 1920s and for most of
the 1930s, China (including Manchuria) was by far Japan�s biggest export market
and import provider in the region. Japanese exploitation of Chinese resources
financed the Japanese military machine for WWII.
Yoshida Shigeru and other Japanese elites saw real economic and political benefits
in establishing
relations with the new Communist regime in Beijing. The new, postwar Japan wanted
to appear
sympathetic to the new Asian post-colonial nationalist movements. The problem was
not that
PRC-Japan trade was viewed as against American or Japanese national interests, but
that it was
unacceptable to US domestic politics.
In February and March 1949, six months before the founding of the People's
Republic, the National Security Council produced NSC 41, a report on China Trade
policy. The document reflected a cautious faith in the possibility of Chinese
Titoism and the usefulness of American trade with Chinese Communist-held areas as
a way to reduce the CCP�s dependence on Moscow. The sections on Sino-Japan trade
were, in a sense, more practical, emphasizing the goal of reducing the American
burden of rebuilding Japan as well as gaining some degree of political leverage
over China through trade dependence with Japan.
The State Department was hardly indifferent to the concerns raised by opponents to
Sino-Japanese
trade, so NSC 41 and other directives advised General MacArthur to encourage trade
on a "quid pro quo"
basis and to try to find alternative markets and raw material sources elsewhere in
Asia to reduce Japanese
dependence on China for critical materials. The need for such alternative markets
for Japan is one of the
arguments Washington used on Japan to secure its support for keeping Southeast
Asia out of communist hands in the early Cold War. This constituted another
"reverse course," in which the United States went from a critic to a supporter of
European imperialism in British Malaya and Indochina. Despite the restrictions,
Japanese trade with the Mainland grew ten-fold from 1947-1950. The Korean War and
the
American-led embargoes against China halted this trend.
Another problem facing the United States in its calculation about US-China and
US-Japan trade was that,
for economic and political reasons, Great Britain was unwilling to apply the
strict export control measures toward China that Washington demanded, fearing the
damage such measures would do to British Hong Kong. In November 1949, top American
officials recognized that if Western Europe traded relatively
normally with China while the United States and Japan embargoed it, this would
only serve to increase
the expense of America�s relationship with Japan without any real costs being
raised to the Chinese
economy. Although the Truman Administration would continue to try to prevent China
from getting
strategically important materials (1A and 1B items on the CoCom list), it seemed
resigned to allow PRC
trade with the United States and Japan on a "cash basis." The logical standard was
that the same criteria
should be applied to China that were being applied to the Soviet Union and Eastern
Europe.
In the first half of 1950, the picture became more mixed as relations with Beijing
worsened after the
January seizure of American consular property and the February signing of the
Sino-Soviet defense
treaty. The United States wanted to find a balance between, on the one hand,
reducing the burden on the
Japanese economy (and, indirectly, on the United States) by allowing trade between
Japan and the
PRC, and, on the other, reducing Japanese dependence on China, which could provide
China with political leverage over Tokyo and threaten American dominance. The
Truman Administration pushed this
argument particularly hard on America�s other non-communist partners in East Asia.
They had been
reluctant to open up their economies to their former Japanese occupiers. The
Truman Administration
argued that increasing their trade with Japan was a necessary role for these
allies since Japan�s natural
market in China had fallen to the communists.
The Korean War would radically alter this picture. When the war escalated in late
1950 with the
Chinese launching a counteroffensive against American forces, the United States
leveled stricter restrictions on trade and financial transactions with the PRC
than it did toward the Soviet Union and Eastern Europe, thus creating the "China
Differential" in CoCom. Two things about this effort are instructive. First,
leaders did not expect the measures to have any real impact on the PRC. And, at
least for several months, they did not (in fact, because of the Hong Kong problem,
trade with the West increased in the first half of 1951). Second, the top American
leadership offered domestic politics as the main reason that the tighter US trade
and financial measures had to be implemented. The argument was that, though almost
certainly ineffective and perhaps even counterproductive, the Truman
Administration
should level the measures because the public and Congress would demand such
action. It was clear that domestic politics, rather than the "high politics" of
strategy, was driving American trade policy toward China. This all but destroyed
Sino-Japanese trade, as some 400 items were put on the list of prohibited
products. Over the next several years, important elites, including President
Eisenhower himself, recognized the illogic of the China Differential and a strict
Japanese embargo on China. But significant relaxation of China-Japan trade
restrictions would remain in place until well after the end of the Korean War.
Throughout 1951, John Foster Dulles, Truman�s envoy to Japan for negotiations on
the Japanese Peace
Treaty, would apply the same logic with Yoshida Shigeru, . Dulles made various
arguments why Japan
should reject Beijing as a diplomatic partner, continue recognizing Chiang
Kai-shek�s regime on Taiwan
as the sole legitimate government of all of China, and sign a Peace Treaty with
the ROC, rather than the
PRC. Dulles also sought Yoshida�s general compliance with American limits on trade
contacts with the
PRC. Like most Japanese elites, Yoshida was very anti-communist. But as a
practical matter, Japan
wanted diplomatic ties with Beijing and much more extensive trade relations than
Dulles�s preferred
scenario would allow. Yoshida bluntly put it: "I don�t care whether China is red
or green. China is a
natural market, and it has become necessary for Japan to think about markets. In
his effort to persuade Japanese leaders, Dulles�s trump card was not a
geostrategic argument but a domestic political one. He emphasized that, if Japan
did not comply with America�s general Cold war strategy, the American Congress and
the American public would not support the Peace Treaty with Japan or the
continuation of other key aspects of American policy toward Japan. Under such
conditions, the military protection of Japan by American forces would become more
controversial domestically, as would economic aid and Japan�s preferential trade
and financial arrangements. It appears that it was this domestic political
argument, above all others, that convinced the reluctant Japanese that questioning
the American leadership role in the Cold War in Asia could carry devastating
results for the maverick nation�s security and economic interests. Dulles would
return to this tried-and-true bargaining tactic again as President Eisenhower�s
Secretary of State in order to prevent Japan from establishing politically
significant trade offices in China.
The result of Japan�s acquiescence to American demands, the December 1951 Yoshida
Letter and
subsequent bilateral Peace Treaty negotiations with Taipei in 1952, locked Japan
into a pro-Taiwan,
anti-Beijing diplomatic posture for the next 21 years. With Japanese acquiescence
to America�s harsh
economic sanctions regime against China, the small-scale but promising trade
between Japan and the
PRC allowed by the United States in 1949-50 practically disappeared.
There are two emerging political divides in Japan. The first is generational,
where 30 to 40-year olds feel increasingly exploited and burdened by the political
clout and financial needs of the previous generation. This divide has
implications for foreign and economic policy, since the younger generation is
generally less
hesitant to consider de-regulation, to debate Constitutional revision,
particularly on military issues, or see a more pro-active and independent Japanese
foreign and economic policy. Yet they are frustrated by what they perceive is a
lack of political representation for their views, viewing the political
establishment in
Japan has been less aggressive in courting the favor of emerging high-tech
entrepreneurs, as compared to their counterparts in the United States.
The second major schism is in the �politics of identity,� referring to competing
Japanese visions
of the future as it relates to its identity as a nation. This divide is
exacerbated by a heightened sense of vulnerability brought on by a weaken economy
caused by a gradual loss of trade preferences, rapid technological change and a
fast aging society. While many feel threatened by US globalization and resent its
pressures on traditional Japanese culture and practice, the response is varied.
Some believe Japan should resist dilution of a pure Japanese identity, but others
are more willing to embrace something more international and allow greater
immigration and foreign investment.
This growing sense of vulnerability and the frustration of younger Japanese to
find a political party with which to identify themselves are leaving their impact
on Japanese politics. Some are drawn to the populist style of a politician like
Shintaro Ishihara (the Governor of Tokyo), without thoughts about the negative
implications of his extremist nationalist foreign policy outlook. Students are
not just accepting the US-Japan status quo as a given but instead are beginning to
think strategically about how Japan should define its own independent policies and
national interest in a more sophisticated, multilateral context.
The younger generation�s attitude toward the US-Japan political alliance is
ambiguous. They seem willing to become a more active partner of the US in
addressing international problems, yet there is frustration with the way the
relationship is currently managed. They feel that Japan�s voice has been
under-represented in the post-Cold War world and that the US military has come to
think of its bases in Japan as an entitlement. Younger Japanese are looking to
take on more control of the alliance, but neither government has so far adequately
addressed their concerns.
The economic situation further pointed to a growing pluralism in Japan, both in
terms of income disparities and connection to the globalized economy. Japan has a
dual economy. One is a �seaside� economy on the cutting edge of technology and
the international marketplace. The other is a �mountain� economy of less
competitive and well protected domestic industries in certain agricultural,
industrial and
service sectors. Many of the most powerful political leaders in Japan represent
the �mountain-side,� which might complicate the nation�s economic development and
create yet another forum of political conflict. Many hard choices remain to be
made in the area of government spending and taxation, in light of the large budget
deficits.
Japan�s dual economy affects the US-Japan relationship as well, since a �victory�
by either side could create tension. On the one hand, the US is anxious for Japan
to reform its economy and contribute to global macroeconomic growth (and provide
access to Japan�s �mountain-side� for US exporters). On the other hand, a
�seaside� victory would likely strengthen America�s biggest competitor in
international markets, and bilateral trade conflict could arise on the micro level
if Japanese firms leapfrog over their American rivals in new product areas such as
digital Internet appliances including mobile phones, television-PCs, and new autos
and accessories.
It is interesting to look at Japan and reflect on the roller-coaster of the past
twenty years. It was twenty
years ago when Japan started its race up the hill to be, as Ezra Vogel�s book
called it, "Number One."
That book was written to wake up US industry to what was happening in Japan. It
didn�t sell very well
in the US, but it was a bestseller in Japan because it was very comforting news
there. It reads well today. The book was based on Herman Khan's infatuation with
Japan as the future power. Today, we have just the opposite types of arguments
being put forward, found in such books as Richard Katz�s Japan: The System That
Soured.
Politicians are probably held in as low esteem in Japan today as in the United
States. For an Asian culture, that is a serious development. Unfortunately, the
bureaucracy, which basically sets policy for Japan, is also not trusted because of
the present anemic state of the economy and American media scapegoating. After a
whole decade of slow growth, the streets of Tokyo still doesn�t look like a poor
economy, because the Japanese government has been effectively insulating the real
pain from the Japanese public.
The budget debate which just took place centered around the banking bill, with
US$500 billion being put into the banking system which needs to be recapitalized.
The main problem is that the opposition in Japan can op ose, but that they are
such a disparate group that they cannot formulate policies of their own.
What are the implications for US-Japan relations? The US had a cozy relationship
with the LDP--the
US and the LDP agreed about many things and fought over trade. But the debate was
limited and the
relationship worked fairly well. Today, young people in Japan are more
nationalistic than the older
generation. It will be more difficult for the US to work with Japan.
For many years, Japan has counted on its economic strength to provide its regional
and global influence.
There was one magic moment when the yen was 79 to a US dollar and the Japanese
economy on a
currency basis was larger than the United States� economy. The psychological shock
in shifting from a
position where the Japanese economy was almost the size of the US economy to a
situation where the
world is criticizing Japan�s economy has been severe. Market capitalization of
Japanese equity fell from 50% of global value to just 10%. For a nation that
relates to the rest of the world only through trade, this is a davastating fall.
The economic difficulties Japan is experiencing are not simply a banking problem.
The banks are part of the problem, but they are the central part of a much broader
system of a dual economy of successful transnational companies built on
subsidiaries and networks of other small companies that are still operating along
feudal lines. The food handling industry is about one-third as productive as the
equivalent US industry yet employs more people in Japan than the steel and
automotive industry combined. The construction industry is another example. It has
been supported because the regional construction companies are the largest
contributors to the LDP. The solution to economic decline has always been public
works, more because of local politics than Keynesian theory. Bridges with few
cars,
trains with few passengers.
The Finance Ministry, trying to help consumers by dropping the discount rate to
0%, didn�t help the consumers but decimated the insurance industry because the
insurance industry offered a guaranteed rate of return on its pension plans. It
couldn�t find any place to put the money to provide the return it had guaranteed.
Large insurance company broke and the people counting on it for their pensions no
longer had pensions. As a result, people started not renewing their policies. Last
year for the first time there was an net decline in money going into pension
plans. Japan is becoming an older society faster than any society in the world.
But it has a large savings base, about US$10 trillion, which amounts to about
US$80,000 for every man, woman and child in Japan, roughly enough to cover per
capita debt in the
US at its height. One should be able to tap that to spark the economy. But 60
percent of that money is held by people over 65. These people are probably not
going to go out and buy a new sports utility vehicle any time soon. How does one
motivate such an economy? The world has never seen a country with a population
this old. What changes does this development bring into the economic milieu? The
banking problem has the beginning of a solution. It is interesting to note that in
part of the program to rectify the economy, the Japanese have set up a financial
security agency which conducted a study of the Long Term Credit Bank, which the
government recently took over. The results that came out of the study found that
the bank was solvent. Nobody believes that, but it is much easier to handle a
solvent corporation in Japan than it is to deal with an insolvent, bankrupt
institution. It
made it easier for the government to take it over. Even before this watchdog
agency began its examination of the other 18 of 19 large Japanese banks, the
government declared that they were solvent as well, despite the recent downgrade
when the Nikkei fell below 12000.
Suggesting solutions to Japan that seemed to have worked in the US economy was not
helpful, more so when events have since shown that they don't even work in the US.
The world consensus is pushing Japan into a quick solution so as to avoid an even
more traumatic Asian financial crisis. The concern in Tokyo is that, if Japan did
"fix" the economy in a hurry, it might cause more trouble than would a gradual
approach. The US has told Japan to lead. The first solution Japan came up with
when the Asian economy started to "go south" was a US$100 billion security fund to
help Asian economies. At that time, the US took the position that this was
unacceptable. The US said that such a plan encouraged moral hazard. In Wall Street
terms, "somebody had to take a haircut." As a result, Japan backed off. Three
years later Japan suggested a similar, US$30 billion package, with much of the
money going to help Japanese firms, but it would still help the region. Now the US
is supportive, regardless of the "moral hazard." The US position now is that "we
have to stop the sinking and start rebuilding."
Japan is the US's largest trading partner after Canada. It is also the world's
second largest economy.
Economic growth has been flat since the real estate and stock bubble burst in
1990, except for 1996 when real GDP growth was 3.6% due to a large fiscal stimulus
and low interest rates. Japan remains a massive net exporter of goods to the rest
of the world. The U.S. has had a bilateral merchandise trade deficit with Japan
since the mid-1960s. Although Japan's merchandise trade surplus with the U.S.
fell in recent yearsto $48 billion in 1996 from $59 billion in 1995, the surplus
rose in 1997 as the weaker yen caused by the strong dollar policy increased
Japan's exports and reduces its imports.
The US encourages Japan to promote strong domestic demand for its products, open
its markets further to imports and deregulate its economy. As Secretary Rubin said
repeatedly, "It is critical that Japan's current account surplus not rise again to
a level that detrimental to global growth, that causes trade friction with Japan's
trading partners and that could fuel protectionist sentiments in other countries."
Excessive regulation and non-transparent procedures continue to be a drag on
Japanese growth and to impede American firms' and products' access to Japanese
markets. Economists in Japan and abroad agree that regulatory reform is necessary.
Consecutive prime ministers have said that deregulation was one of the
administration's top priorities. But, progress has been slow, as existing
bureaucratic and economic interests favor the status quo. There are complaints
that US firms want Japan to change to fit their operating culture rather the other
way around.
US trade policy aims at opening Japan's markets, so that foreign firms can compete
on an equal footing. The Framework Agreement, signed by President Clinton and PM
Miyazawa in 1993, governs bilateral trade relationship. Since then, the two
government have negotiated scores of trade agreements. Under the Framework, the US
has had recent successes in insurance, semiconductors, and intellectual property
rights protection, and enjoyed similar success in a WTO case involving distilled
spirits. Nevertheless, Japan remains a difficult market especially for new
entrants owing to government regulation, exclusionary private business practices,
and inadequate anti-trust enforcement.
Henry C.K. Liu
Mark Jones wrote:
> William Keegan on the real roots of the country's plight: US policy and inept
> economic management
>
> Sunday March 18, 2001
> The Observer
>
> As the Japanese stock market falls to levels below a third of the peak reached
> in 1989 (Nikkei index: 39,915.87), concerns have re-emerged about the
> viability of a banking and financial system that is far from 'transparent' and
> characterised by cross-share holdings. There is particular concern about the
> historic cost valuation of bank assets and the possibility of some kind of
> 'meltdown'.
>
> The worries of overseas investors were exacerbated recently when veteran
> finance minister Kiichi Miyazawa declared that, after years of public works
> projects - recommended by, among others, the Americans - the budget position
> was 'near a state of collapse'. This is not the kind of thing finance
> ministers are meant to say, even when the budget deficit is some 130 per cent
> of gross domestic product. Miyazawa later retracted, but the cat was out of
> the bag.
>
> This is all a far cry from the mid-1980s, when the Japanese economy attracted
> the envy of the world, and even the mighty US was concerned that it had
> somehow lost out to Japan's miraculous industrial machine.
>
> Everything changed when the US realised that the - at the time - very strong
> dollar was in fact a source of industrial weakness. Via various Group of Seven
> agreements, the Reagan administration first devalued the dollar and then
> stabilised it.
>
> Central to Washington's international economic policy from then on - under
> both Republican and Democratic administrations - was the goal of attacking the
> huge Japanese trade surplus, and assuaging the protectionist sentiment that
> Japan's economic 'invasion' was arousing in the US.
>
> This involved several successful attempts to drive the value of the yen up to
> peaks which would damage the Japanese export effort, as well as repeated
> appeals to Japan to expand domestic demand in order to encourage imports.
>
> Ironically, an earlier contributor to all those deficits whose accumulation
> now cause such concern was Miyazawa who, as finance minister in the
> mid-Eighties, introduced several stimulatory economic packages. He is cited in
> Managing the Dollar: From the Plaza to the Louvre by Yoichi Funabashi as
> '[enlisting] foreign pressure in an alliance with domestic expansionists to
> advance his stimulative policies'. Japan also kept interest rates extremely
> low in the late Eighties, thereby encouraging the notorious 'bubble economy'
> from whose effects it is still recovering.
>
> There are conspiracy theorists who think the US was in fact attacking two
> empires in the Eighties - the 'evil empire' of the Soviet Union, which duly
> collapsed in 1991, and the Japanese economic powerhouse, which needed bringing
> down a peg or two.
>
> But, in the clichi of the moment, no economy is an island, and there is no
> knowing what the repercussions might be if the Japanese economy goes 'down the
> tubes'.
>
> However, let us remember that those very tubes would almost certainly have
> been manufactured in Japan, to the very highest quality standards. British
> observers who are beginning to compare Japan's 'plight' to that of the former
> Soviet Union - on the grounds that there has been a degree of centralised
> planning which no longer works - are making something of a leap.
>
> Communism produced a 'shortage economy', and exposure to what was possible in
> the West contributed to its downfall. People all over the world want Japanese
> consumer goods, and two Japanese multinationals, Toyota and Sony, are among
> the top 10 corporations.
>
> The Japanese economy has succeeded in making many adjustments over the years,
> when the sense of crisis was sufficient.
>
> The Nobel laureate Robert Mundell told an audience at City University last
> week that the 12 per cent per annum growth rate achieved by Japan between 1955
> and 1970 was 'probably the most successful economic expansion of any economy
> at any time in history'.*
>
> Although the envy of the world by the Eighties, Japan, with its heavy
> dependence on imports of oil and raw materials, had felt vulnerable in the
> face of the 'oil shocks' of the Seventies. Its modern consumer society, with
> one of the highest standards of living in the world and huge savings on top,
> is in part a reaction to those crises. And the Japanese were particularly
> stung by an EU Commissioner's remark in the late Seventies that they were 'a
> nation of workaholics living in rabbit hutches'.
>
> Mundell thinks that, encouraged by America, Japan has relied too much on
> fiscal policy and not enough on monetary policy to refuel its economy. It has
> also been good at macro-economic policy mistakes: in 1997, for example, it
> raised consumer taxes just when it seemed to be emerging from the recession
> that followed the bursting of the bubble.
>
> With almost incredible ineptitude, the Bank of Japan tightened monetary policy
> last August when the economy was again showing tangible signs of recovery.
>
> To any visitor to Japan, the current period of deflation seems very much a
> 'golden recession'. Moscow was never like this. And, even if the political
> system seems paralysed, there is far more awareness in Tokyo now of the need
> for the next step in Japan's 'catch-up' process with the West.
>
> This is far from saying that simultaneous economic slowdowns in the US and
> Japan are not worrying. They are, and it is going to be a very difficult year.
> Japan is aware of the need to catch up with some of the 'reforms' now
> commonplace in the West, and it needs to address its banking crisis the way
> the US came to grips with the potentially disastrous Savings & Loans crisis.
> History suggests it might be capable of the adjustment. But it will be a very
> hard road.
>
> *'The Thornton Effect: Monetary Instability Arising from Big Wars', City
> University
>
> Sell, sell, sell. A week of market madness
> Line of failures feared as telecoms boom hits gloom
> Charging bulls and bears with sore heads
> 'Stockbrokers ran stalls on Petticoat Lane to make money'
>
> Guardian Unlimited ) Guardian Newspapers Limited 2001
>
> _______________________________________________
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