Japan’s About-Face Is Far From Sure : Nakasone Backs Economic Shift, but Protectionism Is Strong
For days now the attention of the American people has been riveted on the U.S. military strike against Libyan terrorism and its diplomatic aftermath. And rightly so. Because of the uproar over terrorism, however, the announcement of what could be a historic about-face in Japanese economic strategy didn’t attract the attention that it deserved.
Early this month a private advisory council appointed by Prime Minister Yasuhiro Nakasone recommended that Japan take steps to make its economy less dependent on the incessant growth of exports, and more dependent on growth in its domestic economy. Nakasone announced his support for the proposals just before his visit to Washington.
If the proposed shift actually takes place, which is far from sure, it is a move of potentially immense pocketbook importance to both Americans and Japanese.
As everybody knows, the United States in recent years has suffered a growing deficit in trade with Japan; in 1985 the Japanese sold us $50 billion more than we managed to sell to them.
There are many explanations, including good corporate management and quality-conscious workers, the high exchange rate of the dollar versus the yen that prevailed until recently, and too little effort by U.S. companies to adapt to the Japanese market.
Overshadowing everything else, however, is the built-in protectionist bias of the Japanese economic structure--a form of protectionism that is rooted more in cultural attitudes and traditional business practices than in formal trade barriers.
As Harvard Prof. Ezra F. Vogel wrote in Foreign Affairs, the underlying attitude has been that “it’s in their interest to produce goods for their own consumption and for export, and to buy as few manufactured foreign goods as possible.”
Japanese economic and social policy serves the purpose by emphasizing savings at the expense of consumption, by making low-interest financing available to firms investing in areas of research and product development with promising export potential, and by perpetuating vertical linkages between Japanese companies that make it difficult for foreign companies to crack the Japanese market. Some foreign items have snob appeal, but in general consumers have a deeply ingrained preference for goods made in Japan.
The result is an economy with a near-neurotic dependence on exports to produce jobs, profits and economic growth. When the economy shows signs of flagging, the response is not to hold back on investments until things improve or to pump up domestic demand through tax cuts, expansion of consumer credit or government spending increases, but to expand exports even more to keep the economy growing.
It works--but at considerable pain to Japan’s trading partners, especially the United States. In the past five years Japanese exports to this country have grown by 128%, while U.S. exports to Japan are up by only 10%.
From the U.S. perspective this is an intolerable situation--a fact reflected in the strong pressures for protectionist legislation. The Japanese, anxious to head off broad formal restraints on their export trade, have cooperated in efforts to adjust the yen-dollar relationship and have taken some steps to open the door wider to U.S. participation in the Japanese market.
These steps are appreciated, but something still must be done about the unhealthy degree of emphasis on exports in the Japanese economic structure. As U.S. Ambassador Mike Mansfield said in January, such structural reform should be “the most crucial action-item on Japan’s economic agenda. Nakasone and his advisory commission are saying that they agree.
Conceding flaws in the present system, the commission called for a “historical transformation"--a shift from “reliance on exports to growth led by domestic demand.” The report was short on specifics and timetables, but called, among other things, for higher worker pay, reduced working hours, increased agricultural imports, an income-tax cut and a reduction of preferential tax treatment for savings.
Although the initial steps thereupon announced by the government were less than revolutionary, Nakasone pledged to work toward full implementation.
The initial reaction of American experts is friendly but skeptical.
Some old hands suspect that the promise of an about-face in economic strategy is just another Japanese ploy. As one U.S. expert said, the prevailing consensus among Japanese “is that they should yield to American pressures on trade as little as possible . . . that the best way to respond is to lengthen and complicate the solution of any problem, to find ways to slow down implementation while maintaining an overall friendly climate.”
Certainly, however, Nakasone shows every sign of sincere determination to forge a new consensus in favor of the change. And as Harvard’s Vogel observed in another context, “Japan has shown a remarkable ability to forge a consensus on new public issues . . . a fundamental sea change can occur in a short time.”
There is no question, though, that as of now the Japanese are a long way from a new consensus. Employers already have attacked the proposal for shorter working hours and extended vacations. A business federation has warned against any attempt to tamper with the thrift ethic or to “mistakenly beautify consumption.” Powerful agricultural interests will try to block increased farm imports. The Ministry of Finance can be counted on to resist domestic pump-priming measures that would require increases in deficit spending.
Japanese business leaders, whose export efforts have been so phenomenally successful, will not easily accept the need for a radically different strategy. In practice, Nakasone is likely to be very careful about tampering with exports--and, if he gives way to a new prime minister in October, his successor may be more so.
Realistically, if the “transformation” of the Japanese economic system is to happen at all, it may need the helpful nudge of continued protectionist pressures in the United States.