U.S. Must Change ‘50s Thinking on Japan
I don’t mean to be an alarmist, but I get the uneasy feeling that America is history.
The total value of stocks listed on the Tokyo stock exchange is now $3.54 trillion dollars, compared to $2.34 trillion for the New York Stock Exchange. Just seven years ago, the New York Stock Exchange was worth nearly four times its Tokyo equivalent. By some calculations, the Tokyo market is overvalued, but it is backstopped by the real growth in Japan’s industrial productivity and its prodigious household savings rate.
Japan has half the population, but greater total capital than the United States, which means that on a per-capita basis Japan is now nearly three times as wealthy as the United States. What is Japan doing with its immense trade surplus and its coffers of newly valuable yen? It is investing them in the rest of the world, which from Tokyo seems a bargain. Japanese life-insurance companies and pension funds buy foreign stocks and bonds, U.S. Treasury debt, and lately Japanese investors are buying increasing amounts of foreign real estate and entire companies.
There is nothing necessarily wrong with foreign investment or with Japan’s marvelous new prosperity. For a century, Europeans and Americans have been investing in each other’s countries. But three aspects are alarming about the Japanese case: the imbalance, the rate of change and the trend. The flow of capital from Japan to the United States is increasingly a one-way street. The rate at which Japan is displacing the United States as the world’s financial behemoth is unprecedented in its abruptness. And by every indication, Japan is widening its industrial and financial lead.
Japanese finance officials tell me they believe Japan can live with an expensive yen and still enjoy a trade surplus almost indefinitely. In March, 1987, when the dollar was sinking against the yen too fast, Japanese investors began dumping American stocks and bonds, causing U.S. interest rates to rise, and indirectly triggering the stock market crash. The Japanese are determined not to let that happen again. As long as the value of the dollar and the yen are carefully managed, Japanese officials are confident that they can maintain their trade surplus and keep recycling their profits back to America to buy our bonds, our stocks and our real estate. We can become a client nation, and hardly feel the sting.
Despite these abrupt role reversals, our two nations continue to operate on assumptions appropriate to 1950. Japan still functions like a small, vulnerable developing nation, and the United States behaves as if it were still the world’s pre-eminent economy. It is still hard to find U.S. products on the shelves of Japanese markets, and despite the devalued dollar the prices of imported products in Tokyo are kept as high as Japanese domestic prices. Oddly, Japanese electronic products are about 50% more expensive in Tokyo than in New York.
Japan now has the wealth to buy up much of the world, yet it still thinks like a society that must engage in mercantilist self-sacrifice in order to pile up export surpluses. The United States still has the illusion that it is cock-of-the-walk, is still consuming its way to oblivion and shouldering the burden of an alliance it no longer dominates. Clyde Prestowitz, a Japan expert, writes in his new book “Trading Places”: “This is surely the first time in history that a territory in the process of being colonized has actually paid for the right to defend the colonizer.”
Japan is an admirable nation, with an unparalleled degree of social purpose. It appreciates the value of equitable outcomes. But that special Japanese comity has always been inward-looking. And as a sudden world leader, Japan needs to extend that sense to dealings with its allies.
At this writing, a very moderate trade bill seeking reciprocal access to foreign markets and greater balance in the world trading system is about to be vetoed as “protectionist.” Reading that news from Tokyo, I have two deep fears. The first is that by the time America wakes up and reverses its policy to demand greater balance in our relationship with Japan, we will be a far poorer nation. The second fear is that by the time we finally acknowledge that economic security is as necessary as military security, the national mood will have turned ugly. By counseling laissez faire, America’s “internationalists” are really seeding a far nastier form of nationalism in the near future.
