An Intersection of U.S.-Japanese Interests
Japan is at a crossroads. In the next few years the world’s second-largest economy could shift to a better deal for its own consumers and a greater openness to buying goods of other countries. Or it may try to accelerate the export machine that has given it a trade surplus with every nation or trading bloc on Earth--and thus provoke bitter conflicts.
The intelligent bet has to be on openness; Japan has a long history of adapting to changed circumstances. But it’s not a simple question and success will depend critically on Japan and the United States achieving a more independent relationship--what one former U.S. official calls “an adult relationship.” And that won’t be easy given the rhetoric in both countries. Even the supposedly credible Paul Tsongas quipped when he was running for President that “the Cold War is over and Japan won.”
No it didn’t. Japan, like Western Europe, enjoyed a protected position during the Cold War. THe United States was its defender as well as its customer. That’s not to diminish Japan’s achievement--rising from nothing to annual output of $3.7 trillion, two-thirds of the U.S. economy, and even challenging the United States technologically. But the Cold War is over and change is coming for Japan.
Coming with a vengeance, as evidence last week’s sharp fall in Tokyo stock prices. Nomura Securities predicts those stock prices will fall further. Japan’s banks now face more than $100 billion in bad real estate loans and will be unable to meet international capital requirements. And stock market losses are reducing Japanese company earnings, which may strain the lifetime employment compacts enjoyed by some workers.
So the market’s decline is significant. Yet the reaction of Japan’s government has been cautious--a mild increase in public works spending.
But the response of Japan’s corporations is traditional--they are increasing exports. “That is how our economy works,” says one economist, “if conditions are bad at home we push exports.”
As a result Japan’s trade surpluses are rising again--to more than $80 billion this year and next, with even greater numbers forecast for the mid-’90s. Its companies now look confidently to a U.S. economic recovery to provide markets for their goods and those of Asian nations that have become subcontractors to Japanese industry.
But that song is getting old. A surge in Japanese exports will meet cold resistance in Europe and increasingly angry response in the United States, where many now are analyzing Japan’s industrial prowess in a different, harsher light.
Economist Lester Thurow, dean of the Sloan School of Management at M.I.T., describes Japan’s economy, in his new book “Head to Head,” as one that favors producers over consumers, and encourages conquest of markets.
“To understand Japanese companies,” Thurow writes, “there is more to learn from an analysis of the empire builders than from the economics of profit maximization.”
Thurow commends the system that encouraged Honda, for example, to accept lower profits for 15 years while it changed from a maker of motorcycles into a leading automobile manufacturer.
But he doesn’t overlook the other side of the equation, the protected and strangely overpriced Japanese home market.
Prices in Japan are 40% above world market levels, on average. And some prices--for paper and glass--are 200% above. The $20 melons in Japanese supermarkets are typical. There is competition among domestic companies but at a high, administered price level. The extra cash flow to producers allows companies to keep on extra employees--unemployment in Japan is less than 2%--and to build excess plant capacity so as to maximize exports.
Similar support for industry over consumers was tried and failed in the Soviet Union. But Japan is not a totalitarian state. Its postwar economy was born from a concern to provide food and work for the Japanese people, who in turn were encouraged to save--by accounts paying tax-free interest as well as by tightly restricted consumer credit--so that capital could be formed for industry. And the policy worked, bringing a better life than ever before to the average Japanese.
“Japan has not had an economic policy,” writes Peter Drucker, “it has had a social policy.”
But that social compact could be fraying as educated, salaried employees--now the largest single group in the population--face difficulty buying a house, which costs twice what an American would pay, and resent the lack of parks and other amenities in Japanese life.
There are calls for change. The Fuji Bank’s Research Institute notes that Japan’s population will soon begin to shrink because for 20 years the birthrate has been below replacement levels. It is not a confident society, says Fuji’s report, but a society that “needs to improve the quality of life.”
That’s one reason the Japanese government is allowing land and real estate prices to go on falling.
The hope, in the words of Prime Minister Kiichi Miyazawa, is to “make homes more affordable to young marrieds.” But as the economy falls into recession, the reflexive appeal of a boost to exports will be hard to resist.
What should be U.S. policy toward Japan?
“Not containment or protection; that would only foster Japanese behavior we don’t like,” says a former U.S. government official who asks anonymity because he does business in Japan. “Rather we should keep pressing to open their market, to get consumer prices down and make them recognize the cost of building overcapacity to boost exports.”
The countries are curiously well matched: Japan needs to pay more attention to consumers, and the United States could profit by being more producer oriented. Both are at a crossroads.
