Fingleton’s 1995 rebuttal of the “basket case Japan” story

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Named one of the Ten Best Business Books of 1995 by Business Week  and excerpted in both Foreign Affairs and Fortune, Blindside: Why Japan Is Still on Track to Overtake the U.S. by the Year 2000 (Boston: Houghton Mifflin, 1995) was published in French and Japanese as well as in several English-language editions. Its central argument was that, behind a fog of largely feigned economic dysfunction, the Japanese economic system in the 1990s quietly surpassed the United States in the most advanced and geopolitically important areas of manufacturing.

The book analyzed the collapse of the Tokyo bubble of the late 1980s and the consequent strains on the Japanese financial system. (These strains had been predicted by Fingleton in “Why the Japanese Banks are Shaky,” a path-breaking analysis in Euromoney magazine in September 1987.) The book went on to argue that Japan’s export sector — the aspect of the Japanese economy that mattered in global economic competition — was fully insulated from the banking problems and thus would continue to forge ahead.

More generally Blindside argued that many of the commentators and analysts who projected the “Japan-as-basket-case” story into the Western media were consciously pursuing a counterintuitive Japanese propaganda agenda intended to forestall then intense American pressure to open Japan’s markets.

In visible vindication of Blindside‘s central argument, Japanese exporters continued rapidly to build their strength during the 1990s and into the new century. So much so that between 1989 — the last year of the stock market boom — and 2007, Japan’s current account surplus multiplied nearly fourfold. In the same period America’s current account deficit multiplied sixfold. The contrasting trends vindicated Fingleton’s view that Japan’s expanding market share in advanced manufacturing would be won largely at the expense of American rivals. The effect was particularly marked in super-advanced manufacturing industries that had previously been the very cornerstone of American geopolitical power. Indeed Japan established hundreds of “chokeholds” — effective world monopolies — in a host of crucial goods such as precision machine tools, high-tech components, and advanced materials. Examples range from LCD production machinery through mobile phone components to aerospace-grade titanium.

Even something as apparently unremarkable as silicon — the basic material used in microchips — is now a Japanese monopoly. Each new generation of microchip requires silicon of an ever more fantastically rarefied purity — a manufacturing challenge that in recent decades has proved too daunting for one American and European producer after another. Thus the field has thinned to only a few Japanese producers, most notably Shin-Etsu and Sumco. In effect without Japanese silicon the entire development of the semiconductor industry since the mid 1990s would have ground to halt. And silicon is just one of many chokeholds Japan enjoys in semiconductors alone.

Another key Blindside theme was that Japan’s distinctive economic system would survive all Western predictions of its demise. The book predicted in particular the triumphant survival of such crucial aspects of the Japanese system’s as the permanent employment system (so-called lifetime employment), the keiretsu system, and the cartel system. And, above all, the Japanese government would continue to pursue its policy of detailed regulation of economic activity.

On all these predictions, Blindside  was clearly vindicated, while commentators at such apparently authoritative Western publications as the Economist and Wall Street Journal, who constantly predicted the demise of the Japanese system, were correspondingly confounded. Thus as of 2008 regulators continued tightly to regulate the Japanese economy. And, of course, the keiretsus — with names like Mitsubishi, Sumitomo, and Mitsui — emerged from the 1990s stronger than ever. So less visibly did the cartels. So too has the permanent employment system. (This has not stopped a constant succession of Western commentators to continue to predict the employment system’s demise into the new century – but such predictions follow in a long line of similarly mistaken ones that have been a constant of Western comment since the 1960s. Japanese sources encourage such reports as a way of deflecting attention from how the permanent employment system actually works. Why? Because any frank explanation would have to acknowledge that trade protectionism is a fundamental condition for the employment system’s survival. So long as the permanent employment system continues, Japan will willy-nilly protect its markets — and will continue handsomely to reward its lobbyists and surrogates in the United States for denying that fact.)

Blindside proved wrong in only one significant respect — its prediction that, given the contrasting trade trends in the two nations, the American dollar’s foreign exchange market value would fall to about 65 Japanese yen before the end of the decade. This prediction was the basis for the book’s subtitle forecast that Japan would overtake the United States by 2000. Fingleton’s view was that in an effort to forestall further hollowing out of America’s advanced manufacturing industries by Japan, Washington would have no option but to undertake a massive devaluation of the dollar.

Instead a few months after the book was published — and before he had read the book (which subsequently praised in a letter to Senator Ernest F. Hollings) – President Bill Clinton opted for a strong dollar. This proved a great boon in the short run for American consumers and importers but the benefits were won at the expense of the collapse of America’s remaining manufacturing industries.

Even today, however, the fact of Japanese leadership in advanced manufacturing is virtually invisible to Americans and its significance almost completely overlooked. The most striking way that it is manifested is in the import patterns of other nations. Take China. China now imports more than twice as much from Japan as from the United States, and this despite the fact that the United States’s population is about two-and-a-half times Japan’s. Yet factory wages are actually higher in Japan than in the United States — and are about five or six times higher than in the richest parts of China. Given that the United States claims to enjoy a political advantage over Japan in selling to China, why do the Chinese buy so much more from Japan? The answer in large measure is because it has little choice. The point is that Japan is now the major source — and very often the only source — of countless highly advanced manufactured products that China cannot make for itself, and without which China’s export industries would grind to a halt. Essentially these days Japan does much of its exporting to the United States through China.

What we saw in the 1990s was a sea change in which rapidly rising trade deficits have become “baked-in” to America’s economic structure. While for a time this change was covered up by the foreign trade lobby and its allies and collaborators in a largely globalist press, the epochal implications of America’s dependence on foreign borrowing were by 2008 becoming unmistakably obvious. Basically the only thing that has kept the American dollar from total collapse in recent years has been that East Asian central banks, most notably those of China and Japan, have kept it on a financial heart-lung machine.

Viewed from the vantage point of posterity, it will be obvious that it was the United States not Japan that truly became a basket case in the 1990s.

For a fuller understanding of the Blindside analysis and its continuing crucial salience in discussions of East Asia,  see the articles below. The first was published by the American Prospect in 2005; the second by Chalmers Johnson’s Japan Policy Research Insitute in 2001.  


Sun Still Rising

By Eamonn Fingleton
The American Prospect

May 6, 2005

“Juggernaut Japan” of the ’80s gave way, in the U.S. press, to a narrative of economic obsolescence. That’s what the Japanese wanted us to believe.

For those who claim to understan d the global economy, here’s a pertinent question: Which East Asian economic powerhouse recently announced the largest current-account surplus in world history?

The answer is Japan, although very few readers of the American press are likely to have noti ced. Given the continuing media obsession with China, little news about East Asia’s other giant economy makes it into print or onto television these days. Yet in most of the ways that matter to current U.S. economic policy, Japan remains far more importan t than China.

To be sure, China is growing very fast. But misinformed American commentary to the contrary, China remains many years away from displacing Japan as Asia’s largest economy. Still less is China any sort of benchmark against which a high-wage economy like the United States should be measuring itself.

Japan, by contrast, is a useful benchmark. One important fact ignored by the American media is that Japanese industrial wages are now among the world’s highest. Not only are they far higher tha n in China (between four and 15 times higher, depending on the region of China), they are actually 20 percent to 30 percent higher than in the United States. Yet Japan’s export industries have not only survived but thrived.

The largely untold story of J apan’s extraordinary manufacturing successes in recent years should inspire a radical reappraisal of fundamental American economic assumptions. Certainly Japan’s trade performance stands as a stunning rebuke to those who hold that high-wage nations can no longer compete in manufacturing. Their argument has fostered an utterly unwarranted sense of inevitability about America’s manufacturing implosion. The damage already done can be gauged from the fact that, at 5.7 percent of the gross domestic product, Am erica’s current account deficit last year was proportionately the second-worst of any major economy in history. It was exceeded only by Italy’s 7.7-percent deficit in 1924 — hardly a happy precedent, considering that Benito Mussolini seized dictatorial pow ers in January 1925.

Here are a few statistics that put Japan’s true economic standing in perspective:

* Measured at market exchange rates, Japan’s GDP last year came to $5.1 trillion — three times China’s $1.7 trillion.
* Japan’s current account surplus last year, at $171 billion, was more than two and a half times China’s. Even more impressively, that Japanese surplus was more than three times what Japan earned in 1989, the last year of the Tokyo financial boom. (Owing to higher oil prices, among other factors, the Japanese surplus may dip as low as $145 billion in 2005. But that would still be a nice contrast with the last time oil prices seriously cramped Tokyo’s mercantilist style; in 1980, after all, Japan incurred a deficit of more than $10 billion.)
* Japan makes most of the high-tech components and materials in China’s vaunted exports to the United States. In fact, Japan’s knowledge-intensive and capital-intensive factories are using China (as well as dozens of other nations) as an export pipeline to the United States. Judged by where the added value is really created, Japan is still a far larger source of U.S. imports than China, despite the higher dollar value of exports from the latter.

How can all this be reconciled with accounts of a perennially ailing Japan? It can’t, of course. The truth is that Japan is no basket case and never has been. Strange as it may seem, for many years Japanese leaders have — for very Japanese reasons — been assiduously exaggerating their nation’s weaknesses and u nderstating its strengths.
Perhaps the biggest surprise is how rich Japanese consumers have become. Their affluence is immediately obvious in the way they dress. Already considered the world capital of fashion by such style mavens as Suzy Menkes and Amy M. Spindler, Tokyo was recently pronounced “the coolest city on the planet” by the editors of GQ magazine.

As UCLA management professor Sanford Jacoby points out, Japan’s prosperity is also abundantly apparent on its roads, which are full of late-model c ars, and in its electronics stores, which are constantly packed with free-spending males. Indeed, the Japanese are so wealthy that the most advanced new products — from the latest game machines to the most spectacular new flat-screen TVs — are often laun ched in Japan months or even years before they reach the United States.

“Japan is a very affluent country with an income distribution much less unequal than in the States,” says Jacoby, author of a new book on Japanese corporate governance. “Those in the bottom two-thirds of the income distribution enjoy a higher quality of life than their U.S. counterparts. As for the upper one-third, they, too, benefit from Japan’s high level of public services, as well as the security that comes from a stable, cohesive society.”

Even in the late 1990s, when commentators abroad were performing daily last rites for the Japanese economy, the palpable prosperity on the ground there stunned visiting Americans. Nathanial Gronewold, a University of Minnesota graduate who st udied economics in Hiroshima in 1997 and 1998, recalls: “My time in Hiroshima went down in the record books as two of the worst years for Japan’s economy. But the affluence I witnessed in and around Hiroshima was a stark contrast to the scores of empty sto refronts and offices in downtown Minneapolis, which was supposed to be booming at that time.”

Although Japan’s real-estate crash in the early ’90s has received plenty of attention, the construction boom Gronewold witnessed was no local phenomenon. As mea sured by the architectural Web site, 80 skyscrapers were built in Tokyo in the ’90s, versus just 49 in the ’80s (with skyscrapers being defined as buildings rising at least 115 feet). In Osaka, the total was 56 versus 18; in Yokohama, 19 ve rsus none. London’s total, by comparison, was 33 versus 28. New York actually registered a decline: Only 103 skyscrapers were built there in the ’90s, versus 257 in the ’80s.

There are still more ways to measure how well Japanese consumers have been doing:

Car-navigation systems. With 3 million systems sold annually, Japan is by far the largest market for these invaluable gadgets, which use satellite signals to pinpoint a car’s position, suggest routes, and provide alerts on traffic jams.
The Internet. As reported by London-based Total Telecom magazine, Japanese Internet connections are now not only the fastest in the world but also the cheapest, and Japan now leads the world in so-called FTTH (fiber to the home).
Mobile phones. Japan came from nowher e in the early ’90s to establish a lead of 25 percent over the United States in the rate of mobile-phone ownership. Japanese mobile-phone networks now lead the world in service quality. By 2003, according to the Virginia-based consulting firm TMG, nearly 2 9 percent of the Japanese population enjoyed Internet service on their mobile phones. Such access was then still almost unknown in the United States.
Health care. Since 1990, Japan’s excellent universal health-care system has cut infant mortality by more than one-quarter, to just 3.28 per 1,000 live births. At roughly half the American rate and a mere one-seventh of China’s, that is nearly a world record. And even though the Japanese have been eating more unhealthy Western food, they are living longer th an ever. They now live four years longer on average than Americans, and almost a decade longer than the Chinese.
* * *
If Japanese consumers have made remarkable progress in recent years, the advances in Japanese industry have been stunning. Thanks to consistently heavy investment, Japan has made huge strides in industrial productivity. As Fortune magazine recently reported, Toyota Motor seems set to pass General Motors within the next two years to become the world’s largest automaker. Back in Japan’s “j uggernaut” era of the late ’80s, Toyota was still being outproduced more than 2 to 1 by GM and more than 50 percent by Ford.

Japanese workers these days typically work with 10 to 20 times the capital of their Chinese counterparts. The Japanese and the Chinese are thus positioned at opposite ends of the manufacturing spectrum — a spectrum that has never been wider. The Japanese workers’ huge productivity advantage is well illustrated by the fact that, according to the latest CIA figures, Japan is home to 57 percent of all the world’s industrial robots.

Underlying all this has been a national strategy to surpass all foreign competition in investment. Completely overlooked by the American press, the result is that Japan has established monopolistic leade rship in more and more areas of advanced manufacturing, particularly in producers’ goods such as materials, components, and machine tools. Such monopolies constitute “chokepoints” that give Japan control over ever-larger swathes of the global industrial l andscape.

One such chokepoint is Japan’s little noticed but important lock on advanced lens cutting. Leadership in production of high-tech lenses helps explain why Japanese companies dominate the world market in everything from television studio equipme nt to endoscopes. Lens technology even gives Japan a crucial inside track in semiconductors. This is the single most important technology in creating so-called steppers, the photolithographic machines that print minute electrical circuits on silicon chips. Japan’s champion lens cutters, Nikon and Canon, make more than two-thirds of the world’s steppers.

Japan also monopolizes such important semiconductor-production equipment as photomasks, as well as key materials including silicon, gallium arsenide, an d epoxy cresol novolac resin (with ever-purer versions needed for each new generation of computer chips).

Elsewhere in the electronics industry, Japan’s hidden chokepoints include charge-coupled devices (essential in everything from home video cameras to guided missiles), high-tech batteries (vital in many portable devices, including advanced military equipment), and laser diodes (the enabling technology in the ever growing CD/DVD family of gadgets). In miniaturized disk-drive motors, Kyoto-based Nidec controls 90 percent of the world market. Its tiny, highly precise, almost silent motors are the key technology in the Apple iPod.

In mobile phones, the Japanese are likewise quietly dominant. Although Western brand names like Motorola and Nokia appear t o lead the industry, today’s sleek mobile phones would not exist without Japan. Two decades ago, Japanese electronics makers embarked on a massive government-led effort to miniaturize the various mobile-phone components. A survey by Deutsche Bank found that as of 2000, 29 of 36 suppliers of the nine key components in mobile phones were Japanese. And Japan also owns most of the world’s optical-fiber production capacity.

Perhaps the single most surprising area of Japanese industrial success is aerospace. After decades of quietly capturing key chokepoints in avionics, carbon fiber, and titanium, Japan has now passed a fast-declining United States in all but name. One indicator is that — as officially acknowledged by Boeing — Japanese contractors will build 35 percent of the new super-advanced Boeing 787, a big jump over their 21-percent share of the Boeing 777. In the view of David J. Pritchard, co-author of a major study on the hollowing out of Boeing, the 787 will be more a Japanese plane than an American one.
* * *
In short, the “lost decade” story was a hoax. The Western media were duped by a total reversal in Japan’s public-relations program. Whereas Japan had once aggressively emphasized both its real and imaginary strengths, that emphasis switched in the 1990s to a highly counterintuitive “bad news” strategy.

The upbeat propaganda of the 1980s had been intended primarily as a defense in dumping lawsuits. Thus the American media were induced to publish greatly exaggerated claims of Japanese produ ctivity. As noted by Pat Choate, an expert on the Japanese trade lobby, The Wall Street Journal proved particularly credulous.

After major American corporations laid off their factory workforces and switched to outsourcing, Japan’s propaganda needs changed abruptly. As companies like Hewlett-Packard and Motorola stopped competing with the Japanese and started buying from them, the dumping litigation disappeared. America’s trade deficits with Japan widened rapidly, prompting Washington to view Tokyo more and more as a power rival.

In the new circumstances, Japan’s old super-economy image was not so much an irrelevance as a liability. Washington’s mood softened remarkably, however, after the Tokyo stock market crashed in 1990. Assuming quite wrongly that the crash signified fundamental problems in Japan, Washington began expressing gentlemanly concern for the “fallen giant.”

Soon Japanese political and business leaders started to tell other sob stories. During the ’80s they had carefully kept Japanese c ities miraculously free of vagrants, thus fostering a myth that Japan was immune to the pathologies of lesser societies. In reality, as James Fallows has documented, down-and-outs had existed all along in Japan. But until the early ’90s, homeless people h ad been kept hidden in remote ghettos such as Tokyo’s Sanya district. The bad-news strategy called for a radical change: Suddenly, the homeless were given carte blanche to camp out in Tokyo’s glitziest neighborhoods, such as the park opposite the swanky I mperial Hotel.

Another official gambit was to adopt highly conservative national accounting assumptions that drastically reduced Japan’s apparent growth rate. Although both Japanese living standards and exports have palpably boomed in recent years, annual GDP growth is officially stated to have averaged only about 1 percent.

In keeping with this strategy, Japanese officials began beating their breasts about an apparently disastrous deterioration in public finance. One “footnote” has been omitted: Japan’s official foreign-exchange reserves rocketed from $85.1 billion in 1989 to $840.6 billion at last count. In effect, the Japanese government has been borrowing to prop up not the Japanese economy but the American one.

Some of the sob stories had a basis in truth, but nonetheless greatly exaggerated the real trauma. Consider the banking crisis. Among Tokyo-based observers, this writer was virtually alone during the 1980s in predicting the banks’ problems. These duly emerged in the early 1990s, but, despite all the misinformed alarmism in the American press, Japan never came close to a domino-style banking collapse.

Many prominent Japanese corporate chieftains compounded the jitters. In 1998, for instance, the president of Toyota Motor made world headlines when he suggested that a collapsing Japan could take the world financial system with it. This remark seemed on its face inexplicable. Certainly no one climbs to the top of a major corporation anywhere, least of all in Japan, by shouting “Fire!” in a crowd ed theater. If all the dramatis personae in the Japanese establishment knew that the fire alarm was merely part of a kabuki act, that would be different.

What is clear is that nothing in Toyota’s own business experiences remotely justified that scary rema rk. In fact, Toyota’s profits in 1998 represented a healthy 56-percent advance from 1989, a performance that put Ford and GM in the shade. The home market in Japan had remained profitable, as household car ownership increased by nearly 2.2 million in the ’9 0s. And Japanese cars had become much larger and more luxuriously fitted, with the svelte Toyota Lexus, for instance, replacing the dowdy old Toyota Century as the executive limousine of choice.

If Japanese leaders put on a convincing impression of econo mic decline in the 1990s, it has to be admitted that Western commentators made a gullible audience. Many business correspondents wailed about corporate Japan’s low profits, and, sure enough, profits are low in Japan. What those correspondents failed to unde rstand is that in the Japanese system — whose workings are consistently misunderstood by foreigners — profits are a secondary consideration. That may seem surprising, but the fact is that even in the “juggernaut” years of the late ’80s, Japanese corporat ions were notoriously unprofitable.

The further those commentators were from Japan, the more extreme were their assessments of the “basket case.” Take New York–based Karen Elliott House, who in 1992 compared the Japanese economy all too gleefully to chil dren’s toys called Shrinkies, which were advertised to “shrink right before your eyes.” Even the normally astute Paul Krugman, in a similar outburst of misplaced schadenfreude, recycled a myth that Tokyo had been reduced to building “bridges to nowhere” a nd “highways with no traffic” to stimulate the economy. Japan has no bridges to nowhere, and it is hard to build unnecessary highways in a nation with one of the highest ratios of cars to road space in the world.

For sheer absurdity, however, few observers came close to Michael E. Porter. In a book titled  Can Japan Compete?, Harvard’s competitiveness oracle convinced himself that Japan had ceased to innovate by the mid-’80s. Thereafter, wrote Porter, its export drive had supposedly become increasingly dependent on industries so laughably low-tech they would embarrass an Afghanistan or a Peru. Among these were yeast, flaked cereal, and, most memorably, “raw bovine and equine hides”! For some reason Porter’s list overlooked all the hundreds of high-te ch products that were then — as he was writing in 1999 — driving not only Japan’s export boom but the world technology revolution.

To be fair to Porter and many others who got the story wrong, it has to be added that key members of the Tokyo foreign c ommunity sought to mislead visiting Americans. It has always been so. As far back as the 1970s, Tokyo-based consultants were already suggesting that Japan’s utterly closed market was one of the world’s most open. In the 1990s, key analysts pitched in to s upport Japan’s bad-news strategy. While that may seem surprising, several of the key analysts in Tokyo have consistently shied away from invitations to debate their doom-and-gloom take on post-bubble Japan.

If there is a moral in Japan’s hidden strength s, it is this: Washington must address the implosion of advanced U.S. manufacturing. As a first step, policy-makers should take a jackhammer to Japan’s closed markets.

Nearly a decade ago, U.S. trade negotiators chivalrously removed almost all pressure f or Tokyo to open its markets. Today, even Japan’s rice market is still tightly closed — despite the fact that the American press announced with banner headlines in 1993 that the market had been opened.

For U.S. trade policy, the most outrageous failure has been the Japanese car market. Detroit’s share in Japan fell to less than 0.5 percent in the late 1990s. Of course, Japan’s trade lobbyists contend that Detroit does not make cars configured for Japan’s drive-on-the-left roads. But this is blatant prop aganda, as the Detroit companies have never had any trouble serving Britain, the world’s other major drive-on-the-left market.

The ultimate smoking gun here is the plight of the Korean car industry. Its products have made inroads all over the world — e verywhere, that is, except Japan. While Japan has opened up in a token way to Korean electronics exports (Samsung in particular sells in Japan), Korean automakers are still completely excluded. Their sales in Japan last year came to just 2,930 units — le ss than 0.04 percent of Toyota’s output.

So why hasn’t Detroit pressed harder for access? Up to the mid-’90s U.S. automakers did try to penetrate Japan, but they have since surrendered. The reason is that the Japanese corporate establishment is noted fo r the alacrity with which it retaliates against U.S. corporations that make trouble for its trade policy. Detroit used to be relatively immune from such pressure, but not any more. American car companies are now heavily dependent on Japan for key material s such as special steels, for precision components such as air-conditioning compressors, and, most of all, for such vital machine tools as painting robots and body presses. Which is to say that the U.S. auto companies are at the mercy of Japan’s chokepoin t strategy. If they were to make more than a token effort to fight Japanese mercantilism now, they would face certain retaliation.

All of which prompts another pertinent question: If America’s largest manufacturing industry can’t stand up to Japan anymore, which nation is really the basket case?


Blindside Revisited

By Eamonn Fingleton

(Article published by Chalmers Johnson’s Japan Policy Research Institute in 2001)

TOKYO. Six years ago I published a book that offered a notably provocative take on U.S.-Japan competition. Not the least provocative aspect of the book was its title— Blindside: Why Japan Is Still on Track to Overtake the U.S. by the Year 2000.
The book was a point-by-point rebuttal of the conventional view that the Japanese economy w as a spent force. The book argued that Western commentators were greatly exaggerating the real economic damage done to the Japanese economy in the wake of the Tokyo stock market collapse in 1990.  It went on to focus attention on Japan’s many hidden econo mic strengths – most notably its world-beating manufacturing sector. The book argued that Japanese manufacturers had escaped unscathed from the whirlwind visited on the Japanese financial sector and as a result were continuing to make rapid progress – progress that was propelling Japan to an ever more powerful position in the world economy.
A lot of people at the time were impressed with the argument. A prestigious journal of diplomacy even published a large excerpt from it. The editors of a top American business magazine voted it one of the best books of 1995. In Washington, those who commended the book included the President of the United States.
So much for the joys of authorship. But with the passing of anno domini 2000, it is time for a reckoning. Given the torrential flows of bad economic news we have had from Japan in the last six years, shouldn’t I now concede I was wrong? Actually no – not a bit of it. Strange as it may seem to those who have not read the book, I am more convinced than ever that Blindside‘s highly counterintuitive analysis was right.
In particular I repeat the basic political point of that analysis: in an effort to avoid stoking protectionist sentiment in Washington, Japanese bureaucratic and business leaders have in the last de cade systematically cultivated the impression of economic dysfunction. They have thus generally both greatly exaggerated the country’s difficulties and understated its successes. And the public relations effect in persuading American policy makers that the Japanese challenge is a spent force has been incalculable. Basically Japan has been allowed a free pass to continue with its fundamental economic policy, a policy it has pursued doggedly the seventeenth century. That policy is, of course, mercantilism.
Of course, not everything in Japan’s garden has been coming up roses. By far the most publicized of Japan’s problems are those that have resulted from the financial crash of 1990. As asset prices have fallen, the impact has been devastating on the fortun es not only of thousands of formerly plutocratically wealthy Japanese families but on their bankers. These financial difficulties were fully apparent as I wrote Blindside and, of course, they contradict nothing in the book. In fact in Euromoney in the lat e 1980s, I loudly predicted the coming financial crash and did so at a time when Tokyo-based securities analysts without exception (check the record) were bulling Japanese stocks to the sky. 
Now for what Blindside actually said. The book made a detailed case for believing that the distinctly different Japanese economic system was a fundamentally more powerful force for creating wealth than American capitalism. This led to the book’s prediction that, contrary to all conventional wisdom at the time, Japan ese leaders would continue to maintain the Japanese  system’s major features – and in particular the permanent employment system, the keiretsu system, and the cartel system. Above all, Japan would continue to pursue its policy of detailed regulation of ec onomic activity.
On all these predictions, Blindside has been vindicated. Specifically the regulators continue to regulate the Japanese economy as assiduously as ever. And, of course,the keiretsus are still intact. So less visibly are the cartels. So too is the permanent employment system. (Yes, I know that recently arrived American newspaper correspondents in Tokyo continue at regular intervals to write reports predicting the imminent demise of  the Japanese employment system – but such reports have a c onstant of misinformed Western comment on Japan since the 1960s.)
Now for that eye-popping prediction in the book’s subtitle – the prediction that Japan would overtake the U.S. by 2000.  On the most literal-minded measure of a nation’s economic size – to tal output as calculated at market exchange rates – Japan at last count was just half of the United States. But on several other measures – measures that are much more significant in assessing a nation’s true standing in the world economic pecking order – Japan has now decisively passed the United States.
 Take, for instance, the size of Japan’s manufacturing base. At last count, Japan’s manufacturing output totalled  $1,260 billion – fully $50 billion more than that of the United States.
Why is manufac turing so important? For many reasons. For one thing, it generates about eleven times more exports per unit of output than service businesses. Even in these days of the vaunted New Economy, this is an absolutely critical factor in world economic competiti on. And the results are apparent in Japan’s extraordinary trade performance in recent years. In fact Japan’s current account surpluses for the decade of the 1990s totalled 2.1 times their level in the 1980s. When you remember that Japan’s surpluses were a lready so large in the 1980s that were considered to be unbalancing the world economic system, it is clear that those who would write off the Japanese challenge have spoken too soon.
And how has the United States been doing on trade? The contrast with Japan could hardly be more startling.  As the American  manufacturing base has shrunk, America’s trade deficits have soared. For 2000, the current account deficit is likely to total a record 4.5 percent of national output. By contrast, the worst deficit in the 1980s was just 3.6 percent of national output — a record that was widely considered disastrous at the time.
Both Japan’s surpluses and America’s deficits stem from a common cause: a rapidly growing dependence by American manufacturers on Japanese coun terparts for critical components and high-tech materials. All this has major implications for exchange rates: basically the trade imbalances are telling us that though the yen has risen fully 24 percent since the end of 1989, it is still greatly undervalu ed against the dollar.
So much for trade. But what about the many aspects of the Japanese economy that have reportedly  deteriorated in recent years? What, for instance, about  the  Japanese government’s finances? As reported in the Western press, the gov ernment has been running huge deficits – deficits so large in fact that they are almost unprecedented in any major economy.
In reality the deficits are a press myth. Although  every year since the 1980s Tokyo-based correspondents have reported that the Japanese government is running a huge budget deficit in the current fiscal year, such reports are invariably later flatly contradicted   by the OECD’s authoritative handbook, OECD in Figures. This shows that, in the case of every year for which we have so far had final figures, on a Western accounting basis Japan has consistently run large budget surpluses – not deficits.  In reality, Japanese bureaucrats – and their spokesmen in the foreign community in Tokyo – have created the myth of the deficits as a w ay to fend off Western pressure for effective measures that might increase Japanese consumption and particularly consumption of imported goods.  The bureaucrats willingness to perpetuate the myth of the  budget deficits is a smoking gun that indicates the lengths to which T0kyo will go to understate Japan’s economic strength.
Now let’s look at Japan’s poor growth record in recent years. The first thing to note is that, even on the basis of Japan’s official figures,  growth in Japan has been far higher tha n has been generally assumed. In fact, as calculated by the OECD, Japan’s annual GDP growth averaged a respectable 1.7 percent in the 1990s. To be sure that is considerably less than America’s average of 2.7 percent. But it is actually fractionally better than that recorded by either Sweden or France, both of whom averaged just 1.6 percent. And no one, it need hardly be added, has suggested that the 1990s have been a “lost decade” for either Sweden or France. It ought to be added that Japan’s performance looks even better compared to such other OECD nations as Switzerland, Italy, the Czech Republic, and Finland, all of whom grew even more slowly than Sweden and France in the 1990s.
That said, Japan’s reported growth rate in recent years has been markedly lower than the world had come to expect from the “miracle” economy. Opponents of the Blindside analysis point to this as evidence that Japan’s days of economic overachievement are over. Again they have spoken too soon. In reality, Japan’s reported officia l growth figures are undoubtedly understated. Remember that in their concern to avoid stoking the fires of protectionism in Washington, Japanese officials have a very good reason to make Japan’s performance seem as mediocre as possible. And unbeknownst to the general public, government officials have wide latitude to understate or overstate a nation’s growth rate at will simply by varying some of the myriad assumptions used in calculating GDP. The assumptions are similar to those accountants must make in calculating a corporation’s reported profits. Just as some corporations calculate their profits conservatively while others take a more optimistic approach, a similarly divergent pattern is clearly apparent in the way nations calculate their growth. And  Japan,  in common with Germany and Switzerland, has clearly been in the conservative camp in recent years. By contrast, as documented by such prominent economists as Dean Baker and Tim Congdon, the United States is equally clearly in the optimistic camp.
After all, the impression that the United States has been outperforming Japan in economic growth in recent years is contradicted by some notably persuasive evidence in the form of the yen’s large – if little-noticed – rise against the dollar in the 1990s.  It is also contradicted by the trend of consumer living standards. Broadly speaking the Japanese have clearly enjoyed as big an increase in their living standards as Americans in recent years. The evidence for this statement is myriad – and includes eve rything from the proliferation of mobile phones and the quality of cars on Japan’s roads recently to the Japanese people’s constantly improving life expectancy.
A key to understanding the accounting issues involved here is that much of the boost in the Ja panese people’s living standards in recent years has come not from higher incomes but rather from falling prices. As such, it is invisible to any statistician who uses conservative accounting assumptions for calculating GDP. What we are seeing is best ter med a “falling price” boom – something very similar to what Americans enjoyed in the latter half of the  nineteenth century (a generally prosperous time that was nonetheless  notorious for its spectacular financial crises). One thing is clear: many of the things the Japanese buy have fallen dramatically in price in the last decade. Particularly big price cuts have been noticeable not only in electronic gadgets and household electrical goods but in alcoholic drinks of all sorts (beer prices have fallen by one-fifth, for instance). There have been big reductions also in specialty foods, in fashion goods, sports goods, in telephone charges, and in airline tickets.
Perhaps the ultimate measure of the changing economic balance between the United States and Japan concerns savings. Helped by the yen’s trade-fuelled strength, Japan is now by far the world’s largest saver and at last count its savings were more than double those of the United States.
The result is that Japan is now exporting more capital in real terms than any nation since America’s days of global economic dominance in the 1950s. While the Japanese economic system is loathe to draw attention to this fact for fear of fanning protectionist sentiment in Washington, the results are starkly apparent i n little-noticed IMF financial statistics for national external balances. These show that in the first nine years of the 1990s, Japan’s net external assets jumped from $294 billion to $1,153 billion. Meanwhile America’s net external liabilities rocketed f rom $49 billion to $1,537 billion.
In the long run this changing balance of financial power will be about the only thing historians will remember about U.S.-Japan economic rivalry in the last decade. Yet it was the one thing Western observers utterly overlooked at the time.

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