|Fingleton’s 1995 rebuttal of the “basket case Japan” story
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
“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.
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.
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 skyscrapers.com, 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.
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.
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?
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.