America’s economic crisis today is not like Japan’s in the 1990s. It is far worse. (This article was first published in the Number 1 Shimbun, the magazine of the Foreign Correspondents’ Club of Japan.)
American commentators have been rushing to draw parallels between America’s recently worsening financial and economic problems with what happened to Japan in the 1990s. In many ways such parallels are reassuring and seem particularly so for Americans who have visited Japan lately. After all, not only did Japan come through its post-bubble strains without any serious job losses, let alone wider social dislocations but, as any visitor can tell at a glance, the Japanese people are now clearly among the world’s richest consumers. In the clothes they wear, for instance, they are second to none. Indeed, Tokyo has been pronounced the world capital of street fashion by influential Paris-based fashion guru Suzy Menkes. Thanks to good food and good health care, the Japanese now enjoy the highest life expectancy of any major nation. As for high-tech products, name any major nation with a more sophisticated mobile-phone system or such consistently fast Internet connections. And how many other nations boast such a high penetration of car-navigation devices?
Even for Americans who have never been to Japan the subliminal message of the comparison is, on balance, reassuring. For a start it is as obvious in New York or Los Angeles as it is in Tokyo that key Japanese corporations have gone from strength to strength.
Take Toyota. In 1989, the last year of the famous Japanese financial boom, it produced fewer than half as many vehiclles as General Motors. This year it will exceed GM’s output and in the process end GM’s more than 70-year reign as the world’s biggest automaker.
Any American with access to trade statistics also knows that the Japanese economy today is more competitive than ever – and this even though South Korea, Taiwan and Singapore have made huge strides in productivity in the past two decades. Perhaps the most telling single indication of this is that, almost uniquely among the highest-wage nations, Japan actually runs a surplus on its trade with greater China (that is mainland China plus China’s major southern port Hong Kong).
Even those who merely looked out the window of the FCCJ saw that nobody in Japan had lost faith in the future. The fact is that construction continued at a breakneck pace throughout the 1990s and this was abundantly apparent to anyone who viewed Marunouchi or Shiodome from the Yurakucho Denki Building’s 20th floor. As measured by the architectural Web site skyscrapers.com, 80 skyscrapers were built in Tokyo in the 1990s, versus just 49 in the 1980s (with skyscrapers being defined as buildings rising at least 35 meters). In Osaka, the total was 56 versus 18; in Yokohama, 19 versus none. London’s total by comparison was 33 versus 28. New York actually registered a decline: Only 103 skyscrapers were built in the 1990s, versus 257 in the 1980s.
Given that Japan came through its travails of the 1990s in such excellent shape, surely the prognosis for today’s flagging American economy is similarly upbeat? It is tempting to think so. But a closer look reveals a world of difference. In reality Japan’s problems in the 1990s were largely superficial. America’s are much deeper. The truth is that Japan was never the basket case it was portrayed to be. Frankly, the basket case story was propaganda. Strange as it may seem, for many years Japanese leaders – for very Japanese reasons – assiduously exaggerated their nation’s weaknesses and understated its strengths.
In short, the Western media were duped by a total reversal in Japan’s public-relations strategy. Whereas Japan had once aggressively emphasized its strengths (both real and imaginary), the 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 against dumping lawsuits in the United States. Thus the American media were induced to publish greatly exaggerated claims of Japanese productivity (such claims were provided as justification for the super-low prices Japanese corporations often charged abroad in an effort to drive other nations’ corporations to the wall). As noted by Pat Choate, an expert on the Japanese trade lobby in Washington, the Wall Street Journal proved particularly credulous.
After many major American corporations laid off their factory workforces and switched to outsourcing from Japanese rivals in the latter half of the 1980s, Japan’s propaganda needs abruptly changed. As American high-tech companies such as Hewlett-Packard and Motorola stopped competing with the Japanese and started buying from them, the dumping litigation disappeared. Meanwhile, as America’s trade deﬁcits with Japan widened rapidly, Washington came to view Tokyo more and more as a power rival.
In the new circumstances, Japan’s old super-economy image had become 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 telling other sob stories. A notable one concerned a supposed explosive rise in the number of homeless. During the 1970s and 1980s officials had kept Japanese cities 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, vagrants had existed all along in Japan. But until the public-relations story changed in the early 1990s, they had been kept hidden in remote ghettos such as the Sanya district of Tokyo. The bad-news strategy called for a radical change in which vagrants would be placed as conspicuously as possible in the field of vision of visiting foreigners. Suddenly, the homeless were given carte blanche to camp out in Tokyo’s glitziest neighborhoods, not least Hibiya Park, right in front of the Imperial Hotel!
Another ofﬁcial gambit was to adopt highly conservative national accounting assumptions that drastically understated Japan’s apparent growth rate. Although Japanese living standards and exports both palpably boomed during the 1990s, annual GDP growth was 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” was omitted: Japan’s ofﬁcial foreign-exchange reserves rocketed more than sixfold during the 1990s. Most of the increase represented the Tokyo authorities’ buying of U.S. government bonds and other U.S.-dollar investments, as the Japanese government led a global effort to finance America’s trade deficits and keep the dollar propped up. Thus, while it was indeed true that the Japanese government was borrowing more, it was doing so not to finance its own spending but rather that of the American government!
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 (see in particular a major story in the September 1987 issue of Euromoney, which is available on line at www.unsustainable.org). The banks duly hit the wall in the early 1990s but, despite all the misinformed alarmism in the Western press, Japan never came close to a domino-style banking collapse.
Many prominent Japanese corporate chieftains compounded the jitters. In April 1998 Sony Corp. chairman Norio Ohga, for instance, made world headlines when he commented, “The Japanese economy is on the verge of collapsing.” A few months later, Toyota President Hiroshi Okuda averred that Japan’s problems could trigger a “worldwide financial crash.” When corporate chiefs talk like this, we might assume that their own businesses were in dire straits. In fact, both corporations did just fine both at home and abroad in 1998. Indeed, Toyota’s profits that year were up 56 percent over 1989 while Sony’s were up fully 131 percent.
These leaders’ stated views were completedly inexplicable on their face. Compounding the mystery was that it was all so out of character. After all, if Japan really had been close to financial collapse, drawing attention to the fact in such alarmist terms was the economic equivalent of shouting “Fire!” in a crowded theater. As a general rule, indiscretion on this scale is not considered an asset in business anywhere, least of all at the top of two of Japan’s – and the world’s – most successful corporations. On the other hand, if everyone in the Japanese establishment knew that the ﬁre alarm was merely part of a kabuki act to fool foreign trade negotiators, the corporate chieftains’ behavior made excellent sense.
The absurdity of Okuda’s remark was particularly obvious to informed observers even at the time. Not only was Toyota far more profitable than Ford and GM, but the home market in Japan had remained extremely buoyant, as household car ownership increased by nearly 2.2 million from 1989. And the quality of cars on Japanese roads had undergone a transformation, with the svelte Toyota Lexus, for instance, replacing the dowdy old Toyota Century as the executive limousine of choice.
Then there was the performance of then-Finance Minister Kiichi Miyazawa. A graduate of Tokyo University’s super-elite law faculty and a man with a steel-trap mind, Miyazawa “blurted out” in 2001 that the country was close to a “catastrophic situation.” If the finance minister of a nation as badly run as, say, Zimbabwe or Somalia had made such a gaffe, he would be bundled off the stage instantaneously. After all, Job One for finance ministers of even the world’s worst hellholes is to pretend that things are hunky-dory. The interesting thing is that Miyazawa’s comment came as Japan was earning the largest current-account surpluses in world economic history!
If Japanese leaders put on an amazing counterfactual impression of economic 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 were low. What those correspondents failed to understand is that in the Japanese system – whose workings diverge significantly from Western capitalism and thus are consistently misunderstood by foreigners – proﬁts have almost always been minimal. That may seem surprising, but the fact is that even in the “juggernaut” years of the late 1980s, Japanese corporations were notoriously unproﬁtable.
The further the commentators were from Japan, the wilder their conclusions about what was supposed to be going on. Take Karen Elliott House, a senior executive of the Wall Street Journal, who in 1992 compared the Japanese economy all too gleefully to children’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” and “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, a famous Harvard-based expert on competitiveness. In a book titled Can Japan Compete?, he concluded that Japan had ceased to innovate by the mid-1980s. Thereafter, Porter wrote, 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”!
In common with virtually all other Western observers, Porter missed the real story of the 1990s: that leadership in advanced manufacturing was passing with stunning rapidity from the United States to Japan. By advanced manufacturing is meant in particular making capital equipment, advanced materials and high-tech components. Such manufacturing is generally both very capital-intensive and very knowhow-intensive (in the sense of proprietary production knowhow that can be kept from competitors almost indefinitely).
In many cases advanced manufacturing is so rarefied that only one or two corporations worldwide are capable of producing particular items. Formerly, such corporations were based in the United States and employed American workers. As such they were the backbone of an economy that could pay wages two or three times European or Japanese levels and still run large trade surpluses. The result of America’s progressive exit from such businesses in the 1990s was that Japan has established monopolistic leadership in more and more areas of advanced manufacturing. Such monopolies constitute “chokepoints” that give Japan control over ever-larger swaths of the global industrial landscape.
One such chokepoint is Japan’s little-noticed but important lock on advanced lens cutting. Leadership in high-tech lenses helps explain why Japanese companies dominate the world market in everything from television-studio equipment 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 and 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 to 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 where Japan has succeeded to America’s erstwhile monpolistic leadership is in 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. This is all such a contrast to the late 1960s and early 1970s. Consider the 747 jumbo jet, that marvel of Boeing’s greatest days of leadership (having ridden one of the first of them across the Atlantic in 1970, I remember well the excitement they generated). Manufactured in the largest building ever constructed, the 747 was a truly impressive testament to corporate America’s global leadership. After all, though this was rarely explicitly stated at the time – it did not have to be – the plane was 98 percent American-made. Not only were all of Boeing’s top suppliers based in the United States, so were these suppliers’ suppliers and those suppliers’ suppliers’ suppliers. Down to virtually the last nut and screw, the plane was made in the United States, using American labor that then was twice to four times as well-paid as labor in Japan and Western Europe. There could hardly have been a more telling testament to America’s global productivity leadership.
Contrast that with the story of the 787, the new high-tech plane to be launched soon by Boeing. The 787’s American content is officially stated as about 35 percent, but even this meager figure probably greatly overstates the true story of where the value added is ultimately being created. What is clear is that the plane will be at least as much Japanese as American. In particular the carbon-fiber wings – probably the most advanced feature of this most advanced of passenger planes – will be made in Japan by Mitsubishi Heavy Industries. In former times, Boeing’s leadership in wing-making was considered one of its crown jewels. Indeed so important is wing-making considered to be, that up to the late 1990s, Boeing’s top executives consistently vowed they would never outsource it.
What’s wrong with outsourcing? Nothing, if it is used merely to delegate non-essential functions to low-wage nations. But when an American company outsources to Japan it is tacitly admitting something that the Washington policymaking community has fought hard to deny: that Japan has now decisively passed the United States in industrial productivity. The point is that, though you could never tell it from the way the Japanese economy has been reported in the past 15 years, factory-floor wages are now actually 10 to 30 percent higher in Japan than in the United States.
Of course we have been told that advanced nations no longer need to look to manufacturing for their comparative advantage. Supposedly, services now provide advanced nations with their most attractive and appropriate economic opportunities – and no nation is supposedly more productive in services than the United States. The trouble for those who advocate postindustrialism is that America’s trade record is screaming that that it is not enough. The fact is that while Japan’s trade surplus has nearly quadrupled since 1989, America’s trade deficit has multiplied sixfold. At more than 5 percent of gross domestic product in recent years, America’s current-account deficit represents the worst trade performance of any major nation since Italy in 1924. How bad things were in Italy in 1924 should be apparent from the fact that in January 1925 Benito Mussolini seized dictatorial powers to sort out the mess.
Basically the difference between Japan in the 1990s and the United States today therefore is trade. Japan continued to boost its exports and improve its trade surpluses through the worst of its financial difficulties. The United States by contrast is burdened with a vast trade deficit that is completely “baked in.” It would have to increase its manufacturing labor force by probably 40 percent merely to break even on trade again. And all of the new jobs would have to be in advanced manufacturing. There is not the slightest chance that the U.S. can achieve this within the foreseeable future. In the meantime the United States is fated to become ever more indebted to other nations, most notably China and Japan. The last superpower that tried this sort of financial policy was the Ottoman Empire. What became of that empire? It is time that U.S. policymakers checked the history books.
Eamonn Fingleton is the author of In the Jaws of the Dragon: America’s Fate in the Coming Era of Chinese Hegemony, (New York: St. Martin’s Press, 2008).