Myths of the Japanese economy

This is a longer version of an article I have just published in the journal of the Overseas Press Club of America.

Former Tokyo correspondents held a reunion at the Overseas Press Club in New York in March at which I was a speaker, and I was less than flattering about recent coverage of Japan. On the principle that it is as well to be hanged for a sheep as a lamb, I herewith offer more detail on my strictures.

Although in the space available I cannot do a comprehensive job of debunking conventional coverage (for more details, see my books), I list below six myths that can be readily disposed of in a few sentences.


All talk of a consumer strike to the contrary, Japan’s consumption rate has actually risen – and risen significantly – over the years. This is implicit in the fact that the household savings rate fell from 15.3 percent in 1989 to 3.1 percent in 2007. As every economist knows, savings and consumption are opposite sides of the same coin; other things equal, every yen by which the savings rate falls is an extra yen of consumption.

If the Japanese consumer were really on strike, you would surely see the impact in weak sales of consumer durables such as electronic gadgets. Yet the Japanese have been consistently among the world’s earliest adopters of succeeding generations of such gadgets, including advanced mobile phones, large flat-panel screens, high-definition video, laptop computers, fast Internet connections and digital cameras. Meanwhile, the Japanese are driving far larger cars than before the bubble burst, and much better-equipped ones. Look how fast the Japanese were to adopt car-navigation devices, for instance.

Even measured in more traditional terms, Japanese consumers are no slouches. In the view of Paris-based fashion arbiter Suzy Menkes, they are the world’s best-dressed people. Thanks to increasing consumption of ever-more sophisticated healthcare services, they have added nearly two years to their life expectancy since the 1980s. Then there is the Japanese approach to food. If Japanese diners are really such miserable, self-denying scrooges, how come Tokyo, at last count, boasted no less than 11 Michelin three-star restaurants, versus just four in New York?


Yes, there has been deflation. But, no, it is not a disaster. Far from it; it is testament to a huge, extremely welcome and laudable leap in manufacturing productivity.

All but forgotten these days, there is more than one kind of deflation. The true precedent for Japan’s current price pattern is not the 1930s, but rather the 1880s and 1890s – decades when the United States went from being a rural backwater to the world’s largest and most successful economy. The trend was driven by a huge productivity leap in the steel industry, where prices fell fully 90 percent. Lower steel prices fed through to other industries, and this, combined with a general improvement in manufacturing techniques, precipitated remarkable cuts in consumer prices. Manufacturers gnashed their teeth, but for consumers it was a bonanza.

Similarly, in recent years a huge productivity leap in electronics has driven price cuts across a wide front in Japan, not only in consumer goods, but in services as well. Although at the consumer level the trend reflects lower prices for imports of finished goods from China, the main driver is the success with which Japanese suppliers of advanced components, materials and production equipment have been moving to ever-more sophisticated production technologies. The productivity leap is nicely exemplified in a tiny electronic stopwatch I bought the other day. The price: ¥105. Twenty years ago I might have paid ¥1,000 and 40 years ago, when the nearest equivalent would have been a traditional mechanical instrument, more like ¥10,000.


What? Again? This story has been a mainstay of misinformed Japan coverage since before many of today’s correspondents were born. Of course, it seems to make sense. Once one employer reneges on lifetime employment, the logic of competition will, it is assumed, compel rival employers to follow suit. Thus, in an age of increasingly free markets, it seems natural to assume – as generation after generation of Tokyo correspondents have done since the 1960s – that the Japanese system cannot survive much longer. Natural, but wrong.

Correspondents make a crucial mistake in taking the term “lifetime employment” literally. There has never been a time when the general run of jobs was guaranteed for life. The system has always been based on what veteran British Japan watcher Ronald Dore long ago termed “flexible rigidities.” Although the system aims to provide stable employment, employers enjoy plenty of leeway to lay workers off in the face of secular changes in production technologies and consumer preferences.

Lately we have heard much about so-called “freeters,” the fashionable new term for temporary workers. Supposedly such workers are a new factor. Nothing could be further from the truth. As recorded by the author Mamoru Iga back in the boom year of 1986, already then between 80 and 85 percent of the labor force comprised subcontracted or temporary workers who enjoyed no special job security. Although the range of jobs freeters are permitted to do has been widened over the years, the system generally functions much as it did decades ago.

Of course, a question remains: Why don’t Japanese employers cut loose from all “rigidities” and embrace full-blooded Anglo-American hire-and-fire? In reality, they are tightly constrained by government “guidance.” Even in bad times, large and solvent employers are under considerable pressure to avoid mass firings, and if they pressed ahead regardless, they would be cut out of the loop on the many ways the government – via the allocation of public contracts, for instance – can quietly pass along favors to those on its approved list. Basically the lifetime employment system is not “tradition” at all, but policy, and it is set at the highest levels.

Why doesn’t corporate Japan challenge all those inaccurate reports of the system’s breakdown? For the very good reason that it has come to rely on millions of easily fired workers in foreign subsidiaries as the swing factor in recessions. Such workers might be less willing to play sacrificial lambs if they knew how much greater job security their Japanese counterparts still enjoy.


Some disaster. A large part of the aging “problem” is simply that the Japanese are living longer. In 1947, Americans lived more than 15 years longer than the Japanese. Today, having increased their life expectancy at birth by nearly 30 years, the Japanese live five years longer than Americans.

As for Japan’s low birthrate, this again is not a problem. Rather it is a solution. Whereas in the 1930s Japanese leaders had resorted to foreign conquest to feed the nation’s then-exploding population, in the late 1940s they set to work to slash the birthrate. The Eugenic Protection Act of 1948, as amended in 1949, legalized abortions and made sterilization and other forms of birth control universally available. As recorded by Encyclopaedia Britannica, abortions rocketed from 246,000 in 1949 to more than 1.17 million in 1955.

Of course, today’s low birthrate is not without disadvantages, and certainly there will be a dearth of worker-age Japanese citizens in coming decades. But corporate Japan’s hiring catchment area these days is hardly limited to the home population. Quite the contrary; there are huge pools of workers in East Asia, Europe and the Americas from which to hire. In any case, older Japanese are well-insulated from financial distress thanks to the nation’s vast accumulation of overseas investments (on a per-capita basis Japan’s net overseas assets are probably the largest in real terms of any major nation in history).

All this has not stopped some Japanese commentators suggesting the Japanese are becoming “extinct.” Will it come to that? Hardly. Certainly if policymakers want to reverse the trend, they have plenty of hitherto untapped remedial measures available. For a start, they could loosen zoning controls and thereby give young couples more space to bring up families. The fact that they have made no serious attempt to do so is a clue to their true mindset – given that Japan remains one of the world’s most densely populated nations (and ranks No. 1 as a food importer), policymakers seem to think it is not yet time to call a halt to the low birthrate policy.


As officially stated, Japan’s ratio of public debt to GDP is one of the world’s highest. It does not follow, however, that the government’s finances are out of control. A closer look suggests a different view. Remember that borrowing is not necessarily a bad thing. It depends how the money is used. In Japan’s case much government borrowing is being applied to investment rather than consumption. Most obviously the Japanese government has been investing abroad, not least in the United States. In fact the Japanese government is the largest holder of U.S. Treasury bonds. Basically it is borrowing from Japanese savers to finance American profligacy, not the domestic variety. If the financial markets were really spooked, Japanese interest rates would long ago have rocketed. In reality they remain among the world’s lowest.


Actually, true genius would be required to do this. Not only is Japan among the world’s most densely populated nations, but it suffers a general shortage of roads, and thus by implication bridges. A new bridge almost anywhere in Japan immediately attracts plenty of traffic because it can be counted on to provide many road users with not only a more direct route, but often a less jammed one. The bridges-to-nowhere story got started when a British magazine in 1998 wrote about the opening of the magnificent Akashi Kaikyo Bridge. The headline ran, “The Bridge to Nowhere in Particular.” The magazine failed to notice that, via the small island of Awaji, the bridge forms one of only two road crossings between Honshu and Shikoku. To say the least, the 4.1 million residents of Shikoku don’t think they live “nowhere.”

Eamonn Fingleton has lived in Tokyo since 1985 and is the author most recently In the Jaws of the Dragon: America’s Fate in the Coming Era of Chinese Hegemony.

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