CHAPTER TEN
Misinterpreting Japan and the Japanese
FOR 40 YEARS I’VE been trying to explain to my American friends that they misinterpret Japan. I haven’t made much progress. The first challenge is explaining what any Japanese civil servant understands perfectly well: despite the country’s economic miracle since World War II, Japan has not had an economic policy; it has had a social policy.
When I first started to work with the Japanese government and Japanese businesses in the early 1950s, Japan was not only a war-ravaged country, but an incredibly fragile society. Half the people lived on the land, and there was an exceedingly high number of small shopkeepers and small factories with a few dozen employees and pre-World War I machinery.
The policy Japan adopted at that time was to avoid taking any social risks—to protect domestic society, especially domestic employment, and at the same time to push a few carefully groomed industries into export opportunities. Nobody then believed that Japanese exports would ever earn enough foreign currency to pay for the imported food and raw materials on which the island country depends.
Japan today remains the world’s largest importer of food and commodities. But the basic social, demographic, and economic foundations of the past 40 years are quickly shifting. Today, of the tens of thousands of small shops in Japan, many are franchises of large chains such as 7-Eleven and Kentucky Fried Chicken. Only about 5 percent of the population now makes its living as farmers.
The new largest single group, though not the majority yet, is people who did not even exist in 1954: educated, middle-class, salaried employees. They are up for grabs politically. In the last election they still voted for the Liberal Democrats, not because they have any use for them, but because the opposition is even less credible. For the next 10 to 20 years, the big political and economic challenge in Japan will be to find the new consensus. The need for policies to protect Japanese society is gone, and in fact those policies are becoming increasingly unpopular among consumers, as the new dominant groups do not feel any need to be protected. What is now needed is a truly economic policy.
Without understanding the fundamental changes that are reshaping Japan, Americans cannot hope to make sense of the United States’ much lamented trade deficit with that country—or know whether the Japanese indeed pose the economic threat to the United States that some people in Washington would have us believe.
For all the headlines about Japan’s trade surplus, I do not know a single Japanese in a responsible government or academic position who believes in it. The export surplus is a mirage. It exists on paper, but nowhere else.
To be sure, a good many of our industries are lagging behind the Japanese. But the United States’ trade deficit with Japan has almost nothing to do with manufacturing, great though Japan’s own industrial prowess may be. The Japanese trade surplus is largely the result of low prices in the raw materials and food that Japan imports.
There has been a glut of petroleum for nearly a decade, to the delight of Japan, which imports all of its oil. In the developed nations, farm productivity has increased dramatically in the last 40 years. At the same time, food consumption is not going up. As people become affluent, they do not eat more; in fact, they buy magazines that tell them how to eat less.
The Japanese have also benefited because food and commodities, with their low prices, are traded in dollars. And since 1985 the dollar has been devalued—at times by as much as half—against the yen. As a result of these various factors, the Japanese pay little more than one-third of what might be considered the “normal” value of the food and raw materials they import.
Yet from the Japanese point of view, if prices ever go up, Japan will have difficulty earning enough through foreign exchange to pay for these imports. And there is a very good chance that in the next few years—not forever, but for a while—world food prices will skyrocket. Where is the food going to come from to feed Eastern Europe, where the food shortage is already great and growing day by day?
As we feed the declining Soviet empire, the food surpluses of the free world will diminish over the next five years. And the Japanese, quite rightly, see the need for a policy that is based on maintaining their present export surplus. Maybe food prices will stay low. Maybe petroleum will stay affordable. But what if not? That is Japan’s nagging fear.
At the risk of sounding totally absurd, I’ve always considered Japanese-American trade negotiations Punch-and-Judy shows. Anyone who thinks the Japanese do not buy foreign goods need only go into any Tokyo shop. You will see nothing but foreign brand names—they just happen to be made in Japan. Does anyone seriously think that IBM is going to ship computers to Japan when IBM Japan controls 40 percent of the Japanese market and is one of the most profitable parts of IBM? Or that Coca-Cola is going to ship anything to Japan?
And so I’ve never seen that mythical great, untapped Japanese market. When I sit down with my sharp pencil and try to figure out how much more Japan is likely to buy—with its American trade surplus of $50 billion a year—I come up with a maximum of $5 billion.
We are so hypnotized by the trade surplus that we do not understand how dependent upon the United States Japan has become. In economic history, the point at which a nation’s dependence on one market becomes economically and politically dangerous is somewhere around 25 percent. Japan has surpassed that point with the United States, which buys more than 40 percent of Japanese exports.
Now, if you have a $50 billion trade surplus, you may be able to take a small portion home in goods. But what do you do with the rest of the money—dump it in the ocean? You must invest.
Since the Japanese know that there is tremendous political risk in buying American real assets—movie companies, Manhattan landmarks and so on—United States Treasury bills are almost the only thing they can buy. And here, we have them over a barrel. Were they to pull out their money, as so many people seem to fear, there would be a run on the market and the dollar might go down to 100 to the yen, which penalizes only the Japanese.
We might not feel the effects at all, but the Japanese would lose a lot of dough. As the old saw goes, if you owe your bank $10,000, the bank owns you. If you owe the bank $1 million, you own the bank. In this sense, the United States owns Japan; or, at least, the Japanese are much more dependent upon this country than they would like to be.
Last year Sony’s chairman, Akio Morita, and a former cabinet minister and nationalist politician, Shintaro Ishihara, irritated many Americans with a book published in Japan, The Japan That Can Say No. The premise was that Japan’s supposed technological superiority has made the United States dependent on the Japanese.
One of the most publicized examples was that if Japan stopped shipping one particular microchip to this country, we would have to stop making a major missile. In fact, most of the microchips for this missile are made here, and it would take us about six weeks to get the rest, if the Japanese cut us off. We know how to make chips. It is a matter of price, not of technical capability.
The same politician, Shintaro Ishihara, recognized the danger of single-market dependence during the 1960s and said, in effect, that Japan needed an outrigger on the left side, to balance its canoe on the right. He is the man who began to beat the drum for Japanese investment in China, and it has been a total disaster—not for political, but for economic reasons.
Some of us tried to tell him that no underdeveloped country has ever been a satisfactory market for the goods of a developed one. The first country to learn this was Great Britain in respect to India in the nineteenth century. Ishihara did not want to hear it, but it has turned out to be true. Toyota, for example, shipped 6,032 vehicles to China last year; the company shipped more than twice that number each week to the United States.
In looking to Europe as another possible outlet, the Japanese see major obstacles. The industries in which the Japanese are strongest are the ones in which Europe has the most overcapacity and incredible overemployment. Not counting Eastern Europe, there are still almost a million people too many in the European steel industry. The automobile and consumer electronics industries also have far more capacity than demand for products. And so, in a period when the European market is rapidly integrating, the Japanese are viewed as a tremendous external threat.
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How are the Japanese to integrate themselves into the world economy in which—because of domestic political changes and external forces—they can no longer pursue the strategies of the past 40 years? The need to protect society in Japan is gone, and is in fact meeting stiff resistance from Japanese importers. Pushing more exports to the West is no longer a viable option.
Is it necessary to try to form an East Asian bloc? And how does one do this with countries of such incredibly uneven social and economic development as, let’s say, Japan and Thailand? And can it be done without the coastal cities of China? And is Southeast Asia likely to allow itself to become dependent on Japan, considering the chilling memories of the 1930s that are still very much alive in China, Korea, Indonesia and Thailand?
If China breaks up again into regions controlled by economic warlords, which cannot be ruled out, then we could see an East Asian bloc organized around Japan. It wouldn’t be easy, in view of the tension between those two cultures and two peoples, but I think Ishihara’s China card might nevertheless finally come into play. So long as there remains a unified Communist China, however, Japan must look westward.
A very drastic course would be for Japan to shift 180 degrees and become the leader of “freer” trade—do not call it free trade; no such thing exists except in textbooks—and enlist the United States in trying to prevent European-imposed protectionism. Japanese society could adjust to that.
It would basically require Japan to forget 40 years in which the fundamental policy was to never take a social risk or expose protected industries to the risk of competition. If you are one of the major corporations such as Sony or Toshiba or Toyota that has proved its ability to compete in the world market, you may be willing to take such a risk; it may be the only way you can maintain access to the American market and gain access to Europe.
One thing you can count on with the Japanese: behind the policy of “take it easy, one step at a time,” there is furious, hard thinking going on. Nobody in the world is as good at making decisions as the Japanese.
[1990]