Japan still teaching the world
By R Taggart Murphy
The following remarks were prepared for the forum "Japan as Number One
Revisited" held on October 27 at the Iwasaki Koyata Memorial Hall of the
International House of Japan in Tokyo. The occasion was an 80th birthday
celebration for Harvard Professor Emeritus Ezra Vogel.
I think it was about two years ago, when the full scale of the financial and
economic crisis that has now swept the world was becoming obvious, that I
remarked at a conference similar to this one that a possible silver lining
would be an end to the condescension of the world's pundits and policymakers
towards Japan.
You all remember the various loudly advertised and mutually
contradictory formulas for pulling Japan out of its stagnation - inflation
targeting, restructuring of the banks with the bad loans - furyo saiken -
separated out so that newly recapitalized banks could start lending again,
full-bore pedal-to-the-floor fiscal stimulus, not to mention that old standby,
complete re-organization of the economy along neo-liberal lines.
What I used to find irritating was not only the smug assurance of those
proferring the advice, but the sense they conveyed that the only reason Japan's
policymakers didn't drop everything and follow whatever it was they were
recommending was that policymakers here were stupid or corrupt or in the thrall
of incorrect mercantilist doctrine or what have you; not that policymakers here
might be subject to the same fears and doubts that assault their counterparts
in Washington, London and Berlin, or be subject to similarly immense and
countervailing political pressures.
Well, now that unemployment, snowballing debt and tumbling real estate prices
seem to have landed the Western world in a vise as tight and unyielding as the
one that has trapped Japan's policymakers for the past 15 plus years, am I
right in detecting a bit more sympathy these days for Tokyo?
I gather from news reports that the Fed is tied up in knots over whether or not
to announce an inflation target; I would hope there might as a result be the
beginnings of some sympathy now for the Bank of Japan's long reluctance to do
so - what happens after all to the credibility of a central bank if it
announces an inflation target and can't reach it?
Americans and Europeans have discovered that it's not as easy as one might
think to restructure from the bottom up a financial sector - not when you've
got all kinds of pressure groups that are quite comfortable with the way things
are, thank you, and are prepared to go to the mat to defend them. And then
there was that favorite sport of the Japan critics - mocking the start-and-stop
fiscal stimulus that we saw here in the '90s.
Well, how would one describe the fiscal history of the last few years in the
United States? It may be true that Kasumigaseki and Nagata-cho [the heartland
of Japan's central government] don't have to cope with Republicans, but there
are plenty of politically powerful people here too who have long regarded
deficit financing as a pact with the devil and see [British economist John
Maynard] Keynes as some sort of snake-oil salesman.
Fundamentally, the notion behind all the advice that was so freely dished out
to the Japanese - and the condescension behind it - was the idea that
decision-makers here operated in some sort of magical policy space, free of
political pressures. I don't think it fair to blame Ezra Vogel for the origins
of this idea. But I wonder if his 1979 classic [Japan as Number One: Lessons for
America] did help kick-start the notion that somehow decision makers
here had gotten it right because they were free of the pressures that beset
their Western counterparts. And thus by extension that when things started to
go wrong after 1989, it was only mule-headed obstinacy that prevented them from
setting things right again.
Now perhaps it is finally becoming clear that Japan's policymakers have been
unable to pull Japan out of its stagnation not because they are obstinate or
stupid or in thrall to mercantilist dogmas but because the problems they have
to cope with are intractable.
Maybe this is becoming clear because policymakers in the West find themselves
confronting a rather similar set of intractable problems. With the dawn of this
clarity, perhaps it's time to revisit Ezra's original contention - that is to
say, that there really were some lessons to be learned from Japan back then,
and that, by extension, there are some lessons to be learned from Japan today -
and not, I might add, the kinds of "lessons" you hear yapped about so much: how
to avoid the so-called "lost decade" as if we in the West were not already well
into one of our own.
Let me tease this out a little more. Implicit in much of Ezra's writing is the
notion that Japan had figured out a superior response to the general political
and economic conditions that prevailed in the immediate postwar decades -
things like a stable exchange rate regime, cheap energy, and pent-up demand
that came from the need to rebuild a world that had just come through decades
of depression and war.
No question that elements of the formula Japan perfected were copied to a
greater or lesser extent by the other economies of East and Southeast Asia -
most particularly China - and that that copying got under way just when the
formula began to work less well for Japan. The response here when the "Japan as
Number One" formula started to break down was to experiment with asset bubbles
- something that, until recently, saw Japan come in for a good deal of mocking
- but then, what exactly has the rest of the developed world been doing since
the 1980s?
Last year, I wrote a long review essay for the Asia Pacific Journal: Japan
Focus of Robert Brenner's The Economics of Global Turbulence. As most of
you know, Brenner - the director of the Center for Social Theory and
Comparative History at UCLA - is arguably the world's most distinguished
Marxian economic historian. In fact, the British theorist and editor Perry
Anderson has written in referring to Brenner's scholarship, that "as in no
other body of work today, Marx's enterprise has found a successor".
Brenner argued in a post-Lehman shock new preface for his book that the bubbles
we have endured for the last three decades were not, as they are commonly seen,
an accidental product of financial shenanigans or policy failures. But rather
that they are "the inevitable response of the advanced capitalist countries in
coping with a major decline, and stubborn failure to revive, of the rate of
profit, finding its fundamental... source in a persistent tendency towards
over-capacity in the global manufacturing sector, which originated in the
intensification of international competition between the mid-1960s and
mid-1970s."
No prizes tonight for guessing who intensified that international competition,
but what makes Brenner so interesting here is that he then goes on to suggest
first that the initial response of the advanced capitalist countries to
counteracting this phenomenon was Keynesian stimulus, second that like growing
insulin resistance on the part of diabetics, Keynesian stimulus has become
decreasingly effective over time, and finally that to compensate for this
declining effectiveness, governments began to aid and abet banks and
corporations in blowing asset bubbles as an alternative way of staving off the
political pressures brought on by secular declines in profitability stemming
from the systemic creation of overcapacity.
Now the issue is not whether one agrees or not with Brenner's analysis - I
obviously find it compelling - but rather his explicit acknowledgement that the
path setter was Japan; that is to say that the mechanisms Ezra described for us
all so brilliantly were turned to the blowing of bubbles.
I have argued in my own writing that the bubble economy was a deliberate policy
response to the Plaza Accord [of 1985, to depreciate the US dollar in relation
to the yen and the deutschemark] and that its origins can be traced as far back
as the Tanaka cabinet's announced intention to redevelop the Japanese
archipelago [in the early 1970s].
The plan of course wasn't specifically to send asset prices soaring to the
point where they bore no relation to the cash flows they could generate, but
rather as the Japanese government's own spokesmen admitted, to reconfigure the
economy so it became less dependent on export-led growth. I think we would have
to acknowledge that so far they have failed, but in the process they may have
another lesson to teach us.
That lesson is not that the rest of the developed world should be chary of
blowing asset bubbles - it's a bit too late for that lesson to register. If
imitation is the sincerest form of flattery, then Tokyo found itself earlier in
this decade with a whole host of flatterers - not just in Beijing, Seoul, and
Taipei, but in Washington, Reykjavik, Dublin and Athens, not to mention the
halls of Fannie Mae and the corridors of Lehman Brothers. But rather in their
efforts to cope with the after-effects of the bubble's implosion, Japan's
policymakers may yet again have something to teach the rest of us.
I don't mean to be pessimistic, but just suppose that beginning with Brenner
some of the doom-sayers out there are right - that is to say, that we really
are facing a whole set of systemic and intractable problems that are simply not
amenable to a quick policy fix. What are those problems?
I mentioned declining rates of profit rooted in overcapacity and the desperate
attempts to compensate with asset bubbles and orgies of credit creation. You
could add a vicious demographic cycle that sees a decreasing percentage of
working-age people supporting a growing elderly population. Mounting fiscal
debts that should theoretically be frightening but seem not to register on
markets for foreign currencies or government bonds even though no realistic
scenario exists for bringing the deficits under control - politicians have
proven demonstrably unwilling or unable to implement the Keynesian recipe of
surpluses in good times to balance deficits in bad.
And thus the snowballing deficits engender so much dread in so many quarters
that governments cannot today resort to the one proven method of restarting a
stagnant economy: fiscal stimulus.
On top of this, the effectiveness of monetary policy appears exhausted as zero
interest rates and bouts of quantitative easing bring on all the visible
results of vigorous pushing on a wet noodle, to choose a phrase deliberately.
All the while, interest groups hold hostage any government that threatens to
reduce their benefits, no matter what the cost to the broader society.
To a greater or lesser degree, these are the policy challenges that face every
developed world government - and if certain pundits are to be believed, will
soon face the new superpower that seems to be rising on the far shores of the
East China Sea. But aren't these problems familiar to those of us who live here
or are otherwise involved with Japan? Indeed, so familiar as to be almost old
hat?
It just may be the case, therefore, that "Japan is Still Number One" - or at
least out there in front - in figuring out how to manage the aging of society,
how to spread the pain when employment levels stubbornly refuse to recover, how
to keep things from falling apart when no matter which monetary lever you
press, nothing seems to happen, what to do when your currency keeps rising no
matter how low you cut your interest rates or how much jawboning you do, how to
keep your would-be pensioners/retraites or Tea Party equivalents from
destroying the social and political bonds that are needed to maintain some sort
of functioning political order.
And that in the workings of the Japanese political economy that Ezra has
described for us are still to be found some very important Lessons for America
- and for everyone else.
R Taggart Murphy is Professor and Vice Chair, MBA Program in International
Business, Tsukuba University (Tokyo Campus) and a coordinator of The
Asia-Pacific Journal. He is the author of The Weight of the Yen and,
with Akio Mikuni, of Japan's Policy Trap.
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