Back in March of this year I did a posting here saying that Japan will be back, and ever since then I have been keeping a particular eye out for Japan news in whatever media stuff came my way. The most startling thing I has spotted so far was an article in the November issue of Prospect, by Eamonn Fingleton, called “Japan’s fake funk”, which says that Japan never went away, and the only surprise will be when the West realises it. This article was subsequently made available here at Financial Review. (My thanks to John Ray for supplying the link to this.) Whatever you think of this piece, it certainly makes fascinating reading. Here’s how it starts:
FOR A DECADE now, the western consensus has been that Japan is an economic basket case. But this is a dramatic misreading of a perennially secretive society. Indeed, it may come to be seen as one of the most significant misreadings in economic history.
Fingleton goes on to argue that Japan’s alleged economic woes are just that – alleged – and that actually Japan is doing very well thank you. It is racing ahead in numerous vital technologies, its standard of living is not at all in decline, and its financial woes are greatly exaggerated. Economically, says Fingleton, Japan has now overtaken the USA.
Why then do the Japanese still send out SOS messages? Because, says Fingleton, it suits them to. Being regarded as a basket case means that they get an easy ride diplomatically from the USA, while they cosy up to the Chinese, who are in Fingleton’s opinion about to emerge any decade now as the world’s dominant economy.
Fingleton is the author of In Praise of Hard Industries, published in 1999, which denounced the internet stock fad for being a fad, so he has something of a pedigree. But is he right?
Or is he just the latest in a long line of dirigiste-inclined self-deluders who regard only certain parts of the economy (in his case big and complicated machines) as being “real” (as opposed to “information” which he reckons is not so real), in the same way that people used to say that only agriculture was real and that manufacturing, and then “finance”, was economic frippery by comparison.
This emailer to Brunton et al. (“Trader”) dismisses Fingleton’s piece as “nonsense”, for all the usual financial reasons that we’ve become familiar with. Fingleton regards people like “Trader” as self-deluders.
Other commentators have made much of Japan’s alleged demographic woes, in the form of a rapidly aging population.
Well, who is right?
If the technological facts assembled by Fingleton are right – Japan racing ahead in “key technologies”, like supercomputers, machine tools, and so forth – then if Japan is in decline, it is in a very odd sort of decline, caused, it would seem, by them financing high technology for the rest of us at a loss, and thus becoming the world’s best informed paupers. Sort of technological monks, you might say.
I don’t know what the truth is about all this, but I would like to very much. Comments?
I think Japan’s crisis has been mostly a banking crisis. Unbelievable quantities of bad loans were exacerbated by an enormous amount of Eurodollars lost when the Japanese paid far too much for U.S. real estate (think Rockefeller Center)often divesting themselves of it at a real loss in order to make payments to the shakey banks.
They still have a long way to go before the busted banks are healthy again but keeping them going is the Japanese way.
[I declare an interest having lived in Tokyo for three years representing a U.S. bank.]
It is tempting to believe Japan is actually in dire straits economically. Either because it’s true or, less meritworthy, out of some isolationist or racist desire to see them get their “comeuppance” or perhaps just out of simple schadenfreude.
I am reminded of a quote I read once from a Japanese industry leader:
“You western businessmen tend to think in terms of 3-5 year plans. We work in 100-200 year strategies.”
If I were a brilliant, realpolitik national leader with such a very, very long view, I might not hesitate to engage in loss-leading economic policy if I believed it would give my people a critical advantage in the long run – say, 100 years down the road.
Of course, this does not say that the Japanese are doing so. But it does occur to me that, among the world nations, only the Far East evidences the savvy, discipline and keen farsightedness to be able to pull off that kind of delayed gratification (and concomitant sleight of hand) over the long haul. Sumimasen mo, I respect them enough not to underestimate their intelligence.
So, it leads to my rather pedestrian observation that not all on the world gameboard is as it seems. Anyone for a game of “go”?
I’ve noticed that, in some recent anime releases(late 90’s), some of the characters are in dire straits. Japanese animation might reflect Japanese society’s fears thae way that American movies do. During the 80’s, when movies showed a post-nuclear war future, animes mostly took place in post-apocalyptic (asteriods, earthquakes, tidal waves) futures.
In ‘Niea_7,’ we see a near-future Japan in the grip of a depression. Main character Mayuko holds down three part-time jobs, plus cram school, while “starving” in a small apartment. In ‘Excel Saga,’ Watanabe is often seen making his “last meal” and trys to get a civil-service job in order to impress a girl. While Excel herself constantly threatens to eat her dog.
These are wacky comedies, of course, but they might reflect Japanese attitudes about the future. If the people have little hope for the future, they might make bad times a self-fufilling prophesy.
I don’t believe it for a second. But before that, the dot-com boom / bust was not a “fad” it was a classic speculative bubble. As for online commerce, it’s still booming, not that anyone seems to notice. There continue to be many serious, commited, well thought out “dot-com” businesses with solid business plans and rosy outlooks. Online sales were up something like 40% since last year, and this during an economic slump. Fad indeed!
Otherwise, his data are faulty, and, when not faulty, misinterpreted. Japan is not the world leader in technology. Japan’s economy is in trouble. There is no scheme, intentional or otherwise, by the Japanese to pretend their economy is in trouble when it’s not (and such a scheme would run counter to Japanese sensibilities with regards to honor and face). Japan’s economy isn’t hurting terribly badly, it’s just in a funk. The 1990s weren’t a great depression for the Japanese, it was simply a period of economic stagnation. The fact of that stagnation is unmistakable, no country, conspiratorially or otherwise, can easily conceal the basic facts of its economic health.
To me Mr. Fingelton’s piece has the ring of desperate wishing for the good ol’ days when America looked like it was headed for second class and the Japanese were seen as the rising powerhouse. It looks to be little more than wishful anti-Americanism. Though that’s just my opinion, I may be wrong.
I agree with Robin Goodfellow. Japanese unemployentis double what it was 10 years ago. It’s stock market recorded 19 year lows recently. It’s property prices collapsed 10 years ago and haven’t recovered (that precipitated the financial crisis in the country as so much money was tied up in overvalued land). Japan’s industrial giants are doing well, but their success conceals some dire industrial problems. 1). They have had to export jobs closer to the markets 2). Much of japanese industrial manufacturing isn’t in the big corporations, but in tiny operations that service the big corporations. And these companies are hurting.
Japan isn’t collapsing though, it is stagnant and going nowhere.
It maintains technological leads in some areas, but not in the intellectual areas that are so imoprtant for growth. The reality is that America is far more dynamic and is growing far more rapidly than Japan.
There are two areas of activity in te world that are creeping in under the western radars. the rise of religious fundamentalism throughout the world, but especially the poor south and the rise of China. Another potential source of world instability will be the EU if it ever gets it’s act together and if that act is controlled by France. the french see the EU as a superpower challenger to the US, with France as its guiding hand – god help us all.
Robin took the words right out of my mouth. However, Brian, I do believe your earlier post was quite astute. But, as this article from October’s National Geographic clearly indicates, Japan is in a real funk.
I also must agree with Mr. Goodfellow regarding Mr. Fingleton’s take on Japan’s economic situation. Perhaps, however, instead of focusing exclusively on the financial and economic factors, ongoing fundamental changes in the society should be addressed.
The last two generations of Japanese have, for the most part, questioned their parents outlook as to the individuals place in the corporate world and in the polity as well. What we are seeing now is an embrace of the western model of individualism and self actualization. While I am convinved that, in the long term, these changes will be beneficial for the Japanese economy, as it stands now Japan is suffering a period of transition and the subsequent instability transition implies.
That there was a slump is not in doubt. Real estate prices fell, the stock market fell, unemployment rose. Money was lost in investments at home and in the West. How deep was the slump ? I used to say to my friends: I wish WE had such a slump.
But things change, and now Japan seems to be starting a recovery.
The talk about Japan being a “basket case” probably never was true, despite the slump.
So basically Eamonn Fingelton seems to be right (beside living in Tokyo for 13 years – you would “feel” a slump living there) and the rumors in the West about Japan’s demise are premature.
Japan is in big trouble, its political elite is stalemated, its youth is in near despair, the economy is hollowing out.
Yes Japanese technology is excellent, worldbeating and increasingly has a “MADE IN CHINA” sticker on it.
If you think Japan isn’t in trouble why does it have a zero per cent interest rate? Hardly a sign of economic vibrancy..
(Basket case it ain’t – it remains the second richest nation on the planet.)
I am going to add my tuppence ha’penny to this. I cannot judge on the basis of financial measures because I simply don’t know enough about them but when I was in Japan in October I tried very hard to spot a recession and failed miserably. Cars are new, people are well dressed, I saw no vacant plots and no abandoned buildings.
The railway companies I know about seem to be doing just fine. And railways tend to barometers of an economy.
I am not saying that Japan is not in a deep crisis. It’s just that if it is it is a very odd crisis indeed.
Another perspective: they’ve taken drugs to mask the symptoms of their economic decline. Massive injections of government credit, raising debt/GDP to aprox. 140% of GDP, vs. US @ aprox. 60%, Italy @ somewhere over 100%.
It is serious. Japanese will increasingly lend to their gov’t only short-term. As the average maturity of their debt shortens, the only textbook cure for deflation — inflation — becomes at some point impossible.
After that, inflation will raise short rates and bankrupt the gov’t before its stimulative effect moves the economy.
Combined with aging population, they do face an endgame, for good or ill.
My brother speaks fluent Japanese and is one of the top bank analysts in London advising on what weighting to give Japanese securities in a diverse portfolio – ie he knows the score re Japan’s economic prospects.
Japan is sinking. Not fast, just very very slowly going nowhere. The problem is indeed debt and banking related in origin. There are vast amounts of undisclosed bad debt and a fear that allowing any banks or financne institutions to go under would trigger a fast collapse. The real problem is that the needed structural reform (especially the Ministry of Finance) requires political movement – and Japan’s politics are totally sclerotic (something to do with giving these old bozos face it seems). Not until the LDP is voted out (as opposed to some faction WITHIN the LDP oving up or down) will there be a real change. Don’t look for this too eagerly – you’ll get very bored waiting. But one day, and it might not be soon, the hidden financial mess will push over hard into the public arena and then it’ll hit the fan. Japan is the frog being brought slowly to the boil rather than plunged in.
..and a further thought…
The Japs like to do western things well (free market economics?) but sometimes they only come close but no cigar. Here’s my favourite example:
A giant department store chain (I think Sogo) were opening a new landmark store in central Tokyo in the late 1980s. They wanted a theme for the opening ceremony. With the ribbon cutting due in Dec they chose Christmas as the theme – and not being Christian this was quite ‘cool’ too. So they got a team together to research Christmas and design a killer display for the foyer that would appear when the Chairman opened the curtains. The team duly did this and looked at religion, Christianity, Christmas, Santa, presents, the tree, etc, etc. and built their display. Come the day and there were the usual speeches and clapping and bowing and then the final moment – the curtain opening. Up steps the Chairman, cuts the ribbon to reveal a wonderful Christmas display. It was a giant Santa – nailed to a cross. Close but no cigar.
Santa on the Cross is an urban ledgend.
“Japan is sinking. Not fast, just very very slowly going nowhere.”
This might be true, but still missleading.
Japan is an extremely rich nation, they have a very strong, solid and advanced industry. What happens when such a nation “sinks” ? It gets 50% poorer ?
So what ? they will still be ahead of the “unsinking” Europeans, and they have been poor not so long ago. Sure, they have all the problems mentioned, and they will suffer the consequences of their bad policies and schlerotic political system. Other nations have their problems, too. Unsolvent pension schemes, aging population, addiction to wellfare and bad labor rules. And the political system in GB is nothing to boast about, as was mentioned on this site a few days back. I’m afraid we are all sinking, and maybe Japan is sinking slower than most.
Jacob:
I don’t think anyone supposes this is a race involving Europe. This is strictly Japan v USA. Who’s winning between them?
Patrick (with the brother):
I understand how a stupid shopping spree ten years ago could get you into temporary trouble, but why does that hold Japan back permanently? Only if in a modified form the spree continues, presumably. What is it about the “structure” of Japanese banks that makes them a permanent problem to their economy? Why the continuing “sinking”?
Has all that debt been mismanaged in a way that does continuing harm? Is that what’s happening? But how?
Also:
What important technologies is the USA definitely ahead in?
Now this is a good discussion. Most of you have made some great comments. I do think Fingleton does have some biases. I don’t know if it’s a hope for the good ol’ days when Japan “was the future.” But, I would bet that he definitely turns his nose at any non-heavy manufacturing industry.
Also, this idea that they are hiding their good economic news has several holes in it. First off, it means that it truly is a closed and undemocratic society. And, for anyone on this site to think that a closed and undemocratic economy is bound to outperform an open and fairly transparent economy like in the U.S. (over the long term) goes against the general assumptions of libertarians I think. I could be overstating that I guess.
And, to “hide” its true economic performance means that it is top down strategy, where the government and business leaders are dictating this strategy the country as whole. I don’t buy that this is a strategy that involves a centralized decision to sandbag it. I don’t have any first hand knowledge of the country or it’s people, but I do believe they are a mostly free country, and that at some point a free society has individuals making individual decisions. And those individuals will make self-serving decisions over the long term. So, they would probably desire the true data of the nations’ actual health. Or more particularly, the nations companies’ true financial health. Basically, I don’t believe it’s one big lie that is being force fed to it’s people and press and thus to the outside world.
Another problem with his and Brian’s point about Japan is the idea that they would be technologically backwards if they were in economic trouble. Just because they are a technological leader doesn’t mean they are healthy economy. Now, their is an economic philosophy that relates technology to growth. I believe that is a sound concept. But, it is not an absolute. The fact that Sony is at the cutting edge of technology does not translate to Japan’s GDP. Or at least not directly. So, while I think Japan’s technological disposition gives one hope that they will get out of their funk, I don’t think it should dissuade someone from thinking their are seriously flawed economic fundamentals in that country.
Another problem with this discussion is this concept of “whose winning”. I guess I came of age, intellectually speaking, in the 80s. I remember all the discussions that Japan was superior because of its trade surplus and what not. Also, they had a better savings rate and that was supposedly the sign of a great society. The comment above about Japan “doing things over a 100 year period” is really kind of screwy. Maybe I’m judging you guys wrong. I would figure a site dedicated to the individual wouldn’t buy so much into the idea that NATIONS push economies. Or maybe, in your hatred of government, you give it too much credit. I don’t know.
But, the U.S. economy is better over the long run because it is freer. Not, because Americans are inherently more innovative or better business people, though certainly their is some cultural parts to it. Mainly a cultural love affair with risk takers. But, I doubt that’s uniquely American.
But, Japan’s problems are structural. Are their some cultural aspects? Probably. But, I’m not one of those people that believe culture is a static quality. For example, Japanese seem to have a “savings” culture. They invest and they save. Statistically, they do a whole lot more of this than the U.S. But, savings are highly overrated. You can only spend your way out of a recession. So, consumption is just as important to an economy as savings/investment. Another problem, is the type of saving. Japanese save a lot. But, the quality of their savings is not equal to the U.S. They don’t get the return on their savings that U.S. citizens do. This probably has something to do with the level of risk aversion that exists in each society. Americans are less risk averse. But, I don’t there is anything permanent about this.
Going back to the idea that Japan is hiding good news or that they are sandbagging it in some grand strategy is the Nikkei index. It’s lost 2/3rds of it’s value since 1990. That’s real wealth loss folks. You can’t hide that. And I doubt there is anyone who held any of those stocks wiping their brow saying “whew, good thing our stocks are no longer overvalued. Now, I can have a moderate retirement instead of the big beach house in Florida. Oh well, didn’t need that anyway.” Just like in the U.S., some of us who knew those dot-coms were overvalued are still no less upset that our 401k’s are in the toilet. The big difference is that the U.S. seems to be slowing gaining back it’s equity wealth where as a large portion of Japan’s seems to be gone for the foreseeable future. That is bad and no amount of doubletalk about hard industries and 100 year plans is gonna change that.
Brian asks “What important technologies is the USA definitely ahead in?”
OK, I’m kind of talking out of my butt on this one, but I think that’s a loaded question that gets people into an unnecessary pissing contests. The U.S. is head and shoulders above Japan in microprocessors. The biggest overseas competitors in this arena are in Taiwan. But, is this a better advantage than the automobile, which most folks would probably put Japan ahead in? It goes back to that hard industry crap. Who knows? America has better financial services. So what if Japan has larger banks. Again, which is superior is anyone’s guess.
But, this is where it gets hairy. Japan (along with some Korean companies) pretty much make all the LCD displays. Is this an advantage? Possibly, except that a lot of the innovations in LCD manufacturing were discovered by IBM in their New York labs. So, who gets the points? Who cares? It’s a global economy, these type of arguments are so 1980. I remember the debates regarding Japan having all these manufacturing jobs and the U.S. having too many “service jobs”. This argument was always put forth as if everyone in America worked for Holiday Inn and McDonalds. But, many of America’s leading companies primarily perform “services.” From high-tech consulting, to accounting, these industries employ people and are not easily transferable to Mexico. Oh, and all those Japanese manufacturing jobs? Many of them have been shipped off to Indonesia, Vietnam and any other “little tiger” you can name.
But, again, this really doesn’t matter. Whatever provides employment for its people at a good income with the ability to enhance ones wealth is really all that should matter. From the looks of it, both economies do pretty well. But, Japan’s problems are bigger than the U.S. They are structural and they are political. They have far less transparency in their financial sector. But, with apologies to Fingleton, a lack of transparency will HURT an economy. Not help it.
Japan’s central bank is still too politically influenced (so much for that 100 year plan). They still do not have as diverse of a workforce, gender wise, that the U.S. does. Individual investment, as opposed to corporate and government investment, is still too low. New business creation doesn’t hold a candle to the U.S. And, they have a welfare state that has many similarities (along with a few stark differences) to those of Europe. And they have some serious demographic issues. And worst of all, the government directly invests in their equity markets.
Again, what’s great about the U.S. is that we are freer economically speaking (and please don’t take that to mean I love the IRS, some of our regulations or anything like that. These are relative statements). This allows the U.S. economy to weather recessions better because the private sector corrects mistakes a lot faster than the public sector. Fundamental problems in the economy get straightened out quicker and more efficiently. Most of this is oversimplification, but I think on the whole it’s true.
I believe over the long haul Japan will right it’s ship. I don’t think it’s sinking per se. But I do believe it’s in U.S. in the 1970s style stagnation. They need more diversity in their political choices. They need to fix the structural problems I’ve mentioned. They do seem to have a culture hellbent on hard work and high quality performance. But, they do have too much government intervention and direction. The label “Japan, Inc.” has some merit. But, again, it doesn’t have so much merit as to make me believe they are pulling some sort of bait and switch with inarguable economic and financial data. Well, I guess that’s all I got to say. Great discussion, sorry I got in late.
Brian: I think it’s safe to say our bio-medical technology industry is head-and-shoulders above Japan’s. That may be true for pharmaceuticals as well.
You are spot-on in stating that this is only a valid comparison between the US and Japan. I have often stated that if our economy was in the same shape as Europe’s, there’d be rioting in the streets.
I agree that this has been a very good discussion, and I’m proud to have kicked it off, for all that several things I’ve said have been criticised.
I take Russ Goble’s point about national pissing contests. At best such comparisons can only be very crude. At least they are comparisons in who is being most creative, which is an improvement on earlier “comparisons”, like the First World Comparison of 1914-1918, for instance.
But the reason I comment again is that I’ve just heard a surmise from the man who mends my computer for me (my Japanese disk driver/copier was playing up!) which pulled a lot of the facts of this discussion together.
During that shopping spree, the Japanese didn’t just spend stupidly on US office blocks and movie studios, they also “overspent” on technological RandD. Lots of this spending has had the magical effects that Fingleton reports; they’re racing ahead in lots of fields. (As techie, he and his techie friends noticed the good stuff and were delighted.) But, now that the price of a square mile of Tokyo no longer equals the price of Southern California, they can’t keep that spending up, any more than they can carry on buying movie studios. So the fantastic technological creativity of Japan that we are now witnessing may soon abate, and that of course is a permanent worry for them.
That makes sense to me.
I think there is a point important for us, even if obvious. Though Japan is still a formidable economic force – she has had her slump, and we, libertarians, have our vindication. Their cenralized-dirigiste model isn’t as perfect as it appeared and might be the main cause they aren’t recovering faster. Japan does’t disprove our beliefs in a free economy.
To say nothing of Northern California.
Is it just me, or does all this talk of hiding good economic news and developing “100-200 year economic strategies” smack of the inscrutable Dr. Fu Manchu?
(twists long mustache)
“You barbarian Westerners are so crude – the “slump” of the 90s was merely to lull you all so we could advance our plans of WORLD DOMINATION unhindered! (sinister chuckle)”
Seriously, this idea of hiding good economic news for so long for some long term goal is really rather far-fetched.
Japan has slowly weakened financially since the 1989 market bust. The gov’t has “socialized” the pain by fiscal policy (large scale, mostly wasted, deficit spending) and financial support to the banks.
Neither is sustainable. Just like pre-revolutionary France, or late 1980’s USSR, I believe they have entered the endgame — for good or ill.
Japan’s aging population contributes to the problem — like the USSR in early 1980s, perhaps foreshadowing Europe’s future. The youngest member of the LDP Tax Commission is 74. No new ideas welcome!
Well Japan’s G.D.P. growth is not doing well (but then no major developed nation is doing well right now). Industrial production seems to be doing fairly well (at the moment). And it is Japanese manufacturing that is holding the rest of the country together.
Japanese economy overtaken the United States? Not true.
Japanese G.D.P. is less than half the size of American G.D.P. (and no this is not an exchange rate thing).
At present rates of development China may soon overtake Japan (in real terms) – having ten times more people mean you do not have to be more efficient in order to overtake in terms of size of output.
Look at the trend, not the moment. Japan is slowing, like the EU and USA. No big deal.
Slow and declining growth since the mid-1980s — that’s the problem. When accompanied with rapidly rising national debt, the mix could be terminal if not corrected.
And the time available, the window of opportunity, slowly closes.
We don’t see it, because the process moves so slowly, like the fall of Rome or the warming after the Little Ice Age.
Our news follows daily events, or those of a few years at most. The rest is background noise, which unfortunately includes most important trends.