A Once and Future Model Economy

When Americans think of Japan, we tend to envision some kind of giant brain in the sky. Oh, how our lowly collective ego sagged just a few years ago as Japan soared toward the top of the world economy. When the ‘80s vamoosed, it seemed only through some miracle that sushi hadn’t replaced Wheaties as the breakfast of champions and the U.S. Constitution hadn’t been amended to enthrone the emperor of Japan. And if you tried to tell someone that, no, Japan is human, could blow a math exam or maybe, on a bad day, even flunk a course, why, people would think you were some kind of Japan-hater.

But these days you don’t have to be a Japan-basher to criticize Japan: The Japanese are even starting to bash themselves. They know full well that their economy is now flatter than last night’s sake. The Nikkei has tumbled 20% from last year’s high and 50% from its 1989 peak, and the yen is at its weakest in four years against world currencies. Worse yet, many banks, groaning under $260 billion in rotten loans, don’t seem any smarter than those failed American S&L;’s.

Suddenly Japan no longer looks like it can walk on water and Godzilla, heretofore guaranteed a job under the Japanese system of lifetime employment, now faces the prospect of looking for work as an extra. Worries noted UCLA Japanese history professor Fred Notehelfer: “Japan strikes me like the U.S. in the late ‘20s--no confidence in the political parties, the suspicion that everyone is corrupt. Worse yet, do we Americans secretly wish for Japan to implode? Japan bashing is only shallowly under the skin of Americans.”

Ordinarily that’s true, but if there’s one bright spot in any of this, it may be the American sense, at least at the highest levels, that nothing is to be gained and maybe everything is to be lost by exulting over Japan’s difficulties. Rather than celebrating, top U.S. officials--perhaps reflecting on our own stock market’s downdraft last week--seem little disposed to trash talk. Agrees Deputy Treasury Secretary Lawrence Summers, who in a major 1995 speech raised serious questions about the basic health of the Japanese economy: “Further economic problems in Tokyo could render Japan a less effective security partner and a less substantial market for American goods; that’s why we need to encourage the Japanese to work through these problems. And while we have to work to open their markets, it would be a great mistake to appear to gloat or crow. Anything that would allow them to externalize their problems and blame them on anyone else would not be in their interest.”

Similarly, Ira Shapiro, the chief U.S. trade negotiator with Japan, so often at loggerheads with his formidable counterparts across a tense negotiating table, offers a bit of cheer: “The Japanese have been highly successful for a long time. They have great companies, great human resources. Their resilience and ability to compete should never be underestimated.” Adds Commerce Undersecretary William Reinsch: “Remember, this is a vibrant, effective, tactically and strategically astute, high-tech Japanese establishment. They haven’t lost too many steps.”

These statesmanlike postures make for smart geopolitics. Asia desperately requires a Japan that’s strong and healthy, not troubled and insecure. The latter always creates severe anxieties for its neighbors, especially smaller fish like Singapore, Hong Kong and Taiwan. Aside from economics, there’s a special reason: The whole region remembers a not-so-distant history of Japanese aggression. Even giant China, invaded by Japan in 1937, is worried. Explains a Chinese diplomat from the mainland who served in Tokyo in the late 1980s: “I felt then that I was at the center of the world. You could feel the energy in the air. Then I returned in 1994 for a visit. I was shocked. It was starting to change and the positive feeling wasn’t there any more. That worries me. Japan seems unhappy now. And when Japan is not happy, we worry. Everyone in Asia worries.”

Jokes famed globe-trotting senior economist Kenneth Courtis of Deutsche Bank Capital Markets of Asia: “Let’s put it this way. It’s always better to have a neighbor that’s rich and pretty.”

In the world economy, Japan is no longer an island. We in America--and our trading partners in Asia--have a very great stake in its vitality and stability. Warns Courtis, “As the world’s principal creditor--Tokyo buys more foreign government bonds than anybody--financial implosion in Japan would trigger an unprecedented global financial crisis.”

Not so long ago, in fact, Japan’s leaders would often lecture America about our needing to clean up our economic act. In many respects their advice was wise. Now Japan needs to look itself in the mirror and straighten out its own act. This will require major domestic reform, such as deregulating protected industries, that will cause Japan real pain at first.

The fear is that true reform is beyond the capability of its ossified social system and fragmented political system. Prime Minister Ryutaro Hashimoto will either become the decade’s first prime minister to achieve true reform or the sixth failed prime minister since 1992.