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What Happened to Japan?

March 12, 2001

While Congress and the media debate the merits of President George W. Bush’s tax cut proposal, a much more interesting economic event is occurring across the Pacific Ocean. Japan, it seems (formerly known as "Japan, Inc.") has been a decade-long experiment in Keynesian Economic Theory, and if the results do not bury Lord Keynes even deeper in his grave, then most likely nothing ever will.

Before explaining how and why Japan got into the current mess—and how turning to Keynes's General Theory has made things only worse—it is time to clear up a few myths about what for many years has been called Japan, Inc. To do that, we must go back 20 years to that time when Japan seemed to be an invincible economic force that cast fear into nearly every U.S. manufacturer.

Whatever American manufacturers did, it seemed the Japanese did it better. Having lost their older reputation of producing junk, Japanese firms began to export automobiles, television sets, VCRs, and watches to the USA, and U.S. producers of those same items began to notice their market shares fall significantly. There just had to be a reason that Japanese firms were outperforming American companies, and the commentators decided to find all of the wrong answers. Thus, the myth of Japan, Inc., was born.

It was not difficult to find out just why Japanese products were seen as being of higher quality than those made in the USA.  Using many of the methods made famous by J. Edwards Deming, especially those involving the use of statistics to eliminate defective production, Japanese manufacturers became much more responsive to consumer wishes than many of their U.S. counterparts.

However, a large number of American counterparts became convinced that the REAL secret of the "Japanese Miracle" lay in about every other fallacy of economics. Among the fallacies spun by American academics, public officials, and labor unions were (1) much of Japan suffered severe bombing damage during World War II, which allowed Japanese firms to construct more modern plants than those in the USA, (2) Japan had high protective tariffs and other import quotas, which encouraged exports over imports, thus assuring full employment, (3) Japanese firms practiced a "corporate welfare strategy," in which employees never had to face layoffs and were given near cradle-to-grave care in return for loyalty, and (4) the trade ministry, called MITI in the West, was the guiding hand of economic decision-making by Japanese companies. A number of American economists, including Lester Thurow of MIT, insisted that we also needed Japan-style "industrial policy" to guide U.S. manufacturers.  

(I remember attending a Thurow talk in 1984, in which he said that the "country" that creates a marketable form of HDTV first would have great riches, while the "loser" would struggle in the future. He also called for the government to develop a fully-automatic textile manufacturing operation. It was the vintage technocrat at work!)

None of those reasons made much sense to people with even a modicum of economic knowledge. For example, if bombing Japanese manufacturing plants made economic sense, then perhaps a fleet of B-52s could have done the same for U.S. firms.  There were no domestic takers for the Air Force’s services, however.  By keeping imports at a minimum, Japan did run large trade surpluses, but one must understand that what that meant was the Japanese firms and individuals held large amounts of dollars.

In the late 1980s, Japanese firms began to purchase large amounts of U.S. real estate. That was about the only thing they could do with their dollars, other than invest them in manufacturing operations here—which they also did in large amounts. Of course, U.S. commentators raised red flags about Japanese firms owning the Rockefeller Center in New York City—as though they were going to tie a rope around those landmark buildings and float them back to Japan.

For the most part, Japanese firms like Honda, Nissan, and Toyota built state-of-the-art factories. Other Japanese companies also did well, bringing quality manufacturing methods and avoiding unionization—much to the chagrin of the AFL-CIO and the Democratic Party.  The real estate investments, however, went south. The cash-rich Japanese, notorious for doing little bargaining, paid premium prices for property that quickly fell in value during the recession of 1990-1991.

Unfortunately for Japan, its economy, like its U.S. real estate malinvestments, also took a downward turn. While one can say that the economic affairs of any nation can be Byzantine when one wishes to analyze them, it is not difficult to see what has been happening in Japan.  For all its modern manufacturing state, much of that nation is an economic time warp from the 1950s.  Not only does the Japanese government discourage imports, but it also has actively kept the retail sector from enjoying large economies of scale by discouraging large-scale retailing.

Unlike the USA, which has managed to circumvent the 1936 Robinson-Patman Act aimed at shutting down "chain stores" by leading the world in retail giants, Japan remains a nation of large-scale manufacturers and tiny-scale retailers. A mom-and-pop retailer, which sounds romantic in name, cannot work on the same productive plane as the large-scale manufacturers. It is the economic equivalent of attempting to pound a square peg into a round hole.

Meanwhile, across the Pacific Ocean, U.S. manufacturers began to get their act together during the 1980s, winning back many of their old customers.  (After having laughed at Deming in the 1950s, the American firms finally acknowledged that perhaps they needed to create quality merchandise in order to be competitive in a world market.)  By 1990, Japan’s other government policies, while forcing up the cost of living for individual citizens, began to run things into the ground.  In order to "stimulate aggregate demand" to help cure a recession, Japanese authorities turned to the Keynesian playbook.

One of the most obnoxious moves by the Japanese authorities has been to discourage Japanese workers from saving large sums of money. The legendary Japanese saver, who puts away up to 25 percent of his income or more, now is being encouraged to spend more of his income on consumer goods, all of this to increase "aggregate demand."

Furthermore, the Japanese central bank forced down interest rates to near zero, while the Japanese government spent billions of dollars on "massive public works" (as socialists like to call them), including roads, bridges, public facilities, and anything else that requires taxes to build. At the end of this Keynesian building binge, the Japanese are where they were when they started, except that now the government is carrying hundreds of billions of dollars in debt that must be paid by Japanese taxpayers. The economy, unfortunately, is still in the doldrums.

There are many lessons to be learned from the fall of Japan, Inc., but don’t expect to read them in the mainstream press. Commentators either will continue to blame the "oversaving" Japanese consumers, or they will insist that the Japanese government simply didn’t spend enough.

What these folks won’t say, however, is that the problem lies with government itself. Japan has large numbers of top-quality manufacturers; there is no doubt about that. But the Japanese government also inappropriately interferes with the economy at every level. By keeping retailers from enjoying large economies of scale, the government manages to try to make a First World manufacturing regime co-exist with a Third World retail sector. The legendary Japanese protectionism means that the Japanese will pay larger shares of their income for consumer goods and food than they would otherwise, and the emphasis of exports uber alles means that Japanese workers might as well be engaging in charitable operations for Western consumers.

Twenty years ago, when it looked as though Japan was going to steamroll through the economic world, the Lester Thurows and other such Japan-watchers proudly pointed out that Japan was not a free enterprise nation. Free markets and private property, argued these economic "experts," were passe and not needed in a modern, technological economy.

Today, we see that these folks were even more right than they had even understood. Japan has become a full-blown duchy of John Maynard Keynes. Perhaps it might be time for the Land of the Rising Sun to fulfill its real potential by unleashing private property and free markets.

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William Anderson (send him mail) teaches economics at North Greenville College. See Anderson's Daily Article Archive . See also this interview with Hiroyuki Okon, who saw as early as 1997 what was taking place.


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