Making sense of Japan.

• Author: Murphy, R. Taggart
• Position: Revisionist policies of Japan's Ministry of Finance

In his book Dead Right, David Frum tells a story about two Viennese Jews reading newspapers in a coffee shop at the end of the nineteenth century. When the man with the respectable daily sees the other holding a scurrilous anti-semitic rag, he asks in astonishment: "What's come over you?" The other responds, "I'll tell you ... In your paper, I read about old Jewish men murdered in Romania, about jewish women raped by Cossacks in Russia, about Captain Dreyfuss unjustly accused in France. In this one, I read that Jews control the banks and stock exchanges, that we hoard sacks of gold in our cellars, that every government on earth trembles at our orders. I prefer good news." While Frum had a different purpose in mind, the joke would undoubtedly seem wonderfully apt to officials of Japan's Ministry of Finance (MOF) in light of the awe with which they have often been viewed in Washington.

The MOF presides today over an economy in its fourth straight year of next-to-no growth. Unemployment is at a post-1950s high. The stock market has teetered since 1991 on the edge of an abyss that could wipe out the reported capital of most Japanese banks. These banks have piled up more bad debts than the existing financial assets of any of a half-dozen developed countries; no one believes the semi-official estimates of only fifty trillion yen (five hundred billion dollars). Japan's real estate market, accounting at current prices for at least one half the real estate value of the entire planet, is, like its stock market, a fathomless black hole where "price" and "value" are meaningless chimera. Japan runs the largest current account surpluses of any country in history but cannot re-start the engines of growth. It is unable to finance the deficits of its trading partners without chronic losses on the securities -- mostly denominated in dollars -- it buys to finance those deficits. As a result, its currency soars to levels that make it impossible for many of its exporters to earn enough on each exported item to cover the labor and supplies necessary to make it @variable costs), not to mention the item's pro-rata share of overhead (i.e., fixed costs).

Nor do the seemingly endless economic crises tell the whole story. The MOF finds itself for the first time the subject of extensive scrutiny in the Japanese press. Mainstream publications complain about the proliferation of retired MOF bureaucrats in Japan's ostensibly "private sector" financial institutions. Articles on cozy links between MOF officials and two failing credit unions with gangster connections complicate efforts to rescue these unions. In December, Shinozawa Kyosuke, the MOF's administrative vice minister vacated his seat at the pinnacle of the bureaucratic hierarchy a mere eight months into his term, attempting without much success to explain his resignation as a gesture aimed at ending controversy over the Ministry's handling of seven bankrupt housing-loan companies (yusen), whose problems stand at the center of the country's financial mess. The settlement itself has been widely seen as a humiliating defeat for the MOF. While the MOF dips into public funds to bail out the jusen, the agricultural cooperatives who were their principal lenders get off nearly scot-free, thanks to formidable backing from the Agriculture Ministry -- one of MOF's long-standing bites noires -- and the Liberal Democratic Party.

But like the Viennese Jew in Frum's joke, the harried MOF official can take comfort in the mixture of envy, resentment, and admiration he still provokes in Washington. A series of books and articles with great influence there place the MOF on the verge of a triumph more complete and more glorious than that accorded any group of bureaucratic officials ever. These writings depict the MOF as the central directing organ of the most productive and advanced economy in history, one that has already overtaken the United States in most significant respects and will surpass it in all remaining ones -- including sheer absolute economic size -- by the end of the century. Thus Eamonn Fingleton salutes MOF officials as the creators of an economic system far more advanced than capitalism, a system that represents as sharp and portentous a break from capitalism as capitalism was from feudalism."(1) Japan's "ascendancy" over the global economy, to quote Chalmers Johnson and E.B. Keehn, is already established and awaits only the proper timing to be revealed to East Asia and the world.(2)

The most widely used term for this school of writing is revisionism." The label was originally applied by Business Week's former Tokyo bureau chief, Robert Neff, to a series of books and articles that emerged in 1988-9, a time when it was obvious to all but the willfully blind that the explosive phenomenon of japan required revised thinking. That was a moment in history when hegemony over the world's economy seemed indeed to have passed to Japan. Tokyo's stock exchange had outstripped New York's to become the world's largest, while even Osaka had bumped London to fourth place. The market appetites of Japanese investors virtually determined the price of U.S. Treasury bonds. japanese companies, secure in their dominance of most of the world's important manufacturing industries, had gone on a global buying spree, snapping up prize U.S. assets from MCA to Rockefeller Center to Firestone, while their banking counterparts bought four of California's top eight banks and controlled one quarter of all credit extended in that state. Meanwhile, like a great conductor leading an orchestra with the subtlest of cues, the MOF had skillfully played the U.S. bond market to suppress dollar interest rates in the fall of 1988, thereby helping to avert a potentially serious obstacle to Japan's glide to global pre-eminence -- a White House in the hands of Democrats with economic nationalist leanings.

The old, received wisdom on Japan was almost useless in helping policymakers grapple with this phenomenon. Such wisdom derived largely from the tenets of so-called modernization theory that itself grew out of the ideological battles of the early Cold War. Modernization theory was an ideological construct intended to counteract the grip of Marxism on developing country elites -- like Marxism, it incorporated the logic of development, but unlike Marxism, it postulated American-style capitalism as the norm to which development necessarily aspires. Japan became the paradigmatic example of a successful modernizing society, moving inexorably toward an economic and political system indistinguishable in essence from that of the United States. All residual differences -- the large business alliances known a keirutsu that dominate the Japanese economy, single-enterprise unions, "lifetime" employment, a low propensity to import and the near total discretion of the bureaucracy in executing policy free of legislative or judicial oversight-were explained away as innocuous cultural phenomena on a par with Kabuki theater, flower arrangement, and the tea ceremony.

Modernization theory never enjoyed unquestioned acceptance in American academic circles, particularly after the Vietnam War opened up a generational rift between its older intellectual champions such as Walt Rostow and Edwin Reischauer and younger challengers grouped together at the leftist Committee of Concerned Asia scholars. But, at least with respect to Japan, it fit the needs of Washington's defense and foreign policy establishments like fine tailoring from Saville Row. Japan's military importance was obvious; it lay astride the Soviet Pacific Fleet's warm-water access to the open ocean, and a vast network of bases and installations from Okinawa to the northern tip of Hokkaido formed the linchpin of the American military presence in East Asia. Japan's political importance was equally great. It served as an icon of the prosperity awaiting countries that followed the capitalist path under American tutelage, instead of the poverty and backwardness of the Indias and Tanzanias seduced by the siren songs emanating from Moscow and Beijing. With the single-mindedness of white blood cells smothering invading bacteria, Washington's elites had for decades viscerally defended America's Japan policy from any challenge by those fretting over growing trade deficits and the steady loss of industry after industry to Japanese competition. Modernization theory proved an exceptionally useful tool to drain such challenges of their power to inspire fear. After all, if Japan was converging with the United States, why worry about trade imbalances that were bound to disappear with such convergence?

But the fall of the Berlin Wall and Japan's emergence in the late 1980s as an economic superpower undermined the rationale for this ideological construct, while destroying its pretensions. At a time when the United States was adding some one trillion dollars per presidential term to its national debt, watching its lower-middle class sink into poverty, and turning over its city streets every evening to gangs of fatherless youths with guns, it was getting harder to argue with a straight face that the world's leading creditor nation -- a place of clean, crime-free urban centers, polite, literate, well-dressed children, and state-of-the-art factories -- was somehow "converging" with the United States.

The End of Consensus

When American policymakers in the late 1980s began groping for a new conceptual framework for Japan policy, they found much of the groundwork already laid in the form of a 1982 book by the then-Berkeley professor, Chalmers Johnson, entitled MITI and the Japanese Miracle: The Growth of Industrial Policy, 1975. The book contained a history of one of Japan's key bureaucracies -- the Ministry of International Trade and Industry (MITI) -- a bureaucracy that particularly in the 1950s and 1960s had been second only to the MOF in the power it enjoyed over economic decision-making in Japan...