Tales from the dark side: Divining the causes of Japan's economic nightmare.

• Author: Oliver, Charles
• Position: Culture & Reviews - Dogs and Demons: Tales front the Dark Side of Japan

Dogs and Demons: Tales front the Dark Side of Japan, by Alex Kerr, New York: Hill & Wang, 432 pages, $27

IN THE ANCIENT Chinese philosophical text Han Feizi, the emperor asks a painter which subjects are the hardest and easiest to depict. "Dogs and horses are difficult," the artist says. "Demons and goblins are easy." In other words, the simple, everyday things are hard to get right; it's much easier to come up with big, eye-catching monstrosities. Alex Kerr, a long-time resident of Japan and author of the acclaimed Lost Japan (1996) believes that nation suffers from a severe case of "dogs and demons." Thanks to ossified and inefficient financial and political institutions, Japan has created all manner of monstrous projects and fiscal outcomes while failing to create the conditions necessary for economic growth. The result: The country that inspired all manner of economic envy and inspiration in Americans 15 years ago now inspires something else.

"In field after field," he writes in his new book on Japan, Dogs and Demons, "the bureaucracy dreams up lavish monuments rather than attend to long-term underlying problems." Kerr traces these problems to both political and cultural sources. The first, familiar to economists from the public choice school of analysis, is the tendency of bureaucracies to expand and defend their turf. Government agencies keep on spending money, building new projects, and finding new excuses to continue long after their original purpose has faded.

But culture plays a major role, too, Kerr argues. Japanese are taught from birth not to question authority, to fit in with the group. That leaves bureaucrats without much serious opposition, and explains why Japan has failed to address problems that are behind an economic malaise that has lasted more than a decade. Kerr is pessimistic that Japan can change before things get much, much worse, With the United States now facing its own serious economic problems, it is worth looking at Japan once again, this time as an example of what to avoid.

At the heart of Japan's economic problems--stagnant growth and a growing irrelevance in the world economy--is a banking system that no longer works. The government says that Japanese banks have some $400 billion in bad loans on their books. Adjusting for the size of the economies, that would make Japan's debt problem four times worse than the U.S. savings-and-loan crisis of a decade ago. However, many economists believe that Japan's bad debts are actually far higher, and may total more than $1 trillion. (It's difficult to get a grasp on just how large the debt problem...