The Enigma of Japanese Power (56 page)

‘Financial liberalisation’ has loomed large in economic comment on Japan during the 1980s. The fact that it was in progress was constantly being reaffirmed during the decade by the administrators in international dealings, especially with the United States, and many statements by foreign emissaries acknowledged that it was proceeding on schedule. Here, finally, there seemed to be an area where Japan was gradually meshing in with the international system.

A degree of liberalisation of financial and capital markets did indeed take place, but it was of a kind that fitted Japanese purposes, and did not significantly increase the accessibility of the Japanese market to foreign financial institutions. There is no reason, in the light of past experience, to suppose that Japanese officials have any intention of further opening their market to such competition, at least not beyond the degree necessary to acquire temporarily needed foreign expertise.

The Ministry of Finance bureaucrats’ apparent concessions were in fact aimed, first, at bringing regulations in line with the way Japanese financial institutions were already operating, and secondly at encouraging the international emancipation of Japanese banks, security houses and insurance firms, enabling them to compete better on the money markets of the world. Until then Ministry of Finance bureaucrats had enforced a strict division of labour, with fences around the banking, securities and insurance territories, and sluices regulating the direction of the money flow, thus creating an orderly and controllable financial market during the period of high growth. But the eagerness of the established financial institutions to embark on new and lucrative activities was being frustrated by what many other administrators had begun to agree were antiquated regulations.

In the second half of the 1980s many foreign observers, especially those responsible for Washington’s policies towards Japan, still believed that market forces would replace regulation in the financial field. But MOF ‘guidance’ remains as important as it ever was. The bank-centred
keiretsu
remain bank-centred. And while the bureaucrats have not relinquished
de facto
control, partial deregulation has had the intended effect of fostering a new sophistication among Japanese financial institutions, as well as significantly increasing investment possibilities for the wealthy firms, allowing them to expand in new directions.

In the same period during which it was gradually discovered that Japanese speculators need not worry overmuch about a crisis of confidence, new financial powers emerged. The commercial banks were tightening their relations with the security firms by exchanging stock and personnel. And the life insurance industry, which was becoming (thanks to Japan’s ballooning pension funds) one of the strongest institutional investors on the international scene, was emerging as a third major financial force, offering what amounted to investment instruments on the domestic market. Besides being hooked up to the manufacturing-banking-trading conglomerates, the big insurers have long operated under the protection of the Ministry of Finance. This sector, too, is dominated by a cartel-like ‘big three’,
⁷⁵
through which it is easily monitored and guided.

The proliferation in Japan of collusive activities inimical to free-market principles naturally makes one wonder whether all these activities might not be part of one gigantic conspiracy. The question becomes still more pertinent when one considers how collusion is rife in areas of the System not directly connected with the economy. An intense focusing on goals pursued, oftener than not, without adherence to any rules and unhampered by any referee: all this certainly seems conspiratorial. Is the consolidation of the System in a form reminiscent of the plans for the Imperial Rule Assistance Association the result, then, of a political master-plan? Have the economic administrators been consciously working to create the confluence of circumstances that gives them their current international financing power? Such questions, though obvious, have not been popular, partly because those who would contemplate them are too easily branded as ‘Yellow peril’ alarmists.

There is no convincing concrete evidence for a master-plan. No conspirators have come forward; no documents have been brought to light that reveal anything of the kind. The consolidation of the System would seem to be less the result of purposeful planning on a grand scale than the logical outcome of two centuries-old characteristics of Japanese political arrangements: the absence of agreement among rival cliques concerning the right to rule; and their shared wish to ensure social order without reference to any legal framework or to universal principles.

Japanese political history, I believe, is witness to the fact that political aims need not be fully conscious to be realised. Just as the omnipresent Japanist propaganda emanates, not from a single strong agency at the centre, but spontaneously from the collective need of separate groups of power-holders, so the efforts of these groups to optimise conditions for themselves, to guarantee their own political survival, have dovetailed together into what merely seems like conscious implementation of a social engineering blueprint.

It was inevitable that the post-1945 administrators should exert themselves from the outset to minimise the influence of the left, to subdue trade unionism and to ‘reverse the excesses of the occupation’ as soon as the Americans had left. It was entirely natural, too, that those who had experimented with establishing a ‘new economic order’ should attempt to apply what they had learned when, after the war, they were given unprecedented scope for setting up such a new order. A tradition of reality management enabled the administrators without many qualms to present their interference as democratic, so long as elections were held and there was a parliament and a seemingly free press. In view of the administrators’ constant dread of disorder, it would not have been realistic to expect them to discard the institutions and habits developed before 1945 for the very purpose of staving off that fear.

As for the ‘capitalist developmental state’ that they have fostered, this pattern of development has not required adherence to rigid principles, and those who chose it may not have been entirely conscious that they were adopting a particular model of economic development. What they did realise, it seems, was that new potentialities in their economic system could constantly be discovered and exploited. This latter tendency is vividly demonstrated in times of apparent adversity. Should the System be seized with a sense that certain unexpected and undesirable developments are unstoppable, the bureaucrats and the élite of other affected components ride the wave, all the time seeking ways to exploit these new developments. The disturbance of normal routine normally causes excessive confusion at first, accompanied by denials that changes are inevitable; but in the second phase groups of administrators will come to the fore to tackle the new circumstances, using them, like a good chess player responding to a surprise move, to gain ground over their rivals.
⁷⁶

In this way the appreciation of the Japanese currency to almost double its original value against the US dollar in only two years has been a boon for those who long advocated rationalisation schemes to raise efficiency and thereby the competitiveness of large firms. It has forced the reorganisation of the subcontractor world. When the domestic outcry against industrial poisoning of the environment finally grew into an unstoppable protest movement, forcing major adjustments, MITI bureaucrats were thereby handed on a platter a whole new range of control mechanisms, in the form of anti-pollution regulations that reinforced their leverage over industry. The United States occupation of Japan – which had hardly been the collective goal of the administrators in the 1930s – gave many of them the chance to carry out their plans, from land reform and labour laws to economic mobilisation. The exploitation of such unexpected and initially undesired opportunities is common enough elsewhere, of course, but Japanese bureaucrats and business leaders, obsessed as they are by their power positions versus their rivals, are exceptionally good at it.

Discoveries of new possibilities to expand industrial and financial power also activate the
jinmyaku
and the System’s informal processes for large-scale co-ordination among bureaucrats, business federations and corporate administrators. It is reasonable to view the massive expansion of intangible assets that has given the System greater leverage over the international financial system as having been guided in such a way. But this does not make it part of a master-plan drawn up before the new ways of making money were tried out. Nor does it mean that the System unanimously endorses the policies followed. In the case of
zaiteku
, for example, a significant number of influential administrators believed, at least initially, that it might sap the vitality of the Japanese economy. Before he resigned as head of Keidanren, Inayama Yoshihiro expressed worry at the way businessmen were straying from their original business.

Although there is no convincing reason to suspect that the administrators have worked out a grand master-plan for industrial domination of the world, what they are doing has the same effect as if there were such a plan. It is not difficult to see why this should be so. The administrators see the entire world in terms of the System. Men who do not appeal to universal rules in protecting their flanks at home are unlikely to believe that internationally accepted rules, treaties, agreements or promises are ultimately reliable. Japan strives for industrial dominance because power is the only guarantee for safety; and military power is for the time being, and probably for a long time to come, not feasible. Hence the continued voracity for foreign market shares and foreign technology.

It is essential to grasp two points with respect to this ‘natural’ Japanese drive. First, Japan has the potential to go a very long way in achieving dominance in certain strategic industries, and could thereby make the West very dependent on it – this has already nearly happened with semiconductors. Secondly, the uninformed supposition of Western trading partners that Japan’s political economy is essentially like their own provides a prime condition for achieving the administrators’ international ambitions.

The present wealth of Japanese firms – at least in terms of the collateral they can produce – has considerably strengthened their basis for operations on international markets. They buy foreign financial institutions and real estate, not for the sake of medium-range profits, but so as to pull more weight. And if land in Tokyo can be ten times as ‘valuable’ as land in Manhattan in 1988, the price could be jacked up to twenty times or more within a few years should the administrators need the collateral to make their overborrowing seem respectable.

All the while, Japan’s comparative advantage continues to be enhanced by other, more long-standing factors. Subcontracting, temporary employment, lower-paid female labour and early mandatory retirement still give Japanese industry the benefit of very flexible and relatively low labour costs. Only one-third of the workforce has been permanently employed. After retirement, employees continue to work at much reduced salaries. Thirty-five per cent of the labour force continues to work past the age of sixty-five, compared with some 10 per cent in Europe. Also, a conglomerate entering a new industry has an immediately guaranteed domestic market share of some 10 per cent. The Japanese System, moreover, continues to be structurally protectionist, shielding Japanese manufacturers and banks from the type of competition with which the System’s corporations have diminished Western firms. The last-mentioned factor seems certain to keep the trade imbalance between Japan and the world permanent.

It is widely believed that Western firms do not try hard enough to penetrate the Japanese market, and the administrators have been only too happy to help spread the notion of European and US business as tired and inefficient. But closer scrutiny of Japanese firms reveals that they are no less prone to bungling than are Western firms – perhaps even more so, when one takes into consideration the companies that cater to the domestic market only. The argument about not trying hard enough, however, is a red herring; the essential point is that those who have tried extremely hard in Japan have mostly failed as dismally as those who have taken it easy. Japanese spokesmen widely advertise the fact that a number of foreign firms that have ‘tried hard enough’ have been successful in their market. These firms are well known because they belong to the same small sample always mentioned in this context. A select few foreign firms receive assistance to serve as fresh examples of Japanese openness.
⁷⁷

An additional and underrated source of Japanese strength is the intimidatory effect of the System’s targeting of new industrial areas. The financing methods used here are such that US or European company presidents who take high risks investing in such sectors would be irresponsible and could never justify them to their shareholders.

The greatest apparent international advantage the Japanese System has enjoyed so far lies in Western misconceptions concerning the nature of the Japanese challenge. The United States has been especially vulnerable to Japan’s industrial onslaught in that the US government agencies overseeing its interests in this respect have no institutional memory. Every two years or so, new sets of US officials must learn afresh that the Japanese economy does not operate in the same way as their own. Hence the continued self-imposed handicap of doctrinal adherence to inapplicable free-trade theories. The result has been misguided stopgap policies. Increased congressional pressure on the Reagan administration to cope with the Japan Problem produced a double formula to help straighten the trade imbalance: a more expensive yen, and demands that Japan stimulate its domestic economy. Increased domestic demand does, indeed, make growth of the Japanese economy somewhat less dependent on exports, but there is no good reason to expect that it will lead to greater Japanese purchases of the finished products Western countries want to sell. Nor has the expensive yen had the anticipated effect. It may even have worsened still further the West’s competitive position by forcing the administrators to streamline relatively inefficient sectors. The yen–dollar rate will have a significant effect on the Japan–USA trade balance only it the US side is prepared to go far beyond what seems likely, by allowing its currency to lose value and prestige even more dramatically than it had in 1987.

Not only did the measures that helped ‘adjust’ the dollar–yen exchange rate fail to bring the hoped-for result, but they almost doubled the buying ability of Japanese investors on the US market. On top of the strength derived from Japanese financing methods described in Chapter 15, this led to a sudden great surge of Japanese influence on Wall Street and other financial trading centres. A major new factor was hereby introduced, with the potential of dramatically changing Japan’s relationship with the US, and with as yet uncertain, but probably important, repercussions for the West in general.

Seen in a long-term perspective, the lack of effective US and European policies towards Japan is not a true advantage to the administrators. On the contrary, their security is in danger. So far, the US legislature has been held back by the example of the Smoot-Hawley Tariff Act of 1930, which was partly responsible for the uncontrollable protectionist chain-reaction that preceded the Great Depression. But at some stage retaliatory measures that could severely damage Japanese interests seem inevitable-especially if frustrations with Japan’s economic activities are aggravated by Japanese actions or statements giving Congress the impression that Tokyo is arrogant or morally deficient. The European countries, which are equally fearful of rampant protectionism but have so far been less affected by the expansion of Japanese power, would most likely follow the US example. The European Community, as a unit, will have more reason for vigilance in the face of Japanese marketing aims when, in 1992, all remaining barriers regulating the flow of goods among member countries are eliminated. With the West clearly unwilling to absorb the effects of any further large increase in Japan’s economic might – at least if achieved in the same manner as post-war economic growth – the continued feasibility of the Japanese goal of unlimited industrial expansion has become uncertain. Restructuring is thus a vital necessity.

The phoenix has soared majestically for the entire world to see, and has drawn deserved applause and expressions of awe. But it is burdened with an inherent defect that disorientates it. The defect is, of course, in its steering mechanism: in its inability to adopt alternative methods and aims, because of the absence of an individual or unified group with the power to make political decisions to shift goals. The phoenix appears stuck on a collision course.