Chapter 57 – Exports, Oil Shocks and Mini-Bubbles
BETWEEN FOUR WORLDS: CHINA, RUSSIA, JAPAN AND AUSTRALIA.
BETWEEN FOUR CAREERS and FOUR LANGUAGES.
Exports, Oil Shocks and Mini-Bubbles
1. Exports, Oil Shocks and Mini-Bubbles
2. Oil Shocks to the Rescue
3. Asset Bubbles also to the Rescue
1. Exports, Oil Shocks and Mini-Bubbles
As domestic demand relative to supply began to fall off in the early seventies, goods makers began even more to turn to overseas markets to dispose of surplus production.
The result, naturally enough, was growing export surpluses, trade frictions and upward pressure on the yen.
The trade frictions issue could be handled in part by hiring lobbyists and by insisting that the rest of the world had to observe the principles of free trade while Japan itself was denying those principles in order to develop its own car, computer and chip industries.
(Eventually, however, those policies were to lead the US to threaten special import surcharges on Japanese goods, which is how I had met Hosomi originally, on the 1982 Finance Ministry committee to discuss the surcharge issue.)
But upward pressure on the yen was less avoidable.
Intervention in foreign exchange markets to try to keep the yen cheap could only do so much.
With the 1972 Nixon shock forcing the yen to up-value from 360 to the US dollar to around 240, exporters and the economy overall seemed headed for trouble.
2. Oil Shocks to the Rescue
But help was soon to come from another and very unexpected direction – the 1973 oil shock.
Expensive oil imports cheapened the yen greatly. The cheaper yen allowed export industries to continue to survive and thrive.
True, expensive oil harmed some other industries. It also led to wild inflation.
But since the export industries were leading industries for the economy, the harm was greatly lessened. (Leading industries are important since they usually stimulate more investment in ancillary industries.)
As well, the oil shocks stimulated new investment in energy saving devices.
The net effect on the overall economy from the oil shock was almost certainly positive.
Even the wild inflation of those days could have had a stimulation effect – some people wanting to spend or invest their money before it lost more value.
More Oil Shocks
But this quick economy recovery in turn meant that the trade surpluses would to continue their rise.
But as before, the more you exported the more the yen appreciated. And the more the yen appreciated, the harder it was to export.
As the Japanese used to say, you strangled yourself with your own necktie.
Fortunately another rescuer was to emerge, this time in the shape of the second oil shock of the late seventies, when Iraq attacked Iran.
Once again the yen cheapened. Like desert flowers in bloom after a sudden downburst, the exporters gained yet another new lease of life.
(Later, on the lecture circuit, I used to enjoy telling audiences that the two oil shocks probably did Japan more good than harm.
(Most of my listeners had gone along with the conventional wisdom that said the shocks were bad for the economy.)
3. Asset Bubbles also to the Rescue
But exports could only do so much to solve the demand problem.
In effect, foreign demand was substituting for lack of domestic demand, and there were limits to how far this could go.
Another rescuer was needed, and this time it came in the shape of the continuous land and share bubbles/booms running right through to the grand-daddy of them all – the Bubble of the late eighties.
This time domestic demand was stimulated greatly.
But in the worst possible way.
A paper delivered at the annual Amagi Conference devoted to the topic of Japan – 50 years after the war end – also published in The Japan Times.
Is Japan unraveling?
In rapid succession we have seen (a) the collapse of a totally irrational boom in land and share prices, (b) financial scandals involving elite Ministry of Finance bureaucrats, (c) the Kobe earthquake and the Aum religious cult affair which have shown the inefficiency of Japan’s once highly-praised public safety authorities, (d) disillusioned voters electing two actor-comedians to head the Tokyo and Osaka metropolitan governments, (e) policy paralysis in the face of a violent but highly predictable yen appreciation, and (f) the sudden realization that Japan trails the US by 10-15 years in the all-important information and telecommunication industries.
And this is the same Japan that some used to see as Number One. What went wrong?
Not much. Japan never was the super-efficient, wellgoverned paragon of much Western imagination It has always been a rather fuddy-duddy, conservative society struggling not very bard to shake off the deeply feudal legacy from almost 300 years of Tokugawa isolation that ended little more than a century ago. What went wrong were our Western preconceptions about Japan, and. our ideas about what makes societies succeed or fail.
Japan succeeded for much the same reasons that the north European peoples succeeded. During its long period of deeply feudal isolation (full feudalism that is, as opposed to the semifeudalism found in many economically backward societies), Japan created a solid foundation of local manufacture and local administration. Feudal localism helped the Japanese develop their strong group ethic, the much-praised work ethic and the strong sense of attachment to the workplace as a basis of identity. Attention to detail, craftsmanship and basic education re other useful byproducts. What today passes as superior Japanese enterprise management is little more than a refined and somewhat democratized version of the feudal IE system – the familial business grouping developed during Tokugawa into which outsiders were recruited, trained and expected to serve loyally till retirement.
In particular, Japan gained greatly from what some more perceptive Western observers now see as crucial to the progress of the north European culture societies, namely the way in which different people thrown together directly in a work or civic activity will tend automatically to cooperate with and trust each other. It is a direct outgrowth of the feudal ethic of close and automatic association with those in one’s immediate vicinity. People in older and more rationalistic civilizations require some more clearly defined attribute to serve as a reason for association – caste, class, kinship, religion etc.
Indeed, much of what we see in Japan is pre-feudal in origin. The Japanese speak freely of their mura-ishlki, or village consciousness. ‘Village’ attitudes go a long way to explain the tightly closed nature of the groups and what the Japanese themselves describe as the narrowness in their thinking – they see us non-Japanese as being much more far-ranging and strategic. I myself have often described Japan as tribal society without meeting any great opposition from Japanese critics*.
(FOOTNOTE: My 1977 book – Nihonjin – Yuunikusa no Gensen (The Japanese – Origins of Uniqueness) sets out this tribal thesis in detail.)
To date we have tended to see village or feudal particularism as a backward element. We see rationalism – the propensity to operate on the basis of argued principles claiming objective validity – as the key to progress. Japan suggests otherwise. Or to put it another way, rationalism has both its plusses and negatives. It allows us to create reasoned systems of economy, science, planning and government. But it also encourages scholasticism, dogmatic attitudes and disregard for the simple virtues of group cooperation and attention to detail.
Besides, the Japanese did not have to rely entirely on feudal/village particularism for their progress. They were able also to borrow the more useful products of other peoples’ rationalism. From China they brought in the systems of government, law, science and ideology which allowed Japan to advance from its original clan/village society to create a sophisticated feudal society. Later they were able to absorb the products of Western civilization needed to create the industrialized nation-state. It was a very effective formula for progress.
We peoples of north European cultural origin did much the same. Like Japan, we were relatively isolated for much of our history. We combined the simple, collectivist, work-oriented values of our village/feudal past with the byproducts of a more rationalistically advanced south European civilization to create our industrial miracles and our disciplined, tightly bound nation states.
If Japan seems different from us today that is because its isolation was much longer and its feudalism much deeper. So its groupist particularism was that much stronger. Emotional and antiintellectual values still hold sway, even among the educated classes. The Japanese never felt the need for strong, absolutist ideologies its Shintoist beliefs are little more than primitive animism. With the possible exception of Germany where feudal isolation was also strong, and which until recently at least shared many Japanese qualities, the better educated classes in most north European culture societies have long embraced the more rationalistic approach of south European civilization.
But among our rural or working class populations a preference for a simpler, more collectivist approach remains. This explains why, contrary to all predictions, Japanese factory management has been so successful in non-urbanized areas of many Anglo-Saxon culture societies. Here, as in Japan, people tend naturally to see the workplace as an important source of identity. But Japanese management has been much less successful in the Sinitic culture societies of East Asia, where workers have a much less sentimental approach to the workplace.
Today many see the progress in Japan and the rest of East Asia as a result of a common Confucianist ethic. But little more than a generation ago a very different wisdom prevailed. Then, Confucianism was seen as an obstacle to growth. Japan’s progress was said to be due to the fact it was the East Asian nation least touched by Confucian influence.
And the reality? The Confucian ethic does have some growthpromoting merits, As a secular ideology developed during China’s feudal era more than 2,000 years ago, it places a useful emphasis on education, extended kinship relationships, obedience to superiors, civility, enlightened government. In this sense it was probably superior to many of the other and more religious ideologies developed by the rest of us on the Eurasian continent. But like all other reasoned ideologies, Confucianism also had its rationalistic faults – excessive emphasis on the principle of blood ties leading to nepotism and lack of trust towards non-kinship related people, excessive emphasis on scholarship and bureaucracy as superior activities, a preference for ‘intellectual’ economic activities such as trading, financing or speculation rather than construction or manufacturing.
Only in recent years, mainly under pressure from communist rivals, have the Sinitic culture societies of East Asia, including South Korea, begun to get rid of some of these faults, and expand the merits. The result is the progress we see today. But with Japan, Confucianism from the start was seen more as a useful organizational tool than as an all-wise ideology. Most of the faults could be avoided. Buddhism too was also amended and simplified to meet the more practical and emotional needs of a nonrationalistic society, in much the same way as the north Europeans amended the sophisticated but dogmatic Christianity of south Europe into a simpler and more pragmatic Protestantism.
Some have seen Japan’s progress as the result of massive Western isation. Better than any of the other non-European peoples, the Japanese were supposed to have had discovered how to borrow our secrets and make them work. But the so-called Western influence was never much more than a practical realization of the need to borrow the technologies and institutions that would allow Japan to catch up with the West, combined with an emotional fascination with the trinkets of Western culture. At heart the Japanese have remained the somewhat feudalistic, emotional, practically-oriented, highly groupist people they have always been.
This in turn explains many of the problems that seem to beset Japan today. To date the plusses in Japan’s approach have outweighed the minuses. But increasingly the minuses are coming to the fore. Faced with the practical problem of inventing a more compact TV or putting video technology into production the Japanese do well. But given the more abstract and theoretical problem of devising the information networks of tomorrow the Japanese are weak. But in tomorrow’s world the information network will be much more important than the compact TV set.
Similarly in social organization. When it comes to specific problems like supplying basic services or keeping the trains on time, the Japanese can be admirably practical and efficient. But the same commonsense practicality failed badly when it came to the more intellectual problem of realizing the folly of the recent land and share booms. Allegedly sophisticated bankers were rushing to lend money at 8 percent interest rates to land speculators whose maximum possible return on that land rarely could exceed 1 percent. Dividend yields on shares were infinitesimal. It will be years before the Japanese economy recovers from these excesses.
True, booms and busts occur elsewhere. But with Japanese investors there was an almost mythical belief that somehow Japan was different; that the booms would last forever and that it was quite safe for grossly inflated asset values to serve as the basis for loans that allowed even further inflation of values. A little more than a generation ago Japan believed its Emperor was godlike and its nation divine. The national capacity for delusion does not disappear overnight.
Worse was to follow. For the past three years the economy has faced the very real risk of a downward demand spiral: collapsing asset values -> falling demand -> deepened recession -> greater pressure on the yen -> further recession -> further demand fall -> further collapse of asset values -> …. In this situation drastic action is needed to fill the demand gap. But the planners find all manner of specious reason to do little.
A major problem for Japan’s economy is the over-expansion of the manufacturing sector, and the severe imbalance in productivity between the manufacturing and service sectors. As in the north European culture societies a century or so ago, the strong group and craft ethic inherited from the village/feudal past helps create mirades in factory production. And the strong group ethic encourages each firm to see itself as a ‘community with a shared destiny’ (urirnei-kyodotai) determined to make and sell the goods that will allow it to survive and prosper indefinitely. Impressive productivity follows naturally, especially in export manufacturing where competition is worldwide. But in the service sector group survival can easily be guaranteed by mini-conspiracies to keep out competition, maintain prices, and deceive unsophisticated customers. Low prestige also discourages the entrepreneurship needed to encourage new and better service industries.
In the West it is widely believed that closed Japanese markets cause Japan’s trade surpluses. But those markets can be surprisingly open at times, especially to those who take the trouble to get to know Japan. The main problem has long been something quite different, namely the aggressive determination of Japan’s many large manufacturing firms to penetrate foreign markets as they seek the volume sales needed for survival, and have taken advantage of Western free trade policies in the process.
An over-sized manufacturing sector is a further problem. My father, the economist Colin Clark, seems to be well known in Japan because some 50 years ago he said that in a mid-level economy the share of the manufacturing sector in GNP must come to exceed the share of agriculture. Japan seems to have forgotten the second part of his message, namely that in an advanced economy the service sector (including construction) becomes dominant and the share of manufacturing in GNP actually declines. Japan keeps manufacturing at close to 30 percent of GNP when it should be closer to 20 percent. Massive trade surpluses are the inevitable result.
For its own sake, not mention its competitors, Japan needs urgently to move more export production overseas and encourage more manufacturing for domestic rather than export markets. Expansion and improvement of the service sector would more than cope with any kyudoka (hollowing out of manufacturing) problems that would result. In the post-oil shock years Toyota set out to diversify into prefabricated houses for the Japanese market. But it soon decided it could do better by sticking to making and sellingcars. Toyota today should make more of its cars abroad, and
redirect more of its Japanese employees into making houses.
The groupist ethic also causes many of the problems we now. see in Japanese governance. Japan was never the rigidly-controlled, corporatist state of much Western belief. It was, and remains, a collection of groups each concerned with its own particular, localized interests. When national goals are clear – wartime expansionism or postwar economic recovery for example – and the national mood is in place, the various groups can combine well to meet those goals. But otherwise it is every group for itself. The nation-state is still immature.
In the bureaucracy this localism leads to the now muchrecognized problem of shoeki versus kokueki – putting the interests of one’s own ministry ahead of the national interest, with each ministry mainly seeking to expand turf, maintain budgets and guarantee employment for retiring employees. A major reason why Japan does not embark on the stimulatory public works program needed to expand domestic demand is. the quaint groupist rule that says any increased spending on badly needed transport links has to be matched by equally increased spending on unneeded fishing ports, rice farmers etc. Each ministry has to retain intact its traditional share of the public works budget.
And as with other groups in Japan, each ministry has its network of sub-groups, factions, facilities and in-house relationships to maintain. In ways more appropriate to a developing Third World country, petty factional squabbles and personal connections can easily dominate policy decisions. The maze of bureaucratic restrictions that does so much harm to the economy and Japan’s image is there mainly to preserve the power and raison d’etre of each ministry. Japan’s extraordinary inability to take action against the tobacco problem, for example, is due largely to the Ministry of Finance deciding that maintaining its cigarette sales empire and tax revenue is more important than the health of the nation.
Politicians too live in a multi-groupist world, with each group far more concerned about gaining the funds and influence needed for survival than devising national policies. Policy making is weak, with most decisions having to be made on the basis of consensus, mood or gaiatsu (foreign pressure), though once again those who get to know Japan often discover how easily personal connections can help to gain favorable decisions. Japan still lacks the concept crucial to all rationalistic forms of organization, namely that there has to be some source of ultimate authority – a dictator, a democratic majority, a bible, a manifesto, a Koran – which sets out well-defined principles that can act as arbiter of last resort.
Similarly with the many other groups that make up Japanese society. The ouside world has an image of Japanese police efficiency. Yet we now find that a group of semi-delinquent Buddhist cultists were able for more than five years to organize themselves into a private army to kidnap, lynch and intimidate fellow Japanese, manufacture drugs and weapons, infiltrate the Japanese military, and then set out to attack Japanese society with poison gas, without the police even seeming to realize what was going on under their very noses despite obvious clues being scattered along the way. One reason was the way religious groups like many other groups in Japan – gangsters, construction firms, loan sharks, trusts etc.- are left to their own devices once they gain a recognition. Another reason is the way regional police units only concern themselves with what happens in their own particular area. National authority is by inefficient and feudalistic fiat.
After the Kobe earthquake we discovered that Japan’s much touted disaster relief services had made almost no preparations for earthquake damage in an area riddled with faults. Central government help was minimal. like so many other groups in Japan, the main concern of these services lay in simply guaranteeing their continued existence by obeying set rules, adhering to the traditions, maintaining group discipline, protecting areas of control and concentrating only on specific problems within those areas. They were thoroughly prepared for the expected, and quite unable to cope with the unexpected.
The same rather stodgy conservatism explains many of Japan’s other weaknesses: the lack of town planning, the rigidity of the education system, the confusion over political reform, the weak control over delinquent youth, the growing distortions in the tax system, and the lack of interest in badly-needed social reforms. Japan seems to lack the basic quality of most rationalistically advanced peoples, namely pride in the way the very nature of the society can be changed by a simple act of intellectual will. In this respect the contrast between the fatalistic Japanese and bossy, legalistic, efficiency-oriented, over-planned Singapore Chinese is staggering.
This is not to be unduly pessimistic about Japan’s long-term economic or political future. Changes are being made, some quite substantial. Once a sense of crisis develops, the Japanese usually find a way to cope, even if they have to borrow the ideas of the foreigners to do so. The bureaucrats are now under extended pressure to improve performance. Similarly with the political parties, now that the electorate has shown it is quite happy to dump professional politicians in favor of complete amateurs if necessary.
Meanwhile the traditional work and loyalty ethics remain fairly intact, even if under continuing assault. The collectivist ethic and the shame-based morality still hold the society together, though Japan is now beginning to pay a price for its excessively lenient attitude to gangs and illegal foreign workers. The productivity of the many honest, hard-working ordinary Japanese still seems able to compensate for the enormous waste caused by bad planning, lavish entertainment, cronyist corruption and service sector inefficiency. Japan retains the very considerable industrial base developed when the advanced Western economies decided they could abandon factories and manufacturing to the free hand of the laissez faire market. When consumers finally realize the real income gains from cheaper imports and collapsing domestic prices a modest economic revival is possible.
But little of this will help overcome Japan’s weakness in developing the industries of the future. The values that encourage successful manufacturing – group cooperation, practical absorption in the task at hand etc. – work against the individualism and creativity needed for devising computer software or new information systems. The causes of this weakness – the weakness of higher education, the paternalistic bureaucracy and the groupist coaformism – are well known. But they will not disappear quickly. And if they do disappear, many of the other and better elements in the Japanese value-system package could also disappear.
Our north European culture societies have faced the same problem. We have lost the traditional, instinctively-based mores that helped so much in the past to hold our societies together and make them productive. We are casting around for alternatives. With the economy, we may be rescued by the growing importance of service and information industries. But our societies could be losing direction. Like Japan today, we ignored problems like petty crime, cheating and corruption in the belief that they would go ay or that the society could cure itself. The end result could well be our having to do what the older civilizations have done – rely more on severe laws, dogmatic ideologies, draconian punishments, fundamentalism and rigid autocracies to hold our societies together.
Some used to see Japan as a model for the West. They were wrong. Japan was were we came from. Singapore is where we are headed, if we are lucky.
Japan’s other major problem is in foreign policy. Almost by definition, it is incapable of developing the reasoned, principled policies needed to develop a sensible role in world affairs. The need for consensus in policy decisions invites both foreign distrust and foreign pressure. The groupist ethic also makes it almost impossible for Japanese conservatives to realize the need to apologize to the victims of past Japanese aggression, and for Japan of its own accord to do something about trade surpluses with the West With the Cold War over, Japan now runs the risk of being isolated bath in Asia and from the West.
If China moves to nationalism as the future ideological basis of national unity and uses the current APEC-BAEC confrontation as a way to create its own mainland Asian bloc, Japan’s isolation would worsen. That scenario, and the insistent rigliting demands both within and outside Japan that the nation play a more vigorous role in world affairs, could encourage a return to the emotional nationalism of the past.