The Headquarters Nation

The Headquarters Nation

Mini Teaser: Japan may soon dominate the world economy--but not as a result of a conspiracy.

by Author(s): Leon Hollerman

At the end of 1988, Japanese banks accounted for more than 50 percent of the total assets of all foreign banks in the United States, or 12 percent of the total assets of all U.S. banks.  By that time, Japan was also the leader of the Eurocurrency markets, holding 36 percent of the total assets of all foreign banks in London, the center of those markets.  At the same time, American banks held 13 percent of foreign bank assets in London.(12)  In Japan itself, U.S. banking assets have declined from 3 percent of the total market in 1981 to 1 percent in 1990.  In the United States, of course, the cost of capital would decline and the competitive power of American banks would rise if the U.S. savings rate were to increase.  This simply means that in this as in other ways Japan's emergence as a headquarters nation is partly attributable to American policies and practices.

In financing developing economies, Japan has clearly overshadowed the United States.  Whereas formerly the United States was a major source of capital to developing nations, now it is a financial black hole, draining savings from Japan, Europe, and elsewhere.  As the world's leading debtor, the United States crowds out the capital needs of poor countries, while Japan appears as their benefactor.  This image is enhanced by Japan's status as the world's leading provider of foreign aid.  Even within the United States, small start-up firms find Japanese venture capital available after they have been turned away from domestic sources.

Relatively minor shifts in the disposition of its portfolio give Japan a hegemonic power in global financial markets.  A case in point is Wall Street's "Black Monday" episode on October 19, 1987.  In the opinion of Treasury Secretary Nicholas Brady, the stock market crash on that day was caused by Japanese sales of U.S. Treasury securities:

People ask me, "What was it that blew it off on the 19th of October?  Was it the twin deficits [budget and trade]?  Was it the Rostenkowski [tax] legislation?  What was it?"....I don't think it was any of those things....The real trigger was that the Japanese came in for their own reasons and sold an enormous amount of government bonds, and drove the 30-year government bond rate up through 10 percent.  And when it got through 10 percent, that got a lot of people thinking, "Gee, that's four times the return you get on equity.  Here we go, inflation again."  That, to me, is what really started the 19th--a worry by the Japanese about U.S. currency.(13)

By contrast, the Tokyo stock market's "Black Tuesday" (October 20, 1987) was a pale reflection of the Wall Street crash because the Ministry of Finance (MOF) instructed Japan's leading stockbrokers and institutional investors to stage a buying campaign.

As a result of liberalization, some of the traditional means by which the MOF formerly controlled the financial community have been watered down; replacing some of the traditional controls, however, is a new milieu of common interests between the MOF and the highly concentrated financial community.

The continuing power of the MOF can also be seen in the Japanese response to the Latin American debt crisis, which began on August 20, 1982 when Mexico declared itself insolvent.  Rescheduling and write-offs for Mexico, as well as for Argentina and Brazil, became an ordeal for international bankers.  In this case, the Japanese private sector was reluctant to embrace the national interest.  But the ability of the MOF to impose "consensus" on the Japanese banking system was revealed in the near unanimity of the response to its request that all banks join in the bail-out process.  As of 1988, the total exposure of U.S. banks in Latin America was $63.3 billion; that of Japan was $34.6 billion.  In the case of Mexico alone, U.S. bank exposure was $17.3 billion; that of Japan, $11.4 billion.

Japan is not, as Karl van Wolferen and others have implied, a country rendered incapable of pursuing a global strategy by a domestic political deadlock.  On the contrary, Japan is an oligopolistic society, conditioned by traditions of centralized feudalism, bureaucracy and imperialism, in which state and business collaborate to promote the comprehensive security of their country.  By orchestrating and manipulating the economic complementarities of other countries with each other and with itself, Japan seeks to emerge as a headquarters nation in the world economy, while the United States acts as a puzzled bystander.  Preoccupied with "the most important bilateral relationship in the world," the United States tends to be oblivious to the fact that if things continue along their present course, its bilateral relationship with Japan will soon be only one element of a larger, Japan-centered framework.  In light of this development, the implications of Japan's global strategy for America are the chief issues with which the United States should be concerned.

Leon Hollerman is a visiting scholar at the Hoover Institution on War, Revolution, and Peace.

Footnotes

1) Both the name and the mission of the Japan Export Trade Promotion Agency (JETRO) have been changed.  In 1961, its acronym was redefined as the Japan External Trade Organization, and its mission was changed to "import promotion."  The new policy was accentuated by Japan's "self-restraint" in the adoption of export quotas.  These quotas were consistent with the policies of expatriating production of items under quota.

2) Martin Fransman, The Market and Beyond, (New York: Cambridge University Press, 1990), as reported in the Financial Times, June 8, 1990.

3) Keidanren represents big business rather than small or medium-size enterprises.  Its membership includes over 100 organizations representing major industries (such as manufacturing, banking, insurance), regional interests, and approximately 800 of the major individual corporations of Japan.  Keidanren performs research on domestic and international issues as a basis for recommendations to government agencies, often takes initiatives and adopts positions in foreign as well as domestic affairs, and acts as a mediator in disputes among major interest groups.  It has a close relationship with the dominant Liberal Democratic Party, to which it makes substantial financial contributions, and, within the government, collaborates most closely with the MITI.  Its junior rival is the Japan Committee for Economic Development, whose members are individuals rather than organizations or firms.

4) Nick Garnett, in the Financial Times, July 29, 1987.

5) Wall Street Journal, July 10, 1990.

6) Journal of Commerce, June 6, 1990.

7) In 1989, the United States supplied 36 percent of Japan's agricultural imports.

8) New York Times, May 10, 1990.

9) J.P. Morgan, World Financial Markets, November 10, 1989.

10) Bank for International Settlements, 60th Annual Report, June 11, 1990.

11) International banking in the United States is likewise concentrated in the hands of a small number of American banks.  Four out of the 10,000 U.S. banking organizations account for roughly half of U.S. international assets; 10 of them account for a little over 80 percent.  Testimony of Alan Greenspan before the Financial Institutions Supervision, Regulation, and Insurance Subcommittee of the House Committee on Banking, Finance and Urban Affairs, May 14, 1990.

12) Nobuyuki Ueda, "The Considerable Monetary Strength of Japan," Economic Review, March 1990.

13) Los Angeles Times, May 7, 1989.

Essay Types: Essay