Wrong on Japan

Wrong on Japan

Mini Teaser: Japan is the most consistently misinterpreted major country in the world.

by Author(s): Karel van Wolferen

C. Fred Bergsten and Marcus Noland, Reconcilable Differences? (Washington: The Institute for International Economics, 1993)

Daniel Burstein, Turning the Tables: A Machiavellian Strategy for Dealing With Japan (New York: Simon and Schuster, 1993)

Kent Calder, Strategic Capitalism (Princeton: Princeton University Press, 1993).

Japan is without a doubt the most thoroughly, most widely, and most consistently misinterpreted major country in the world. This has just been confirmed for the umpteenth time in the ubiquitous media commentary about the Japanese public choosing a new political system that will cater to their interests as "consumers." Americans have long been told that in 1945 Japan was remade in the American image. Since the late 1950s they have read serious articles about a changing Japan, one beginning to resemble the United States even more closely. Thirty years ago Japan's youth no longer accepted the old ways and was remaking the country once again. Twenty years ago the consumers and grassroot activists were creating a more responsive politics. Seven years ago, the Japanese economy was going to be destroyed by its "death yen." Two years ago respected economic publications around the world were announcing the end to Japan's great economic performance, while Tokyo was busy building skyscrapers. Scandals have punctuated Japanese political life throughout the post-war period, each time prompting rampant and ignorant speculation about a Japan becoming more open, more democratic, and a more "responsible" member of the international community.

This misinterpretation is dangerous, for Japan is a very powerful country. The Greater East Asia Co-Prosperity Sphere, which Tokyo failed to establish by military conquest, is now becoming a reality as significant economic decisions for the countries in Southeast Asia are made by Japanese economic institutions. The United States and Japan together account for some 40 percent of the world's GNP, and how their troubled relationship eventually turns out will probably help determine what life is going to be like in the next century. Since continued blindness is likely to nullify future attempts at preventing diplomatic disaster, we need to ask why Westerners, especially Americans, cannot conceptually come to grips with Japan.

Ideology masquerading as science continues to be a major conceptual hindrance. Mainstream economists, and advocates of the Reagan/Thatcher world view, have taken Adam Smith one step further by postulating that liberty in economic pursuits is a necessary condition for economic success. This free-market ideology has recently been reinforced by two contradictory impulses: 1) It appears to have been vindicated by the demise of the command economies of Eastern Europe. 2) It is becoming more dogmatic and strident as secret fears that it may be false arouse the psychological urge to wall it off against evidence.

These fears are prompted by Japan. Simplified, the implied argument of the defenders of the faith goes: The Japanese must have organized their economic system according to free-market principles because they have been successful. If they haven't, this is scary, giving us ever more reason to insist that they have.

The staunchest defenders of this faith can be found filling the editorial pages of the Wall Street Journal. Let me try to place the Journal's considerable contribution to the misinterpretation of Japan in perspective with a story of an attempt to do something about it. On the 11th of March this year, the Journal ran a long article by Karl Zinsmeister, whose firsthand experience of Japanese economic reality can only have been severely limited. It presented the familiar notion that Japanese government bureaucrats, rather than having helped Japan's postwar economic development, actually hindered it. His points perfectly reflected the Journal's position that if MITI officials and other bureaucrats had not meddled so much, Japan's businesses would be doing a lot better than they are now.

One of Tokyo's best informed foreign financial journalists, Eamonn Fingleton, decided to write a letter to the editor demonstrating that virtually every sentence in the article was a "misconception or an outright misstatement of facts." Fingleton absolved the author from blame, since he could "hardly be held accountable for error which he has absorbed in good faith from reading the Journal." A draft of the letter circulated among academics and journalists who know Japan--but hold diverse and often conflicting opinions--with the result that thirty-three wanted to add their signature to it. Among twenty-four academics who had the opportunity to join, only two declined. After about a month of negotiations, the Journal offered Fingleton two options: they would print the entire letter with only two signatures, or they would run all the signatures, but delete all but two paragraphs of the letter, thereby eliminating the substance of the critique.

An expanded version of Zinsmeister's article, entitled "MITI Mouse: Japan's Industrial Policy Doesn't Work," was published in the summer 1993 issue of the Heritage Foundation's Policy Review, whose editor asked some experts on Japan, including myself, to contribute 300 words to get a debate going. I had visions of the editor of Nature sending letters to geographers, navigators, and astrophysicists soliciting their comments on the ongoing debate about whether the earth was round or flat.

In a good-humored and well-written response to the "Gang of 33" Zinsmeister reveals another great hindrance to getting things straight: The appraisal of the Japanese political economy has become hopelessly entangled in the altogether different discussion of whether or not the United States should have an industrial policy resembling Japan's. He refers to the signatories as "the officer corps of the industrial policy army," implies they are partisans for MITI, and appears to assume that they all believe that the Japanese bureaucratic way is a just way to conduct society. The free-market purists deceive themselves. They are not defending their way of life properly, as they think they are, by rejecting the notion that Japan could have built a powerful economy through making the market subservient to expansionary goals. Zinsmeister's response is shot through with assumptions he never examines. Every sentence, every clause, made me think that this man does not grasp that he is writing about an entirely different order of things than the one he knows from personal experience--that MITI, the Ministry of Finance, Japanese democracy, the Japanese "private sector" are entirely different species of institutions than their labels would suggest to Americans.

As long as the Wall Street Journal and the Economist (the second most steadfast free-market ideological beacon) set the tone of commentary on Japan in serious English language publications, we may not soon expect widespread enlightenment about its political economy. But in the meantime, businessmen and government officials who must deal with Japanese reality require something more than the irrelevant models that mainstream economists teach their students. This creates room for a new type of businessman: the entrepreneurial policy expert. "Japan experts" rent themselves out as consultants and advisors, and have produced scores of titles on both sides of the Pacific. Nothing comparable to this kind of literature exists on any other country in the world.

The latest prominent example is Daniel Burstein. We need to know the motives of those who inform us on complex matters we cannot witness directly ourselves. What to think of someone who in 1978, after a trip to Cambodia, could claim that the stories about atrocities and forced labor under the Khmer Rouge were fabrications: the product of a "massive propaganda" effort by the CIA? This was three years after the forced evacuation of Phnom Penh, when all but a handful of apologists for Pol Pot had been silenced by the tales of hordes of refugees. Was Burstein blind when he was a guest of the Khmer Rouge? Did he care?

The entrepreneurial Burstein made the lucrative discovery in the mid-1980s that an important force in the global economy--the Japanese financial system--had been all but ignored in publications for a general audience, and he wrote Yen!. This book, without ever explaining what made Japanese financing the force it is, at least pointed out that the phenomenon existed. But Burstein's political and financial interests have changed. Since his editorship of the Chicago-based communist newspaper The Call, and since writing Yen!, he has become the public relations advisor and ghost writer of Peter G. Peterson, head of the Blackstone Group, whose biggest funder is the Japanese firm Nikko Securities. Burstein's new patrons are revealed in the jarring tone of Turning the Tables: A Machiavellian Strategy for Dealing with Japan, whose message, if it has one at all, is tantamount to: if you are being raped anyhow, you may as well lie back and enjoy it.

Burstein knows that the earth is not flat. He has talked with people like Kenneth Courtis of Deutsche Bank, who have set him straight on the "collapse" of the Japanese economy. But as I tried to get through Turning the Tables (not an easy task because it is not so much a book as a disjointed paste job of half digested bits of information), I never glimpsed what shape Japan has taken in Burstein's mind. At no point did I have the sense that he had sat down for a moment and made everything he knew about it come together to form a coherent picture.

If he has an inkling of the political reality underlying Japanese economic developments, he is smothering it under prose aimed at pleasing his market. Much of it is reworked propaganda from Japan's professional foreigner-handlers. He seems to grasp that the "bubble economy" of the second half of the 1980s was managed for the purpose of supplying large Japanese companies with virtually costless capital. But he does not seem to understand how this crucial given relates to the subjects he touches on. He doesn't seem to understand the role of the Ministry of Finance. He does not even know why foreign cars imported into Japan generally have the steering wheel on the wrong side (not because of lazy manufacturers, but because there has hardly been a market for those with the wheel on the right side--the Germans and Swedes have long debated this question, and decided it was to their advantage to keep the wheel on the "wrong" side). He tells American negotiators to concentrate on things that are simply not negotiable in the Japanese context. And he thinks that it is possible for United States companies to integrate into keiretsu (Japan's gigantic corporate groupings) as partners and suppliers.

When Burstein comes to the mandatory policy suggestions, his writing turns downright silly. Reminiscent of those who have advocated the establishment of a world government for preventing all future wars, Burstein calls for a Trans-Pacific Community, "launched at the initiative of the U.S. president and the Japanese prime minister, chartered by both the U.S. Congress and the Japanese Diet, presided over by a binary executive body, with shared policy-making and enforcement institutions." One wonders how this executive body is going to deal with Japan's Ministry of Finance. Japan's cabinet and parliament have never been able to manage that.

It is worth dwelling on this. The book is reviewed in Foreign Affairs as the most important in five years on the Japan-United States relationship. Blackstone's Peterson may be Burstein's sponsor, but he is also chairman of the Council on Foreign Relations, and if he can describe the book as one "that will forever change the nature of the Japan debate" with a straight face, and get away with it, it is time to wonder if there are any standards left anywhere.

Burstein's assertions cater to a constituency that wants to hear them: things are changing in ways that will make it easier for the United States to deal with Japan. The initiatives for change are coming from Japan's private sector. Let's tie up with these dynamos. They also fit in with what Robert Reich at the Labor Department keeps repeating: Who is us? Let them come! They will bring jobs!

Proof of change initiated by Japan's private sector is found in the proposals that Akio Morita of Sony makes for changing Japanese business practices. Burstein has ghost-written some of Morita's articles in English, including the one published by the Atlantic Monthly earlier this year. It should be understood that this cosmopolitan and, in the United States, very popular Japanese businessman is nowhere near the moving force in Japanese industry that he has been made out to be in many publications. There are, no doubt, certain advantages to having Japanese investors in the United States. But one needs to know that they are not capitalists of the kind American are used to, and that Morita's recommendations have been received with a fair amount of ridicule in Japan. Japanese investors are much less interested in profits than in economic territory. They rarely come alone, as they are always connected to the colossal system of Japanese economic institutions, the power and the dynamics of which America's policy makers only dimly perceive, and about which they are systematically misled by the likes of Burstein and Peterson.

The quintessential entrepreneur in the eerie market of Washington policy expertise is C. Fred Bergsten. His panacea has been currency realignment. For many years Bergsten has been the most visible advocate for devaluing the dollar as a solution to all of America's problems with Japan. Considering some twenty years of overwhelming evidence that this has not only not been a solution, but has been very counterproductive, it is a mystery that he is still taken seriously. Because the entrepreneurial policy expert must, first of all, keep an eye on his market, and the new idea market under Clinton seems to go for limited government activism in international trade, Bergsten has now guardedly come out as the co-author of a densely written book saying that there is more to problems with Japan than the free-market (with re-aligned currencies) can solve. Sorry Fred, it's too late. Your statistics and charts don't tell much of a new story, and they don't begin to fathom the depth of the bilateral problems.

The entrepreneurial policy "experts" pursue a business, and one is prepared for the fact that their souls are not absorbed by the search for truth. That is supposed to be the pursuit of the academic community. But alas, the widespread lament that university scholarship is about hierarchical position and funding before it is about truth is particularly pertinent where it concerns studies of the Japanese political and economic systems.

It is therefore sad to see a Japan specialist, Kent Calder, not only failing to deliver on earlier promise, but also, evidently, pursuing academic politics through shoddy scholarship. This young tenured professor at Princeton did not exactly write: "I am going to set you up, Chalmers Johnson, in such a way that I can knock you down and take your place as the leading theorist on the Japanese political economy." But if he had, this would hardly have made his intention clearer. Calder leaves no doubt in the early pages of Strategic Capitalism that the model of the Capitalist Developmental State constructed by Chalmers Johnson deserves demolishing and that his own frontal attack will do the job.

One sits down expectantly, for an exhilarating intellectual experience. Johnson, after all, has been just about the only original thinker of his generation in a field populated by intellectual light-weights. And his book on MITI, demonstrating the pre-war/ wartime/postwar continuity of virtually unchanged bureaucratic power in Japan, has more than any other work confronted Japanologists and mainstream economists with the need to reconsider their rather complacent assumptions concerning the forces propelling the "Japanese miracle."

But Calder does not deliver. He relies on the distinction between "strategists" (Johnson's MITI officials) and "regulators," without clearly spelling out what sets of activities distinguish them. Again and again, as he promises yet another piece of evidence of "strategic" weakness, and makes you think now it comes, you get something that could easily be explained in another way, or seems hardly relevant. As he was enumerating bureaucratic setbacks, and internal rivalries, pointing out ad infinitum ad nauseam that political, or "conservative," or whatever other interests won out rather than "strategic" interests, I kept thinking: when is he going to tell me something new, something I did not know, and for that matter, something that also Chalmers Johnson has not already thought of?

The activity Calder focuses on to prove his point is industrial credit allocation. He shows that this has mainly been determined by a conservative group of private sector financiers and their government regulators, rather than by government industrial strategists. He talks constantly of industrial "transformation," and posits a conservative financial bureaucracy as inherently wary of such transformation. All this sounds plausible enough to people who are unaware of what goes on in Japan. But for those who know as much about the Japanese political economy as I had thought Calder knew, it is unconvincing on three counts.

The easiest to deal with is the assumption that Japan's industrial "strategy" entails industrial "transformation." Why should it? Japanese economic interests have been engaged, first and foremost, in industrial expansion. Since 1945 this has been the unquestioned national goal, to which practically all other major endeavors were made subservient. Calder's picture of a conservative bureaucracy, with a "strong bias toward status-quo policy patterns," is correct. Like all bureaucrats, those of Japan prefer things to stay the way they are. But the status quo in Japan is unlimited expansion of productive capacity. This purpose is meaningful to both the government and the business bureaucracies. As one of Japan's most astute observers of the Ministry of Finance, Akio Mikuni puts it: "these administrators never again want to be short of productive capacity as they were in 1945. They have all these postwar years been running what is essentially a war economy."

A bit more difficult to fathom is the fact that Japan's Ministry of Finance officials are not "regulators" in the accepted meaning of the term. A regulator is someone implementing regulations that are transparent and subject to external review. Regulators are accountable to higher bodies in a political economy. Japan's Ministry of Finance makes the regulations it implements, need not be explicit about them, is not accountable to a higher body, and can change its interpretation of the regulations at its own discretion to fit its current aims--its "strategy," if you will.

The much less "conservative," because innovative, Ministry of International Trade and Industry once harnessed Japan's companies to the main national goal of unlimited industrial expansion, with a multitude of formal regulations and informal directives administered at its discretion. During the period covered by Johnson's famous book, the two government agencies worked mostly in tandem. But as Johnson aptly pointed out, MITI was so successful that it could be compared to a poverty agency that actually succeeded in wiping out poverty, making itself almost superfluous. And, certainly, plenty of conflicting intermediate motives appeared in the course of administering their bailiwicks, which caused the ministries to quarrel occasionally, but that does not invalidate the developmental theory Calder is trying to demolish.

To score points against Johnson's "Developmental State Model," Calder extends the arguments used in the MITI book, and presents a very naive and simplified picture of the theory. Direct government funding, for instance, was never a decisive factor, as opposed to unambiguous indications which sector areas had been earmarked for development (which amounts to indirect allocation of capital). Calder is so intent on disproving Johnson that repeatedly he undermines his credibility by overplaying his hand. And the supposedly scholarly treatment of his subject is at crucial junctures fatally impoverished by such assurances as: "more than many think," "another way of looking at it," "less than is generally thought."

Calder misses subtleties concerning "regulatory" and "developmental" activity. For the word "regulatory" to retain any meaning at all, it must imply a political order in which disinterested regulatory officials are charged with safeguarding the integrity of economic activity. This excludes all activity aimed at creating specific economic outcomes. But developmental officials are obsessed with outcomes, while they know that one needs to guard against things going out of kilter, which has been a constant Japanese problem as a result of forced industrial development. Of course, the Ministry of Finance wants to "regulate" for order. This is essential to the success of its "developmental" policies.
Calder's most important message for the larger American audience is that Japan's baffling economic success is, after all, the work of the private sector. We can breathe more easily again. The bureaucracy had much less to do with it than people were beginning to think recently. This is a godsend for those who share the illusions of the Wall Street Journal and the Economist. And it would all be wonderful were it not for the fact that in Japan the private sector does not exist--not a private sector as we know it. When Calder writes on the first page of Chapter One about "A richly organized private society as counterpoint to the state...," and twenty-four pages later "institutionally speaking, the role of the private sector in the Japanese economy was thus prior to that of the state," he is speaking the language of Rational Choice theorists, but using a label that carries with it a host of connotations that anyone more than superficially acquainted with the Japanese political economy knows to be invalid.

The Industrial Bank of Japan, which figures prominently in Calder's book, cannot by any stretch of the imagination be considered a private sector institution. (It was created as a government bank in 1902 and "privatized" in 1952). Neither can the large keiretsu banks or the large corporations. They are not like banks and companies in the United States, in their operating methods or incentive structure. Profit-making is not the ultimate consideration underlying their transactions and relationships. They are bureaucratic entities ensconced in an informal, protective, power structure, which has eliminated the risk of large bankruptcies. The combination of two institutional innovations, the keiretsu systems, and the industrial associations in every sector, has effectively erased the division between private and governmental sectors.

Using Calder's model one could not begin to explain what happened during the "bubble economy" and its deflation. Crucial for understanding Japan's postwar industrial success is to grasp the ways in which the administrators have been able to create money out of nothing: first with "overloan," in the 1950s and 1960s, second during the "bubble economy" years. Neither would have been possible with clearly delineated and differentiated private and public sectors. The officials at the Ministry of Finance have been eminently "strategic," as they presided over a deflation these past three years, which in a country with a genuine private sector would have wiped out most of the banks and many large companies. Calder's main argument, supporting his entire book, collapses the moment one understands that Japanese government bureaucrats abdicated day-to-day regulatory control of industrial-credit decisions to what are essentially their colleagues in the very well-organized business bureaucracy.

It will be interesting to see how far this book will be allowed to set the terms of future discussion, as it comes in very handy for an army of wishful thinkers. It appears tailor-made for the approbation of Japanese administrators, as it confirms the latest propaganda line out of Tokyo: "There was a time that bureaucrats were important, but now we do everything with the private sector." This also means that Princeton's Japan study programs will be favored by those who administer the plenty of Japanese funding, which is an important consideration when students decide where to go. As long as the field continues to attract a lot of mediocre students, Calder may well rule the roost of young scholars who make sure to steer away from the controversy that is the inevitable byproduct of attempts to make Americans come to terms conceptually with Japan.

It is not all hopeless in academia. Three good recent books have begun to deal with some of the fundamental errors that prevail, in popular assessments of where Japan is heading, where it is, and has been, in its economic relations with the United States. Mark Mason's American Multinationals in Japan demonstrates how from 1899 through 1980 (where his study ends) a very systematic effort has blocked American investments in Japan, and punctures the common popular theory that foreign industries haven't tried hard enough, or that it has been a matter of competitiveness. Dennis Encarnations's Rivals Beyond Trade: America Versus Japan in Global Competition gives a superior account of how Japan's long-term investment strategy is the ultimate cause of the persistent trade imbalance. Michael Gerlach's Alliance Capitalism is an exhaustive treatment of the keiretsu system, and invaluable as a very detailed analysis and taxonomy of the variety of relations of Japanese business organizations. Although meant for an academic audience, all foreigners involved with Japanese business will benefit from this antidote to some popular assumptions--for instance, that the keiretsu system is about to break down.

Yet, while these are valuable books, by concentrating on the "private sector," without clearly qualifying what this means in the Japanese context, they leave very much unsaid. I regret that none of these three academic authors has had the daring to use the high vantage point of his own findings as a platform for the conceptual leap that must be made in order to offer perspectives on the fundamental question in the Japanese political economy--the relationship of the quasi private and public sectors. Encarnation, who provides an excellent overview of the dominant theories, comes closest to dealing with it by carefully differentiating Japanese "oligopolists" from American multinationals. But Mason emphasizes that it has been the private sector that pressured the bureaucrats to create barriers blocking foreign access to the Japanese market, and leaves it at that. Gerlach overlooks important political motives that help determine the social organization of Japanese business he enumerates so well, as well as the fact that this social context has a political component of coercion.

As young academics without tenure they may not have had much of a choice. Much "social science" as currently practiced literally forces numerous authors of PhD dissertations to start from erroneous premises--such as the existence of a Japanese private sector, comparable to those in the West--if they want to avoid giving the impression of having been "unscientific."

A satisfying, and generally accepted, overall theoretical scheme in which to fit Japan will probably not emerge until economic theory is re-integrated with political philosophy. Studies like those of Encarnation, Mason, and Gerlach, should be placed in a much larger context that takes into full consideration the crucial questions of accountability, the Japanese legal order, and the interplay of formal and informal power. Large Japanese companies are important social control institutions, besides being producers of goods and services. Collectively they have neutralized the Japanese middle class as a political force. What passes for public opinion is manufactured by the five large daily newspapers, which form a monolithic entity effectively allied with the economic and social control bureaucrats. In its totality this is a magnificent edifice. The easiest way to begin grasping its nature is to imagine a communist system that actually works, one based not on secret police coercion, but on generations of conditioning by socially sanctioned, pervasive intimidation; one kept in place by an effective ideology of Japanese identity, which postulates an innate social harmony among the Japanese people, supporting bureaucratic authoritarianism.

If one can stretch the meaning of capitalism to accommodate Japanese reality, one could, with equal plausibility, stretch the meaning of communism to do the same. If this sounds like a smear on Japanese society, that is not my purpose. It is one way of beginning to grasp how Japanese power is organized, and how--largely through informal methods--civil society is suppressed. Over the years I have had Hungarians, Poles, and Czechs living in Japan tell me that the politicization of Japanese life was much more thorough than what they had been used to at home.

It is difficult to imagine Americans accepting that their "most important ally in the Pacific," the partner in the "most important bilateral relationship in the world, bar none," has actually been, all this time, the world's most successful communist state. But if there is to be gradual awakening concerning the nature of the Japanese political economy, one can only hope for more scholarship to develop outside the social science theocracies of the American universities, unfettered by the very inhibiting peer review system, and unhindered by funds guaranteeing orthodoxy.

Essay Types: Book Review