Japan’s “lost decade”

Here are some excerpts from the 2008 book
In the Jaws of the Dragon:
America’s Fate in the Coming Era of Chinese Dominance

by Eamonn Fingleton.
The emphasis is added.

Chapter 2
“Don’t Worry, Be Happy”

Section 2.9
Sisyphus Revisited:
Japan’s “Lost Decade”

Optimists about America’s China strategy like to recall
Washington’s Japanophobia phase of the late 1980s.
They argue that
just as fears then about “juggernaut Japan” were quickly dispelled,
so too will fears today about the “unstoppable dragon.”
This is how the Hoover Institution economist Russell Roberts has put it:
“The next time you find yourself losing sleep over China,
remember that you were worried about Japan and … everything turned out OK.”

In an editorial page article in the Wall Street Journal in 2007,
he explained
“Remember when Japan was a big threat to the American economy?
You have to go back to the late 1980s.
Back then, every politician in the mood for pandering to economic ignorance
could scare a bunch of folks with worries about
how the Japanese were stealing our jobs.
How our trade deficit with Japan was going to destroy the American economy…
But then the Japanese economy hiccupped
and played Rip Van Winkle for a decade,
while America kept growing.”

The Columbia-based economist Jagdish Bhagwati
has put it even more pointedly.
Commentating in 2007 on the rise of the Chinese economy,
he argued that American concerns about the Japanese economy in the 1980s
“appear astonishing now.”
Writing in the New York Times, he added:
“For well over a decade Japan has been deeply mired in macroeconomic failure,
its feared dominance has been dissolved into dreary ordinariness.”

Comments like these sound like a convincing case for complacency.
In reality, however, although a lot of people want you to believe otherwise,
the idea that
a suddenly “resurgent” United States turned the tables on Japan in the 1990s
is nonsense.

In promoting grossly exaggerated accounts of Japanese economic difficulties,
American observers lost sight of the one thing that mattered: trade.
This, of course,
had long been the key issue in U.S.-Japanese economic competition,
and it was after all the reason why Japanese economic policies
had become an issue in Washington in the first place.
Japan’s trade surpluses had soared in the 1980s
while the U.S. incurred worsening deficits.
By the late 1980s Americans had correctly come to see that
aggressively expansionist Japanese exporters
were eating corporate America’s lunch.
Add in the fact that
the Japanese market was perceived—again correctly—to be closed,
at least as far as key American exports were concerned,
and it was understandable that by 1989 an “all-conquering” Japan
was being widely blamed for America’s deindustrialization.

Before considering the stunning truth about
Japan’s trade performance in the 1990s,
I ought to declare an interest.
I have been writing about the Japanese economy since the late 1980s,
when I was alone among Tokyo-based financial observers
in publicly predicting Japan’s financial implosion
(which I did in three articles in Euromoney magazine).
I went on in 1995 to publish Blindside,
a book that argued that Japan would come out of the crash stronger than ever.
The book’s subtitle was
Why Japan Is Still on Track to Overtake the U.S. by the Year 2000.
That was wrong but not in the way you might think.
My error was not in misreading Japan
but rather in misreading the United States—
or, more precisely, Washington.
Aware that
America’s continuing vast trade deficits
bespoke disastrous manufacturing competitiveness problems,

I was convinced that
the dollar would have to undergo another massive devaluation,
similar to the 50 percent devaluation instigated by
the Reagan [40] administration in 1985–87.
Had such a devaluation been implemented,
American industry would have been positioned to make a real comeback—
and, with American economic output
suddenly valued at a much lower exchange rate,
Japan would have, at least temporarily, drawn ahead.
Thus the subtitle of the book would have been fulfilled!

The subtitle aside,
virtually every other aspect of the Blindside analysis
has been unquestionably vindicated.
Thus, far from going into “reverse” (to use Jagdish Bhagwati’s term),
Japan’s export economy continued triumphantly to surge ahead in the 1990s.
It did so, moreover,
even though exporters elsewhere in East Asia were hardly standing still.
Quite the contrary:
the South Korean, the Taiwanese, the Singaporeans, and of course the Chinese
were aggressively increasing their share of world markets
(which they did at the expense of the United States and Europe, not Japan).

Thanks to a strong performance in boosting both quality and productivity,
Japan stayed well ahead of the competition,
boosting its exports by 73 percent in dollar terms in the decade.
Thus by 1999
the Japanese current account surplus had hit $107G,
representing a gain of nearly 90 percent over 1989.
And as of 2006 it had reached $174G,
or fully three times the 1989 figure
that Washington had considered so unacceptably high.

As for the United States, its trade went
from the merely disastrous to the totally catastrophic.
Although its exports seemed to rise strongly,
this was only because
it had resorted more and more to assembly and distribution activities
that depended on ever greater imports of components
and indeed entire products.
By 2006, fueled by soaring imports,
the American current account deficit had hit $862G,
a world record for any nation and more than eight times the deficit in 1989!

Why has Japan’s trade performance
been so remarkably different from America’s?
One key issue has been investment:
all through the 1990s and into the new century,
Japanese industry quietly invested ever more heavily in
productivity-enhancing new manufacturing technologies.
One result has been that, as recorded by the Central Intelligence Agency,
Japan, with just 2 percent of the world’s population,
was at last count home to fully 57 percent of all the world’s industrial robots.

As I recounted as one of my main themes in 1995,
Japan’s performance was also powered by a policy of establishing
monopolistic positions—“chokepoints” in the jargon—
in more and more advance manufacturing fields,
particularly in producers’ goods such as
materials, components, and machine tools.

Perhaps Japan’s single most surprising—and significant—success
has been aerospace.
After decades of quietly capturing key chokepoints in
avionics, carbon fiber, titanium, and advanced ceramics,
Japan has now passed a fast-declining United States in all but name
to become the world’s premier aerospace power.
Not only Boeing and Airbus,
but also jet-engine makers like Pratt & Whitney, Rolls-Royce, and GE
depend on Japanese suppliers
for their most advanced components and materials.

One indicator is that Japanese contractors are building
35 percent of the superadvanced Boeing 787,
up from a mere 23 percent share of the Boeing 777.
These are Boeing’s own published figures,
and they probably greatly understate the true Japanese contribution
(because Boeing counts only what it buys direct from Japan,
thus leaving out of account Japanese-made inputs supplied to
Boeing’s American contractors).
Although Beoeing maintains that
broadly as much of the new plane will be made in the United States as in Japan,
in the views of David J. Pritchard,
coauthor of a major study on the hollowing-out of Being,
the 787 will be more a Japanese plane than an American one.
What is officially known is that
the only part of the plane Boeing will fabricate itself
is the vertical tail fin.
For the rest it will snap together large sections
made by contractors in the United States, Japan, and elsewhere.
[As of late 2010, the 787 has been delayed at least two years.
I don’t know what this means to Fingleton’s assertions.]

Let’s now consider some of those 1990s reports about
how the United States had supposedly “turned the tables” on Japan.

Take, for instance, the television set industry.
It seem hard to credit now but in the early 1990s it was widely reported that
a resurgent America had made a brilliant comeback in the industry.
Supposedly the Japanese had been outmaneuvered by
such American corporations as Zenith and General Instrument
in developing high-definition television (HDTV).
Although the Japanese had spent two decades developing
a so-called analog version of HDTV,
the Americans had come from nowhere with a much more advanced digital version.
The Nikkei Weekly,
the main Tokyo-based English-language business newspaper,
hailed the “rebirth” of the American consumer electronics industry.
The Economist talked of a “startling triumph.”
Newsday headlined its report,
“Build ’Em Here: U.S. Has High Definition Lead.”
Even the New York Times joined in the insanity,
suggesting that Japan’s technology development system had proved a “liability.”
Not to be outdone,
Business Week talked of a Japanese “fiasco.”
In reality Zenith and General Instrument were never heard from again.
All they had done was
help American regulators define a new broadcast standard.
Contrary to all the press hype,
this did not give them any inside track
in manufacturing products to the new standard.
The advantage remained with the Japanese
who had merely to make minor changes
to their home version of high-definition television
to serve the American market.
Long skilled in fashioning their products
to meet countless standards around the world,
they quickly made the necessary adjustments.
The result today is that they continue utterly to dominate
not only the American HDTV market
but every other HDTV market around the world.
Even non-Japanese makers like Philips and Samsung [Korean] depend on Japan
for advanced components and materials.
Thus although a few American patent holders
receive a trickle of royalties from Japanese HDTV makers,
most of the most valuable manufacturing jobs have been captured by Japan.

Another widely publicized “turning the tables” story was supposedly in semiconductors.
True enough, such American corporations as Intel and AMD
consistently increased the speed of their microprocessors during the decade.
But overlooked by American commentators,
the Japanese were hardly resting on their laurels.
Far from it.
The Japanese continued to dominate
most other advanced areas of the semiconductor industry.
In any case, the Americans depended crucially on the Japanese
for highly sophisticated inputs that the United States no longer made.
Just the most obvious of the Japanese chokepoints is
semiconductor-grade silicon,
which has to be refined to ever more fantastically pure levels
for each new generation of chip.
For more than fifteen years
Japanese corporations such as Shin-Etsu and SUMCO
have completely monopolized the purest semiconductor grades.

Besides, the idea—widely publicized in the United States in the 1990s—
that the Americans had recovered the lead in microprocessor speed
was nonsense.
The Americans led merely in personal computer microprocessors,
whereas the Japanese led in games-machine microprocessors.
These latter are far more advanced—and more difficult to make.
(While Japan’s leadership in the games category
may seem underwhelming to the non-technical,
the skills the Japanese have acquired position them to dominate the market
in all sorts of superfast chips used in missiles and other defense systems.)

A host of other examples could be cited.
Take the car industry.
In 1994 two Pulitzer Prize-winning business journalists,
Paul Ingrassia and Joseph White, published
Comeback: The Fall and Rise of the American Automobile Industry.
Describing Japanese carmakers as in “retreat,”
they presented Chrysler as
“the envy of the auto industry around the world.”
All in all the Americans were now “formidable global competitors.”

Such wishful thinking was soon to be dispelled and by 2007,
Japan, with half of America’s population,
had passed the United States in total car production.
Toyota boosted its sales revenues by 61 percent in the 1990s,
whereas General Motors managed an increase of only 34 percent.
Toyota continued to charge ahead in the new century,
with the result that by 2007 it had passed General Motors
to become the world’s largest automaker.
Back in Japan’s “juggernaut” days of 1989, by contrast,
its sales were a mere 45 percent of General Motors’.

By now it should be sufficiently clear that,
at least where direct U.S.-Japanese economic rivalry was concerned,
the “Japan hits the wall” notion was farcically at odds with reality.
Let’s now consider Japan’s domestic economy.
Although we do not have space for an extensive discussion,
here are a few indicators of
how well the Japanese did in advancing their living standards
in the “lost decade”:

  • Car-navigation systems. Launched in the latter half of the 1990s,
    these super-smart gadgets
    (which pinpoint a car’s position, suggest routes,
    and provide alerts on traffic jams)
    caught on far faster in Japan than anywhere else.
    By 2000,
    Japanese drivers accounted for more than half of all such devices in use
    anywhere in the world.
  • The Internet. Recovering from a hesitant start,
    Japan raced ahead of the United States in the speed of its Internet connections
    in the latter half of the 1990s.
    Japan now leads the world in so-called FTTH (fiber to the home)—
    a reflection in part of the fact that
    Japanese companies dominate the manufacture of optical fibers.
  • Mobile phones. Japan made a slow start in this category also,
    but by the late 1990s it had jumped two product generations ahead
    of the United States
    (with cameras already standard features).
    By 2003 nearly 29 percent of the Japanese population
    enjoyed Internet service on their mobile phones.
    From the start, incidentally,
    Japan has dominated the manufacture of
    the enabling components in mobile phones.
    A survey by Deutsche Bank found that as of 2000,
    twenty-nine of the world’s thirty-six suppliers
    of the nine key components in mobile phones were Japanese.
  • Health care. Between 1990 and 2005,
    Japan’s universal health-care system
    cut infant mortality by more than one-quarter,
    to just 3.28 per 1,000 births—
    roughly half the American rate.
    [I would not give all the credit to the difference in health-care systems.
    Politically incorrect though it may be to say, some of the American population is notable for its inability or unwillingness to avoid unhealthy behavior.]

    Despite a marked increase in
    the Japanese people’s consumption of Western-style fatty foods,
    they now live about four years longer on average than Americans
    (and almost a decade longer than the Chinese).

As should be clear from testimony like this,
there was no “lost decade.”
Yes, the Tokyo-stock market crashed.
So did the real estate market.
And the consequences for the Japanese banking system were painful.
But the problems were kept well-contained within the financial system.
It is a fact, for instance, that
not a single bank customer was inconvenienced
(because not a single bank shut its doors,
let alone reneged on its obligations).
And most areas of the nonfinancial economy did fine.

Why did the American press correspondents get the story so wrong?
The truth is
they were encouraged by their Tokyo sources
to exaggerate Japan’s problems.

This reflected a hidden agenda by the Japanese establishment,
which had noticed that reports of the Tokyo stock market crash
had greatly softened anti-Japanese sentiment in the United States.
With their unerring eye for the main chance,
Japanese officials began
emphasizing Japan’s economic negatives
while hiding the positives.
Not the least of their tactics
was to understate Japan’s economic growth rate.

Stephen D. Cohen of the American University in Washington argues that
the psychological effect of the Tokyo crash
was particularly strong in Washington.
Writing at the height of American concern about the Japanese economy in 1998,
he commented:
“The implication of this negative view of Japan’s economic future
is that its trading partners should
stifle their criticism;
temper their demands;
and not try to take advantage of a weakened, unstable Japanese economy.”

The gambit worked because Western economists
desperately wanted to believe that,
after decades of scorning Western economic rules,
Tokyo had finally had its comeuppance.
Meanwhile, in an unholy alliance with the Tokyo Finance Ministry,
top Western securities firms made huge profits in
the so-called carry trade.
The term refers to a complicated foreign exchange maneuver in which
favored Westerners have consistently benefited from a low Japanese yen.
As a matter of firmwide policy
(and one clearly insisted upon by the Finance Ministry),
Western investment banks
not only consistently talked down the Japanese yen
but gave widespread credence to
the most extreme rumors of a coming Japanese economic Armageddon.

One of the most revealing aspects of the “lost decade” story
was the behavior of Japan’s top industrialists.
In April 1998, Sony Corporation chairman Norio Ohga, for instance,
made world headlines when he commented:
“The Japanese economy is on the verge of collapsing.”
A few months later,
Toyota president Hiroshi Okuda opined that
Japan’s problems could trigger a “worldwide financial crash.”
When corporate chiefs talk like this,
we might assume their own businesses were suffering.
In fact, both corporations did just fine that year,
at home as well as abroad; indeed,
Toyota’s 1998 profits were up 56 percent over 1989
(the last year of the Tokyo stock market boom),
while Sony’s were up fully 131 percent.

The contradictions in the “lost decade” story
have probably been most pointedly critiqued by Robert Locke,
a New York-based contributor to the American Conservative.
In an essay in Real World Economics (London: Anthem Press, 2007),
Locke suggests that

Westerners have been victims of an elaborate hoax,
perpetrated by
officials and corporate chieftains in Japan on the one hand,
and globalists and free trade ideologues in the West on the other.
He comments:
“That is a formidable set of potential liars,
equipped with money, technical experts,
transnational reach, and state power.”

Referring to the Japanese government’s authoritarian control over society,
he added:
“Journalists and academics who in America or Europe
would have challenged its [the government’s] version of the economy
by now are loyal collaborators of the system, not its critics.
So from a Japanese point of view,
there is nothing immoral, unusual, or terribly difficult about
misrepresenting Japan’s economic performance.
In fact because it is in the national interest,
it would be unpatriotic not to do so.”

Locke is right, of course, to suggest that
Japanese officials have cooked the numbers.
But even in Japan some statistics are less easily cooked than others.
One statistical series in particular is worth considering:
electricity output.
In an energy-deficient nation like Japan
whose electric utilities’ imports of oil, unranium, coal, etcetera,
are not only easily cross-checked against other nations’ exports
but are closely monitored by various Western experts,
electricity statistics cannot be significantly faked.
Thus, as Lester Thurow has pointed out,
when the veracity of a nation’s economic growth statistics is in question, electricity output, which is now closely tracked to true economic growth,
provides a highly revealing cross check.

It is interesting therefore to note that
Japan’s electricity output statistics
flatly contradict the “lost decade” story.

According to the International Energy Agency,
Japan’s electricity output grew by 30 percent in the 1990s—
a startlingly stronger performance than America’s 24 percent,
yet the America economy was supposed to have boomed.
Japan’s performance moreover put many other advanced nations in the shade,
most notably Germany, Sweden, and Switzerland.
With strong capital goods industries,
these nations moreover boast economic profiles very similar to Japan’s.
It is true that their electricity growth was tempered by conservation efforts.
But then so was Japan’s.
As a rich and extremely densely populated nation,
Japan has long been curbing electric power growth by, for instance,
strongly promoting recycling and phasing out
such electricity-intensive industries as smelting and “metal-bashing.”
All this is more significant for the fact that
in the 1980s Japan and the United States
saw broadly similar growth in electricity output—
an increase of 36 percent in Japan
versus 33 percent in the United States.

Perhaps the most revealing aspect of this story is
how Japanese officials treated the electricity evidence:
they swept it under the carpet.
Whereas in any other country
this remarkable contrary indicator would have been widely discussed
by officials, elected representatives, and press commentators,
in Japan in the 1990s there was dead silence.
Not only that,
there was the interesting matter of how the series was treated in
Japan: An International Comparison,
a handy semi-official statistical booklet relied on by
virtually every Western journalistic and diplomatic observer.
This publication had long provided a detailed historical series
showing the rise in electricity output
in the immediately preceding several years.
This practice was stopped with the 1995 edition
(whose series ended with the 1992 figure).
In subsequent editions the most recently available figure was published
but only in isolation
so there was no hint of how fast output had been growing.
The electricity numbers were eventually dropped entirely
and now the booklet itself has ceased publication.

I will sum up by noting that I have extended a standing invitation
to debate the “lost decade” story either in Tokyo or in Washington.
My offer was first made in 1999
to the then two most prominent Tokyo-based sources
of the “Japan hits the wall” story,
the stock analysts Peter Tasker and Alexander Kinmont.
I later extended it to their peers
Kenneth Courtis, Robert Feldman, and Jesper Koll.
All these people knew Japan in the 1980s—
and none has been prepared to enter into a debate.

[End of section.]

Here is a link to a MSM article that exemplifies his charge
that the MSM ignores Japan’s current account surpluses
while bad-mouthing Japan’s economic performance:
Japan stands in contrast to fast-growing nations on Obama's tour.”
Note in particular this graphic.

Miscellaneous Articles


The Myth of Japan’s Failure
New York Times Opinion, 2012-01-06

DESPITE some small signs of optimism about the United States economy, unemployment is still high, and the country seems stalled.

Time and again, Americans are told to look to Japan as a warning of what the country might become if the right path is not followed, although there is intense disagreement about what that path might be. Here, for instance, is how the CNN analyst David Gergen has described Japan: “It’s now a very demoralized country and it has really been set back.”

But that presentation of Japan is a myth. By many measures, the Japanese economy has done very well during the so-called lost decades, which started with a stock market crash in January 1990. By some of the most important measures, it has done a lot better than the United States.

Japan has succeeded in delivering an increasingly affluent lifestyle to its people despite the financial crash. In the fullness of time, it is likely that this era will be viewed as an outstanding success story.

How can the reality and the image be so different? And can the United States learn from Japan’s experience?

It is true that Japanese housing prices have never returned to the ludicrous highs they briefly touched in the wild final stage of the boom. Neither has the Tokyo stock market.

But the strength of Japan’s economy and its people is evident in many ways. There are a number of facts and figures that don’t quite square with Japan’s image as the laughingstock of the business pages:


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