Every so often an article appears on global-economics which demands serious reflection. Ethan Devine's recent piece in Foreign Policy, entitled The Japan Syndrome is one. The article is really about China and its economic and socio-political prospects, but it is written against the backdrop of Japan. If Devine is correct, then, the implications for New Zealand are material. One implication is that we would be foolish to put all our eggs in the Asian basket. Yet that is precisely what successive New Zealand governments appear to be doing.
Will we ever learn? Very unlikely. Politicians, as a species, believe their own press. They believe they really can make a difference when it comes to the economy. The naivety of our Prime Minister thinking that he could make a positive difference to our tourism industry is a case in point. Power and hubris are a heady narcotic. (Now to be fair, as we have often pointed out, the same naivety runs throughout the nation: the voters also overwhelming believe "yes, we can" is not only possible, but the sole authentic mode of government. "In government we trust" is the dominant idolatry and ideology of our age.) But we digress.
We will break down Devine's article into two posts. First, his recapitulation of recent Japanese economic history. Japan, in the eighties, was touted as the economic miracle and powerhouse for the entire world. In fact, right throughout this time, it was a glass-house economy, artificially propped up, skewed, unsustainable, and doomed to implode. As a result, Japan has had to endure one of the longest recessions recorded in human history. Today, Japan's gross domestic product is lower than it was thirteen years ago! What went wrong?
Firstly, Japan since the Second World War has been a centrally planned economy. Japan has a dominant religious commitment to social harmony, or wa. Now, this cultural value, based on a pagan cosmology, can be quite helpful when it comes to things like crime. Ordinary, run-of-the-mill Japanese do not like crime or criminals because it disturbs wa--a very bad thing. A cultural taboo. A no no. But when the values and principles of wa are applied to economics and economic systems there is an inevitable veering towards central planning and control by elites and oligopolies. The creative destruction of personal capital deployed and invested by sovereign citizens is an anathema and offensive. It is un-Japanese.
Dithering was par for the course in a system designed to maintain the status quo. Although technically a democracy, the extent of Japan's central planning has at times matched China's. Japan has been centrally planned since it was ruled by Gen. Douglas MacArthur, eventually morphing into an informal alliance between bureaucrats, business leaders, and elected officials known as the "iron triangle." Difficult reforms were not in the triumvirate's best interest. Bankruptcies and unemployment are never palatable, but they are intolerable for a ruling class whose legitimacy depends on engineering social harmony.We note, in passing, that the Japanese value of universal wa is anti-Christian. In Christian cosmology, diversity is as ultimate as unity; the one equally ultimate with the many. Therefore, diversity and difference, is as ultimate as unity and oneness.Note, also in passing, how New Zealand, with its own form of paganism, has tried to replicate the wa of Japanese central planning. We have our own iron triangle of elected officials, bureaucrats, and business leaders trying to direct and steer our economy in preferred directions (value added production, export-led recoveries, high-tech industries, the knowledge economy). The result? Bubbles, bubbles everywhere, bursting as we speak.
This leads to Devine's second point. Central planning of economies usually leads to huge bubbles that burst spectacularly. So it has been in the case of Japan. The central plan called for exports, exports, exports. To be in wa with exporting, the Japanese currency had to be kept low.
Sure, Japan's export boom funded stellar growth for four decades. But its undervalued currency eventually helped blow one of the largest bubbles in history, the bursting of which still hobbles Japan today. . . .
Post-World War II Japan pioneered Asia's export-driven growth model, sextupling GDP from 1950 to 1970 and pulling more people out of poverty more quickly than any country except modern China. Japan achieved this remarkable growth with a weak yen -- which supported exports and discouraged imports -- and high savings rates, which funded massive investments in infrastructure and manufacturing capacity.
But, in national economics, as in physics for every action there is an equal and opposite reaction--well, being a dismal science, and wonderfully messy, never exactly equal nor opposite, but a reaction nonetheless. Japan's export led miracle economy generated the opposite reaction of killing the domestic (consumption, service) economy.
An unfortunate side effect of export- and investment-driven growth is that it strangles the consumer. But that's kind of the point: The entire exercise depends on suppressing consumers as their cheap labor fuels exports. In Japan's case, the same undervalued yen that supported exports sapped consumers' purchasing power while yields on their savings were kept artificially low to fund cheap loans to corporations and government. And the shrunken share of economic spoils that did end up in the hands of consumers had no outlet but the heavily protected domestic market with its hopelessly inefficient and shockingly overpriced goods and services. When American humorist Dave Barry traveled to Japan in 1991, he was stunned to find department stores selling $75 melons.
Eventually the "iron triangle" worked out that they had to re-balance the economy and get that little old Japanese housewife spending.
In plain English, the Japanese were consuming relatively little while investing heavily in steel plants and skyscrapers, which didn't leave much for fish or tourism. Belatedly, Tokyo realized that a balanced economy must also have consumption and that coating the country with factories and infrastructure wouldn't do the trick. Japan tried to rebalance slowly through the 1970s and early 1980s: The yen was allowed to strengthen a bit each year, and consumption ticked up to 54 percent of GDP, while investment shrank to 28 percent by 1985.
But, this re-balancing act failed to work. Why? Because the internal consumption economy was so anaemic it could not cope. As exporters found the going more tough with a higher yen, they attempted to re-orientate their production and sales to the Japanese market, only to discover that a solid, efficient, productive service-sector economy did not exist. Distribution chains were hopelessly clogged with too many people. In a fast food restaurant, for example, it was not uncommon to find ten people on the forecourt, welcoming, greeting, bowing, ushering, smiling. Hopelessly inefficient
In the event, export-oriented industries did not adapt to a domestically led economy because the domestic economy was not fit to lead. Conceived as a tranquil oasis for the Japanese to enjoy their exporters' hard-fought gains in peace, domestic Japan frowned on competition. Former Japanese Vice Finance Minister Eisuke Sakakibara termed this the "dual economy," in which world-class exporters existed alongside domestic companies that were "very tightly regulated with a lot of subsidies from the government, which makes them extremely uncompetitive." As a result, productivity in Japan's service sector lagged manufacturing badly. Having nowhere better to go, the Bank of Japan's loose money found its way into stocks and real estate instead of funding innovation.Who could ever forget the $US35,000 annual golf course memberships? Now, there is a bubble!
Japanese companies large and small punted in stock and property markets, generating huge paper profits that masked their inefficient domestic businesses. The Nikkei nearly quadrupled from 1985 to 1990, and land values in many areas did the same, leaving ample opportunity for companies to pad profits with stock and real estate investments. But when the bust came five years later, domestic companies were as inefficient as ever, only now also stuffed with debt and bad investments. And they had company.
But wa has prevented the necessary housecleaning, the essential creative destruction that lets the bubble burst properly, so that the economy can be re-aligned and begin to grow in a more sustainable mode. Instead, Japan's internal economy has gone from bad to worse--hence the shrinking GDP. (Again, in passing, we should note that we in New Zealand have another variant of wa--which, we remind ourselves is a thoroughly pagan idea--in that here pseudo-harmony is maintained by state welfare and entitlement payments. This, more than anything else, impedes the economy from cleansing itself and starting on a better footing. It perpetuates the hopelessly outmoded unproductive inefficiency of both our domestic and export economies. )
The bubble's burst knocked Japan down, but torpor in the name of wa has kept it from getting back up. From one of the fastest-growing economies in the world, Japanese GDP has grown at less than 1 percent per year since 1991, and GDP today is lower than it was in 1997. Exports, though, barely missed a beat after the Plaza Accord: Despite the stronger yen, net exports actually increased in 1986 and are a bigger part of the economy today than they were in 1985. But without a functioning domestic economy, Japan cannot prosper, so it doesn't. Persistent overcapacity restrains private investment and consumption is the last thing on most consumers' minds, so Japan runs on exports and government spending. After 20 years of almost continuous fiscal stimulus, Japan has little to show other than mounting government debt, now nearly 200 percent of GDP.
And so, the Japanese economic miracle is fading into a wasteland. Is it not significant that no-one talks about Japan as New Zealand's cargo-cult partner to deliver us economic prosperity any longer? Yet in the eighties and nineties we were told repeatedly that in Japan lay our economic salvation. Now, a new saviour has appeared. We have seen his star in the East. His name is China.
In Part II, we will review Devine's argument that China's economic future is looking eerily like Japan.
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