JPRI Critique Vol. VIII No. 3 (March 2001) Blindside Revisited
by Eamonn Fingleton
Six years ago I published a book that offered a notably provocative take on U.S.-Japanese economic competition. Not the least provocative aspect of the book was its title Blindside: Why Japan Is Still on Track to Overtake the U.S. by the Year 2000. The book was a point-by-point rebuttal of the conventional view that the Japanese economy was a spent force. I argued that Western commentators were greatly exaggerating the real economic damage done to the Japanese economy in the wake of the Tokyo stock market collapse of 1990. I went on to focus attention on Japan's many hidden economic strengths-- most notably its world-beating manufacturing sector. Japanese manufacturers had escaped unscathed from the whirlwind visited on the Japanese financial sector and as a result were continuing to make rapid progress. It seemed to me this progress would propel Japan to an ever more powerful position in the world economy.
A lot of people at the time were impressed with the argument. A prestigious journal of diplomacy even published a large excerpt from the book. The editors of a top American business magazine voted it one of the best books of 1995. In Washington, those who commended the book included the President of the United States. So much for the joys of authorship. But with the passing of anno domini 2000, it is time for a reckoning. Given the torrential flows of bad economic news we have had from Japan in the last six years, shouldn't I now concede that I was wrong? Actually no-- not a bit of it. Strange as it may seem to those who have not read the book, I am more convinced than ever that Blindside's highly counterintuitive analysis was right.
In particular, I stand by the basic political point of that analysis: in an effort to avoid stoking protectionist sentiment in Washington, Japanese bureaucratic and business leaders have in the last decade systematically cultivated an impression of economic dysfunction. They have thus both greatly exaggerated the country's difficulties and understated its successes. And the public relations effect in persuading American policy-makers that Japan is a spent force has been incalculable: basically, Japan has been allowed a free pass to continue with the mercantilist trade policies it has pursued since the seventeenth century.
Of course, not everything in Japan's garden has been coming up roses. By far the most publicized of its problems are those that have resulted from the financial crash of 1990. As asset prices have fallen, the impact has been devastating, not only on the fortunes of thousands of formerly wealthy Japanese families but on their bankers. These financial difficulties were fully apparent as I wrote Blindside and, of course, they contradict nothing in the book. In fact in the late 1980s, long before I wrote Blindside, I had loudly predicted the coming financial crash and did so at a time when Tokyo-based securities analysts without exception were pushing Japanese stocks to the sky.
Japan's Economy Today
Blindside also made a detailed case for believing that the distinctly different Japanese economic system was a more powerful force for creating wealth than American capitalism. This led to the book's prediction that, contrary to all conventional wisdom at the time, Japanese leaders would continue to maintain the system's major features-- in particular, permanent employment, the keiretsu system, and the cartels. Above all, I argued that Japan would continue to pursue its policy of detailed regulation of economic activity.
On all of these predictions, Blindside has been vindicated. The regulators continue to regulate the Japanese economy as assiduously as ever. The keiretsu are still intact, and so-- less visibly-- are the cartels. So, too, is the permanent employment system. (Yes, I know that recently arriving American newspaper correspondents in Tokyo continue at regular intervals to write reports predicting the imminent demise of the Japanese employment system, but such reports have, of course, been a constant of misinformed Western comment on Japan since the 1960s.)
What about my prediction in the book's subtitle, that Japan would overtake the U.S. by 2000? On the most literal-minded measure of a nation's economic size-- total output as calculated at market exchange rates-- Japan's at last count was just half that of the United States. But on several other measures that are much more significant in assessing a nation's true standing in the world economic pecking order Japan has now decisively passed the U. S.
Take, for instance, the size of Japan's manufacturing base. I estimate that, after adjusting gross domestic product numbers for trade distortions, Japan's manufacturing output in 2000 totalled $1,260 billion-- fully $50 billion more than that of the United States. Why is manufacturing so important? For one thing, it generates about eleven times more exports per unit of output than service businesses. Even in these days of the vaunted New Economy, this is an absolutely critical factor in world economic competition. And the results are apparent in Japan's extraordinary trade performance in recent years. In fact Japan's current account surpluses for the decade of the 1990s totalled 2.1 times their level in the 1980s. Given that Japan's surpluses were already so large in the 1980s they were considered to be unbalancing the world economic system, it is clear that those who write off the Japanese challenge have spoken too soon.
And how has the United States been doing on trade? The contrast with Japan could hardly be more startling. As the American manufacturing base has shrunk, America's trade deficits have soared. For 2000, the current account deficit is likely to be a record 4.4 percent of national output. By contrast, the worst deficit in the 1980s was just 3.6 percent of national output-- a record that was widely considered disastrous at the time.
Both Japan's surpluses and America's deficits stem from a common cause: a rapidly growing dependence by American manufacturers on Japanese counterparts for critical components and high-tech materials. All this has major implications for exchange rates: basically the trade imbalances are telling us that although the yen has risen fully 24 percent since the end of 1989, it is still greatly undervalued against the dollar.
But what about the many aspects of the Japanese economy that have reportedly deteriorated in recent years, for example, about the Japanese government's finances? According to the Western press, the Japanese government has been running deficits so large they are almost unprecedented in any major economy. In reality, these deficits are a press myth. Although every year since the 1980s Tokyo-based correspondents have reported that the Japanese government is running a huge budget deficit in the current fiscal year, such reports are later invariably contradicted by the OECD's authoritative handbook, OECD in Figures, which is published three years in arrears. According to the OECD, and using Western accounting assumptions, Japan has consistently run large budget surpluses, not deficits, since the 1980s. Japanese bureaucrats and their spokesmen in the foreign community in Tokyo have created the myth of the deficits as a way to fend off Western pressure for effective measures that might increase Japanese consumption and particularly consumption of imported goods. The bureaucrats' willingness to perpetuate this myth is a smoking gun that indicates the lengths to which they will go to poor-mouth Japan's economic position.
Now let us look at Japan's poor growth record in recent years. The first thing to note is that Japan's annual GDP growth, as officially calculated, averaged a respectable 1.7 percent in the 1990s. To be sure, that is considerably less than America's average of 2.7 percent. But it is actually fractionally better than that recorded by either Sweden or France, both of which averaged just 1.6 percent. And no one, it need hardly be added, has suggested that the 1990s have been a "lost decade" for either Sweden or France. Japan's performance looks even better compared to such other OECD nations as Switzerland, Italy, the Czech Republic, and Finland, all of whom grew even more slowly than Sweden and France in the 1990s.
That said, Japan's reported growth rate in recent years has fallen compared to the 1980s. Opponents of the Blindside analysis point to this as evidence that Japan's days of economic overachievement are over. However, Japan's official growth figures are undoubtedly understated. In their concern to avoid stoking the fires of protectionism in Washington, Japanese officials have a very good reason to make Japan's performance look as mediocre as possible, and government officials have a wide latitude to understate or overstate a nation's growth rate by simply varying some of the myriad assumptions used in calculating GDP. These assumptions are similar to those accountants must make in calculating a corporation's reported profits. Just as some corporations calculate their profits conservatively while others take a more optimistic approach, a similarly divergent pattern is clearly apparent in the way nations calculate their growth. And Japan, in common with Germany and Switzerland, has clearly been in the conservative camp in recent years. By contrast, as documented by such prominent economists as Dean Baker and Tim Congdon, the United States is equally clearly in the optimistic camp.
The impression that the United States has been outperforming Japan in economic growth in recent years is contradicted by some notably persuasive evidence in the form of the yen's large, if little-noticed, rise against the dollar in the 1990s. It is also contradicted by the trend of consumer living standards. Broadly speaking, the Japanese have clearly enjoyed as big an increase in their living standards as Americans in recent years. But the Japanese boost in living standards has come not from higher incomes but from falling prices. Particularly big price cuts have been noticeable not only in electronic gadgets and household electrical goods but in alcoholic drinks of all sorts (beer prices have fallen by one-fifth, for instance). There have also been big reductions in specialty foods, fashion goods, sporting equipment, telephone charges, and airline tickets. What we are seeing in Japan is a "falling price boom," very similar to what Americans enjoyed in the latter half of the nineteenth century (a generally prosperous time that was nonetheless notorious for its spectacular financial crises). However, such a boost in consumption is invisible to any statistician who uses conservative accounting assumptions to calculate GDP.
The Forced Savings Phenomenon
Finally, let me turn to the core of the Blindside analysis, its highly counterintuitive assessment of Japan's all important savings rate. The book rejected the conventional view that Japan's high level of savings reflects a peculiar aptitude for savings on the part of millions of ordinary Japanese people. Rather, I sought to show that Japan's high savings rate is imposed from above by bureaucratic fiat. Basically the bureaucrats comprehensively regulate the economy with the prime objective of suppressing consumption. Suppressed consumption is another way of saying a superior savings rate.
While conventional commentators such Bill Emmott, editor in chief of The Economist, predicted that the Japanese savings rate would fall in the 1990s, Blindside argued that the bureaucrats would maintain their regulatory grip on consumption and would thus ensure that Japan continued to produce huge savings flows. That prediction has been vindicated, with Japan now routinely saving twice as much as the United States. And from Japan's high savings rate almost everything else flows-- most notably the enormous investment in manufacturing that has propelled Japanese manufacturers to ever stronger positions of dominance in the world economy.
In fact, so strong are Japanese savings that Japan is now exporting more capital in real terms than any nation since America's days of global economic dominance in the 1950s. While the Japanese economic bureaucrats are loathe to draw attention to this fact for fear of fanning protectionist sentiment in Washington, the results are starkly apparent in little-noticed IMF financial statistics for national external balances. These show that in the first nine years of the 1990s, Japan's net external assets jumped from $294 billion to $1,153 billion. Meanwhile America's net external liabilities rocketed from $49 billion to $1,537 billion.
In the long run this changing balance of financial power will be about the only thing historians will remember about U.S.-Japanese economic rivalry in the last decade. Yet it was the one thing Western observers utterly overlooked at the time.
EAMONN FINGLETON is a Tokyo-based author whose most recent book, In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity, was published by Houghton Mifflin in September 1999. He is the founding editor of Unsustainable.org, a new website on America's trade problems.