JPRI Working Paper No. 43: March 1998
How Rich Japan Misled Poor Asia
by Murray Sayle

For what is supposed to be the world's wealthiest economy, some odd things have been happening in Japan lately. At breakfast-time one recent Monday, for example, a polite young man tapped on our door. We know him well. He works for our village building society, which takes in savings and lends to buy homes.

"Can you help us out?" our visitor asked. "If you have any spare cash around the house, please come and pay it in. It's only for twenty-four hours. You can take it out again tomorrow."

"We'd like to help," said my wife Jenny, "but we don't have an account with you. And," she added, "what you've said doesn't exactly encourage us to open one, either. Why would you need our housekeeping money?"

"Well, it's no big deal," he said. "I'll try next door." And off he went.

I went around later to ask our visitor what was going on. His office, all glass and chrome, stands out among the wooden houses of our main street. "We don't usually keep cash here over the weekend," he explained. "I was afraid that someone would try to withdraw money this morning, and the word would get round that we couldn't pay. Within an hour we'd have been cleaned out."

It didn't happen, but an hour later a neighbor rang. "If you have any money in the Yokohama Bank, take it out," she said. "They'll be the next to go." Jenny went down to have a look, and sure enough, queues were making withdrawals. It turned out to be just a rumor, but that fact that it was being spread, about one of Japan's oldest banks, shows how jumpy Japanese are getting. I rang a friend from Sydney, one of Tokyo's most successful currency traders. "We're expecting forty to fifty banks and insurance companies to go under, merge or be taken over in the next few months," my friend said. "Good business for us, of course, if we play it right." That night a banker friend phoned from Geneva, Switzerland. "How's the mood there?" he asked. "If the Nikkei [the Tokyo stock index] drops below 12,000, then the world economy goes bust." I checked the papers: the Nikkei, which touched 38,915 on December 29, 1989, was yo-yoing between 14,000 and 15,000 (it is since up). Old-timers say New York, 1929, felt edgy and nervous, just as Japan does in the spring of 1998.

I visited our village post office for a mood check, as well as to post a letter. The Japanese postal system also takes in savings and offers insurance policies, and at the present time it holds the yen equivalent of three trillion U.S. dollars, seven times the size of Australia's economy, easily the biggest pool of capital in the world. A flashing sign showed the day's interest rates: one quarter of one percent for deposits held for a year, 0.455 percent if held for five years. Yet I saw gray-haired neighbors paying in thick wads of cash, ten thousand dollars or so at a time, and being rewarded with a bow from the postmaster (an honored man in our village) and a packet of paper hankies.

Why isn't Japan using this towering Fuji of all-but-free finance to solve its Asian neighbors' debt crisis, as well as its own? For weeks doom has crowded the Japanese media: first an important bank in Hokkaido collapsed, then one of the "big four" stockbroking firms went under, then another bank, while almost every day a new case of bribery and corruption surfaces in the heart of Japan's administration, with huge payoffs to gangsters, crooked politicians, and the top level of Japanese bureaucrats and ex-bureaucrats, who are looking more and more like the corrupt party-boss "nomenklatura" of Soviet communism's last days. As exports soar, Japan's economy has paradoxically gone into deep recession; the Finance Ministry has confessed that Japanese banks hold confidence-crushing bad loans of 76.7 trillion yen, more than twice Australia's gross domestic product. Next, a right-wing gunman took a Finance Ministry official hostage in the Tokyo Stock Exchange and fired a shot into the ceiling, two Finance Ministry officials were arrested and their offices searched, another has hanged himself, the Finance Minister and his deputy were sacked. What, one may ask, has come over peaceful, prosperous Japan? Has it been hijacked by criminals?

Introducing Ethno-economics

None of this grew up overnight, of course. The real explanation of Japan's-and therefore of Asia's, and of the world's-present crisis goes far back, to the hungry, confused years after Japan's defeat in 1945. Japan did not use free market economics to fight its war; no one did, on either side. In Japan a powerful Ministry of Munitions rationed raw materials, organized cartels of manufacturers, set production targets and directed labor into war industries. Contracts were fixed at cost-plus; capital was simply created by the banks, under the orders of the Finance Ministry. Civilians were exhorted to save and save some more, so as to cut demand for rationed food and clothing and, in theory, curb the inevitable black market. Wartime Japan was a vast machine for mass-producing weapons at the least possible cost in labor and imports. For "weapons," read "high-tech exports," and that's what, economically, Japan still is today.

The Allies dismantled their war economies within weeks of victory. But Japan, its cities ruined, factories levelled or seized as reparations, treasury empty, occupied by foreigners bent on punishment, unable to feed millions of refugees and disarmed soldiers back from just-liberated China and Southeast Asia, could afford no such luxury. It had, however, a secret asset: intact amid the ruins was the single-minded human organization that had equipped it for war. Within days of Japan's surrender the Munitions Ministry became the Ministry of Commerce, then the Ministry of International Trade and Industry, the much-demonized MITI. Its wartime partner, the Finance Ministry, kept its innocuous name, which goes back to the eighth century, but the same officials still sat at the same desks and talked to the same industrialists over the same battered phones. In by-passing Japan's rubber-stamp parliament and governing through its bureaucracy, the American Occupation removed the last restraints on the bureaucrats' power. Other countries have administrations, it is said; Japan's administration has a country. It fostered the Japanese economic "miracle." Incurable weaknesses, rooted in its history, have caused the present crisis.

Japan's bureaucracy does not govern under law. Japan has laws, but the officials supposedly bound by them have wide discretionary powers, freedom from public scrutiny, and a code of covering up each other's delinquencies. They, and not the politicians, negotiate deals between ministries, or in more basic terms, decide who gets what. Politicians who have tried to change the system have simply been ignored until they went away. This bureaucratic power was originally justified by the thesis for which Japan fought its war. All Japanese, the theory goes, are one big blood family, all descended from the Sun Goddess, with the emperor as her direct descendant and hereditary high priest. Even after the end of the war, Japan's upper layer of bureaucrats, less than a thousand strong, still held commissions personally brushed by Emperor Hirohito, which literally turned them into demigods. Today they no longer hold Imperial warrants, but they still expect to be obeyed as if they did. Japanese politicians, as mere peddlers of influence (with the bureaucracy) are held in public contempt. The top bureaucrats, qualified by stiff examinations, an elite, "old-boy" quasi-priesthood of the national religion, Shinto, run (or at least until the past few months, ran) Japan much as they collectively saw fit.

Yet corruption has always been part of this system. The Shogunate that half-governed Japan until 1868, fell from power by losing control of its finances. With revenues paid in rice, from only part of the country, the shoguns had no way of taxing the rising merchant class. The shoguns' officials taxed them anyway, by extracting secret payoffs without any basis in law. The old Japanese word for a bribe, sodenoshita, much heard in recent weeks, means "something in the sleeve"-and only officials wore wide sleeves. Despite this the officials who look out for corruption can be diligent, and no prosecutor or judge has ever been caught taking a bribe. The trouble is drawing the line, in a culture with few clear lines. Venerable customs like giving gifts to the powerful and conducting official business in brothels and their modern equivalents, hostess clubs and geisha houses, mean that ever more ingenious methods of bribery are discovered, unmasked, and re-invented. The two small-fry Finance Ministry bank inspectors who were arrested had allowed themselves to be lavishly entertained by overlent bankers in a "No Pants Shabu-Shabu"-an unusual steak house whose waitresses serve at table without underwear. They were only following their predecessors of centuries ago.

This system of semi-legally governing what is supposed to be, by Japanese nationalist theory, one big family united by blood has had profound economic consequences, for which all Asia is now paying. Defeated postwar Japan still had a surplus of skilled hands and, with a squeeze, enough land left to live on. The third ingredient for economic growth is, according to classical theory, capital. With few exceptions (such as Burma, and, until recently, China) every other country seeking to build, or rebuild, its economy has taken the easy option and borrowed from abroad. Japan in the immediate postwar years had little appeal for foreign lenders, and the U.S. Occupation discouraged them anyway. The bureaucrats left over from the war, using their vague, unquestioned powers, set about coaxing, squeezing and inventing capital from ruined Japan itself, devising inducements for Japanese with a little money to invest it at home. Thus was born the little-understood "Japanese model" or, what we might call "ethno-economics."

Banks were allowed to buy and hold shares and real estate, as reserves on which to make loans ten or twenty times bigger. Japanese stockbrokers, long accustomed to bending the law and taking huge risks, were licensed as if they were banks, and tacitly allowed to give secret deals to favored clients and trade on their own account or, bluntly, to rig the markets for their political and business friends. Ordinary wage-earners were encouraged to keep their savings at microscopic rates of interest in the local post office, one inducement being exemption from income tax up to a limit (currently around $100,000) which is easily evaded by opening other accounts under assumed names. Set up in 1875 on a British model, long disappeared, the postal savings system is one Japanese institution that, although it has on occasion been corruptly mismanaged, has retained the confidence of the public. It has never defaulted, honoring even the tattered savings books that Japanese refugees brought back from occupied Korea and China after the war. Postal savings have now grown to equal four-fifths of Japan's yearly gross domestic product, the biggest pool of capital in the world. Controlled by the Finance Ministry, it paid for the rebirth of Japanese industry after the war, and then financed much of Japan's stunning export success. No one in Japan now knows what to do with it.

Japan's post-war improvisations, hair-raising to the most reckless Western banker, were mostly kept secret. They still are. Deals are made on the telephone or in geisha houses and sleazier nightspots; records are not kept, or shredded. Only in January of this year did the governors of the Bank of Japan announce, for the very first time, that they had just met to discuss the official discount rate, which they decided to keep at 0.5 percent, the lowest ever set anywhere in the world; but their reasons have not been published. Japanese ethno-economics promise that everyone who is inside the Japanese family will be looked after by the Emperor's picked officials, who know best. Some members have always been a lot further inside the family than the rest, but this, too, has been kept secret, in the interests of family harmony, a paternalistic "not in front of the children" policy only now starting to come apart. In the hungry 1940's, few Japanese knew, or cared, about the secrecy or questionable ethics of the system, only whether it could provide jobs, food and shelter.

Every distinguishing feature of the Japanese economy comes from the concept of a nation united by ties of blood, and the desperate and mostly secret strategies devised in the post-war years to achieve national survival. Official manipulation of markets? Families are ruled by love, not markets. Preference for costly local products over cheap imports? Don't break Granny's rice-bowl. Only token strikes? Families don't strike against themselves. Keeping out foreign capital? (The only significant exceptions are IBM, let in because of its technology, and two foreign oil companies, who owned the wells.) Don't sell the family business to strangers. The exclusion of immigrants or foreign guest workers? Don't let outsiders enjoy what Japanese have slaved to build. The equitable distribution of income, still the most egalitarian the developed world has ever seen? Families share. The deals with unions that have consistently kept wage raises below increases in productivity? We're all Japanese here, not bosses and workers, and inflation will hurt the whole Japanese family. Near-full employment? A family owes all its members the dignity of work. The fabled Japanese work ethic itself? Don't let the family down. And so on.

The uglier aspects of the system, which so astonish non-Japanese, all come from the same idea of Japan as one big family. Bid-rigging on private and government contracts is all but universal. Big firms get the big jobs, little ones the scraps, but everyone in the family stays in business. Japan has far too many banks, bars, building contractors, mom-and-pop retailers and even post-offices for economic efficiency-but they provide a living for other Japanese. Japan has by far the safest streets, but also the biggest criminal organizations in the world. Why do the police tolerate these pests? Because they're Japanese too, and they tend not to prey on ordinary people. They evenreport free-lance muggers and burglars to the police. Why are semi-Fascist right-wing thugs allowed to blare their stale war-time propaganda from armored loudspeaker trucks? Because they use the language of the Japanese family. Why are Japanese companies obsessed with market share and unconcerned about profits? Because market share means jobs for Japanese, while mere shareholders have no right to meddle in management or demand dividends. Some of the biggest Japanese companies routinely hire gangsters to rough up shareholders who ask embarrassing questions at company meetings. Even MITI's "convoy system," with weak exporting firms propped up by the stronger ones-often denounced as a diabolical plot to destroy foreign competitors-is only ethno-economics in action in a multi-ethnic world marketplace. The shoring-up of insolvent banks with taxpayers' money is ethno-economics, too-after all, the bad loans were given by Japanese to other Japanese, so the whole family has to help repair the damage.

Outsiders sometimes ask why Japanese tolerate such a stifling system? Why do they knowingly pay the highest prices in the industrialized world, endure the meanest streets, most cramped housing, longest working hours and most crowded trains, with no regular vacations? Why have many clandestine post-war expedients lasted so long? Isn't Japan a democracy? The answers are yes, of a peculiar kind; and, by every known test, most Japanese prefer their system to any that has been offered them. The Liberal Democratic Party was created in 1955 (with not-so-secret American funds) as an anti-Communist facade for the bureaucracy, from which many of its leaders have come. The LDP has been in power for all but two of the past 42 years, is still in power, and will be for the foreseeable future, as its opposition of tainted, self-styled "reformers" has just collapsed. The rural-based party is the successor to, and uses the same crude vote-buying methods as, the Imperial Rule Assistance Association of the war years, with a similar justification-political parties speaking for different interests and taking turns in government signify a divided family, while One Big Party can work in the family interest and please everyone, except the unpatriotic communists. True or not, the theory brought Japan from rubble to being the world's top creditor, the happiest decades in all Japan's history. Like any success, it will not be discarded without a bitter family fight that no Japanese really wants to start.

So What Has Gone Wrong?

So why are Japanese so nervous today, and why have other Asian economies been dragged down by Japan's jitters? Because Japan's ethno-economics have come to a dead end, presaged by the bursting of its late 1980's bubble economy, and by more intractable social failures now becoming obvious. Late 1980's Japan has already joined the South Seas Bubble, the Dutch Tulip Mania, the Florida Land Boom, and New York 1929 as a textbook example of what happens when enough naive people sincerely want to be rich, and some unscrupulous ones see them coming. Early in 1987, the Bank of Japan (actually, the Finance Ministry) reduced its discount rate to 2.5 per cent, then Japan's lowest-ever, hoping to restrain the mild recession forecast for the U.S. from spreading world-wide. Books by admiring foreigners such as Ezra Vogel's Japan As Number One (translated into Japanese as Japan IS Number One) persuaded many Japanese that the dismal laws of economics had been repealed especially for them. Land and share prices rocketed as credulous and clever people got aboard the boom, all believing (correctly as it is turning out) that Japanese ethno-economics would somehow allow them to keep their winnings.

At the height of the bubble, in June 1990, the grounds of the Emperor's palace in Tokyo, about the size of Sydney's Botanical Gardens, were valued at more than all of Canada, while skinny Japan itself was supposedly worth more than the entire U.S. Japan's special contribution to high financial lunacy was a speculative boom in memberships in (mostly non-existent) golf clubs. An official index, still published, records an eight-fold increase in memberships up to 1990 (some were sold to non-golfers at a quarter-million dollars each) and then a sickening plunge. If these schemes had actually come off, two percent of Japan's scarce land would today be covered with golf courses-and the golf clubs, one promoted by top Finance Ministry officials, themselves have uncollectable debts totalling seven trillion yen. Money from farmers' cooperatives, housewives, taxi drivers and gullible foreigners poured into the Tokyo stock and property markets. Japanese banks bought on their own account and lent on customers' illusory holdings. Alarmed, the Bank of Tokyo raised interest rates, in three stages, to six per cent in August 1990. The bubble burst, as they all do, leaving the ever more desperate Finance Ministry secretly propping up the share and property markets to save the wildly overlent banks. Japan's economy has since been flat as a dead fish on a chopping-board, and is steadily getting flatter, the prospect of an upturn more distant every day.

In market or non-ethnic economies, Japan's 1990 crash would have been the moment of truth. But the patriotic makeshifts of the 1940's had become routine, run by a new generation of bureaucrats brought up to believe in, and profit handsomely from, the many subterfuges. Every bubble in history has undermined traditional ethics, and no Japanese seeking the truth about the Japanese banking system had access to the secret deals. Old Emperor Hirohito died when the bubble was at its height, and the moves by his son, Emperor Akihito, to humanize the throne had the unintended side effect of stripping the bureaucracy of what was left of its semi-divine aura. So official secrecy became, if anything, tighter. Owning up to the bad debts would have shattered the dwindling public faith in the parliamentary facade, the scandal-plagued Liberal Democratic Party, whose share of the overall vote was slipping. Concealing the debts conveniently hid some even uglier facts: the missing trillions had not vanished, but were in the bank accounts of undeserving people who happened to own well-placed land-"the land rich." Even more damaging to the theory of Japan as an honest family headed by a wise Emperor, the money had lined the pockets of LDP politicians, of the bureaucrats who were supposed to be overseeing the system, and of Japan's durable yakuza gangsters, who had used the bubble to climb from the relatively humble tasks of bullying shareholders and blackmailing business executives into being major (crooked) financiers in their own right, with all the political influence that money buys in Japan. Only a strong, united government can ever make real reforms anywhere; Japan's was, and still is, weak and divided, still feebly trying to please everyone in the family.

The bubble years brought some benefits, to be sure. Our village, for instance, spent its swollen tax revenue on a skating rink, heated pool and library, which our children and their Japanese friends love. Much private money went into buying rare violins and Old Master paintings, mostly fakes, but useful as security for further loans. With the encouragement of the bureaucrats, who planned to join them as "advisers" after retirement, enormous sums went into more and more capital equipment for Japan's already grotesquely over-capitalized export industries. Meanwhile, the flat economy encouraged consumer savings and discouraged imports. The result was a surging trade surplus and a rapid rise of the yen against the dollar. As the yen touched 79 to the U.S. dollar-a long way from the 360 to the dollar of the "miracle" growth years-many Japanese exports became just about unexportable. Japanese exporters saw the crunch coming and, from 1994, began moving production offshore, to Thailand, Indonesia, Malaysia and South Korea-all well-known in Japan as former parts of Japan's wartime Greater East Asia Co-prosperity Sphere. The evidence is strong that it was this flood of Japanese money, as loans and direct investments, that inflated the wild speculative bubbles that have now burst in those countries.

Altogether Japanese banks-themselves hiding huge bad domestic loans--lent 265 billion U.S. dollars to the rest of Asia, well after Japan's own bubble burst. Of 60 billion dollars owed by Indonesia, 23 billion came from Japan. Japan is owed 53 percent of Thailand's debt, and was by far the biggest lender to South Korea, with 68 billion of unpayable debts soon coming due. Seeing Asia's bubbles rising, other gullible bankers followed Japan's lead.

The Japanese banks hoped to reap the profits abroad they could no longer make in Japan's depressed economy, and recover some of their own bad debts. Despite the high yen, Japanese export industries hoped to stay competitive by using components made abroad at sweat-shop wages; Asia, in its bubble era, was also a big market for Japan's own exports. Confident that any mistakes would be covered by their wined-and-dined friends in the bureaucracy, the Japanese banks lent in their usual reckless, market-share-grabbing style. But this time they were on their own. Just as Tokyo's wartime government had little control over its armies abroad, its finance bureaucrats had even less over the Japanese money that poured into Asia. The result was to duplicate in these countries Japan's own bloated export industries, all competing for the same markets in the U.S., Australia and Europe. But Japan's new Co-Prosperity Sphere had, like the original one, fatal weaknesses. Japan had mainly used its own money to industrialize; all the others have borrowed it, mostly from Japan. Thus, when China, in 1994, devalued its currency 33 percent none of them could compete with the motherland of all sweatshops, or keep up interest payments on their loans. No wonder Japan has eagerly joined the International Monetary Fund's $120 billion "Asian bailout" scheme; it will bail out not so much the borrowers as the lenders, and Japan was by far the biggest and wildest lender of them all.

Why did European, North American and even some Australian banks add another $200 billion or more to the torrent of Japanese money pouring into Asia? Partly in the mistaken belief that the Japanese knew what they were doing, partly because of the traditional argument-cheap labor-but mainly because something called the "Asian economic model" had been discovered, and, like many another myth, was mistaken for the wave of the future. In fact, there is only a Japanese model, the accidental consequence of a crushing defeat. South Korea's own version of Japanese ethno-economics, with its even more homogeneous and just as diligent population, harbors the same disdain for foreigners and their products, but it has a fatal fondness for (private, short-term) borrowing. As for the others, they are ever-new variations on the South American Model of greedy elites, long-suffering peasants, grandiose schemes-the biggest airport in the world for Kuala Lumpur, the tallest tower for Jakarta remind one of the opera houses moldering in Brazilian jungles. Such projects have been a bottomless sink for naive foreigners' money for centuries, and no doubt, often will be again.

Japan's Long-Term Problem

Japan, with its immense cushion of cash, faces no immediate problem. It is the world's biggest creditor, with external holdings approaching a trillion U.S. dollars. The Bank of Japan has $285 billion in foreign exchange reserves, more than twice the IMF's "bailout" plan for Asia. Japan's trade surplus this year will be $100 billion, probably climbing to $150 billion next year. The U.S., which absorbs most of this torrent of exports will grumble, as usual, but nothing more; Japan lends it the money to buy Japanese goods. If Japan ever stopped putting so much of its surplus into U.S. Treasury bonds, the current U.S. bubble would also collapse, and interest rates would hit depression-inducing double-digit figures. There are signs of a cosmetic cleanup of the Japanese banking system, with the arrest of a few officials for doing what everyone does, a suicide, and the sacking of a minister, with probably more gestures to come. These have persuaded the markets in Japan that ethno-economics are alive and well, and that the crisis is for the moment under control. There will be no panic sackings in Japan, no mass unemployment, no revolution-for the time being, anyway. Yet Japan's crisis is basically more serious, and time can only make it worse. Ethno-economics, the locomotive of Japan's success, has reached the end of the line, and no spare engine waits to take over.

The problem isn't money-Japan has too much-but people, of whom it will soon have too few. When Japan started its stunning post-war revival, it had modern medicine and public health measures, plus one of the highest birthrates in the world. It has been steadily falling since, as Japan has prospered, and has now hit a crisis-point. Fewer babies were born in Japan last year than in any year since 1899. Half of Japan's women under thirty are unmarried. This year the number of Japanese over 65 will equal the number under fifteen; in a year or two there will be more old and fewer young people than any human society has ever had. Japan's birthrate is currently 1.46 per woman, well below replacement level (Australia's is 1.84 per woman and the population is growing, with migration, at a healthy one percent a year). Japan's population, currently growing at .21 per cent annually, will stabilize early in the next century at around 125 million and will then begin to decline.

Why don't today's Japanese marry and have more children? In part, all developed societies have low birthrates. But ethno-economics have also frozen Japan into some third-world social patterns of the last century. Traditionally low starting wages mean that young married couples must live with parents or in-laws, in tiny houses where brides are often tyrannized by mothers-in-law. Grossly unequal pay and poor career opportunities for women mean that wives stuck in unhappy marriages cannot afford to leave, a trap exploited by philandering Japanese husbands. The wife of an eldest son is still expected to be an unpaid nurse to her husband's parents, who might live forever, or close to it. When families were large, only the eldest was stuck with this duty, rewarded by inheriting the family farm or business. With one and two-child families, most sons are now eldest sons, and young women are refusing to marry them. Living together first and getting the habit, rapidly becoming universal in the West, is all but unknown in Japan. So are mixed parties, camping weekends, dances and most of the other unsupervised gatherings of young people which give master economist Dr. Cupid his chance in the West (and swell the illegitimacy rate, vanishingly low in Japan).

Japanese weddings are still ruinously expensive displays, third-world style. Childbirth is not covered by the stingy Japanese health system, so tax-avoiding doctors demand the yen equivalent of three thousand dollars and up, in cash, before the baby can be taken home. Education is fiercely competitive and, with after-school cramming all but universal, expensive. Student loans are meager, and parents are expected to supplement the low salaries of young people. Early marriage and large families used to be enforced by community pressure, as a duty to the Emperor. Now marriage has become both voluntary and unfashionable, and young people can, and increasingly do, say no thanks. Result: the one big Japanese family is dying out.

Here is proof, if it were needed, that Japan was never the diabolically clever conspiracy to take over the world that has so often been described. There is no economic general staff running Japan Inc., only a crowd of unimaginative bureaucrats who, expecting future favors, are more concerned to defend the special interests they are supposed to be supervising than worrying about the future of the whole Japanese family. Busy propping up insolvent banks, for instance, they have taken no steps whatever to increase the supply of future members of the Japanese family, without whom ethno-economics are ultimately futile. In our village last year we had thirteen funerals, three weddings and only one new baby.

Enter-and Exit-the South Americans

One expedient the bureaucracy is trying is a policy, never officially admitted, of allowing South Americans of Japanese descent, or claiming it, to settle in Japan. There are now more than 210,000 Brazilians with names like Maria Watanabe and Gonzalo Suzuki officially in Japan, but published reports put their number as high as 400,000 (some, who have preserved their Japanese koseki family registry certificates, hold Japanese citizenship as well as Brazilian). They are the biggest foreign group after the Koreans and Chinese left over from Japan's empire. South American "Japanese" are willing to take "three-K" jobs (kiken, kitsui, and kitanai; dangerous, dirty, and dull) that young Japanese these days disdain. They work hard, give samba shows for their neighbors, sing, dance and throw cheerful parties at which they drink cana, a fiery spirit made from sugar-cane. As a result, perhaps, they marry young and have families of three and four children. A community who live near us have learned little Japanese and intend, they tell us, to return to Brazil with their children as soon as they have saved what will amount to a small fortune back home. Japanese education, they report, is highly esteemed in Brazil, so their children will find good jobs. Japanese-Brazilians remit two billion U.S. dollars home to Brazil every year.

Multi-ethnic immigration, as in Australia and the U.S., could solve Japan's imminent demographic disaster. But ethno-economic Japan has set its face against accepting any substantial number of immigrants who are not of Japanese origin as a matter of principle. The installations for the Winter Olympics at Nagano, for instance, were completed by some four hundred Chinese, Iranians, and Pakistanis, all on tourist visas, who were allowed to stay only long enough to get the job finished in time. They were then rounded up by the local police and deported, in something called "Operation White Snow" (free, that is, of foreign contamination). Non-Japanese children, like my own, who are born in Japan have no claim on Japanese citizenship. "Look at them" our neighbors say. "You can see they're not Japanese." In Australia and the U.S., this would be regarded as a distastefully racist remark; in Japan is it simply the mono-ethnic thinking of centuries, and we have learned not to resent it, because our neighbors are on the whole good friends as well. But if it continues, the Japanese family must surely, if slowly, fade into not-so-distant obscurity.

Japan's crisis, which has overspilled into the other Asian countries, is illustrated by the scene I see every day in my post office-old people, fixed in their ways, timidly depositing enormous sums of money. Japanese who retire (usually to a post-retirement job, and then to another, and often to a third) get traditionally huge retirement bonuses. As there are no even reasonably safe investments to be made in the sluggish economy, they save their bonuses in the post office. Some don't even trust the postmaster. The sale of home safes has soared in recent weeks.

"The traditional financial system is not well equipped to meet their needs," Dr. Kazuhito Ikeo of the University of Kyoto told the Japanese Press Club back in May 1997. "What we must basically aim for is a transformation from a system based on bank credit to one based on the capital market." That is, more Japanese savings should be invested in industry, both in Japan and abroad, and foreign financial methods should be allowed into Japan. If young Japanese cannot support the old in the future, Ikeo in effect argued, their savings must. He might have added that the postal savings system is ultimately controlled by bureaucrats and their political allies, who have been using it to finance Japan's gigantic bridges and tunnels, the biggest on earth, concrete roads leading to isolated farm houses, duplicated bullet trains and railways that can never make a profit but that have already served their real purpose by paying the standard three percent rake-off to grasping politicians.

Dr. Ikeo was one of the main authors of Japan's current plan for financial reform, known as the Big Bang after the superficially similar exercise in London. "We should never have called it that!" a Finance Ministry bureaucrat wailed the other day. This "internationalization," first described in detail last June, about the time Japan's banking system started to come apart, is due to begin on April 1, 1998. The date is of no particular significance on the Japanese calendar, but it is the time by which all Japanese banks trading abroad, although not the domestic ones, are supposed to meet the modest requirement of the venerable Bank for International Settlements that loans be backed by eight percent in real assets.

What Lies Ahead?

The Asian bubbles were going to burst anyway, as all speculative, last-out-loses bubbles must, but a comparison of dates points to preparations for the Japanese Big Bang as the pin that did the puncturing. As long as only a few wined, dined and well-lubricated Finance Ministry bureaucrats glanced selectively at the books of the Japanese banks, ethno-economics still worked. "Credit," we should remember, is also Latin for "he believes it," and Japanese believed. In the harsh light of "internationalization," with hard-nosed non-Japanese about to peek as well, the discovery that the banking system was overloaded with bad debts, hospitable to criminals, and an informal, non-contributory welfare scheme for politicians and bureaucrats was, to say the least, unnerving. One way Japan's banks could begin to meet the eight percent target was to stop lending, hastening Japan's seven-year-old teetering on the edge of recession. But as Maynard Keynes observed, there is a level of deflation no banking system can withstand. When Japanese banks suddenly stopped lending to the rest of Asia, and probably recalled some earlier loans, they burst the bubbles they had helped inflate. This in turn impacted on many Japanese exporters. Allowing a major brokerage and several banks to go under, the first breach of ethno-economics in four decades, probably began as the cautious effort of rattled bureaucrats to help restore confidence by tidying up the worst of the mess. If so, it backfired, as the Nikkei index dived towards 12,000, the point of no return for us all.

Japanese-style damage control is now under way along tried-and-true ethno-economic lines. A couple of minor Finance Ministry inspectors were arrested and publicly humiliated on TV by being shown with their neckties removed, the mark of a criminal in Japan. The Finance Minister, Hiroshi Mitsuzuka, was forced to resign to "take responsibility" for a state of affairs he did nothing to bring about. Shocked editorials, revealing what everyone has known for years, dominate the financial press. The hoary technique of tossing out a handful of bad apples, thus implying that the rest are sound and the system is still workable, may save the day again, but it is not a cure. The government of Ryutaro Hashimoto, a suave and well-meaning exponent of pleasing everyone, is once again pursuing two different policies. On the one hand, he is cutting taxes, authorizing more white-elephant public works, and promising a mountainous thirty trillion yen to "stabilize the nation's financial system"-that is, to manipulate the stock and property markets, which are supposedly being freed from bureaucratic baby-sitting-in the hope of keeping erring banks solvent. At the same time, he is vowing to reduce the government's dependence on loans extracted from captive financial institutions-loans that are now approaching this year's gross domestic product and constitute one of the heaviest per capita national debts in the world.

Once again, the Japanese family is borrowing from itself, not to finance a better future but just to keep afloat now. Who is going to repay all these loans? In the end it has to be either the Japanese people, or at any rate people living in Japan, Japanese or not, who can pay in yen. Japan's foreign holdings cannot be brought home without depressing its customers' economies, thus crippling the export industries that are keeping Japanese in work. The export industries, the mostly highly capitalized in the world, are clanking away like the fairy-tale machine under the sea that makes salt and that no one knows how to stop. They are keeping Japan in business now, but machines don't make babies, and they don't consume foreign products. Tomorrow's young Japanese, in ever-declining numbers, will have to repay today's debts, if they want to live in a Japanese-only country. What Japan needs to modernize is not its industries, but its society, so that enough young people will earn enough to marry and start families in adequate housing, and thus increase domestic demand (for which read, a fuller life) for so long promised by Japan, and for so long demanded by its exasperated trading partners, and that never seems to come off. Japan, in short, needs a social revolution inspired, for the first time ever in Japan, by ordinary people.

But who is going to make this revolution? I look at my grey-haired neighbors checking on their postal savings. They won't have any more babies, and I doubt they will make any revolutions. They earned their money the hard way, and I can understand why they don't want to entrust it to bankers with criminal connections, or risk it on a stock market manipulated by insiders. Even a far-right revolution against a system corrupted by greed-the slogan of Japan's ultra-nationalists of the 1930's, which the gunman who recently loosed off a shot in the Stock Exchange was evidently hoping to revive-could well rouse some of the violence sleeping below Japan's peaceful surface, especially if unemployment passes four percent or so. But this revolution will still need energetic young people, and nothing is being done to produce them. In the end, an economy that wants to prosper in a multi-national system has to buy as well as sell and accept foreigners as well as lending to them. Today's fast-ageing Japanese, themselves products of an antiquated, inward-looking, ultimately self-defeating system, have no idea of how to change it-or, more importantly, whether they even want to.

MURRAY SAYLE is an Australian journalist who has lived with his wife and family in the same village in southern Kanagawa prefecture for the last twenty years. This essay is a companion-piece to his JPRI Working Paper No. 32 (April, 1997), "The Buddha Bites Back."

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