THE INTERNATIONAL ECONOMY FALL 2010Japan - PDF document

THE INTERNATIONAL ECONOMY FALL 2010Japan’s fter the Democratic Party ofJapan’s overwhelmingSeptember 2009 victory fol-lowing half a century of LDPdominance, Western commen-tators hailed Japanese democ-racy’s revitalization with,finally, a two-party system.They were wrong. Japan inaugurated a no-effective-party system that continued the decay of a regime thatAlthough hopeful, Japanese voters did not give theDPJ a mandate to govern. They gave the LDP a mandateto exit. The Hatoyama government comprised an unman-ists, old communists, a religious party, the mostreactionary elements of the old LDP, and idealistic youth.Unable to govern, its poll support collapsed from 70 per-cent to 14 percent eight months later. Yukio Hatoyamaresigned and in July 2010 the DPJ managed to win evenfewer seats than the old LDP. Hatoyama’s fall, but Obama didn’t bring Hatoyama down.affecting Ozawa and Hatoyama, collapse was inevitable.Japan desperately needed enhanced competition at home,enhanced globalization, reduced corruption, and reducedwaste of national resources. However, Hatoyamadenounced globalization, presided over traditional elec-toral corruption, paid off the usual interest groups,promised to expand the wasteful postal savings system,and promised to rescind reforms of the country’s vast,redundant national post office network. His contradictorynational security policy proposed to loosen ties to theUnited States while keeping Japan’s military weak at atime of rising tensions with China. He committed to mak-ing Japanese leaders less dependent on the bureaucracy, aworthy goal, but not if the politicians couldn’t makecoherent policy. His successor, Naoto Kan, ran on a plat-form of drastically raising the consumption tax while cut-ting corporate taxes—in a country where corporations areextremely rich at the expense of consumers who have toUnfortunately the DPJ’s decline probably does notend Japan’s long political decay. What brought Japan tothis state? The answer is found in the country’s success-ful search for stability.JAPAN’S SUCCESSFUL POSTWAR STABILIZATIONPostwar U.S. and Japanese leaders sought stability for ademoralized, divided, unstable, and threatened Japan. VERHOLT The exponential growthof political failure. William H. Overholt is Senior Research Fellow atHarvard University’s Kennedy School of Governmentand author, most recently, of Asia, America and theTransformation of Geopolitics Press, 2007). INTERNATIONAL ECONOMIC POLICY888 16th Street, N.W.Washington, D.C. 20006www.international-economy.comeditor@international-economy.com FALL 2010 THE INTERNATIONAL ECONOMY VERHOLT They started by vesting power in the bureau-cracy, keeping much of policy safe from demo-cratic politicians. Half of government revenueswere off-budget, away from political scrutiny. But the country remained divided, vulnera-ble to gridlock, disruption, and communist sub-version. Then, in 1955, the two conservativeparties joined to create the LDP, backed by asystem of patronage, bureaucratic control of vastresources not subject to democratic oversight,corrupt political funding, U.S. support, politicalmanagement of the media and judicial system,and successful economic policies that no chal-lenger could defeat. The LDP governed withonly one tiny break until 2009. The 1955 polit-ical system perfectly complemented the so-called 1940 economic system which, to mobilizethe country for war, gave the government greatpower to guide the economy, ensured big com-panies against failure, and protected Japanesecompanies against foreign competition andtakeovers. Even after electoral defeat, the LDP-The LDP’s stabilization of Japan and its successfuleconomic policies—subsequently emulated throughoutthe region—saved Asia for the West. For twenty years,the LDP borrowed best practices from all over the world,built world-class administrative institutions and infra-structure, supported world-class conglomerates, andpushed aside interests that impeded national progress. Byits example and its economic stimulus, it stabilized Asia.Without Japan’s example and stimulus to the smallerregional economies, American military might would haveSTABILITY BECOMES OSSIFICATION With the Japanese miracle soaring, powerful prime min-ister Kakuei Tanaka determined to rebalance politicalpower. To wrest some power from the bureaucrats, heorganized the legislature into most powerful interest groups, notably agriculture, con-struction, property, retail, and banking. The legal andthem insuperable. But after the Lockheed corruption scan-dal brought down Tanaka in 1972, the bureaucracy allied into an ossified system that inhibitedfundamental political or economic change. Japanese pol-itics became a subsidiary of the interest groups behind theThe economic miracle begat complacency. By 1975,growth was in their DNA, ensuring leadership of Asia andeventually the world. Instead of sidelining obsolescentinterest groups, they subsidized them. Vital postwar infra-structure construction segued into egregious patronage:railroads to small towns, superhighways to small villages,long bridges used largely by deer, and concrete lining ofevery river and stream in Japan. The Japanese intelli-dominance of decision-making“structural corruption,” a phenomenon far more debili-tating than Chinese corruption. In China, most transac-tions entail bribes or kickbacks, but policy moves theeconomy forward. In Japan, most officials are scrupu-lously honest, but policy dominated by reactionary inter-Instead of sending teams abroad to seek best prac-tices, leaders began to emphasize Japanese uniqueness.Foreign trade negotiators asserted that imports of U.S.beef must be prohibited because Japanese intestines werea different length. European skis were unacceptable Japanese voters did not give the DPJ a mandate to govern. They gave the LDP a mandate to exit. apan desperately needed enhanced compe-tition at home, enhanced globalization,reduced corruption, and reduced waste ofnational resources. However, as prime minister,Yukio Hatoyamadenounced globalization,presided over traditional electoral corruption,paid off the usual interest groups, promised toexpand the wasteful postal savings system, andpromised to rescind reforms of the country’s vast,redundant national post office network. His con-tradictory national security policy proposed to loosen ties to the UnitedStates while keeping Japan’s military weak at a time of rising ten-sions with China. He committed to making Japanese leaders lessdependent on the bureaucracy, a worthy goal but not if the politicianscouldn’t make coherent policy.—W. H. Overholt THE INTERNATIONAL ECONOMY FALL 2010 VERHOLT because Japanese snow was different. Foreign goods ingeneral needed to be restricted because Japanese house-wives didn’t like foreign things. Grateful for corporate funds, the LDP protectedsqueeze the citizenry through high prices. Restrictiveproperty and tax laws kept living spaces tiny. Resultantlack of domestic demand kept the economy dependenton exports for growth. But import constraints raised pro-duction costs and thereby limited exports. Restrictedcompetition led to inefficiency. Although Western night-mares about Japanese economic domination persistedpast 1990, productivity and growth steadily declinedafter 1975; the 1990 bubble bursting and two subsequentwasted decades just accelerated post-1975 decay. (SeeThe System That Soured,1998.) Demographic decline and lack of domesticdemand have made it impossible for Japan’s economyto grow without fiscal stimulus that has accumulatednational debt over 200 percent of GDP (net debt overAlthough Japanese incomes are nominally veryhigh, by 2000 Shanghai farmers, in a country with anominal average incomes about 5 percent of Japan’s,were living better than mid-career Tokyo executives—inspacious two-story detached houses, with stylish clothesand $30 DVD machines barely lower in quality thanJapanese $600 machines. Likewise, calculations byRichard Katz of show that byaround 2015, purchasing power-based Korean incomeswill likely exceed Japanese. Even while Japan’s econ-omy remained much larger than China’s, China’s farmore open economy yielded trade connections and atten-dant influence with neighboring countries that farexceeded Japan’s. ate its first class of college students who have neverexperienced solid economic growth. They lack the con-spicuous energy and optimism that have vividly charac-terized youth in modern South Korea, Taiwan, China,and pre-1990 Japan. While Chinese and Korean studentsflood U.S. universities, Japanese professors report declin-A disturbing number of Japan’s great companies are inrelative decline. Samsung, Hyundai, and Korean Airlinesare eating the lunch of Sony, Toyota, and bankrupt JapanAirlines. Japan’s stodgy commercial banks are increas-decade ago seemed hopeless. Beneath still-brilliantCanon and Honda are extensive mushy, protected,A decade ago, facing crisis, Prime Minister Koizumicleaned out the banks, increased transparency, allowedsome (not enough) old firms to die, globalized some-what, and started to cut the taproot of the structurallycorrupt patronage system (the Postal Savings Bank). Hethereby averted a Japanese financial collapse that wouldThis heroic accomplishment required him to run against nderstanding the process of decay clarifiesmany issues. Facile comparisons betweenJapan’s lost decades and America’s post-crisisproblems fade when one contrasts Japan’s ossificationwith U.S. capacity for change. The bipartisan 2000Armitage Report demand to reduce U.S. attention toChina and reestablish a Japan-focused Cold Warnational security structure would never have beenattempted had U.S. national security specialists under-stood Japan’s decay. The Japanese popular futility inthe face of interest groups’ power explains the electoralapathy and yearning for change that nearly allowedJapan’s right-wing nationalists to take power—a riskthat could arise again in even more unpalatable form.Ichiro Ozawa, a reactionary ex-LDP machine politicianblackened by scandal and opposed by 79 percent of theelectorate, got 200 parliamentary votes to Kan’s 206 inballoting for party leadership. Ozawa’s defeat could ini-—W. H. Overholt By 1975, Japanese leaders weregrowth was in their DNA, ensuring leadership of Asia and eventually the world. FALL 2010 THE INTERNATIONAL ECONOMY VERHOLT his own party, threatening to “destroy the LDP.”Ironically, his success actually saved the LDP and con-demned Japan to another decade of political and eco-nomic decay. Koizumi’s successors restored complacency. TheAbe, Fukuda, and Aso governments ignored economicreform. The DPJ’s Hatoyama reversed reforms, denounc-ing globalization and explicitly repudiating much ofKoizumi’s most important reforms of the Postal SavingsBank and the post office system. Post-Koizumi leaderships have looked to the pastrather than to the future. As the core LDP weakened, itsfar right, represented by Prime Ministers Abe and Asoand by Koizumi’s need to maintain right-wing support bypatronizing the Yasukuni Shrine, sought to restoreJapan’s self-esteem by countenancing and encouragingthe rewriting of history, giving stature for instance tothose who argue that the United States deliberatelycaused World War II, that invasion of China was neces-sary, and that Koreans invited Japanese colonization. Hatoyama’s more honest backward-looking visioncounterposed to the evils of globalization a nostalgicvision of traditional village Japan, to be supported bymaintaining much of the rural patronage system that hasso drained Japan’s finances and inhibited its social mod-No influential leader has yet provided a crediblevision of the future. Japan has the world’s most educatedpopulace, exceptional technology, great organizations,honest and competent officialdom, outstanding energyefficiency and environmental standards, and the world’smost civilized standards of behavior. It could show theworld how to manage a graying society in ways that takehuman dignity to new heights. But to do so, its leadersmust enhance competition, globalize investment andtrade, give women equal job opportunities, and expandOpponents of reform invoke “cultural” traditionsthat were actually copied from German and Soviet pre-war mobilization efforts. Japan’s leaders must explain totheir people that the remnants of the 1940 and 1955 sys-tems are not unique ancient Japanese traditions thatassure contemporary success. Rather, they were special-ized responses to the needs of wartime mobilization andpostwar recovery. Japan today is like Nissan beforeCarlos Ghosn: everyone knows what needs to be done,but the establishment can’t do it. Once before, all of eastern Asia learned from Japan. TheJapanese miracle became the Asian miracle. Now theflow of learning must reverse. South Korea, coming fromworse poverty, greater financial trauma, and similardemographic problems, not to mention a worse problemwith North Korea, has shown through faster globaliza-greater competition, and more sustained financial reformhow to create a more dynamic economy. China, with itsgreater openness to foreign trade, foreign investment,and foreign culture, may well avoid the risks of Japan-Historically, Japan has reformed more successfullythan other nations when faced with great crises. Japan’seras of magnificent achievement occurred immediatelyafter Admiral Perry’s Black Ships appeared in the mid-nineteenth century, and again after General MacArthur’sgray ships in the mid-twentieth century. Both periods ofspectacular economic growth and rising prestige resultedfrom repudiation of traditional organization in favor ofcess, Japan ultimately rejected the lessons of institutionalDecay of the old fruit necessarily precedes germi-nation of a new seed. Japan has both solid fundamentalsand exceptional international goodwill. U.S. commit-ment to a supportive alliance with Japan is unchallenged.Virtually the entire world hopes that this time Japan willreform and revitalize without some terrible crisis.Leadership could come from new parties like Your Partyor from coalescence of younger leaders drawn from sev-eral parties. Meantime, the postwar U.S. and Japaneseleaders who sought to ensure stability built verysolidly—too solidly. Foreign trade negotiators asserted thatimports of U.S. beef must be prohibitedbecause Japanese intestines were adifferent length. European skis were Japanese snow was different.