Japan's 'Terrifying' Economy
RECENT coverage of the Bush-Kaifu summit makes it clear that America has fallen into a dangerous trap. Our misguided belief that a significant reduction of the bilateral trade deficit would be the best measure of economic parity between our two economies jeopardizes our national economic sovereignty and future living standards. Immediately preceding the summit, during a briefing in Tokyo on US efforts to open specific Japanese markets, one US trade expert candidly warned against this narrow view, confiding to me that even if we were to solve these trade problems, "the fundamentals [of the Japanese economy] would be terrifying."
While such a drop would certainly aid some US exporters and ease anti-Japan sentiment within the US public, reducing the trade imbalance through an increase in US exports of agriculture, for example, might only help to hide the basic strengths of the Japanese economy as we enter an era when manufacturing and software muscle matter most. For example, Toshiba's March 19 purchase of US-owned Vertix Semiconductor Corporation for $20 million won't show up in the trade statistics, but says a lot about Japan's economic future.
Here's a brief overview of some of those "terrifying" fundamentals - and a debunking of a few favorite myths about Japan:
Investment. Japan, with an economy about half our size, out-invested the US in plant and equipment in 1990 by $60 billion, or per capita by more than 2 to 1, the first time in the postwar period that the US has been surpassed in this key measure of long-term economic growth.
Copycats. The conventional wisdom that the Japanese are only good copycats, not innovators, is becoming outdated, as a Business Week article concluded about software. One example: In an effort to promote creativity through basic R&D, the Japanese have set up a private-public sector collaborative effort (the Key Technology Center), which has invested over $1.1 billion to fund hundreds of cutting-edge projects.
Consumers. Some commentators have suggested Japan's export-led economic growth will diminish as consumer frustration with high prices boils over. I wouldn't count on such change soon, nor would many Japanese public-opinion experts.
Banking. As investment banker R. Taggart Murphy says: "Japan today sits on the largest cache of wealth ever assembled." Of the world's 10 largest banks, nine are Japanese. Japan buys over 30 percent of US Treasury bonds. Japanese-owned banks now supply 20 percent of all credit in California. Nomura Securities has enough capital to buy up all top Wall Street companies.
Individuality. Don't continue holding your breath for the long-awaited Japanese social revolution that will put the brakes on their economic growth. More workers are job-hopping and some youths are more outspoken than their parents. But work hours haven't really dropped (companies like Matsushita talk of new policies to force workers to take vacations). Studies indicate a "limit to the progress of individualization" with only 34 percent of the nation believing it's better to be different from others.
Taxes. While I was concerned about Japan's delay in anteing up for the Gulf war, when the $13 billion finally came through it was paid for by a tax increase - bitter political medicine but sound fiscal policy. As one Japanese trade official said, "Japan is a society concerned with solvency." By contrast, Congress' $15 billion Gulf funding was financed with debt, doubling the total taxpayer cost and ignoring the pay-as-you-go ideal of last year's budget accord.
Acquisitions. In an effort to position themselves in the US and gain access to innovative technologies, Japanese companies have rapidly increased their acquisitions of US firms over the last decade, with over 150 such partial or whole acquisitions in the electronics industry since 1986.
Infrastructure. Tokyo's current budget indicates Japan is committed to a massive infrastructure investment program promised under bilateral talks - $4 trillion over 10 years. Ironically, this was a demand pressed upon Japan by US trade negotiators who hoped to slow Japanese export growth. While this domestic investment may produce short-term results, in the long run it can only ensure rising productivity growth for Japanese firms.
By contrast, consider the basics of the US economy: out-of-control budget deficits, hundreds of billions in infrastructure needs, a dramatic decline since 1980 in the US share of global exports in key industries, a $500 billion S&L bailout, and an education system that produces Nobel laureates but also fails to graduate 1 million kids a year.
Despite these concerns, I'm still optimistic about America's unique economic strengths and flexibility. But if we're going to avoid either a dangerous trade war with Japan or third-rate US economic status, we've got to go beyond the myth that a bilateral trade balance will be the silver bullet for the US economy. America must be rebuilt, and a level multilateral playing field be aggressively created.