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J U N E 1 9 9 8
ITH its immense cushion of cash, Japan faces no immediate crisis on the scale of what the "tiger" economies have suffered. It is the world's top creditor, with external holdings worth close to a trillion dollars. The Bank of Japan has $225 billion in foreign-exchange reserves, nearly twice what the IMF's bailout plan is to cost. Japan's current-account surplus will be $100 billion this year, and probably $150 billion next year. The United States, which absorbs most of this Niagara of exports, will grumble as usual, but Japan lends it the money to buy Japanese goods, and if Japan ever stopped recycling much of its trade surplus into U.S. Treasury bonds, or sold them to buy gold, the current U.S. bubble would probably collapse too, with interest rates at depression-triggering double digits. A cosmetic cleanup of the Japanese banking system is under way -- with the firing of a minister, the arrest of a few unlucky officials for doing what everyone does, the promised use of public funds, and more gestures probably to come. These have persuaded the markets that ethno-economics is alive and well; Japanese taxpayers will cover the banks' bad loans, and so the crisis is for the moment under control. There will be no panic layoffs in Japan, no mass unemployment, no revolution -- for the time being, anyway. Yet Japan's crisis is basically more serious than the tigers', and time can only make it worse. Ethno-economics, the locomotive of Japan's success, has reached the end of the line.
The problem isn't money, as it is in the rest of Asia; Japan has far too much -- mostly in the wrong places. The problem is people of the right age, of whom it will soon have too few. When Japan began its stunning revival, it had modern medicine and public-health measures, a postwar baby boom, and one of the highest birth rates in the industrialized world. As Japan has prospered, the birth rate has steadily fallen; it is now at a crisis point: 1.43 births per woman, well below replacement level. Fewer babies were born in Japan in 1995 than in any year since 1899. Two thirds of Japanese women between twenty and thirty have never married. Last year the number of Japanese over sixty-five exceeded the number under fifteen; Japan is one of the oldest societies on earth. Its population, currently increasing at a glacial 0.21 percent annually, will peak early in the next century at around 127 million and will then begin a long decline. Meanwhile, Japan's archrival China is in population-growth terms where Japan was just after the war, only ten times as big -- with 26 percent of its people under the age of fifteen and only seven percent over sixty-five, China has more than 300 million youngsters with a working life ahead, and few old people to support.
Why don't today's Japanese marry or have more children? In part because all developed societies have low birth rates. But ethno-economics has also frozen Japan into many Third World social patterns of the nineteenth century. Traditionally, low starting wages mean that newly married couples have to move in with parents, in tiny houses where brides are often tyrannized by mothers-in-law embittered by their own subjugation. Grossly unequal pay and few career paths for women mean that wives in unhappy marriages cannot afford to leave -- a trap widely exploited by philandering husbands. A wife is still expected to be an unpaid nurse to her husband's parents, who might live forever, or close to it (the Japanese are the longest-lived people on earth). Once, families were large and only the eldest was stuck with this filial duty; he was rewarded by inheriting the family farm or business. With one- and two-child families, most sons are now eldest sons; young women are reluctant to marry them. Living together on a trial basis, fast becoming a Western norm, is all but unknown in heartland Japan. So are mixed parties, camping weekends, dances, high school dates, and most of the unsupervised meetings between young people that give Cupid's growth economics a start in the West -- and swell the illegitimacy rate (still, at 1.1 percent of births, vanishingly low in Japan).
From the archives:
"The two ways that a society provides for its future ... are its level of physical capital accumulation ... and the number and the quality of its kids. In both cases, you can cheat on the accumulation and, by doing that, raise your current consumption. But eventually it comes back to haunt you."
Japanese weddings are ruinously expensive displays of family wealth, Third
World style. Childbirth is not covered by the yen-pinching Japanese health-care
system, so tax-avoiding doctors demand the equivalent of $3,000 and up, in
cash, before a new baby is released to its parents. Access to higher education
is fiercely competitive and -- with private after-school cramming all but
universal -- costly. Student loans are meager, and parents are expected to
supplement the low salaries of young people. Early marriage and large families
were once enforced by community pressure, as a duty to the Emperor. Now
marriage has become both voluntary and unfashionable, and young people are
increasingly saying no, thanks. Result: the one big happy family, for which so
much has been sacrificed, is fast running out of new members. Not even the
ethnic Japanese from Latin America are tempted to join this socially backward
society; they want to make money in Japan and then take their children back
home, to Peru or Brazil. Here is proof, if any were needed, that Japan was
never guilty of the oft-described diabolically clever conspiracy to take over
the world. There cannot now be, if there ever was, an economic general staff
running Japan, Inc.; there are only nests of bureaucrats who, expecting future
favors, are more concerned with cosseting the special interests that they are
paid to supervise than with worrying about the future of the big Japanese
family, and coteries of politicians looking for secret money to buy votes. Busy
propping up insolvent banks, for instance, the administration has taken no
realistic steps to increase the supply of future members of the Japanese
family, without whom ethno-economics must ultimately be futile. Our village
last year had thirteen funerals, three weddings, and only one new baby.|
LMOST every day in our village post office old people, fixed in their neighborly, uncompetitive ways, nervously deposit enormous bundles of money. Japanese who retire (often to a succession of post-retirement jobs) traditionally get hefty bonuses. Since there are now no safe and profitable investments to be made in the sluggish Japanese economy, they hoard their bonuses in the post office. Some don't even trust our honorable postmaster: sales of home safes have been brisk since the bank and brokerage crashes.
"The traditional financial system is not well equipped to meet their needs," Kazuhito Ikeo, a professor of economics at Keio University, in Tokyo, told the Japan National Press Club in May of last year. "What we must basically aim for is a transformation from a system based on bank credit to one based on the capital market." Ikeo later amplified his thinking: "The Japanese financial system has been a financial-institutions-oriented one, which gives higher priority to the interest of banks and other financial institutions than to that of users. The system must be changed into a user-oriented one." If in the future the young Japanese cannot support the old, Ikeo was in effect arguing, then Japanese savings must. "The financial system should be sound, stable, efficient, and progressive," he urged. "It is manifestly none of these things. The whole ragbag of single-purpose institutions, restrictions, and bureaucratic administration has to go." The colossus among such institutions, the postal-savings system, is controlled by bureaucrats and their political allies, who have been using it to finance Japan's gigantic new bridges and tunnels; concrete roads leading to isolated farmhouses in politically sensitive regions; duplicated bullet and conventional trains; and railways that can never turn a profit but have already served their reputed real purpose by paying the standard three-percent rakeoff to politicians ever hungry for funds. The cost of getting out the vote has, like all Japanese prices, risen steadily over the years, and it is estimated that an entry-level member of the Japanese parliament needs $2 million a year to run his or her operation. None of these public-works projects has had any obvious effect on Japan's domestic slump, now in its eighth year, but without them, of course, things would have been worse.
From the archives:
During the depression that followed the stock market crash of 1929, Keynes wrote hopefully, "A process has been set moving which may relieve in the end the deflationary pressure. The question is whether this will have time to happen before financial organization and the system of international credit break under the strain."
Ikeo headed the working group that prepared the current financial-reform plan,
known as Nihonban Biggu Ban, "Japan's Big Bang," after a superficially similar
exercise in London. ("He should never have called it that!" a Finance Ministry
bureaucrat wailed to a mutual friend recently.) The Biggu Ban calls for market
principles, transparency, accountability, deregulation, and
internationalization -- in sum, it calls for converting Japan from the
centralized, implicitly mono-ethnic, bank-financed, national-development
economics that it copied from Prussia in the 1880s and has followed ever since
into something more like the system that evolved in English-speaking countries
from the free-trade doctrines of Adam Smith and Smith's self-proclaimed
disciples Ronald Reagan and Margaret Thatcher. Such ideas have long been
esteemed at Ikeo's university, from which Prime Minister Ryutaro Hashimoto, the
promoter of the current reform plan (at least the third in ten years),
graduated. More like a string of damp firecrackers, the Biggu Ban is being put
into effect in stages, starting this past April 1 -- a day of no particular
significance in the Japanese calendar -- and continuing until March of 2001. Its
details were publicly described in June of last year, about the time that
Japan's banking system started to come apart.
One Biggu Ban requirement is that all Japanese banks trading abroad should meet the modest capital-adequacy-ratio standard of the venerable Bank for International Settlements -- that eight percent of loans be backed by real assets. One way Japan's banks could begin to meet the target was to stop lending, a step that has pushed the teetering economy over the edge into recession. As John Maynard Keynes observed, there is a level of deflation that no banking system can withstand. When Japanese banks suddenly stopped lending to the rest of Asia, and probably recalled some existing loans as well, they burst the bubbles they had done so much to inflate. Allowing a major brokerage firm and several banks to go under -- the first open breach of ethno-economics in almost four decades -- may have begun as the cautious attempt of a rattled Japanese bureaucracy to restore confidence by tidying up the worst of the mess. If so, it has had exactly the opposite effect.
The Asian bubbles were going to burst anyway, as all speculative bubbles must, but a comparison of dates implicates the announcement of the approaching Biggu Ban as the pin that did the puncturing. As long as only a few complacent, complicit Japanese insiders glanced selectively through the books of the Japanese banks, ethno-economics still worked, after a fashion. Credit, we should remember, is also Latin for "he believes," and most Japanese, having no reason not to, loyally believed. To discover in the pitiless glare of "internationalization" that the banking system is sinking under bad debts, is hospitable to criminals, and is an informal, noncontributory welfare scheme for politicians and bureaucrats was, to say the least, destabilizing. The current crisis might have been a chance for true reform -- the "creative destruction" that free-market economic theory demands. But almost the opposite has happened.
The key question after a speculative bubble bursts is who suffers the pain. Free-market purists select first the guilty, if they can be identified, and then the imprudent (who have knowingly dealt with corporations with limited liability). But in the case of the wholly innocent -- small bank depositors, for instance -- even free-market fundamentalists mostly agree, reluctantly, to compensation from "public funds." Thus the taxpayers are collectively billed for the downside of the widely touted system. The ethno-economic position is that speculative bubbles are impossible under the wise guidance of officials -- but if by ill chance one should happen, it is best to conceal the bad news, as Japan has been doing for almost eight years. Only when that becomes impossible is scapegoating the Band-Aid of choice. Thus small-fry bank inspectors were arrested and publicly humiliated by being shown on TV with their neckties removed to prevent suicide -- the mark of guilt in Japan. The ideal scapegoat, however, is someone who doesn't really belong to the Japanese family.
Shokei Arai, the politician who hanged himself, was of Korean ancestry and had moved through several "reform" parties before rejoining the ruling Liberal Democrats -- a grim object lesson to other friendless, not-wholly-Japanese reformers. Arai held a "VIP" account with his brokers, which was guaranteed to make money no matter what happened in the market -- an arrangement perilously close to bribery. At least 10,000 such accounts are known to exist. Who holds them? Of the $614 billion in bad debts, at least $50 billion was, reportedly, lent to gangsters who blackmailed bank executives and threatened them with violence. Finance Minister Hiroshi Mitsuzuka was forced to resign to "take responsibility" for a state of affairs he had done nothing to bring about. Shocked editorials, revealing what insiders have known for years, dominate the financial press. Glimpsing the abyss, the government of Prime Minister Hashimoto, whose Liberal Democratic Party, the One Big Party for the One Big Family, has presided over the triumph and decline of ethno-economics for all but three of the past forty-three years, interrupted its drive toward accountability, transparency, and the rest of the free-market program to stage what may be the biggest bailout, or cover-up, in financial history. Thirty trillion yen ($240 billion) is promised to "stabilize the nation's financial system" -- that is, to manipulate the same stock and property markets that are supposedly being freed from bureaucratic baby-sitting -- in the hope of keeping the erring banks solvent. At the same time, Hashimoto has vowed to reduce the government's dependence on loans wrung from captive financial institutions by the ethno-economic "administrative guidance" of bureaucrats -- loans that equal a full year's GDP, one of the heaviest per capita national debts in the world, and all run up in less than three decades of ethno-economics, without a single war to be paid for.
NCE again the Japanese family is borrowing from itself, not to pay for a better future but just to keep afloat. Who is going to repay all the loans, the service of which already takes a fifth of the national budget? In the end it has to be the Japanese people, who can pay taxes in yen. Japan's foreign holdings cannot be brought home without depressing its customers' economies, thus crippling the export industries that keep the Japanese in work. The export factories clank away like the fairy-tale machine under the sea that makes salt and that no one knows how to stop. But machines don't make babies, and they don't consume foreign products. Unless the laws of the marketplace really have been repealed, Japan's ballooning exports -- particularly to the United States -- and dwindling imports must force the yen up again, compelling more offshore investment in sweatshop production and more belt-tightening at home, for as far into the future as anyone can see. Japan is hostage to American prosperity, and America is hostage to Japanese frugality. Ethno-economics has locked the two nations into a loveless embrace, and smaller Asian economies into a sumo wrestler's hug by Japan. Something has to give. But what?
Japan needs to modernize not its all-too-modern industries, or even its rickety financial system, but its society, so that more young people will earn enough to marry and start families in adequate housing, generating the increased domestic demand (for which read "leading the fuller lives") long promised by Japan and long demanded by its exasperated trading partners. In short, Japan needs a social revolution inspired, for the first time ever in its history, by ordinary people, in their own interest. But who is going to make this revolution? I study my gray-haired neighbors as they check 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 trust it to bankers with criminal connections, or risk it on a stock market manipulated by sly insiders. The security of safe savings, of neighbor helping neighbor, as we were helped, of trust born of centuries of surviving earthquakes, typhoons, and rapacious landlords together, may die with them; but while they are here, they have a growing proportion of the votes, and they will not use them to destroy the old certainties. Japan is a democracy, and its aging population grows ever more conservative and more supportive of the status quo, which means the conservative, rural-based Liberal Democratic Party.
Not all Japanese, however, meekly accept the use of public funds to shore up the erring banks, another sign that ethno-economics is in terminal decline. "GIVE US BACK OUR TAX MONEY, YOU BIG THIEVES!" demanded the headline, in the March 14 issue of the magazine Shukan Gendai (Modern Times Weekly), over an article charging that the banks that have driven many small businessmen to suicide by refusing them credit have assets -- fancy buildings, private clubs, and luxury holiday resorts -- that could be sold to cover some of their bad loans. The social critic Jun Ito, writing in the influential magazine Bungei Shunju (Spring and Autumn Literary Art), sees international investors and speculators behind what he calls "American pressure" for opening Japan's closed financial markets. These charges are reminiscent of some of the anti-capitalist themes that were used in the 1930s by Japanese ultra-nationalists, who claimed that pure-minded Japanese had been corrupted by greedy businessmen in league with foreigners -- themes the far-right gunman in the Tokyo Stock Exchange was evidently hoping to revive. If Japanese unemployment climbs much above the present 3.6 percent, some of the political violence sleeping under Japan's orderly surface could erupt; but Japan's economy is nowhere near a 1930s crisis -- yet -- and the tiny Japanese far right has no military arm. The lone ultra-nationalist living in our village is quiescent, and shunned by his neighbors.
For the present the likeliest outcome for Japan is drift, and for its Asian neighbors the slump that inevitably follows a speculative boom. The Biggu Ban may well be sidelined or reduced to a series of gestures, like the many reform programs that have preceded it. The reformers themselves face removal from office in an intra-party maneuver. The Japanese public, if our neighbors are a reliable sample, is more bemused than alarmed by daily revelations of how the nation has been misgoverned; belief is still strong that the one big family will somehow sort out its troubles, and if a few reprobates have to go to jail, so be it; the system itself must be sound. There are a few hundred homeless sleeping in cardboard boxes in Tokyo, and lines at Salvation Army soup kitchens can sometimes be glimpsed near Tokyo University. But public pressure for real reform is still slight. Today's aging Japanese, formed by an antiquated, inward-looking, ultimately self-defeating system, have no idea how to change it -- or whether they even want to.
Murray Sayle has traveled widely in Asia and has written for "most of the magazines that still publish substantial pieces in English." He has addressed the Japan Policy Research Institute of San Diego on some of the themes in his article in this issue.
Illustrations by David McLimans
Copyright © 1998 by The Atlantic Monthly Company. All rights reserved.
The Atlantic Monthly; June 1998; The Social Contradictions of Japanese Capitalism; Volume 281, No. 6; pages 84 - 94.