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J U N E  1 9 9 8

The Social Contradictions of Japanese Capitalism
by Murray Sayle

Out-of-control Japanese economic beast
The online version of this article appears in two parts. Click here to go to part two.

IT'S not every day that a nation's economic woes -- and the whole world's -- come knocking at your door, especially when you are the only foreign family in a Japanese mountain village a couple of hours outside Tokyo. But by the turn of the year we had already heard so much amazing news about what everyone said was the world's richest and most admired economy that we were ready for -- well, almost anything. Even so, the request of the polite young man at our door on a snowy Monday morning was, to put it mildly, a surprise.
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Related link:

  • NikkeiNet
    An English-language business newspaper focusing on Japan.




    From the archives:

  • Flashback: "Indonesia's Search for Order" (March, 1998)
    Asia and the world have changed dramatically since Suharto came to power -- but the fundamental questions facing Indonesia remain the same.


  • Flashback: "How the World Works" (December, 1997)
    East Asia's financial woes have prompted claims of victory for American-style capitalism. But as James Fallows argued in December, 1993, Asia was actually following our example.



  • "Can you help us out, Sayle-san?" our visitor asked. We know him well. He works at our village credit union, which accepts savings and lends so that people can buy homes. "If you have any spare cash around the house, please come and pay it in straightaway. It's only for twenty-four hours. You can take it out again tomorrow."

    "We'd like to help," my wife, Jenny, said, "but as it happens, we don't have an account with you. And what you have just said doesn't exactly encourage us to open one. Why do you need my housekeeping money?"

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

    Here I should explain that I am Australian and Jenny is English, but our three children were born and raised in this village, and the villagers treat us like family. When our house burned down, by accident, nine years ago, our neighbors collected close to $13,000; insisted that we accept it, along with old clothes, dishes, pots and pans, and a typewriter for me to get back to work on; found us the house where we now live; and generally made it clear that they wanted us to stay among them. As other villagers have hit trouble, we have slowly been repaying their bounty.

    I stopped by later to ask our visitor what was going on. His new office, all glass and chrome, stands out among the old wooden houses on the village street. "We don't usually keep cash over the weekend," he explained. "I was afraid that someone would try to take money out this morning, the word would get round that we couldn't pay, and in an hour we'd be cleaned out."

    It didn't happen, but an hour later a neighbor called us with some breathless advice. "If you have any money in the Yokohama Bank, take it out," our caller advised. "They'll be the next to go." Jenny went down to take a look, and sure enough, lines of people were making withdrawals. It turned out to be just a rumor, but it showed how jumpy ordinary Japanese are getting these days.

    I called a friend from Sydney, who is 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, if we play it right." That night a banker friend of ours called from Geneva. "How's the mood there?" he asked. "If the Nikkei [the Tokyo stock index] drops below twelve thousand, 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.) New York in 1929 felt edgy and nervous, old-timers say, just as Japan does in the spring of 1998.

    Next I did a mood check at our village post office. I am there most days, posting letters, but mail delivery is not its main business. Japan has 24,638 post offices, big and small, which also accept savings and offer insurance policies. A flashing sign over the counter showed the day's interest rates: 0.25 percent for deposits held for a year, 0.455 percent for those held for five years. Despite these microscopic rates, I saw our gray-haired neighbors paying in thick wads of cash, the yen equivalent of $10,000 or so at a time, to be rewarded with a low bow from the postmaster (an honored man in our village) and a packet of tissues, as a small, friendly gift. Money has been pouring into postal savings since the crisis began, last year, and the system now holds, with insurance and pensions, the yen equivalent of $3 trillion -- enough to pay off three fifths of America's national debt. It is by far the biggest (and most stagnant) pool of capital in the world. Japanese savings in banks and the post-office system have been said to be two thirds of all the money readily available to lend to our indebted planet.

    With that majestic Mount Fuji of all-but-free capital, how can Japan be in economic trouble, and why is it not rescuing the rest of Asia? Well may we ask. That Japan's crisis is deep is obvious, even in our sleepy village. For months doom has crowded the Japanese media: first a major bank on the northern island, Hokkaido, collapsed, then one of Japan's "big four" stockbroking firms, and then another bank. Almost every day a new case has surfaced of corruption in the heart of Japan's national administration, with payoffs to gangsters and crooked politicians, and lavish wining and dining of top Japanese bureaucrats and ex-bureaucrats, who increasingly resemble the terminally corrupt nomenklatura of Soviet communism's last days. Exports are soaring, but Japan's economy has paradoxically gone into deep recession. As the Bank of Japan delicately puts it, "A prominent recovery in final demand is hardly foreseeable." The Finance Ministry has confessed that Japanese banks hold bad loans worth a confidence-crushing 76.7 trillion yen ($614 billion), proportionally ten times as much as America's savings-and-loan failures cost.

    On January 13 a right-wing gunman took a Finance Ministry official hostage at the Tokyo Stock Exchange and fired a shot into the ceiling. Later that month two Finance Ministry officials were arrested and their offices searched; another committed suicide on March 12. Finance Minister Hiroshi Mitsuzuka and his deputy were forced to resign. An up-and-coming member of the Japanese parliament, accused of pocketing $2 million in secret payoffs from a securities firm, hanged himself in a Tokyo hotel in February. In mid-March a high official of the Bank of Japan was arrested on a charge of bribery -- the first-ever arrest in the Japanese central bank's 116-year history -- and the bank's governor and his deputy have been replaced by two nonbankers, a businessman and a journalist. Many Japanese are wondering, Has peaceful, prosperous Japan been hijacked by criminals?

    The Fiery Birth of Ethno-Economics

    THE Second World War ended fifty-three years ago this August, with Japan devastated as no other industrialized nation, even Germany, had ever been before. The Allies began dismantling their war economies within weeks of victory. Japan -- its cities ruined, its factories leveled or seized for reparations, its treasury empty; occupied by Americans at first bent on punishment; unable to feed itself, especially with millions of refugees and disarmed soldiers back from occupied China and Southeast Asia -- could afford no such luxury. But Japan had a secret asset: the single-minded organization that had equipped its fleets and armies. Within days of Japan's surrender the Munitions Ministry became the Ministry of Commerce and Industry; in 1949 this became the Ministry of International Trade and Industry (MITI). Its wartime partner, the Finance Ministry, kept its innocuous name, which goes back to the eighth century. The same officials sat at the same desks and arm-twisted the same industrialists over the same battered telephones. In bypassing Japan's rubber-stamp parliament and governing through its efficient, biddable bureaucracy, the American Occupation unintentionally removed the last restraints on the bureaucrats' powers. Whereas it is said that other countries have administrations, Japan's administration has a country. But Japanese official corruption is deeply rooted in history too: the picturesque Japanese euphemism for a bribe, sodenoshita, means "something in the sleeve" -- and only the shogun's officials wore wide sleeves.
    Related link:

  • "The Origins and Meaning of Corruption in Japanese Ministries: One Hypothesis"
    A 1996 article published in a University of California online journal that focuses on U.S.-Japan relations.



  • The Japanese bureaucracy has never governed strictly 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 one another's lapses. Bureaucrats, and not elected politicians, negotiate the deals between ministries -- or, to put it in more basic terms, decide who gets what. The rare politicians who have tried to change the system have simply been ignored until they went away. Rule by officials was originally justified by the theory under which Japan fought its war: all Japanese, the thesis goes, are one big family, bound by blood and descended from the Sun Goddess; the Emperor is her direct descendant and hereditary high priest. Long after the war ended, the top layer of bureaucrats, fewer than a thousand strong, still held commissions personally brushed by Emperor Hirohito, which gave them the aura of demigods in the eyes of simple folks. Today the successors to those bureaucrats no longer hold imperial warrants, but they expect to be revered as if they did. Japanese politicians are held in public contempt as mere peddlers of influence -- with the bureaucracy. "To expect integrity or honesty in a politician is like trying to buy fish at a produce market," a blunt Minister for Justice (and former Tokyo police chief) once remarked. Elite officials, qualified by stiff examinations and bound by school and college ties, were long held in awe, almost like a quasi-priesthood of the national religion, Shinto. Until the present crisis these officials ran Japan much as they collectively saw fit.

    Sad state of affairs The semilegal means by which Japan is governed have had profound economic consequences. Postwar Japan had a surplus of highly skilled hands and, with a squeeze, enough land to live on. The third ingredient necessary for economic growth, according to classical theory, is capital. With few exceptions (such as Burma and, until quite recently, China), other countries seeking to build or rebuild their economies have taken the easy option and borrowed from abroad. Japan right after the war held little appeal for foreign lenders. The young bureaucrats left over from the war, using their vague, unquestioned powers, set about coaxing and squeezing capital from their ruined country, devising inducements for Japanese who had a little money to invest it at home. Thus was born the poorly understood but much praised "Japanese model" -- what we might call ethno-economics, Japanese-style.

    Banks were allowed to buy and hold corporate stock and real estate as capital reserves, against which to make loans worth ten or twenty times as much. Japanese stockbrokers, functionally descended from the traders who bribed the shoguns' officials and gambled on rice futures, were tacitly allowed to make secret deals with favored clients and to trade on their own account -- or, to speak plainly, to rig the markets for their political and business friends. After the stock-market crisis of 1965 securities companies were licensed almost as if they were banks. Ordinary wage-earners were encouraged to keep their savings at frugal 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). Set up in 1875 on a long-since-vanished British model, the postal-savings system is the one Japanese financial institution that, despite some corrupt mismanagement, has kept faith with its depositors, honoring even the tattered savings books that Japanese refugees brought back from Korea and China after the war. Controlled by the Finance Ministry, postal savings paid for the rebirth of Japanese industry after the war and then financed much of its stunning export success. Now no one really knows what to do with all that money.

    Every distinguishing feature of the Japanese economy comes from the national theory of unity through ties of blood, and from the desperate and often semi-secret strategies devised in the postwar years to exploit that theory for bare national survival. Official manipulation of markets? Families are ruled by love, not markets. Preference for costly local products over cheaper imports? Don't break Granny's rice bowl. Only token strikes? Families don't strike against kin. The rejection of foreign capital (the only significant exceptions are IBM, let in because of its technology, and two foreign oil companies with wells in the Middle East)? Don't sell the family business to strangers. The exclusion of new immigrants and foreign "guest workers"? Outsiders shouldn't enjoy what Japanese have slaved to build. (The only substantial exception, some quarter of a million Latin Americans, are, or claim to be, of Japanese descent.) The equitable distribution of income -- still the most egalitarian the industrialized world has ever seen? Families share. Deals with labor 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. Nearly full employment? A family owes all its members the dignity of work. The legendary Japanese work ethic? Don't let the family down. Self-policed quality control? A defect harms every Japanese. And so on.

    The uglier aspects of the system, which so disturb non-Japanese, all come from the identical theory. Bid-rigging on private and government contracts is nearly universal: big firms get the big jobs, little ones get the scraps, but everyone stays in business. Japan has far too many banks, bars, building firms, mom-and-pop retailers, and post offices for economic efficiency -- but they provide a living for some Japanese. Japan has the safest streets in the world but also the biggest criminal organizations. Why do the police tolerate these pests? They're Japanese too, and so they tend not to prey on ordinary citizens, and they report freelance muggers and burglars to the police. Older people even see them almost as patriots, because they rescued the Japanese underworld from Chinese and Korean mobsters after Japan's lost war. Why are semi-fascist right-wing thugs allowed to blare their stale wartime propaganda at bored passers-by from armored loudspeaker trucks in city centers, including Tokyo's? Because they use the metaphor of the Japanese family. Why are Japanese corporations obsessed with market share and unconcerned about profits? Because market share means jobs for Japanese, and mere shareholders, who did little or nothing to finance or run the business, have no right to criticize the management or ask for dividends. Well-known Japanese companies routinely hire gangsters to rough up shareholders who ask embarrassing questions at company meetings. Even Japan's "convoy system" (often denounced as a devilish plot to destroy foreign competitors), in which weaker exporting firms are propped up by stronger, is merely ethno-economics in action in a multi-ethnic world marketplace. The current shoring up of insolvent banks with taxpayers' money is ethno-economics too. After all, the bad loans were made by Japanese to other Japanese, so the whole family has to help repair the damage -- like repaying a brother's debts.

    What Has Gone Wrong?

    WHY are the Japanese now so nervous, and why are other Asian economies being destabilized by Japan's jitters? Because Japan's prized ethno-economics has come to a dead end, presaged by the bursting of its late-1980s bubble economy and by intractable social failures that are now painfully obvious. The Japan of the late 1980s has already joined the South Sea Bubble, the Dutch Tulipomania, the Florida Land Boom, and Wall Street 1929 as a textbook example of what happens when enough naive people wish to become rich, and unscrupulous people see them coming. When the bubble was at its height, in June of 1990, the grounds of the Emperor's palace in Tokyo, smaller than New York's Central Park, were informally valued at more than all of Canada, while skinny Japan itself was supposedly worth more than the broad USA. Soon after, the bubble burst.
    Atlantic articles written during the height of Japan's seeming economic invincibility:

  • "How the World Works," by James Fallows (December, 1993)
    "Starting in 1990 a number of Japanese businessmen and scholars began publicly saying the same thing, suggesting that Japan's business system might be based on premises different from those that prevailed in the West."


  • "What Is an Economy For?", by James Fallows (January, 1994)
    "Anglo-American theory instructs Westerners that economics is a 'positive-sum game,' from which all can emerge as winners. Asian history instructs many Koreans, Chinese, Japanese, and others that economic competition is a form of war."


  • "Getting Along With Japan," by James Fallows (December, 1989)
    Instead of nagging the Japanese to change their society and economy, we should protect our own interests by acting on the new realities of international trade.


  • "Japan: Let Them Defend Themselves," by James Fallows (April, 1989)
    Americans want Japan to spend more on its military, thinking that will equalize economic competition. It won't.


  • "The World According to Ohmae," by James Fallows (June, 1988)
    An unconventional look at the U.S. trade deficit.



  • The bubble brought some public benefits, to be sure. Our village spent its extra tax revenue from nearby export industries on a library, a skating rink, and a heated pool, in which our children and their Japanese friends frolic. Enormous investment went into Japan's already grotesquely overcapitalized export industries, with the blessing of bureaucrats who planned to join them as "advisers" after retirement. Meanwhile, the flat post-bubble economy encouraged consumer savings and discouraged imports. The result was a surging trade surplus and a rapid rise of the yen against the dollar. Even before the yen touched 79.75 to the dollar, in April of 1995 (a long way from the 360 of the "miracle" growth years), Japanese products became just about unexportable. Soon after the collapse of the bubble, in 1990, many Japanese flagship companies started moving production of Japanese-brand-name goods offshore, to Thailand, Indonesia, Malaysia, and South Korea -- all well known in Japan as parts of Japan's wartime Greater East Asia Co-Prosperity Sphere. The evidence is strong that a flood of Japanese money, in the form of loans and direct investments, touched off the speculative bubbles that have now burst in those countries.

    Altogether, Japanese banks (hiding huge bad loans at home) sent $265 billion to the rest of Asia, well after Japan's own bubble had burst. Of $58.7 billion owed by Indonesia, $23 billion came from Japan. Japan holds about 60 percent of Thailand's debt, and was by far the biggest lender to South Korea, with $68 billion of unpayable debts that will soon come due. Seeing Asia's bubbles rising, other gullible bankers followed Japan's lead. The Japanese banks hoped to reap abroad the profits they could no longer make in their depressed home economy, and to cover some of their bad loans. Despite the high yen, Japanese export industries hoped to stay competitive by using components made abroad at sweatshop wages. And in their bubble eras other Asian countries were taking nearly half of Japan's exports.

    Economic suicide Confident that inevitable miscalculations would be covered by their wined-and-dined friends in the bureaucracy, the Japanese banks lent in their usual reckless style. But this time they were on their own. Tokyo's wartime government had little control over its armies abroad; now its finance bureaucrats had even less over the Japanese money pouring into Asian neighbors. The result was to duplicate in these countries Japan's bloated export industries, all competing for the same markets in the United States, Australia, and Europe. And Japan's new co-prosperity sphere, like the original one, had fatal weaknesses. Japan had used mainly its own money to industrialize; all the others had borrowed, mostly from Japan. So after China in 1994 devalued its currency by 33 percent, none of the others could hope to compete with the motherland of all sweatshops, or to keep up interest payments on its loans. No wonder Japan has eagerly joined the International Monetary Fund's $118 billion "Asian bailout" scheme: the scheme will bail out not so much borrowers as lenders, and Japan has been by far the biggest lender of them all.

    Why did European, North American, and even some Australian banks add another $200 billion or more to the Japanese money inundating Asia? Partly in the mistaken belief that the Japanese must have known what they were doing; partly because of the traditional argument about cheap labor; but mainly because something called the Asian economic model had been discovered, and it, like many another mirage, was mistaken for the wave of the future. In truth, there is only a Japanese model -- the accidental consequence of an overwhelming defeat. South Korea, with its even more homogeneous and just as diligent population, and the same disdain for foreigners and their products, has a homegrown version of Japanese ethno-economics -- along with a fatal weakness for unrestrained private short-term borrowing. As for the others, they are ever-new variations on the old Latin American model of shortsighted elites, long-suffering peasants, and grandiose schemes: the world's tallest buildings in Kuala Lumpur, for instance, are reminders of the opera houses crumbling in Brazilian jungles. Such credit-swollen fantasies have for centuries been a bottomless sink for naive foreigners' money, and will often be again.


    The online version of this article appears in two parts. Click here to go to part two.

    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.

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