Containing Japan

Japan's one-sided trading will make the U.S.-Japanese partnership impossible to sustain—unless we impose limits on its economy.  

FINALLY I UNDERSTAND HOW A DIPLOMAT FEELS when he lies. A diplomat learns to suppress his shame about small deceptions, if they serve a larger goal. In Saudi Arabia, I once heard a visiting American dignitary tell Saudi princes about the "deep similarities" between his nation and theirs. I maliciously hoped that someone would ask him for examples (big deserts, perhaps?) but I recognized the motive behind his fib. If he'd been gratuitously honest—"our societies have nothing in common"—he would have made no one any happier and would only have undermined his real purpose: securing a supply of oil.

There is a similar but more powerful temptation toward tactical dishonesty about Japan, a temptation that reporters as well as diplomats feel. Japan is more important to the United States, in more ways, than Saudi Arabia or most other countries will ever be. Yet Japanese-American relationships have a fragile, walking-on-eggs quality, which makes people think that it's dangerous to talk frankly in public. Many other international relationships are robust enough to survive open discussions of disagreements; during the nasty little "beef hormone" war early this year, for example, no one imagined that the United States and the European Community were about to turn their backs on each other. But the American fraternity of Japan-handlers, which includes most diplomats and a number of businessmen, scholars, and journalists, instinctively stifles outright complaints about Japan.

The impulse toward tact is understandable. Most Americans who have worked in Japan are aware of raw anti-Japanese prejudice in the United States and don't want to pander to it. They are also reluctant to do anything that would aggravate Japan's ever-present fears that the rest of the world is about to gang up on it and exclude it. The last time Japan felt left out was in the 1930s, when it started down the road to fascist nationalism after it suffered a number of international snubs. These started with the British Commonwealth's opposition to an anti-racism resolution at the Paris Peace Conference in 1919, which the Japanese saw as a rejection of their racial equality with the white West. In 1941 the Japanese Imperial Navy went ahead with the attack on Pearl Harbor despite a widespread belief among naval strategists that the war would be a catastrophe for Japan. The country's military leadership was convinced (and Japanese students are now taught) that the West had decided to choke Japan to death, with boycotts, so Japan might as well strike. Japan is not likely to lash out again through military aggression. But people aware of its history and sensitivities think twice before saying anything that would make Japan feel cornered.

Now, however, Japan has become too important to be treated with such delicacy. Excessive politeness prevents Japan and the United States from facing the conflict that in the long run endangers their relations much more than the comments of any bigoted Japan-bashers could.

For the foreseeable future Japan will be America's single most valuable partner, because of what it can do in three areas. First is the U.S.-Japan military understanding, which prevents Japan from building as large an army as it would need on its own, leaves the United States as the reigning power in the Pacific, adds very little direct cost to the U.S. military budget, and prevents an arms race throughout Asia in which all other countries would try to defend themselves against the Japanese. Second is finance: Japan has become America's financier, providing investment capital and covering much of the U.S. government's debt. Third is business: Japanese-American business relations provide technology, markets, talent, supplies, and other essential elements to both nations' companies.

These three realities tempt many people, especially American diplomats, to assume a fourth: that Japanese and American interests do not clash in any fundamental way. This assumption is wrong. There is a basic conflict between Japanese and American interests—notwithstanding that the two countries need each other as friends—and it would be better to face it directly than to pretend that it doesn't exist.

That conflict arises from Japan's inability or unwillingness to restrain the one-sided and destructive expansion of its economic power. The expansion is one-sided because Japanese business does to other countries what Japan will not permit to be done to itself. It is destructive because it will lead to exactly the international ostracism that Japan most fears, because it will wreck the postwar system of free trade that has made Japan and many other nations prosperous, and because it will ultimately make the U.S.-Japanese partnership impossible to sustain.

The Japanese do not desire any of these results, or the erosion of American power that would go along with them. Despite their pride, veering toward arrogance, about what Japanese business has achieved, most Japanese would feel more comfortable with a United States that is strong, stable, and rich enough to remain the No. 1 of the non-communist world. (Much more frequently than Americans, Japanese talk about nations holding No. 1 and No. 2 positions.) Japan's twentieth-century history in Asia implies that it will be much better accepted as an economic power and cultural force than as a major military power. As a diplomatic leader, Japan is still reluctant and inexperienced. It has given the world an example of what hard work can do, but in general Japan prefers to focus on its own affairs and let other countries proselytize for democracy, capitalism, communism, or whatever else they believe in. Most Japanese politicians say that they would like to leave non economic initiatives to the United States—if the United States can afford them. Unfortunately, the major external threat to America's ability to pay the costs of leadership is Japan's uncontrolled, unbalanced economic growth. To keep a world trade system going,the strongest powers must be willing to make certain sacrifices—for example, keeping their own markets open, despite domestic political objections, as the British did during their free-trade heyday and as the United States has on the whole done since the end of the Second World War. (Japanese and Korean politicians now complain about American "protectionism," but how protectionist can a country with a $10 billion monthly trade deficit really be?) Japan shows very little inclination to make these sacrifices itself, and its continued expansion will in time weaken the ability of the United States to do so.

Friends must sometimes help friends break destructive habits. Japan is in a good position to lecture the United States about its destructive business and financial habits, and more and more Japanese officials have been doing just that. But Japan's destructive habits are potentially more harmful to the rest of the world than America's are. If Japan cannot restrain the excesses of its own economy, then the United States, to save its partnership with Japan, should impose limits from outside.

Unequal Competition

IS JAPAN'S ECONOMIC GROWTH REALLY UNBALANCED? One indication of imbalance is so obvious that it seems almost tasteless to bring it up. This is the gap between Japan's export success and its artificially suppressed consumption at home. The same country that has the biggest cash surpluses and the largest overseas investments in the world also has by far the highest consumer prices, the highest proportion of unpaved roads among developed countries, the lowest per capita endowment of parks, sporting areas, and other public facilities, and across the board the least materially bountiful life.

A recent international survey found that the residents of Tokyo, the richest metropolis of what is theoretically the richest country in the world, stand only twenty-eighth highest in purchasing power per capita among fifty-two major cities, way ahead of people in Cairo and Lagos (two of the poorest) but way behind those in Los Angeles, Zurich, and Frankfurt (first through third, respectively). Some of Japan's underconsumption reflects an unavoidable lag in putting its recent wealth to work—it will take decades to improve Japan's roads and houses—but most is caused by the economy's continuing bias toward corporate profit and foreign investment rather than individual consumer welfare.

The Dutch journalist Karel van Wolferen asks in the opening pages of his forceful and important new book The Enigma of Japanese Power, "For what ultimate purpose do [the Japanese] deprive themselves of comfort and risk the enmity of the world?" His answer is that individual Japanese, rather than depriving themselves, are deprived by the country's major power centers—the big corporations, the government regulators—which are always struggling to keep from losing ground to one another or to foreign competitors. I'll refer several times to his book, which has just been published in the United States, because, like MITI and the Japanese Miracle, by Chalmers Johnson, of the University of California, it is a seminal study of the structural and institutional reasons for Japan's growth. ("MITI" stands for the legendary Ministry of International Trade and Industry, or Tsusansho.)

A second, equally obvious indication of imbalance involves trade statistics. Japan's trade is somewhat more balanced than it used to be. When the yen began to rise in value against the dollar, in 1985, the trade surplus began to shrink. As a proportion of Japan's gross national product, for instance, the surplus fell by almost half in three years, from about 4.5 percent in 1985 to about 2.4 percent last summer. Last year Japan's overall trade surplus fell by some 2.5 percent, from $80 billion in 1987 to $78 billion in 1988, and its surplus with the United States fell also, from about $52 billion to $48 billion. A big surge in foreign tourism recycled some of Japan's export earnings last year.

But these adjustments stopped happening about a year ago. By every available measure—dollars, yen, physical volume, or percentage of Japanese GNP—Japan's exports and its trade surplus increased from the middle of 1988 through the first few months of this year. Measured in dollars, Japan's worldwide trade surplus reached its highest-ever level last December. (The dollar measure is significant, because most international trade is conducted in dollars, and dollars, of course, are used for investment in the United States. Also, the yen-dollar rate has been fairly stable since early 1988. This removes the distortion caused by the plummeting dollar in 1986 and 1987, when Japan's trade surplus decreased in yen terms while rising in dollar terms.) In 1985, when the dollar was worth 250 yen, the American trade deficit with Japan was about a billion dollars a week. In 1989, with the dollar worth 125 to 135 yen, the trade deficit is a billion dollars a week. That is, for products worth half as much in yen, Japan receives the same flow of dollars, which it can use to obtain as much as a billion dollars' worth of U.S. assets each week.

More important, the underlying trends point to larger surpluses in the future. Japan's most rapidly growing exports are the highest-tech and highest-value ones, where its research is most advanced and where in many cases—fax machines are an example—there are few or no non-Japanese competitors. Japanese industrialists often talk about the "phenomenal adjustments" they've made since 1986, but in most cases they're talking about cost-cutting and other maneuvers that have allowed them to keep up their exports despite the strong yen.

The remarkable thing about the surpluses, of course, is not that they stopped growing for a while but that they persist at all. "If the United States were a well-run country, neoclassical economists would be hanging from the Capitol dome," Chalmers Johnson told me early this year. "They predicted that by the time the dollar got down to 190 yen, the trade deficit would have disappeared." The dollar crashed through the 190 level more than three years ago, and has spent most of the past year in the 120s, and still Japan has the largest trade surpluses in the world. Johnson may sound intemperate, but his point is fair. Classic free-trade analysis has proved virtually useless in predicting how Japan's trade balances would respond to a rising yen. Although Japanese officials typically put less faith in free-market equilibrium than Americans do, they also were often surprised by the effects of endaka ("high yen"). Many Japanese officials I interviewed early in 1986 moaned and wrung their hands about the devastation that endaka was sure to wreak among Japanese producers. In 1987 the Sankei Shimbun, a perfectly respectable paper, published a column that likened the yen's rise to the U.S. military's Pacific campaign during the Second World War.

In a few months the yen soared from 245 to 200. This was the equivalent of Japan's loss of four aircraft carriers at Midway.... Washington's final objective is probably an exchange rate of 100 Japanese yen to $ 1. That represents Japan's total defeat and Gen. Douglas MacArthur's triumphant entry into Tokyo.... We must not lose the Pacific War twice.

Why didn't it turn out that way? Some of the peculiar buoyancy of Japan's trade surplus reflects another unexpected consequence of endaka. Since Japan imports nearly all its oil, its economy was more disrupted than America's after Ayatollah Ruhollah Khomeini came to power in Iran and engineered the second "oil shock." As prices soared, Japan had to spend more than five percent of its gross national product on imported oil. Since then the price of oil in dollars has collapsed, and so has the price of dollars in yen. As a result, oil now costs Japan less than one percent of its GNP, an enormous windfall that has increased Japan's overall trade surplus—and will curtail it if the price of oil shoots up again. Astute business strategies also played a crucial role. Fearful of competition from Korea and Taiwan, whose currencies were slower to rise against the dollar, Japanese companies cut costs and held down their retail prices in the United States. At the same time, they held their prices up in Japan, despite savings on imported supplies, which in effect meant penalizing the Japanese consumer to preserve market share overseas. (This is a very familiar pattern and is the main explanation for the "47th Street Photo paradox": that Japanese-made products are always cheaper in New York than in Tokyo. If Japan's markets really were open to new contenders and to price competition, 47th Street Photo itself could make a fortune by shipping Japanese cameras and audio systems back to Tokyo and selling them there.) During the mid-1980s Japanese exporters built huge war chests of cash—Toyota Motors, for instance, now has more than $12 billion in cash in the bank, and no corporate debt. This gave them the money to buy new production equipment, cut costs further, and wait out the effects of endaka. Meanwhile, foreign firms were slow to penetrate the Japanese market, and even the ones that acted quickly were often thwarted by the inefficiencies and cartel arrangements of the Japanese retail system.

Economists can and undoubtedly will keep weighing the various factors that prevented endaka from eliminating Japan's trade surplus, but the theoretical explanations are not as important as the practical consequences: the surplus didn't shrink very much, Japanese exports are now rapidly rising, imports aren't increasing fast enough to offset them, and for now it looks as if endaka's effect on the trade surplus is about over. The effect of the yen's rise against the dollar was almost identical to what happened when the yen rose against European currencies early in the 1980s. Then as now, Japanese industries modernized, held down prices, resisted imports—and soon were increasing their trade surplus despite a stronger currency. The same Japanese firms that were bewailing the perils of the 180-yen dollar are now well equipped to survive with the dollar worth 100 yen or even less. "The change in currency rates was essentially a one-time shift in prices," says Kenneth Courtis, of Deutsche Bank in Tokyo. "By increasing their volume and adding to their efficiency, Japanese firms have by now completely offset the dollar's devaluation. It's as if nothing changed, except that Japan's assets are now worth twice as much." Moreover, as Courtis and others point out, Japanese industries have changed strategically, toward manufacturing much more valuable products. All the underlying trends in the economy indicate another export surge: manufacturing productivity is up, the personal savings rate is up, corporate profit and investment are both up, value added per unit of export is up. Despite month-by-month fluctuations, the Japanese surplus should, on the evidence now available, keep moving up too.

The supercomputer industry is one poignant indication of the long-term trends. One relatively small American company (Cray Research) and one medium-sized (Control Data) are competing for market share against three of Japan's major corporations: Fujitsu, Hitachi, and NEC. Cray, especially, has the lead in software and other performance points, but the Japanese manufacturers feel confident that the sheer difference in financing and integrated manufacturing ability will ultimately grind down the smaller American firms. "We have our own chip divisions," an NEC spokesman told David Sanger, of The New York Times. "We can custom-make the high speed chips we need. Cray can't." Cray buys from a chip-making division of Fujitsu, one of its direct competitors.

To be clear about it: Much of what has happened since 1985 is to Japan's technical and even moral credit. Its industries adapted where others were slow to do so. Some of the continuing imbalance reflects less worthy factors, notably the clogged-up nature of Japan's domestic economy. What really matters is not the blame but the result: almost four years after the radical corrective step of endaka, Japan's trade is becoming more imbalanced, not less.

There is one further indication of economic imbalance: the continuing pattern of one-sidedness in many Japanese transactions. A few years ago the management expert Peter Drucker introduced the term "adversarial trade" to describe Japan's approach to commerce, which is characterized by resistance to high-value imports and by targeted attacks on established foreign industries. The contrast with Germany is instructive. Like Japan, Germany chronically runs a large trade surplus; exports actually represent a higher proportion of its GNP. The reason there are fewer complaints about Germany, however, is not simply that it imports much more than Japan (20 percent of its GNP, versus Japan's six percent) but also that it imports more valuable things. Three fourths of the goods that Germans (and Americans and most Western Europeans) import are manufactured products; less than half of Japan's imports are. Germany's trading patterns are similar to those of most other developed countries—Germany is simply more successful at carrying them out. Japan's are the exception. Japan is now starting to import more manufactured goods, but from a very low base.

Even some of Japan's "market-opening" measures end up illustrating its adversarial tendencies. Last year Japan agreed to reduce its barriers against beef imports, in stages over the next few years. One immediate effect was to increase the sales not of U.S. beef in Japan but of U.S. beef ranches. (There is already significant Japanese investment in the Australian beef industry.) "The whole point in opening up the Japanese market was for American producers to be able to sell here," Billy Cody, of Oregon's Japan Representative Office, told Fred Hiatt, of The Washington Post. "So what is the mentality that refuses to buy our products? What is the necessity to come and buy our producers?" Japan has also theoretically liberalized its wine market, although you would not know it from the prices or selection at the liquor store. But at a seminar for wine producers held last year in Washington state, an export adviser told the vintners to face the fact that they would be selling grapes to Japan, not finished wine. At what economists call the micro level, the Japanese preference for buying raw materials (grapes) or entire businesses (the cattle ranches) may be perfectly rational. No one is forcing American ranchers to sell out to the Japanese, just as no one forced the U.S. government to borrow so much money from over seas. But at the macro level the Japanese preferences reinforce the impression of adversarial trade.

Taken together, these developments reveal the tension between free-trade theory and Japan's place in the world. Most economic forces are supposed to be self-correcting—if the price goes up enough, the demand goes down. In the case of Japan's trade balance, there was a powerful external shove toward correction, in the form of endaka. Yet on the evidence of what has happened since 1985, normal economic and business pressures are not going to balance Japan's trade accounts. Its surpluses, assets, and industrial strengths will continue to grow in a lopsided way.

Money Politics

IF NORMAL MARKET FORCES WON'T MODERATE JAPAN'S expansion, what about outright political control? For more than five years Japanese leaders have said, with seeming sincerity, that they want to reduce their nation's trade surplus sharply, since it is the source of 90 percent of the ill will that Japan encounters in the world. So far their efforts have made little or no difference, because the basic elements of Japanese politics—the flow of money, the balance of power, and the underlying structure of ideas—all push the economy ahead on its unbalanced course.

A historical comparison illustrates how little the Japanese have done to redirect their economy. The last time one nation had such an unbalanced position in world trade was the late 1940s, when the U.S. economy represented half the economic activity in the entire war-battered world. With its own industries newly expanded during the war, and everyone else's blown up, the United States could have completely swamped all competitors in an outright production contest. Instead, the United States rapidly and deliberately opened its markets to imports, and through the Marshall Plan it helped rebuild foreign factories so that they could produce something for Americans to buy. In 1947 the U.S. trade surplus represented 4.5 percent of GNP (comparable to Japan's surplus in 1985). By 1950 it had been driven down to 0.5 percent. At the time, that was regarded as a great accomplishment—and it was, because the opened American market gave Europeans, Asians, and other producers a place to sell their goods.

Those were extraordinary times, when the U.S. government felt it had to, and could, act boldly to rebuild the world. Still, the change occurred within three years—exactly as much time as has passed since Prime Minister Yasuhiro Nakasone's government released the Maekawa report and indicated that it represented a step almost as dramatic as the Marshall Plan. The report outlined a radical reorientation of Japan's economic structure. No longer would salary men be admired for toiling eighteen hours a day in order to expand Japan's market share. No longer would Japan's standard of living be so far out of whack with its paper wealth, and no longer would Japan view its trade surplus as an indication of its superiority over the West. Japan would take its place as a normal capitalist nation—producing but also consuming, making some advanced products but leaving others to competitors, no longer scrambling desperately to "catch up" with the West, which it had in many ways surpassed.

The Maekawa report was formally unveiled about a week after I arrived in Japan for the first time. I went to the jammed press conference at which its recommendations were explained, and there I was impressed by the clear logic and apparent earnestness of Haruo Maekawa, the former Bank of Japan governor who supervised the study. When the Western reporters started asking their questions, I was surprised and slightly embarrassed by their cynical, barely respectful tone. "We've heard this so many times before," one German reporter said. "Why should we believe it now?" An Englishman said, in arch upper-class tones, "Could you tell us, please, quite specifically, what industry are you going to expose to the market? And how many years from now will this be?" Was this any way to build good will?

Now, of course, I understand. Three years have gone by, the same period it took for the postwar United States to transform a huge trade surplus into practically none, and the vaunted Maekawa report has had a very modest effect. There have been a few symbolic changes—banks and some government offices are closed on Saturday mornings—but compared with the claims made when it was presented, the report has been a major disappointment. Considering that Maekawa himself seems to have put his heart into his program, the meager results illustrate how heavily the odds are stacked against the small tribe of Japanese "internationalists" who would sincerely like to open the economy to real competition. To Americans, MITI may still appear to be something like Trade Surplus Central, plotting round the clock to keep foreign products off Japanese shelves. MITI had roughly that role for several decades after the war, and some parts of it still operate in the same way, yet MITI as a whole has become a home for such free-trade sentiment as can be found anywhere in the Japanese bureaucracy. But as a whole the Japanese government's effect is as restrictive as ever, because of the growing importance of special-interest politics.

UNDER KAKUEI TANAKA, JAPAN'S PRIME MINISTER IN the early 1970s, special-interest money became even more important than it had been before. Unlike most modern Japanese politicians, Tanaka was a self-made man, a cunning, earthy figure not unlike Lyndon Johnson. He was the central character in Japanese politics for almost a generation; even after he left office in disgrace because of his involvement in the Lockheed bribery case, he exercised behind-the-scenes power, and continued to do so for a while after a disabling stroke. (He is still alive but has had no public role for several years.)

Tanaka's most significant contribution was to put together a system of money politics which ultimately led to today's longrunning and highly confusing Recruit Cosmos scandal and—more important—is probably the major reason the Japanese economy is so hard to bring into balance. The Japanese government had coordinated investment and export plans in the 1950s and 1960s, but in the Tanaka era the arm of the government responsible became less a high-minded national-development agency and more a straightforward source of pork-barrel cash. By now it has evolved into something similar to the iron-triangle and military-industrial-complex pattern found in the United States. These are informal alliances of government bureaucracies and private companies, held together by the desire to ensure the continuing flow of public funds. In Japan the alliances are often known as zoku, or "tribes," and they include the politicians who support budget increases for their favorite agencies.

The influence of the zoku is tremendous. The Japanese government consists essentially of nothing but competing zoku, who fight among each other (and against the Ministry of Finance, which tries to rein in their spending) to advance their own interests. The construction zoku, the most lucrative, protects the industry against foreign competition and divides up public money among participants through a system of dango, or pre-bidding conferences at which "competitors" decide how they will apportion the available work. The Ministry of Agriculture does its best to protect farmers and fishermen against imports. Even the fact that Japan is about to surpass the United States as the world's leading donor of foreign aid has its zoku aspect. Compared with aid from the United States or Europe, a high proportion of Japanese aid is formally or informally "tied," so it comes back as purchase orders for Japanese equipment or contracts for Japanese construction firms.

The Zenno, or National Federation of Agricultural Cooperatives, is a major cartel that sells farmers most of what they need to raise their crops and is the middleman for the government subsidies that make Japanese rice farming profitable. Some of this money is recycled back into politics: farmers and co-ops are the largest source of political contributions to the permanently ruling Liberal Democratic Party, which in turn grants them continuing protection against foreign competition. The health zoku protects private physicians, who enjoy a godlike status and a monopolistic position in the economy to a much greater degree than do their counterparts in the United States. Government regulations impede private companies (such as the American Humana group) from owning or operating hospitals, which are predominantly run by doctors. The Ministry of Health views birth-control pills as an extreme medication, suitable only for treating serious hormone disorders. The obvious consequence is a very high rate of condom sales, and—although accurate figures are very hard to obtain—some analysts claim that the abortion rate is notably higher than in the United States.

The significance of this system is not that it is collusive—it's the opposite of centrally coordinated—but that it is stifling. The economy is broken up into tribes, and each tribe does everything possible to prevent "confusion"in the market it regulates—"confusion" being the euphemism for real competition that would put inefficient producers out of business, offer new services, and lower prices. Only the skill and discipline of the Japanese work force in general keep the whole system from breaking down. Recently The Japan Times, Tokyo's main English-language paper, published an article about the huge cost gap between airline tickets bought in Japan and those bought overseas. Since a Hong Kong-Tokyo-New York ticket bought from the Japan Air Lines office in Hong Kong costs two thirds as much as a simple Tokyo-New York ticket bought from JAL in Tokyo, a thriving niche business has grown up. Agents buy tickets in Hong Kong, tear off the Hong Kong-Tokyo leg, and sell them at discount in Japan. What was the focus of the paper's concern? Not the harm to Japanese consumers but the "confusion" in the airline business that the cheaper tickets were causing, and the tragic "loss" of up to 300 million yen a month that this practice was inflicting on Japan Air Lines. JAL itself has inaugurated a scorched-earth ticket-inspection policy at Narita Airport, in an attempt to keep the (mainly Japanese) passengers with Hong Kong-fare tickets from using them. The president of JAL, Susumu Yamaji, told the Asahi Shimbun, "Cheap imported tickets may cause confusion in the market, so we can't recognize them." To its credit, the Asahi ridiculed his explanation, and Japan's airfare regulations are starting to be criticized so widely that they may actually change. Still, the general pattern is the one Karel van Wolferen describes in his book: "The USA stresses that Japan itself stands to gain from free trade and open markets, but what it means by this—greater choices for the Japanese consumers—is not at all what the Japanese administrators understand by gain. A truly open market would undermine the domestic order, so how, in their eyes, could this ever be considered a gain for Japan?"

Americans can understand how unplanned this system is, and yet how resistant to change, by thinking about what has happened to the Democratic Party in the past twenty years. No Democrat wants the party to be dominated by small factions that help it lose presidential elections, but no one seems able to bring the factions under control. That challenge is even harder in Japan, because the flow of money is larger, the offsetting forces of grass-roots democracy are weaker, and the evidence of "failure" is more abstract. In short, the structure of Japanese politics, far from providing a brake on one-sided economic expansion, actually keeps the expansion going. Moreover, the component parts of the system intensify the appearance of adversarial trade, by discrediting the idea of reciprocity with the outside world.

Capitalistic trade is not supposed to be reciprocal on the small scale. I buy from the local grocery store, and it doesn't buy anything back from me. But capitalist theory assumes that life will be reciprocal in a larger sense. Each of us specializes in certain functions, and we use our earnings to buy from those who specialize in something else. This model, more or less unchanged since Adam Smith set it out in the Wealth of Nations, stands in contrast to several other ideas of how economic systems should work. One is the primitive-village model, in which small groups of people produce everything they want to use. Another is the mercantilist system that Adam Smith was directly attacking, in which the Spanish and Portuguese empires tried to store up as much gold as they could, rather than frittering any of it away in trade. And the latest and most relevant is what Chalmers Johnson calls the "capitalist developmental state," whose prime example is Japan. Here the government uses a number of strategies to suppress consumption, channel personal savings to industrial investment, and convert industrial competition into a ratchet-like process. In the industries where the country has a lead-in Japan's case, consumer electronics and autos—it holds on to the lead, and in areas where it lags, it discourages imports until its own industries can grow. Japanese corporations typically compete with each other in every product line—each beer maker produces a draft beer, a "dry" beer, a lager, and so on; each electronics company tries to produce a full range of radios, TVs, and fax machines. Successful Japanese students are expected to get top marks in every subject; star pitchers in Japanese baseball often burn out early because they are expected to pitch in practically every game. Trying to be on top in every field, rather than specializing in some and leaving the rest to competitors, is a stronger impulse in Japanese society than in most others, and is the rule that Japan's trade policy appears to follow.

Americans may complain about the decline of their steel and semiconductor industries—that is, areas where the United States once enjoyed a lead and has had to watch factories shut their doors. But few Americans really think it is a problem if we have to buy our entire supply of CD players from overseas. The United States has no government project under way to create a domestic fax industry, and when government guidance is proposed—for semiconductors, high-definition TVs, and superconductors—it is always controversial. Japan acts differently.

Japan's military-aircraft policy represents a straightforward attempt to move into the commercial aircraft industry, which Boeing, Airbus, and McDonnell Douglas now dominate. If this were not the case, Japan's military would simply buy imported planes, rather than insisting that its planes be manufactured in Japan, under license, at much higher cost. During the controversy over the FSX fighter plane this winter The Japan Times admitted, in an editorial, that "the overall cost would be lower" if other countries bought planes directly from the United States, but this would be "tantamount to eventual abandonment of that aircraft industrial sector. " Right—and when I buy shoes at the store rather than cobbling at home, it is tantamount to abandoning my own shoe-making capacity.

Of course, any manufacturer should be free to enter any industry—that's how capitalism works. The problem is the one-sidedness of Japan's ambitions. By continuing to launch new industrial assaults rather than simply buying better, cheaper products from abroad, Japan suggests that it does not accept the basic reciprocal logic of world trade. If more than a handful of countries behaved this way, there couldn't be any international trade.

Underlying Principles (or the Lack of Them)

WHY IS JAPAN SO UNCONCERNED ABOUT THE DOUBLE standard of its trading policy? It has to do with the ultimate values of Japanese political life—or what can be called the lack of them. Japan is a highly honorable society, in which individuals are deeply bound by obligations of gratitude, loyalty, and deference. But Japanese society has always been short on abstract principles dictating proper treatment of those outside the network of obligations—such as foreigners. The result is Japan's distinctive view of "fair" competition and its seemingly clear conscience about one-sided behavior.

Many foreigners in Japan become captivated by Nihonjinron, the "study of Japanese-ness. " It is a literary and intellectual genre that consists of two opposing flows. From one side comes a large outpouring of books and articles, almost all in Japanese, about the reasons that Japanese society and the Japanese language and Japanese brains and Japanese people are "unique." From the other side comes a smaller but more splenetic stream of rebuttals, mainly written by foreigners who have read Nihonjinron in Japanese and mean to expose its lunacy to the outside, English-speaking world. By Western standards of evidence, logic, and rhetoric, the latter side clearly runs away with the argument. Van Wolferen's Enigma of Japanese Power, for instance, is essentially one long demonstration that many traits considered to be "intrinsically" Japanese actually reflect the way power has been wielded in Japan. Why do Japanese people file so few lawsuits? Nihonjinron theorists say it's because of the great love of consensus, stretching back to the rice paddies of ancient Yamato, the legendary homeland of the Japanese race; Van Wolferen points out that the state-run law schools produce hardly any lawyers. (He also notes that people are "loyal" to their companies throughout their careers at least partly because no one else will hire them if they resign.)

The real importance of Nihonjinron, however, may be not what the sides disagree about but what they both accept: that whether the explanations are racial or political, the institutions and values of modern Japan are highly unusual, in ways that make it even more difficult for Japan to restrain its one-sided growth.

One important factor is Japan's lack of emotional connection to the rest of the world. "If some country does not buy cars and does not sell petroleum to us, that society does not interest us at all," the literary critic Shuichi Kato says. "The rest of the world is interesting only as it affects Japan." Every society is narcissistic to some degree, but Japan is more so than others. I have collected a big stack of speeches and newspaper articles about Japan's most controversial dealings with the rest of the world—the demands that it provide more foreign aid, its refusal to accept immigrant laborers from Asia, its trade with South Africa, its strict observance of the Arab boycott on trade with Israel. Only a few of the clippings say that it would be "good" or "right" for Japan to change its policies. The stated reason in the rest is that otherwise Japan "will be criticized," or that "more is expected of us now."

The deeper concept here is the weakness of universal principles" in Japan—of ideas that make the Japanese feel that their lives run according to axioms similar to those of any human beings' lives around the world. As countless foreign observers have reported, the honor and discipline of Japanese life are based on highly personal loyalties—to the feudal lord, to the honor of the family, these days to the corporation. These are different from such abstract principles as charity, democracy, world brotherhood, and so on, and they lead to different kinds of behavior. The members of a tight-knit Japanese work group or neighborhood will spontaneously sacrifice more for one another than their counterparts in the United States will—but they are a lot less likely to sacrifice for someone outside the group. Volunteer work and charitable organizations, like the United Way and Community Chest, are virtually unknown in Japan, and there is little instinctive concern about starving children in Ethiopia, earthquake victims in Armenia, or refugees from Indochina. On the other hand, people in Japan are more likely to take care of their own.

The differing ideas about the basis of moral behavior are probably the most fundamental contrast between Japan and the West. "However calmly Americans and Europeans rationalize their old religious philosophy, it remains true that their cultural heritage, their political and social institutions have been shaped by a belief in absolute values," Frank Gibney wrote in his influential postwar book, Five Gentlemen of Japan. "This the Japanese conspicuously have never had. " The Shinto religion has no overarching theory of behavior and virtually no scripture or teachings. (It is basically a system of local faiths that was converted by the government over the past century into a nationalist tool.) As in Mayor Daley's Chicago, in Japan the most important political disagreements, those within the Liberal Democratic Party, are struggles for power rather than clashes of policy or ideas.

To bring this back to trade: the standard complaint about Japanese trading practice is that it's hypocritical. Japanese manufacturers sell freely in the United States, but foreigners must fight their way through public and private cartels to compete in Japan. The very idea of hypocrisy, however, assumes that there is one rule of behavior, which should apply to everyone at all times. Japan's brand of morality is more "situational," applying rules that seem appropriate to each occasion. It is appropriate for American consumers to demand the best product for the money. It is also appropriate for Japan to promote its aircraft industry. My point is not to criticize the fundamentals of Japanese morality—on the whole they're less troublesome for the world than universal creeds that lead one society to try to convert everybody else. But they have an effect on Japan's international dealings that other countries, with different values, are foolish to ignore.

For example, when foreign negotiators ask Japan to embrace the principle of free trade, they run up against not only Japanese special interests that would be hurt by imports but also a broader Japanese discomfort with the very prospect of abiding by abstract principles.

A British friend gave this illustration, from the negotiations about seats for foreign firms on the Tokyo Stock Exchange: "Our position was that, in principle, any company that met the financial and other standards should be allowed to enter the market. Each time we said that, the Japanese reply was, 'How many seats do you want?' We would say, 'We don't know how many, we want it to be open to any qualified applicant.' And they would say, 'Do you want two seats? Do you want three?"' The British negotiators eventually decided that two British companies seemed qualified, so they told the Japanese, "We want two." The Japanese side went back to deliberate—and in that time another qualified British firm appeared. My friend said, "They came back to us and said that two would be all right—but by this time we were asking for three. They were incensed at us for not sticking to our word and not knowing what we wanted. I'm sure they thought it was a case of Western deception. The principle of free entry never had a chance." In the wrangle over beef and citrus imports Michael Smith, a blustery U.S. trade negotiator, got nowhere arguing that import quotas should, in principle, be relaxed. Then his side calculated that the beef quotas had a price effect equivalent to a 376 percent tariff—and he asked that the tariff be reduced, in stages, by 306 points. On the basis of this concrete demand, rather than an airy principle, a deal was struck.

Americans tend to squirm about the messiness of their two best-known trade agreements with Japan: the "voluntary limitations" that have restricted exports of Japanese cars to the United States since 1981, and the semiconductor agreement of 1986, which declared by fiat that foreign manufacturers should get 20 percent of semiconductor sales in Japan. These agreements are embarrassing to the United States because they so blatantly violate the principle of free competition; they assign market share by fiat, rather than leaving it to the free play of competitive forces. While the details of these agreements may displease the Japanese, they are perfectly comfortable with the basic concept. Like many of their own industrial understandings, it helps avoid "confusion" in the market.

A WILLINGNESS TO OVERLOOK COLD, PURE PRINCIPLE and get down to practicalities can be seen as a virtue by Americans as well as Japanese. But Japanese society's lack of interest in principle has a profound effect that most Americans are slow to recognize. The lack of interest in principle makes sheer power the main test of what is "fair. " Might makes right anywhere, but in Japan's dealings with the outside world it does so sweepingly. In Western societies there is a constant tension between officially constituted authority and principles that reach beyond worldly authority ("Render unto Caesar..."). These principles become the main grounds for a challenge to authority. People can throw tea in Boston Harbor, or overthrow the Czar, or refuse to pay their taxes, or tack a list of theses on the door, on the grounds that the authorities are not living up to some higher standard. But to do so, they must first believe in abstract, transcendent principles. The weakness of such principles in Japanese life makes it much harder to lodge a legitimate challenge to authority. (The most famous and flamboyant rebellions in Japanese history have usually been gestures of personal or clan loyalty, or efforts to erase a stain on individual honor, as when the Minister of War committed suicide after Emperor Hirohito ordered surrender, in 1945.) As a result, the Japanese are more likely to believe that what is is right—and to adjust themselves to changing realities of power.

The most dramatic wartime example, eloquently described in Frank Gibney's book, is the lightning change in the Japanese public attitude after the army surrendered. Only weeks after women and children had been preparing to defend the home islands with bamboo swords, the public cooperated with the Occupation authorities with a minimum of insubordination and sabotage. When the wartime Cabinet had authority, it was obeyed; when MacArthur did, he was. I've heard many Japanese in their sixties and seventies say that they always thought the war was a terrible idea. Their comments are not Japan's version of "We were all against the Nazis," since the same people freely say that they fought wholeheartedly in the Emperor's name. The significance is that they thought the war was suicidal but were still ready to go ahead without complaint. Once, while riding in a Japanese friend's car, I was stuck in traffic, along with fifty other cars, behind a dozen bosozoku, or "wild boys," in a motorcycle gang. For more than thirty minutes they slowed traffic on one of Japan's few highways to about five miles an hour, blockading all the lanes and not letting anyone pass. During all that time not a single car honked its horn, not a single driver waved his fist, not a single person did what drivers in most other cultures would have done, such as ramming the bikers or running over them. Yes, this passivity is better than gunning other motorists down, as in Los Angeles; but I interpreted it less as gentleness than as reluctance to take individual action against what was, for the moment, the established power.

The conclusion is not that average Japanese people are mindless followers but that, like Catholic priests and members of the Marine Corps, they live in a culture that honors authority. And what this means, in turn, for U. S. Japanese relations is that the appearance of American power is more important than most Americans fully realize.

It's hard to imagine a strictly internal force that could push Japan off its current path, even though more and more Japanese realize that their lives would be easier and their country would be better liked if its economy were less lopsided. The political system is grid-locked by powerful moneyed groups, and the customs and the intellectual tradition of the country discourage those who otherwise might protest. When I ask Japanese friends why they aren't angrier about anti-consumer policies or the increasingly visible political corruption, they often reply with a phrase that means "It's been arranged—there's nothing to be done.") What is left, then, as a way of changing Japan's internal behavior is pressure from outside. This principle is so widely recognized that the Japanese term gaiatsu is used much more frequently here than the comparable words, "outside pressure," are used in America. Since the end of the Second World War the main source of gaiatsu has been the United States, which first imposed a Constitution and a new social order on Japan, during the Occupation, and after that began "demanding" liberalizations in Japan's economic behavior. Many Japanese seem to understand why the constant nagging occurs and why it eventually improves their standard of living. "Will people say they want imported rice or beef?" one Japanese friend said. "Of course not. Will they accept it when we 'give in' to American demands? Yes, and most will be grateful.") The problem with relying on gaiatsu, however, is that whoever is pushing from outside must be unchallengeably strong. If he seems to falter, he is like a rough-and-tough drill instructor who loses a fistfight with one of the recruits and can no longer intimidate by his mere stare. His main source of authority is gone.

This is why the appearance of American economic decline and social disintegration, highly exaggerated as it may be in Japan, can do almost as much damage as the real thing. If America's strength seems to wane, so does the main hope for obtaining "normal" economic behavior from Japan. "The Japanese ... are peculiarly sensitive to the smell of decay, however well screened," Kurt Singer, a German expatriate who lived in Japan before the First World War, said in his eloquent little book Mirror, Sword, and Jewel, "and they will strike at an enemy whose core appears to betray a lack of firmness." Of course Japan is not about to attack in any military or overtly hostile way. But the smell of decay that now seems to be wafting across the Pacific from America is a tremendous obstacle to Japanese liberalization. Most Americans living in Japan scan the news each day for industrial-output and trade figures, for signs of robust recovery and the appearance of strength from the United States. They know that the Japanese political system, like Japan's constellation of economic forces, cannot save Japan from its excesses.

What Will Change

WHAT PRECISELY IS THE DANGER FROM CONTINUED Japanese expansion? Some people say there is no danger at all. Three lines of reasoning lead to such a conclusion.

The first is that whether or not the expansion can be controlled, it is about to end. Many Japanese people, temperamentally pessimistic even though their country has repeatedly surmounted prophecies of doom, fall into this camp. So do some outside observers, such as Bill Emmott, of The Economist, who in his book The Sun Also Sets, which will be published late this year, points to a number of long-term trends running against Japan. The population will soon have the world's highest proportion of retirees and will be using up some of the savings it is amassing now; Korea and Taiwan will exert unrelenting pressure; at some point the yen may rise so far that it actually does price Japanese exporters out of the world market. And let's not forget the next big earthquake. In addition, certain divisions are opening within Japanese society, which could eventually impair the country's ability to sacrifice, invest, and grow. Besides cynicism about Japan's money-politics system and the rise of an affluent and perhaps less self-sacrificing yuppie generation, a noticeable gap is opening up between Japanese haves and have-nots. This class divide has to do mainly with land ownership-land has become so expensive that people who do not inherit it from their parents can probably never afford their own house—but also with education, which is becoming stratified. In theory, such developments could limit Japan's growth quite soon. However, the limits are still purely theoretical; no symptom of slowdown can yet be observed. By every measurable indication—corporate profit, personal savings, industrial productivity—Japan is distinctly on the rise.

According to the second line of reasoning, Japan's expansion cannot, by definition, be threatening to anyone else, since it merely increases the wealth and welfare of customers in the rest of the world. This is the classic free-trade view, which often guides U.S. government policy toward Japan and which dominates the view of the American media. On its own narrow terms, it is obviously correct: consumers are always better off with fewer restrictions on trade. Indeed, the main reason American consumers now live so much better than those in Japan is that U.S. policy has hewed closer to free trade.

Inconveniently, offering consumers the best price is not the only thing involved in building a good society. Permitting children to work in garment factories, for instance, would lower the price of shirts and help the American consumer, but it is against the broader national interest. In the case of Japan's expansion, the harm comes from the erosion of numerous elements of American strength, especially those being left to erode because of a sense that the United States is so deep in debt that it can't afford to do many of the things a leading power should do—explore space, improve its schools, maintain its military bases in Japan so that Japan doesn't build its own army, and so on.

From the strict free-trade perspective, not even the accumulation of debt is necessarily a cause for worry. The borders between Japan and the United States are increasingly artificial to corporate managers and to consumers, who buy Sony Walkmen in Chicago and McDonald's hamburgers in Tokyo. Perhaps the borders should be ignored in observing capital flows as well. No one cares about the Texas state "deficit" relative to Illinois; we concentrate on how individual firms are doing. Some Japanese internationalists suggest that the overall U.S.-Japan balances should also be overlooked. This is noble-sounding and forward-looking, but the fact is that Japan and the United States still are two separate nations, and America's ability to pay its own way still is the basis of its strength. The United States can't tax the Japanese to pay for its military—it can only borrow. Until national borders really don't matter, America's ability to meet its commitments will depend on its own solvency, not on the size of the combined U.S.-Japanese capital pool.

This is related to the third line of reasoning: that reasonably soon the borders between Japan and the United States will for all practical purposes disappear. Japan and the United States, which already interact closely in business and the military, will integrate themselves in other ways and, despite remaining separate countries, will function essentially as one unit.

Anyone who has spent time in Japan will recognize how attractive such a merger would be. These two countries, with their respective economic strengths, technical skills, political ideologies, and sources of social resilience, make up two complementary halves of the mightiest possible superstate. I would be delighted by the creation of a hybrid U.S.-Japanese state. For all its difficulties, Tokyo is a more stimulating place to live than almost any city in America. I would rather work with my best Japanese friends than for most companies in the United States, and would rather bind Japan's strengths to America's than view Japan as a threat. But like most other foreigners who have lived in Japan, I consider such a de facto merger impossible, because of social resistance on the Japanese side.

Some Japanese idealists contend, quite sincerely, that their society is on the verge of radical change. The millions of Japanese who travel overseas each year, and the hundreds of thousands posted to foreign countries on long assignments, presumably come home with a more open, internationalized point of view. Eventually they will demand a fairer political system and a more consumer-minded economy, and will open their society in the way it is now most closed: the visceral reaction against non-Japanese intruders among the "pure race" Japanese. At that point, according to the optimists, Japanese and Americans (and other foreigners) will work alongside one another as individuals, aware of their national identities but not separated by them.

I admire the idealists and hope they turn out to be right, but nothing I have seen so far makes me believe that they will. Despite Japan's boom in international travel, the proportion of its people who go abroad is lower than that in any other industrialized country—roughly five percent a year in recent years, versus 45 percent for England and 15 percent for even the famously parochial United States. (Also, most Japanese travel is in tightly organized and highly insulated groups, not exactly the ideal means for deep exposure to foreign societies.) Our Japanese neighbors often ask, in all innocence, whether prices here are higher or lower than those in the United States. We usually don't have the heart to give them a frank reply. And even if people became actively (and atypically) unhappy with their daily lives, the full brunt of Japanese political power would, again, stand in the way of change. The closing words of Karel van Wolferen's book are "The wonderful alternative of turning the [political and economic] System into a genuine modern constitutionalist state, and Japanese subjects into citizens, would require realignments of power akin to those of a genuine revolution."

National merger is not even occurring on the modest level of the corporation, as opposed to the level of the nation-state. American and European multinationals are typically "unpatriotic"—they shift production from country to country and hire talent wherever they can find it. Shell is a Dutch firm in theory, though not in daily operation or promotion policy. IBM is an American company but in its overseas operations takes pride in turning itself into a German, a French, a Japanese firm. Japanese corporations are now investing worldwide, but they still have a distinct national identity. Non-Americans run important divisions of major American-based multinationals; Japanese citizens run virtually all important divisions of major Japanese firms. A recent MITI study found that Japanese multinationals operating outside Japan differed from European and American companies operating in Japan in two ways. The Japanese companies had lower profit margins, because they concentrated on market share; and they selected many fewer non-Japanese for management jobs. Unless Japanese society changes fundamentally, it is hard to imagine that Mitsubishi, Matsushita, the Dai-Ichi Kangyo Bank, or any of Japan's other great power centers will ever share their power with non-Japanese. "Westerners do have to think about one day being the noncommissioned officers in Japan's economic army," the columnist Richard Reeves wrote last year. "The new Horatio Alger story could have the hero starting with nothing and by dint of hard work and pluck rising all the way to the middle."

Unless Japan is contained, therefore, several things that matter to America will be jeopardized: America's own authority to carry out its foreign policy and advance its ideals, American citizens' future prospects within the world's most powerful business firms, and also the very system of free trade that America has helped sustain since the Second World War. The major threat to the free-trade system does not come from American protectionism. It comes from the example set by Japan. Japan and its acolytes, such as Taiwan and Korea, have demonstrated that in head-on industrial competition between free-trading societies and capitalist developmental states," the free traders will eventually lose. The drive to break up the world into trading blocs—united Europe, North America, East Asia—is largely fueled by other countries' desire to protect themselves against Japan. Even in their own inroads into the Japanese market, foreigners are tempted to settle for a small place in the dango—"Do you want two seats? Do you want three?" —rather than pushing for truly open competition in Japan. The ideal of free trade retreats, as the states that don't really believe in it expand.

THE PURPOSE OF THIS ARTICLE IS TO MAKE THE CASE for containing Japan's expansion, rather than to discuss specific means of containment. The specifics will be the subject of a future article. But merely recognizing that American and Japanese interests do conflict is in itself an essential step. It frees us of the delusion that normal business competition will balance out whatever is unbalanced now.

Of course America needs to reform its own corporate practices, improve its schools, and reduce its debt. Of course our economic goal should be an open free-trading system around the world, not escalating trade barriers. Of course we have no business telling the Japanese how to run their own subtle, sophisticated society. But we do have the right to defend our interests and our values, and they are not identical to Japan's.