RISE AND FALL OF THE“JAPANESE MODEL”,
RECIPES FOR REANIMATION （Originally written in Russian for PR in Russia. It was published in “Japan Almanac”） 　　　　　　　　　　　　　　　　　　　　　　　2002,3 Akio Kawato I. Preface Japan in the midst of stereotypes Japan is surrounded by the myriad of stereotypes: as if its economy emerged all of a sudden out of primitive feudalism; as if it achieved a “miracle” after World War II only due to the blind subordination of workers to their companies; as if the Government of Japan completely controls the economy like it was the case in the USSR. Japan is the only “non-white” nation in the world that was the first to perform such a rapid economic development. At first it made attempts at territorial expansion following the steps of Western colonialism, and after the World War 2 the rapid growth of its export dealt a severe blow against American and Western European industries. This doomed Japan for suspicion and envy of the developed countries. They tried to find something “unfair” and “backward” in the reasons for the Japanese economic development. This attitude was in part responsible for various stereotypes about Japan. From their viewpoint Japan is a country that developed at the expense of “backward” position of its society, that is to say excessive collectivism, workholism, low social status of women, etc. For them the present economic recession in Japan is a logical completion of their thought: the backward society could not cope with tasks of “economic globalization”. However, the reality is much more complicated. Japan did not suddenly emerge from the darkness of backwardness. Capital, “know-how” of doing business and engineering skills had already been accumulated before the end of the feudal period. And even before the World War II industrialization in major cities had created a wide layer of middle class. Myth about the “Japanese Model” “Japanese model” of economy is discussed frequently but there is no one definition of this phenomenon. However this word combination is almost always understood as (with a negative shade at times): life employment; increase of salary in accordance with age and length of service; “family” relationships between management of companies and workers; consensus in decision-making and a practice of thorough preliminary coordination (“nemawasi”); a multi-stage system of sanctioning (“ringi”) and “tough” control over business by the government. Thereby more positive aspects are often overlooked: high level of information sharing among managers, regular rotation of employees that offers them experience in diverse activities and prevents corruption and, finally, a strong initiative by middle layer of management in developing both strategic and operative decisions (this varies in each individual company, and it should be noted that increasing bureaucratization in many companies eliminated these positive aspects). In any case it would be a mistake to say that Japan accomplished the economic miracle only thanks to the “Japanese model”. After the war a rapid growth of domestic demand and favorable international situation played a great role. Only some of the elements of the “Japanese model” mattered for the growth, such as well-organized bank system. Other elements, like life employment with regular increase of salaries, are rather consequences than causes of economic growth. Today this model became obsolete, having completed its mission; a rapid industrialization. Due to weakening of moving forces – domestic demand and export – Japan needs now a different model to sustain the present level of its economy. However, one would not need a next “model” or ideology to escape the spell of the current economic crisis. Japan’s task is a pragmatic one, i.e. reorganization and reorientation of its government, companies, education and society as a whole. This job may turn out to be complicated, taking into account the deep-rooted bureaucratic mentality in major companies, psychology of dependence upon the government money (this is especially strong in the construction industry) and the excessive stress upon “equality” in schools, depriving children of initiative and entrepreneurship. II. Accumulation of Capital, Know-How and Craftsmanship (Before the End of Feudalism) Before industrialization the land was the main means of production. And the history of Japan evolved around the forms of possession over the main property – land. The Yamato Government established a de facto monopoly over the possession of land, giving it to every peasant (han-den-sei in the year 689). Soon after the land became accumulated in the hands of aristocracy (syo-en-sei). However, the actual administration over “syo-en” gradually shifted into the hands of local managers (or stewards) “zhito’s” who either became themselves samurais or sided with samurais – armed bands that provided safety for “syo-en”. The destruction of state monopoly over the land resulted in universal uncertainty about ownership and triggered a lingering period of unrest in the middle ages (“sen-goku zhidai, 16th century). Zhito’s, who by then became feudal lords, constantly fought against each other. At the same time many of them were also actively expanding arable lands, opening up mineral resources in their territories and encouraging handcrafts. China at that time was the center of trade and industry both in Asia and the rest of the world (Europe was still behind in its development). According to the research conducted by Heita Kawakatsu and other scholars, Japan of that period was an active player in international trade – the largest exporter of gold and the largest importer of sugar. The collapse of the Min dynasty in China gave Japan an opportunity to increase export of porcelain. Isolation of Japan from the outside world (sakoku) from 17th through 19th century stalled “globalization” of Japanese economy (There is no single explanation as for the motives of this phenomenon. In my opinion the main reason for “sakoku” was political. After brutal suppression of peasants’ uprising “Ikkou” [adherents of monotheistic religion “Ikkou-shu”], the Edo Government grew very cautious about the increasing influence of monotheistic Christianity in Japanese society. On the other hand, however, the isolation might have been prompted also by the decrease of gold and silver production in Japan). Although the import of luxurious goods still continued, the goods of every-day use – sugar, cotton, vegetable oil, etc. – came to be produced locally in self-sufficient economy (now these crops are practically not produced in Japan due to lack of competitiveness). The trade in these products, especially in rice, flourished everywhere in Japan. Along the coastline of Japanese islands the whole network of marine transportation had developed. In Osaka a large commodity exchange was opened where the practice of future dealings with rice was invented for the first time in world history. In major cities big merchants emerged, craftsmanship and culture achieved the highest level. And although the Japanese people of that period were not seemingly so hard-working and punctual as today (it seems “punctuality” is a product of industrialization), many people sent their kids to private schools to acquire reading and calculation skills. In these schools children not only studied traditional Confucian values but also philosophy of diligence. The philosophy of diligence which incorporated Shintoism, Confucianism, Buddhism was created by Baigan Isida and other scholars. This simple philosophy called “Sekimon Sin-gaku” is partly similar to Protestantism: a human being can justify his or her existence only through honest behavior and hard work. Until recently it was fashionable in Japan to reevaluate the meaning of the Edo Period (1603-1867). A number of academic and non-academic works were published on this topic. The authors paid special attention to: (1) high level of development of urban infrastructure (system of water supply in Edo, sophisticated system of canals in Osaka); (2) permeation of culture in wide layers of society (Kabuki, Joruri, mass publication of books and newspapers (Kawara-ban), high level of craftsmanship (Netsuke); (3) high level of self-consciousness of the population (In cities the status of samurais fell as they became impoverished. They could be prosecuted if they harmed or killed a city dweller without any reason. In the rural areas the peasants often rose against them); (4) prosperity of peasants, especially on the territories under the Edo Government jurisdiction (the taxes were raised rarely). Most authors of these works reached a conclusion that by the end of Feudalism a civil society came to being. Lack of absolute power (the authority was shared by the Edo Government, the Emperor and the local Daimyos) also provided a favorable condition for it. The atmosphere of such egalitarian society is reflected in “Rakugo” and literature of Saikaku Ihara. Yet one has to be cautious with such conclusions. To my mind these scholars and observers might be idealizing the past too much, simply riding on the public sentiment in Japan: disenchantment with the Western civilization. III. Industrialization of Japan and making of the “Japanese Model” before the World War II It took 150 years for the “Japanese model” to take its shape. Each component of this “model” has different roots and is not the result of some “single and unified” strategy. In the beginning of the Meiji period the government started a speedy process of industrialization under the slogan “Rich Country, Strong Army”. Staving off the danger of colonization by the Western powers was the first and utmost task for the leaders of that time but there were also other more immediate goals: building of the army for civil war against insurgent samurais under the leadership of Takamori Saigo and possible war with Korea. The main source of capital was peasants – owners of practically the only means of production at that time. Collection of taxes in natural form was replaced with unified monetary tax, conditions of payment became much stricter than during the Edo period. The Government built plants to sell them later to big merchants who emerged during the Edo Period, such as Mitsubishi, Sumitomo, and Mitsui – this was the formulation of the Zaibatsu process(conglomerates). Thus became formulated two of the components of the “Japanese model” – economic growth under the government control and huge corporations. Around corporations and state plants (military in particular) a smaller businesses started operating. They catered orders from their bigger counterparts in tough conditions. Because of high tax rates majority of peasants became poor tenants without land ownership. The economy of Japan started growing. And the wars stimulated the process. In 1894 the Sino-Japanese War brought a large compensation from China, in 1904 the Russo-Japanese War resulted in the production growth, and during the World War I, in which Japan did not take a serious part, Japan received a great number of contracts from fighting European powers). A war is always a turning point in economy – for better or for worse. In USA, for example, three major wars they were part of – Civil War, World Wars I and II – resulted in substantial economic growth every time. During less than 70 years after feudalism and before the World War II Japan could create its heavy industry, urbanize the country, form a large medium class, which we can witness in the movies of that period. With the development of the heavy industry it was gradually joined by other elements of the “Japanese Model” – first of all life–time employment and seniority wage system. Yet we should emphasize that although a life employment is a common practice, it is not a law. And it can be found not only in Japan. Such practice is common everywhere, where highly qualified professionals are needed; it can be seen both in Europe and USA. At the same time even in Japan the life-time employment never embraced all workers and clerks (see the analysis in “Sigoto no Keizaigaku” by Kazuo Koike). Life-time employment is a guarantee of stability but when it becomes a norm, it causes bureaucratization, lack of initiative and new ideas, and excessive subordination. In post-war Japan transfers from one company to another after a long period of service became practically impossible, because companies reluctantly hired outsiders with higher salaries, fearing that this may cause envy and dissatisfaction by their own employees. The lack of influence by stockholders and boards of directors also augmented inertia. After the World War II The World War II added some more elements to the “Japanese model”. Centralized war-time management increased the government’s capacity to interfere into private business and the seniority wage system spread throughout the entire economy. In comparison with Russia today, which still suffers from aftermath of the over-militarized economy, Japan’s postwar economy fared a better fate, though ironically: her military-industrial complex had been coercively annihilated, creating rooms for civil production. And this happened exactly when the era of mass consumption started in the US, Europe and later in Japan. There exists a whole range of myths regarding revival and fast growth of Japanese economy. The Japanese themselves tend to fall under the spell of false theories, praising the “Japanese model”. Looking back at the time after World War II till the beginning of the Korean War, one could not safely say that the Japanese economy was rebuilt thanks to the government’s consistent strategy. In reality a whole set of various initiatives from both Japanese and American sides, and sometimes inconsistent movements and currents in the Japanese society had finally prepared a strong base for a prompt growth, which was triggered by the Korean War. However, among the initiatives undertaken by the Japanese Government at that time the following were perhaps (I say “perhaps” because I have not seen a detailed scientific analysis of the issue yet) the most effective: Prioritized direction of resources into power industry and metallurgy (keisya-seisan). In 1947-1948 when these measures were taken the maximum share of the government’s capital in the total amount of investments reached 65-87%. Production output in these sectors was quickly restored to previous level (There are no sufficient proofs as to the efficiency of this measure, however). Strict control of the government over hard currency (until 1955). This measure unlike in Russia after 1992 made importing of consumers’ goods impossible and encouraged import of advanced technologies. Japan chose to buy a fishing rod instead of fish. Restoration of banking system under a strict supervision and with precise distinction of functions. Japanese banks could recover the trust of the people. Companies started widening their activities with bank loans – both long-term and short-term. Introduction of stable taxation system (so called Schaup taxation system). Setting yen’s rate in Japan’s favor (in 1949). There is no doubt that the presence of the occupation army played a major role in sustaining stability in the society (For example, prohibition of general strike in 1947. Marxism was very strong in the trade unions at that time) and in promoting the reforms (land reform, break-up of huge concerns into smaller companies, lay-offs among elderly top management of big corporations). Although Japan did not receive large grants as Western European countries did under the Marshall’s Plan (on the contrary, about one third of the Japan’s budget was consumed for up-keeping of the occupation forces in 1946), she was provided with soft loans (grants were limited to urgent humanitarian aid only) for the total amount of $2.4 billion in 1945-52 (approximately 4.5% of Japan’s annual GDP at that time). Besides, the World Bank also provided Japan with loans of $860 million (IMF did not have a scheme for long-term credits at that time). In Japan’s economic development the Korean War was very important. United States placed orders for various products and weapons for the total amount of $1.1 billion and consumed in Japan products for the total amount of $2.2 billion, which correspondent to 6.2% of Japan’s GDP. In 1949-51 industrial production in Japan doubled. Time of Rapid Economic Growth. Domestic Consumption and Capital Investment as its Locomotives Explaining the reasons for Japan’s development, some people refer to the «specific national characters of the Japanese». “National characters” may mean both negative and positive things. This concept may mean work ethic – deeply embedded in Japanese psychology. But sometimes we hear negative intonations: we, Europeans, could achieve economic development without any sort of workaholic attitude unlike the Japanese who only thanks to their excessive selfless labor could catch up with us. This is very emotional and naïve view. Firstly, the Japanese also can be lazy. Let us recall the popular song in the sixties by Hitoshi Ueki “How easy to be a clerk!” This song illustrates the attitude of company’s employees towards their job; they do not care about promotion, enjoying the life-time employment and drinking on company’s money. Secondly, both Americans and Europeans can be very hardworking. And finally, the Japanese worked hard after the war, only because they knew that their company’s successful performance would raise their own salary. The Japanese people are hardworking not because they blindly submit to their companies but because they see their own benefit in the success of their company and because they want to be respected by their colleagues for their honest work. Then what was the real moving force of the growth? Many people abroad think that Japan worked “miracles” at the expense of its export. But it took a long time before it became a strong trading power. For example, Japanese automobiles and electronic devices became popular in USA only in the end of the sixties. Table 1. Structure of GDP
Private Consumption (%) Capital Investment (%) Government Spending (%) Export (%) Import (%)
1946-49 67.1 9.5 17.6 4.2 8.0
1950-54 62.6 13.9 17.4 12.5 11.6
1955-59 63.2 17.0 15.4 11.9 11.6
1960-64 58.1 23.3 16.2 9.9 10.5
1965-69 56.0 24.1 16.0 10.5 9.7
1970-74 53.7 26.0 17.4 12.2 11.4
1975-79 57.8 21.7 19.2 13.1 12.5
1980-84 59.2 20.6 18.6 15.9 14.8
1985-89 58.0 22.1 16.0 13.7 10.4
1990-94 57.8 22.3 16.8 13.6 10.9

(“Two Thousands Years of Japanese Economy” Keiso-shobo) From Table 1 it is clear that the dependency of the Japanese economy on the export practically remained on the same level initially (lower than in Germany). Then it rose as the fast growth slowed down coinciding with the oil crisis of 1974 ,and fell again after the yen’s evaluation in 1985. In other words for the Japanese economy export was not so much the main moving force of the growth (however obtaining of foreign currency was vitally important to import high-tech and natural resources) as it was a life-vest during economic recess. The main engines of growth were domestic consumption and constantly increasing capital investments, which is clearly illustrated by the Table 1. Besides, by mid fifties Japan experienced “consumption boom” – a demand for novel products – such as vacuum cleaners, refrigerators, TV-sets, and automobiles. This was a rosy period with bright hopes for future. The constant growth of capital investments combined with import of high-tech – partly encouraged by special tax arrangement of “accelerated amortization” – sharply increased labor productivity and provided the complete formation of chemical and heavy industries, which in its turn exerted a greater impact (compared to light industry) on the development of other sectors of economy. It is remarkable that the share of foreign capital investments was inconsiderable (there is no viable statistics on this topic though). Growing Pies If one divides everything in hand is, the economy will not grow. With the population growth such a society will become poor. It is necessary to accumulate resources for capital investments. Post-war Japan followed this simple rule. Of course, workers demanded higher salaries but could not receive more than what their companies could offer them. At the same time majority of managing elites – both government officials and company managers worked for the benefit of the society and for the development of their companies, though they were paid relatively low. The time around 1970 was something incredible for those who survived that period. Salaries increased not only in intensively developing sectors but also in relatively backward and low profile branches of economy, such as service. At that time the author thought many people began to receive unjustifiably high salaries. In such sectors productivity remained unchanged. Yet they had to raise salaries in order to recruit good employees. These companies could increase salaries only by increasing prices for services. Table 2.
1971 1972 1973 1974 1975 1976 1977 1978
Increase in monetary base (M2+CD) (%)(1) 25 26.7 16.1 11.8 14.5 13.9 10.7 12.2
Growth of consumer prices (%)(2) 6.5 4.7 11.7 23.4 11.5 9.6 8.1 4.3
GDP growth (%) (in current prices)(3) 10.1 16.3 21.0 18.6 10.0 12.4 11.0 9.7

(sources: (1) – Central Bank of Japan (2) – “Hundred Years of Japan” (Kokusei-sha)) Such growth might have a virtual character. Yet, Table 2 shows that the inflation rate almost always lagged behind GDP growth, which contributed to real improvement in quality of life. The sectors with higher productivity gave a positive impact on the society as a whole. Table 3. Monthly salaries by sectors (in thousand yens)
Construction Industry Transport;Communications Trade Finances; Insurance
1951 -- 11.7 12.3 14.9 16.7
1960 21.2 22.6 28.3 23.1 32.2
1965 39.4 36.1 47.2 36.5 50.5
1970 71.7 71.4 84.8 68.6 85.3
1975 158.0 163.7 198.7 165.0 207.0
1980 251.6 244.6 281.6 239.5 324.1

(From “Hundred Years of Japan”) There was another factor that contributed to this “equal” sharing of fruits of economic development – annual “spring struggle for salary increase”. After the end of fiscal years trade unions started tough negotiations with top management of companies (gradually this act became some sort of a “ceremony”). These negotiations often were accompanied by fierce strikes. I still remember how we suffered every spring from strikes of the public transport. All these factors made Japan a society in which 95% of it members regard themselves “middle class”. Successes of Centralized Planning? There are pundits who consider that Japan’s development was realized on the basis of “planning”, just like the Soviet Gosplan – strictly centralized distribution of resources. It is a total nonsense. It is true that every year Agency for Economic Planning used to publish economic growth forecast. Companies referred to these figures differently when preparing their annual plans. But they were not legally bound by these plans. If the market turns out to be more favorable, they could freely purchase additional resources and equipment for a larger production. Forecasts of the Agency for Economic Planning were primarily used to prepare annual government budget. In other words based on these forecasts Ministry of Finance calculated annual revenues. The officials who came to the Agency for Economic Planning from the Ministry of Finance often lobbied for relatively low economic growth, because it becomes easier to cut requests of other ministries and protect the Finance Ministry from the pressure of politicians demanding larger expenditures. And those people who came from the Ministry of Foreign Trade and Industry often fought for relatively higher index, because larger budget allocations would stimulate economy, and companies would act more optimistically. The result was that the Agency’s “plan” never coincided with real results (See Table 4). Table 4. Discrepancies between forecast and real results
Five-years plan 1956-60 Five-year plan 1958-62 Ten-year plan 1961-70 Five-year plan 1964-68 Five-year plan 1967-71 Six-year plan 1970-75
Plan (%) 4.9 6.5 7.8 8.1 8.2 10.6
Real result (%) 8.8 9.7 10.0 10.1 9.8 5.1

(From “Japanese Economy” by Takafusa Nakamura) Besides, share of the government’s budget in the total GDP was at that time relatively low compared to other industrially developed nations (even in 2000 it was 29.4% including municipal budgets). This was partly due to the fact that defense spending was always less than 1% of GDP. In addition to this the government had stopped allocating subsidies to maintain the prices, which used to amount to approximately 27% of the total budget immediately after the war. Some people allege that the Government of Japan spent “incredibly large amounts” to develop new technologies. But the role of the government was limited most of the time to small seed money to stimulate research and development. The Government also coordinated research activities of interested companies within frameworks of targeted programs. In such cases expenses were paid by the companies. We should note, too, that in other countries technology development is frequently financed by large military expenditures. Daniel Okimoto clearly demonstrated this in his book “Tsusan-sho to Haiteku Sangyo”. In postwar Japan the government’s role was probably most substantial in finances. Having set clear differentiations in functions and goals of various banks and other fiscal institutions and closely controlling their activities, Finance Ministry and the Central Bank managed to gain trust of the public to banks (Pre-war Japanese banks were somewhat similar to present Russian banks. Bigger banks mainly served corporations in their own concerns and the smaller ones lacked sophisticated professionalism). People’s savings started flowing into industries. The Government itself managed the largest network of banks in the country – Post Bank, and transferred its money into private sector through various structures, including the Bank of Economic Development (Post Bank was forbidden to provide loans independently). Table 5. Monetary resources pumped through Government (in billions of yens)
1955 1960 1965 1970 1975 1980 1985
Loans and Investments Program(1) 322 607 1621 3580 9310 18180 20858
Budget (incl. special accounts)(2) 2169 3269 6586 13727 33571 72932 90834
GDP 8598 16681 33765 75299 152362 245547 324290
(1)+(2)GDP 29.0% 23.2% 24.3% 23.0% 28.1% 37.1% 34.4%

(“Hundred Years of Japan”) Table 5 shows that the role of the government in pumping monetary resources was modest during the period of fast economic growth. But if we take into account the role of Japan’s Industrial Bank (Nippon Kogyo Ginko) we have a totally different picture. Special law allowed this bank to issue long-term bonds in order to pump money for long-term crediting. There were two more banks with similar competence. And together they contributed immensely to investments. Cumulative volume of transfers of money by the government, National Loans and Investment Program, municipal budgets and banks of long-term credits amounted to a considerable part of GDP (Table 7). From Table 7 it can be seen that after the rapid economic growth it became even too large. Table 6. Volume of Loans provided by the three Banks for Long-term Crediting
1955 1960 1965 1970 1975 1980 1985
Billions of Yens
(3) 324 934 2248 4729 11058 16524 28525
(1)+(2)+(3)
GDP 32.7% 28.8% 31.0% 29.3% 35.4% 43.8% 43.2%

(source: Central Bank of Japan) Table 7. Budget Expenditures of Municipalities
1955 1960 1965 1970 1975 1980 1985
Billions of Yens (4) 1137 1597 3649 8043 23346 38829 46603
(1)+(2)+(3)+(4)
GDP 46.0% 38.4% 41.8% 39.9% 50.7% 59.6% 57.6%

Note: (4) – with deduction of grants (subsidies) from the center (From “Hundred Years of Japan”, Central Bank of Japan) There were also other instruments for government interference and control. Taxation system was used as a leverage to influence the economy: accelerated amortization for use of new high-tech equipment and tax privileges for purchase of environmentally safe equipment, for example. To control economic activities official regulations and standards were used, too. Banks, transport and power industry were protected by such regulations from rigid competition. Statistics show that people in these sectors were paid higher salaries than in other sectors of economy. But these measures often incurred crony relationships between companies and the government, and quite often subjected to criticism from abroad as protectionist measures. There was also another type of interference that had little legal backing – so called “Gyosei Shidou” by state agencies, administrative guidance mainly conveyed via telephone. For example, Government officials may call a company, suggesting that they do not expand their production. The Ministry of Foreign Trade once took trouble to limit export of automobiles when excessive export was criticized by the outside world (because of competition the car manufacturers could not agree upon their export quotas. Only the Ministry possessed moral capacity to set quotas for each company). And finally, Japan had plenty of time before it opened itself to foreigners. Japan joined GATT only in 1955 and started to liberalize foreign investments in 1967. Besides a relatively undervalued yen brought protectionist effect for a long time. In sum, though official financial institutions played a substantial role in post-war Japanese economy with their large share in long-term crediting, the competition in private sectors remained intact and even intensified. Positive and Negative Fruits Economic growth brought an egalitarian society with high standard of living. Japanese economy became the second strongest economy in the world, becoming almost the “global factory”. Trade, investments abroad and large economic assistance elevated Japan’s status in the world. But behind all this a decay was growing – self-satisfaction and bureaucratization of thinking in larger organizations and companies. Many Japanese people lost curiosity and entrepreneurship. School education paid too much attention to “equality”, sometimes excessive. This made it hard to meet the challenges of globalization of business. Today there are only few Japanese bankers and financiers who can act well in the international financial markets. Money circulation by the government and other related organizations began embracing too large a share in the economy, thus probably reducing the efficiency of money. Although without this system money would never be spent on the projects with low return, they were sometimes spent too irrationally. Today most of coastline is clad with concrete, paths in the rice fields covered with asphalt. Construction industry, mainly financed from budget, occupies unreasonably large place in the economy. About 10% of employed population in Japan work in this industry while in USA this figure is close to only 5%. According to Nikkei calculations cumulative expenses of both government and municipal budgets and thirty seven special accounts (Tokubetsu kaikei), after deducting overlaps, amounted to 240 trillion yens in 1998, which constituted 48.3% of GDP (if national program of loans and investments are included here this figure will reach approximately 52%) (Ministry of Finance). Here we can see moments of artificial upkeep of overgrown economy. In other words domestic consumption and investment reached their limits.

IV. Fall of “Japanese Model” – the Limits of Expansion

Some people say that “Japanese Model” has become obsolete for the time of globalization and became the main reason for the recess in Japanese economy. I cannot agree with this argument.

Creeping Crisis

To discuss this issue let us recall some characteristic features of 1980-1995. Firstly – it was an age of globalization of trade. After the end of the Cold War the world economic space expanded. Former socialist countries became markets for export of Western products and base for low-cost production. Some South American countries that implemented reforms also joined them later. Thus came the epoch of “mega competition”, when Japan and the West had to compete with newly industrialized countries (although in most of the cases it is the Western European countries and Japan themselves who moved their production to these countries).
While global exports increased by 2.5 times during 1980-95, Japan’s export increased only by 1.4 times (in yens. In terms of US dollars it grew 3.4 times [due to sharp fall of US dollar]).

Table 8. Volume of Export from (in billion dollars)

China Hong-Kong Thailand India Mexico USA Total
1980 18.1 19.8 6.5 8.6 15.6 225.6 2001
1985 27.4 30.2 7.1 9.1 22.1 218.5 1921
1990 62.1 82.2 23.1 18.0 27.1 394.0 3425
1995 148.8 173.8 56.2 30.6 47.1 584.7 5005
Growth
1980-
1995
822%
878%
865%
356%
302%
259%
250%
(From “Hundred Years of Japan”)

Secondly – by 1990 Japan’s market was already saturated. Houses and apartments of the Japanese were filled with all kinds of electronic devices and equipment, pianos, and even fur coats. People bought new cars every second year.
During the “bubble” economy demand was high. But when the “bubble” burst, market over-saturation started casting shadows on the economy. Moreover, perspectives of aged society and related tax burdens made the Japanese keep their wallets tighter.
Hence by 1990 two out of three moving forces of the economy -domestic demand and export – showed signs of decline, which in its turn was followed by a fall in investments as well.

Aftermaths of Reagan’s Economic Policy

By 1985 it became apparent that the “successes” of Reagan’s economic policies were virtual. Although GDP in USA grew by 7% in 1984, financial and trade deficits were accumulating at high speed.
President Reagan lowered tax rates and simultaneously increased military expenses, which became a last blow against the Soviet Union but it also created a huge financial deficit for the USA. A large issue of treasury bonds financed this deficit. Instead of getting cautious the Japanese Government and Japanese companies started energetically purchasing these bonds, thus becoming a #1 foreign buyer. This happened not because of political pressure exercised by the US, but because it was the best option for investments due to higher interest rates (for such a big “whale” like Japan’s foreign currency reserve, simply there was no other “pond” to swim in).
Thus the two economies began to conglutinate. Japan earned dollars on its exports, only returning them to USA by purchasing American treasury bonds, which in turn constrained the growth of interest rate in the American financial markets. So American economy kept running and continued to import from other countries, Japan among others.
In other words because of forced printing of American banknotes the world economy was somehow revolving. Everybody understood the danger of this a situation but instead of stimulating their economies with their own means they depended upon the virtual growth of the American economy. If the trust in American dollar be lost, it would immediately become evident that this scheme is virtual, and the world economy would collapse.
Such a risk became recognized by 1985. Although the financial deficit was under control as above, the trade deficit constantly grew, corroding trust in the dollar. Ironically high interest rate in the US financial market at that time (caused by boom and financial deficit) attracted foreign investments, pushing dollar’s rate even higher. Because of dollar’s high value, American export suffered, exacerbating the trade deficit.
Therefore, in 1985 G7 finance ministers gathered in New York to agree upon gradual devaluation of the dollar. However, their capacity to interfere in the financial markets turned out to be limited compared to gigantic flow of private money in the world market. Dollar’s rate fell sharply. Yen’s rate jumped from Y257 per dollar in 1984 to Y122 per dollar in 1987.
Export from USA jumped 1.9 times during 1984-91, while at the same time Japan’s export in yen term remained almost on the same level (only 0.5% growth). Before these events Japanese economy had already entered the period of moderate growth. Domestic market was saturated compared to the period of rapid economic growth. In 1985 Japan lost the last resort for economic growth---export (its export used to grow by 92.6% in 1978-84).
The Government of Japan took measure for stimulating internal demand and investments, inflating budget expenditures (34.6% growth from 1984 through 1990) and lowering interest rate to zero.
At first it seemed to be working. GDP grew in 1984-1991 by 51.8% (in current prices). For Japan it was a “Golden Age”. It almost became a “world factory”. Some people in Japan started even claiming that there was nothing left they could learn from the West. USA and EU requested further growth of Japanese economy in order to support the world economy. While USA’s import for 1985-1990 grew only by 46.7% , Japan’s import grew 80.4%.
The USA proposed Japan to share its burden as the “world power”. Japan became # 1 donor of official economic assistance and paid ¾ of expenses of American troops stationed in Japan (now this period is ending and the US is again becoming # 1 donor of official development aid). At that time British “Economist” published an article with a title “Thank you, Japan”. Japan was trying hard just like a poor frog inflating itself bigger and bigger.
But I also remember how a friend of mine who worked for a large corporation said to me at that time: “A big trouble may occur. We are more or less holding for now. But sooner or later we’ll have to lay off lots of people. Otherwise we cannot compete with Asia”.
And the trouble came. A frog, just like in a fairy tale, burst open. A hike in interest rate by the Central Bank of Japan triggered the downfall. Inflated prices for land and stocks fell down in a short period of time, dramatically lowering values of collaterals. “Bad debts” started to accumulate, and banks withheld new crediting, thus exacerbating the economy even further. A vicious cycle was in place: recession– less crediting – even worse recession.

Table 9. Moving Forces of Japanese Economy (billions of yens)

1975 1980 1985 1990 1995
Private domestic consumption 143,400 173,354
(growth – 20.9%) 202,226 (16.7%) 250,760 (24.0%) 277,930 (10.8%)
Export 16,545 29,383 (77.6%) 41,956 (42.8%) 41,457
(-1.2%) 41,531
(0.2%)
Private investments for equipment 30,292 39,093 (29.1%) 52,689 (34.8%) 85,418 (62.1%) 76,624
(-10.0%)

One decision by the Bank for International Settlements (BIS) worsened the situation. By that time international activities of Japanese commercial banks began to pose a threat to the Western banks. Taking advantage of low interest rate in Japan, commercial banks had started to offer cheap loans overseas as well. According to Nikkei, volume of such credits amounted to one third of the world total. In 1992 representatives of central banks of Western countries gathered at BIS headquarters (Basel, Switzerland) to adopt a new norm of crediting.
According to the new regulation, the commercial banks, in which share of their own capital in the total volume of their actives does not exceed 8%, should not be engaged in international banking activities. At first the Japanese bankers felt relieved, when they saw that the value of stocks in their capital was to be calculated at current prices. However, when the stock prices began the free fall, this regulation nevertheless turned out to be unfavorable, and the banks adopted even tighter lending policy.
The size of catastrophe was immense. Cumulative loss in stocks value was equal to USD 5 trillion and another 5 trillion were lost in land’s value. Japan’s total loss corresponded two years of its GDP, but the quality of life suffered very little. The only thing they lost was profits from the “bubble”.
What is it? A plot by the West against prospering Japan? In my opinion this is nothing but a logical conclusion of excessive expansion of the economy, although some intentional steps, neutral and malevolent, were certainly taken against Japan. Above all it is a belated consequence of Reagan’s economic policy. Artificial expansion of economy by Reagan’s administration at the expense of financial deficits increased Japanese export to USA to an excessive extent. By 1994 the amount of unpaid American treasury bonds reached USD 5 trillion. So Japan and United States jumped forward for several years at the expense of debts. Japan was sustaining its economy based on inflated demand. It is not surprising that now approximately 25% of equipment remain idle. By 1996 USA got out of the crisis but Japan, left alone with its problems, is hardly breathing, only saved by issue of bonds and increased export to the USA. It is hard for a frog to return to its previous natural size.

Ten Years Lost?

In Japan the period between 1991 and 2000 is called a “lost decade”. Is it true? Despite gloomy news about degeneration in all aspects of Japanese life, the society looks stable and prospering. Streets and buildings are well taken care of and compared to the American towns they look very tidy. And people are still well dressed. At the first sight the Japan at last has built a Scandinavian type civil society with all advantages of social welfare and without extra interference in private life. It is comfortable and interesting to live in today’s Japan.
Despite rumors about the “fall” of the country per capita GDP in real terms grew by 20% in 1990-98! Private monetary savings in the same period grew by 50% and reached USD 12 trillion in 1998. Is such a “depression” not a success compared to USA where for 20 years since mid 70s average annual income stayed at the level of $45 thousand (USA at that time was suffering from rapid increase of import and loss of jobs) (source: Nikkei).

V. What Needs to Be Done and What Can Be Done?

Despite difficulties Japan remains economic power #2, and its share in total Asian GDP (including China) was about 55% in 1997.
While Japan produces half of the USA’s GDP, it spends only 1/5 of energy. Its currency reserve (USD 397 billions as of September 2001) and private monetary savings (approximately USD 12 trillion) guarantee to some extent endurance of the Japanese economy.
Its import (Y35 trillion in 1999 and 5.2% of the world’s total import. Over 44% of Japanese import is industrial goods with high added value) and huge investments overseas (Y22 trillion in 1999 in direct and indirect investments) have a substantial bearing on the world’s economy.
Japan’s overseas investments started bearing fruits. In 2001 revenue from interests, dividends, and profits were equal to Y6.7 trillion (although proceeds from direct investments is only 10% of the total) , thus exceeding the amount of trade surplus (by Y6.4 trillion). Payments from abroad for the Japanese patents are also growing, in 2000 they exceeded Y1 trillion for the first time.
In this sense Japan is taking shape of a mature economic power like England after World War I. But unlike England Japan does not possess a world’s financial center and Japanese yen is not an international currency (as of March 1998 only 36% of its export and 22% of its import were conducted in yens, which makes Japanese economy vulnerable to currency fluctuations).
Huge private monetary assets provide macroeconomic durability but cannot guarantee social stability. For 70% of all assets are in the hands of people aged fifty or older. A considerable amount (Y400 trillion) belongs to 560 thousand affluent people (0.4% of the total population, majority of these people are peasants who became wealthy by selling their lands). Younger ordinary citizens are less prepared for the “dark days”.
Hence Japan cannot sit idle in vain hopes, for example, saying that increase of stock prices will solve all problems.
Japan faces a need for considerable restructuring of its economy. Bad debts cannot be blamed as reasons for recession; they are more probably consequences of unfinished restructuring of the economy. At the same time we should bear in mind that Japan does not need rapid growth any more. Level of private income is sufficiently high or too high, which harms competitiveness of the economy. Moreover demographic situation is such that in a few years there will be a negative population growth.
In such conditions only one percent of GDP growth, which is roughly half as much as Russia’s annual budget, would be enough. But even this 1% is not achievable without considerable efforts, because industrial production is rapidly moving overseas, to China lately. According to the data of the Ministry of Economy and Industry 23% of “Japanese” industrial products were produced overseas in 2001 compared to 6.4% in 1990 (forecast for 2004 – 30%). One third of cars and 92% of color TVs are already produced overseas. For the period between 1995 and 1998 volume of direct investments abroad amounted to 7.2% of the total domestic investments in equipment. In other words during this period 1.1% of the Japan’s GDP flowed out abroad with multiplication effect.
While income from investment abroad grows number of jobs at home shrinks. Many elder Japanese are now forced to quit their jobs long before retirement age. Many of them find other jobs but often with lower salaries. Younger people are aware that they cannot count on the life-time employment any more and many of them change their jobs frequently.
“Creation of new jobs” or discovery of new growing sectors became task # 1 for the Japanese economy just like in the beginning of Clinton’s administration in USA. In restructuring Japanese economy it is essential keep edges in high-tech. USA under Clinton could cope with the crisis thanks to the advanced technologies in informatics, biotechnology, medical equipment, and financial transactions.

“Bad Loans”

Loss of competitiveness, languid domestic consumption and investments pushed the land and stocks prices lower, which in its turn causes constant accumulation of “bad loans”.
Paying off of such debts is a vital task, but it may take considerable time until new growing forces come out in the economy.
The gist of the matter is rather simple. Most part of the “bad debts” caused by the “bubble outburst” in 1991, is already paid off. Current “bad debts” are caused by unfavorable state of affairs in the market. In 2001 “bad debts” of banks were Y43 trillion. Two thirds of them are debts of small and medium enterprises. Japan can deal with this issue. Companies do not go bankrupt all at the same time. Serious risks for the Japanese banks are the “bad debts” of some major construction companies, non-banks and the retailers; their total amount exceeds $100 billion.
The total annual profit of all banks in Japan is less than Y5 trillion , which is not sufficient to deal with “bad debts”.
Hence, the problem of “bad debts” will recur, even if the Government injects official money to the ailing banks. And frequent injection of the official money may be tantamount to subsidizing the economy, allowing it to survive without serious efforts for restructuring. On the other hand, coercible measures – bankruptcy of banks and companies might cause a chain reaction because of their tight relations with other banks and companies.

What Can Become the Next Moving Force?

A more fundamental remedy exists elsewhere: to find new moving forces. One solution would be the so-called niche products like hard discs (70% of world’s production), LCD’s (100%), measuring equipment for automobile exhaust gas (80%), lithium batteries (100%), etc.
However, this is not sufficient at all. More viable perspectives can already be seen on the horizon: nano-technologies (according Keidanren forecast its sales volume may well reach Y27 trillion by 2010), medical equipment (Y5 trillion likewise), computerized household equipment (Y8 trillion), computer software (Y11 trillion), robots (Y3 trillion), remodeling of houses (Y5 trillion), and above all building of houses coupled with deregulations (Y21 trillion in 1998, with accompanying demand in related industries – cement and glass, for example, – Y45 trillion). Biotechnology will also play an important role.
And yet there are no guarantees that these measures will compensate for the volume of production and number of jobs transferred overseas.
To further increase competitiveness it is necessary to deter excessive growth of wage (although in most products with high added values wage takes relatively small share). Statistics indicate a tendency of wage decline since 1998 (although this is compensated by deflation). Maybe we are witnessing a period similar to the situation in the USA twenty years ago, when real per capita income remained on the same level.
But even this will not sharply improve competitiveness, not to speak of stimulating the economy. So, it is now fashionable to talk about “controlled inflation” as means of recovery.
According to Paul Klugman inflation (moderate and “controlled”) should be created through large emission of money, pushing down interest rates so much that the real rate become “minus” (1.02 “Chuo-koron”).
Others argue that flooding the market with money will not save the situation, because banks will keep withholding new credits, and because the consumption will remain low. All this will end up in such a way that redundant money will be consumed for purchasing government bonds (as of September 2000 commercial banks already possessed such bonds for the total amount of Y75.5 trillion) or purchasing securities in USA.
Lowering of the yen’s rate might be a more efficient way of creating inflation. Publicists offer various “ideal rates” for the yen. True, yen’s high rate was the cause of the stagnation of the export. Fall of yen’s rate should, to their mind, increase export, profits in yen term, and decrease import, stimulating domestic production.
But in today’s economy no government can manipulate the rate of its currency. Private money often moves in wrong direction. Moreover, one should note that production of low-tech commodities is already moved to China and South-eastern Asia. Companies took steps to protect their profits from currency fluctuations. Therefore, a lower rate of yen would not necessarily mean a return of production to Japan. Lower yen may well end up with higher prices of imported goods without substantially stimulating domestic production.
Consequently, the theory of “modest inflation” is in fact an attempt to place a carriage in front of a horse. When there is no sufficient domestic demand, exports and investments, the “bad debts” will not disappear, instead they will constantly grow. Inflated emission of yen will not stimulate the Japanese economy. It will rather stimulate the American economy. Thus, a lower yen, even if it is realized, will not cause a substantial impact.

Is Apocalypse Inevitable?

Then, is Apocalypse really unavoidable? The number of homeless people in major cities is growing; although there are jobs, underpaid and not prestigious. But for now the Japanese economy somehow manages to tick thanks to “good companies” and issue of state bonds. One third of major corporations that are quoted at the stock exchange operate exclusively with their own capital without resorting to bank loans. In 1999 volume of direct financing (profits and issue of stocks) of private sector exceeded for the first time the volume of financing through bank loans – Y362 trillion. Share of only 30 major corporations is 52% in all of exports and their share in GDP is about 12% (Nikkei). For Japan they mean as much as gas and oil for Russia.
Many warn against rapid fall of prices for the Japanese state bonds. But their main purchasers are not foreigners but the Japanese. There are still huge savings in Japan for the total amount of Y1200 trillion. Besides, every year Japan receives Y10 trillion in profits and dividends from investments overseas (in 2001 Japanese property abroad was estimated to be Y150 trillion).
Besides, Japan has a huge market (third place after EU and USA) and its production, technologies and services remain strong. The essence of the current process is to transit from “inflated” volume to modest production, at the same time creating new growing sectors.
Resources for restructuring the economy are enough (some of them are mentioned above). While service sector in Japan comprises 60% of GDP, in USA and Europe it is 70% (in 1992-2000 number of people employed in services sector increased by 3 million, while in industrial production it decreased by 2 million people). Rapid growth of the elderly in age structure of Japan may create a huge market of medical care and services for them. A large part of the post-war baby-boomers who should soon reach pension age, will keep working, increasing the consumption in the society. They are used to “extravagant” expenses and in older age can spend most of their savings on consumption.
Growing number of NPOs will create new jobs, especially for younger people.
Whether or not Japan can achieve a gradual transition, or whether the confluence of various unfavorable conditions will lead to massive lay-offs remains to be seen. Anyway Japan won’t stop being an active participant of global economy. Japan deprived of natural resources has to earn hard currency with its labor. In current world economy only giant corporations with large financial and technological potential can survive. Fortunately Japan possesses several of them.
Japan’s economy is so deeply intertwined with other economies. Today high-tech companies would not be able to produce their products without foreign parts and machine tools. A large part of stocks of the multinational giants is owned by foreigners. In 1998 foreigners invested $7 billion in the Japanese stock markets and today more than half of the stocks of SONY are in the hands of foreigners. So, when Japan sinks, others do so, too.

Today all of the industrially developed countries reached the “ceiling” in their economic growth. If their population does not grow (exception will be only USA) and innovation in technology is not made, what they can do is at most to maintain the present level while implementing constant restructuring. For Japan, however, the task is more difficult, because since 1980s it has “inflated” its economy too big. Post-war Japan was a big “machine” targeted at economic growth. When this goal was achieved, many institutions became obsolete; for example, the bank sector. Today three special banks for long-term credits are abolished, and other commercial banks are merging.

Summing up what has been said we could add the following about the future of Japanese economy:
(1) Big corporations with large financial and technological potentials may and should remain engines of economy and source of hard currency incomes.
(2) Enterprises with relatively low technology will be moving abroad even more. In Japan the industries mentioned above should grow more (see the section “What can become the next moving force?”). Housing sector should play an important role among others.
(3) A larger proportion of population will be involved in services sector, though incomes will be lower than in industrial production. This sector needs deregulations for creating new and profitable enterprises.
(4) Neutrality of Japan in the world politics and its isolation in the world economy are impossible. From economic viewpoint it is too tightly intertwined with other countries. In politics it would be irresponsible for Japan not to be involved in maintaining stability in Asian-Pacific region which is one of the bases of Japan’s prosperity.

American Experience

American experience in overcoming the recent economic depression is very interesting and it helps us forecast the future of Japanese economy. One should bear in mind that till the middle of Clinton’s presidential term American economy was in a languid condition. The dollar devaluation in 1985 did not lift the economy immediately, although it increased volume of export significantly. Considerable cuts of state orders for weapons ruined economy of New England. In the beginning of Clinton’s term his buzz word was “creation of jobs”. And suddenly by 1996 the US economy made a headway jump. Even today there is only partial explanation of these successes.

Table 10. US GDP (in billion dollars)

1991 1992 1993 1994 1995 1996 1997 1998 1999
GDP 5917 6244 6642 7054 7401 7813 8301 8760 9256
growth -0.9% 2.7% 2.3% 3.5% 2.3% 3.4% 3.9% 3.9% 4.2%
(“Hundred Years of Japan”)

Table 11. Population of Japan and USA

1970 1980 1990 1995 1998
Japan 103,720 117,060 123,611 125,570 126,486
growth 12.9% 5.6% 1.6% 0.7%
USA 204,878 227,738 249,950 263,040 270,561
growth 11.2% 9.8% 5.2% 2.9%
(“Hundred Years of Japan”)

Table 12. Exports of Japan (in billions of yens) and USA (in billions of dollars)

1980 1985 1990 1995 1998
Japan 29,383 41,956 41,457 51,531 47,548
growth 42.8% -1.1% 0.2% 14.5%
USA 226 219 394 585 682
growth -3.1% 79.9% 48.5% 16.6%
(“Hundred Years of Japan”)

It is true USA was able to restructure its economy. They “opened” new frontiers: information technologies, financial transactions, biotechnology, genetic engineering, new medical equipments, and a huge layer of lawyers and consultants.
Companies considerably downsized the number of employees, selling less cost-effective businesses and actively adopting new management style, including Japanese one. Productivity started growing by mid 90s.
But these are not the only explanations for the growth of American economy. Statistics are deceptive. For example, in financial transactions higher stock prices inflate incomes of securities companies simply due to larger commission fees. Larger sales of expensive and luxurious consumer goods would bring a virtual growth of labour productivity in distribution sector.
Excessive lay-offs cause inconveniences for the clients, especially in services sector. In American airports one cannot find recipients behind information counters, and there are long lines in the banks and at cashiers in the shops.
Some vulnerability of American economy should yet be overcome. Accumulated deficit of the state budget exceeded $5 trillion in 1994, while volume of private debts reached $6 trillion (although there are collaterals for most of them). A large in-flow of foreign money supported the market prices of stocks and bonds (in 1999 its volume was equal to $60 billion which was twice as big as the trade deficit). Although private savings are immense – approximately $40 trillion by the end of 2000 – only 10% of the population possess about 70% of the assets and roughly half of all the savings are in shares, which makes them very vulnerable during recess.
In 1995 Mr. Welch, who was then the president of General Electrics, said that 70% of improvement of American economy is due to lower dollar which caused revival of American industry. There is probably some truth in this statement (see Table 12). But not all of the truth. There is another hidden aspect – growth of the population (Table 11), especially at the expense of immigrants.
A large in-flow of immigrants, although quotas were lately reduced, immediately creates additional market for consumption and provides low-waged labor.
However, there is more spontaneous moment in the development of American economy – information technology. The information sector grew annually by 30% in the nineties, although before the growth it had comprised only 5% of GDP.
In conclusion we can say that USA was able to cope with global competition thanks to restructuring of their economy, creation of new sectors and possession of universal hard currency – dollar. At the same time effects of these factors – including in-flow of immigrants, increased export and development of information technologies – are probably exhausting. But for Japan some of these factors could still serve as seeds for a next growth.

The Future is in China?

The world trade is at the stage of reorganization around fast growing industrial power, China. In mid- and long-term perspective this will have a great impact on Japan both in politics and economy.

Table 13. USA and China as Japan’s Trade Partners
(proportions)

1990 1999
Export to USA 31.5% 30.7%
Import from USA 22.4% 21.7%
Export to China (including Hong Kong) 6.7% 10.9%
Import from China (including Hong Kong) 6.0% 14.4%

The level of economic interrelations between Japan and Asia was always high. In 1999 Japan directed 30.2% of its export to such countries and areas as Taiwan, Korean Republic, Hong Kong, Singapore, Thailand, Malaysia, Philippines, and Indochina (to the USA - 30.7%). The same year 40.7% of Japan’s import was brought from the same countries (from USA – 41.4%). In other words if Japan’s trade with Asia and China are combined it is bigger than the trade with USA (but we should remember that export comprises only 10% of Japan’s GDP).
As Table 13 shows, proportion of trade with China is rapidly growing. According to the World Bank’s forecast Japan will benefit the most from China’s accession to WTO (Japan is number 1 trade partner for China): by 2005 increase in Japanese export to China will reach $61 billion. This means China may soon become as big a market for the Japanese products as the USA.
In Japanese import from China (including Hong Kong) proportion of machineries and equipment made up 23.9% in 1999, and most of them were produced in Japanese factories in China. An economic symbiosis of Japan and China is taking its shape. Japanese wealth is now being shifted to China but parts of it return just like was the case between Japan and USA. A part of Japanese economy is being moved to China, while jobs within Japan are lost.
If one calculates production and export by Japanese companies in USA, Europe and Asia (although it’s a difficult task), then there is no recession in Japanese economy. It means Japanese big capitals continue growing, and the Japanese employees and the Government treasury are the only ones who suffer. It will end either in a society with a large income gap, or in a society like Sweden with a high-lovel welfare and high taxes.

Position of the USA in Asia

Economic relations between Asia and USA have also symbiotic nature. While Asia provides USA with inexpensive and high quality goods, USA is a source of high technologies and capital for Asia. As the economy and technology develop, the variety of new goods and related components also expands fast. If certain countries have advantages in producing product A, others have advantages in manufacturing product B, and without exchanging them final products cannot be assembled. This is the current situation between Japan and USA.
During my work in Boston 1996-1998 I only once became a witness of trade conflict between Japan and USA.. In all other cases, wherever I went, American companies would say that Japan is their most important trade partner (number one to three) both in their export and import. The Japanese at that time built their plants in USA, creating 700 thousand new jobs, and export from these new plants reached 9% of US’ entire export.
The present volume of American trade with Asia exceeds its trade volume with Europe. USA for Asia is a model of both political and economic freedom and also a source of high technologies and capital. And USA will remain one of the most important players in the Asian economy.