Japan is sick, but once again people are becoming hopeful that it may at long last recover, mostly because a committed reformer named Heizo Takenaka now seems to be running the economic policy. But what policymakers and pundits fail to recognize -- or refuse to recognize -- is that economic policies per se will not reinvigorate Japan.
Japan's crisis is systemic, not cyclical. Debt, deflation and other maladies are purely symptoms of Japan's disease. The causes are a combination of institutional sclerosis, social anomie and gerontocratic governance.
For several decades after WWII the Japanese system worked remarkably well, not only in generating growth, but in providing high levels of education, long life expectancy, security, and other welfare benefits to its citizens. This system rested on three pillars: a cohesive political-industrial establishment, the mobilization of resources to achieve national economic ends and America's defensive shield. Almost immediately after defeat in WWII, Japan metamorphosed from being America's enemy into its pampered protg. This was "real geopolitik" in action. The Cold War, the rise of Maoist China, the Korean War all made Japan indispensable to America. Not only did the US provide military protection to Japan -- allowing Japan to concentrate on industrial goals -- but it also provided vast economic assistance, including massive technology transfers and, most important, opening up its market to Japanese exports while allowing Japan to protect its home market. Japan developed an "outward looking protectionist" strategy and structure. Unlike India or Brazil, which opted for inward-looking protectionism, select sectors of Japanese industry actively participated in international markets. Far ranging efforts were deployed to obtain technology transfers. The domestic market however was protected by a combination of industrial policy, cartels and a "Buy Japanese" mentality. As a "catch-up" strategy, it worked fantastically well.
By the mid-1980s Japan had more than caught up. The September 1985 New York Plaza Hotel meeting of US, European, and Japan's finance ministers -- a meeting where the yen was considerably re-valued -- symbolized a new era, and should have set in motion new policies in Japan. The problem was that alongside its outward-looking protectionist policy, Japan's establishment -- the national bureaucracy, the ruling Liberal Democratic Party, business, universities, and the media -- had fostered a corresponding ideological orthodoxy.
Instead of evolving as an open, liberal society, Japan had developed a closed mercantilist nationalism. This was reflected in an aggressive industrial machismo -- exports and outward investments reflect virility, in contrast to inward investments and imports -- and in various forms of chauvinism, illustrated by the book, The Japan That Can Say `No', (1988) co-authored by the current Governor of Tokyo, Shintaro Ishihara, and Sony founder Akio Morita.
By the late 1980s the world was changing fast, but Japan refused to change. The country became characterized by immobility and atavism. Japanese institutions were archaic and pursued mistaken economic strategies and structures. But the illiberal nationalist ideological ethos that defined Japanese society brooked no genuine debate, let alone heterodox positions. Indeed, among Japan's most moribund institutions are its universities and media. Not only was there no new leadership, but the seniority system and the omnipresence of "senior advisors" continued to prevail throughout Japanese institutions. This ossification was driven by the rigid, conservative and gerontocratic nature of governance. So even as the Japanese tidal wave appeared poised to overwhelm the world economy in the late 1980s -- remember "Japan Inc"? -- the country was nearing collapse at home.
Collapse it did, in 1991. But instead of reacting and adjusting, Japan went into denial and wasted a decade (and beyond) spinning its wheels in the sand. Policymakers, business leaders, academics and journalists refused to recognize the depth of their country's problems.
A day of reckoning came with the Kobe earthquake on 17 January 1995. As thousands died, the government froze, proving itself incapable of mounting an efficient rescue operation and displaying its ludicrous machismo by refusing the assistance of the US 7th Fleet. It was then that the Japanese people realized that "the emperor" (specifically the government) had no clothes. Today's deflation arises from the state of anomie in which Japan was plunged in the mid-1990s and from which it has not recovered. The Japanese have no confidence in the future because the establishment has lost all credibility and legitimacy. Yet that establishment remains doggedly entrenched in power, its mooted reforms little more than cosmetic: "re-arranging of deck chairs on the Titanic-Maru."
Strange to say, but the situation may get dramatically worse, not only economically, but also socially. The long-suffering Japanese tend to be more patient and disciplined than, say, Argentineans, but when social eruptions have occurred in Japanese history, they have been very violent. There is also a strong extremist political minority and a not-too-difficult to tap latent national chauvinism.
But a different scenario is possible: a reinvigorated, open post-industrial, globally-oriented Japanese society can be established on liberal political foundations. Realizing such a scenario will require thorough institutional renewal, rejuvenation of leadership at all levels, a radical change in national "mindset," and the opening up of Japan's economy and society to foreign influences and participation. The potential is there; there is a young generation of Japanese who harbour such a vision. They need every encouragement, for today's trends are frightening for Japan, for Asia, and for the world.
Jean-Pierre Lehmann, Professor of International Political Economy, IMD, is a Founding Director of the Evian Group, Lausanne, Switzerland. Copyright: Project Syndicate
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