It is nearly ten years since Japan was about to take over the known world. Until a month ago, the United States seemed unable to put a foot wrong. Then it, too, showed ominous signs of faltering. Can Japan’s mysterious ailment, whatever it is, be spreading? Japan came third last in the OECD’s table of industrialised and would-be industrialised member nations’ growth for 1999, with 0.2 per cent, ahead of Turkey and the Czech Republic. The OECD predicts that when the figures for 2000 are in, Japan will be at the bottom of the table with 1.9 per cent, behind Britain (3 per cent), the US (5.2 per cent), and effervescent Ireland, heading the OECD charts with 11 per cent.
For half a century we have been hearing that 1929 can never return, most recently from Paul Krugman of Princeton, who proposes the old Keynesian strategy for averting a world depression: cut interest rates, flood the markets with money, and if that fails, ensure that governments create demand. But Japan’s ‘lost decade’ has just seen the greatest Keynesian pump-priming operation in history produce only a disheartening dribble. Living entirely on performance-enhancing drugs, the Japanese economy still only manages to limp in last. The Japanese are the world’s keenest savers; they spend so little on themselves that the Government has to do it for them in order to keep the national economy, and the world’s, ticking over. The Japanese Finance Ministry estimates that in the financial year to March 2001, central and local government debt will exceed 140 per cent of GDP; the authorities in the world’s second largest economy will, in other words, have laid out almost a year and a half’s income before a single yen has come in.
On what? Not on housing, urban transport, parks, schools and libraries, in all of which Japan trails behind most OECD members. The Government’s colossal borrowings have gone to bail out banks, to build barely used tunnels, bridges that go nowhere, duplicated lines for the bullet train and dams that serve no discernible purpose. The gleaming 512-foot monster that towers over our local trout stream, for instance, barely generates enough electricity to run its own lavish PR show, much less to light the mountain village where I live, or earn anything to repay the four billion dollars it has cost. Sixty-five per cent of the Government’s revenue is required to service its debt, if we include the compulsory transfers of funds to local authorities, who use them in part to service their own. Just to stabilise Japan’s ballooning national debt at 150 per cent of GDP by 2005 would involve raising taxes or cutting spending by 11 per cent of GDP, or by 55 trillion yen – or half a trillion dollars – thus instantly plunging Japan and probably the world into depression. The London-based consultant Andrew Smithers calls his gloomy analysis ‘Japan as a Laboratory for Economic Theory’ because no major economy has ever run up such an extraordinary peacetime debt, or had so few ideas about how to ease its burden.
Last year, the 171-year-old Sogo Department Store, Tokyo’s Bloomingdale’s, closed its doors well before Japan’s heavily commercialised Christmas sales. The Nikkei Index lost a quarter of its value in 2000. Household spending was down 2 per cent for the year and Tokyo prices down an unheard-of 1 per cent, as shopkeepers competed for shrinking business. Unemployment touched 4.8 per cent at the end of the year, a whisker below the record 4.9 per cent posted in March – a hiccup by European standards, but ominous in a Confucian society in which work is the purpose of life, and those without jobs are resentful non-persons. The cardboard shelters of the Tokyo homeless are well out of sight, and open begging is unknown in Japan, but the old and not-so-old unemployed practise the respectable equivalent, hawking neatly folded newspapers and magazines retrieved from rubbish bins. Meanwhile, Japanese households collectively possess the biggest pool of idle capital in the world, the equivalent of 13.7 trillion dollars, much of which is deposited in savings accounts at local post offices, paying a measly 0.08 per cent interest, while the Government and private firms have more than a trillion dollars salted away abroad, making Japan the world’s biggest creditor.
Tokyo property prices, meanwhile, are edging down – which, together with the plummeting stock market, threatens to uncover fresh layers of bad debt and capital inadequacy in the banking system (Japanese banks are allowed to hold both stock and real estate as capital reserves). The Government has responded with a plan to divert part of its postal savings fund into the stock market: the Treasury, in other words, will not only spend people’s savings for them on make-work projects, but play the stock market for them, a twist that didn’t occur to Keynes. Life insurance and pension claims are massively unfunded, and more business failures are feared around now, as companies close their books at the end of the financial year – not exactly likely to encourage new investments. Capitalism, at least in its Japanese form, is falling apart – I’m quoting Koichi Kato, an elder of the ruling Liberal Democratic Party, whose own timid reform movement fell apart late last year.
One approach to the present malaise and the possibility that it could be spreading is to look back to Japan’s glory years, beginning with Prime Minister Hayato Ikeda’s plan, announced in 1960, to double the national income, and to see what went right. In the following two decades Japan piled up annual growth rates of 10 per cent and more and produced world-class steel, electronics and cars, financed entirely by domestic savings, without a penny of foreign capital – thereby flatly contradicting the current IMF dogma that global financial markets are the key to rapid growth. Forced to rely on energy imports, Japan had by 1976 weathered the Arab oil embargo and the resulting stagflation, while the US and others felt its effects well into the 1980s. Similarly, the exchange rate of the yen doubled against major currencies in the 1970s, which would normally be the kiss of death for an exporting nation, but Japan’s trade surpluses doubled in tandem. Now, however, this energetic and industrious country seems paralysed by indecision, as the economy trundles downhill.
‘Capitalism’, if by that loaded term we mean anything more than the current business customs of English-speakers, is a cloudy concept; but most authorities follow Joseph Schumpeter in seeing credit creation by, or through, a banking system as its distinctive feature. Historical experience suggests that pioneering, credit-based capitalism is effective on frontiers, before competitors have arrived and whittled profits below the level at which plant can be replaced and loans serviced. A steady-state capitalism in which markets, technology and productivity all stagnate is hard to imagine – although present-day Japan may be coming close. But frontiers, or business opportunities, come in many forms that are often hard to spot ahead of one’s rivals. Nevertheless, Ikeda, a former financial bureaucrat, saw open frontiers beckoning to Japan from all points of the social and political compass when he announced his income-doubling scheme in 1960, by which year Japan had moved from the ravages of its own futile wars to the sunlit security of being the key Cold War ally of the US, the world’s richest and most powerful nation.
Japan’s own demography, a key economic frontier, was then wide open. Most of the population was of working age, with fewer non-workers to feed. Rapid urbanisation, and then the war, had already reduced its birthrate below the rates that are still prevalent in rural Asia, where babies are seen as potential hands to work, rather than mouths to feed and minds to fill. On top of its own minor baby-boom in the immediate postwar years, Japan had taken in six million returnees from its former empire, mostly young, hungry and industrious. (One was Toshiro Mifune, soon to be Japan’s first international movie star.) Conversely, wartime privations and erratic medication meant relatively few old people lived beyond their productive years.
Japan’s geographical frontier, far from having contracted after defeat, became, in economic terms, more open, when the US, the world’s richest market, agreed to accept Japanese products with no reciprocal opening of the Japanese market. ‘What Japanese market?’ one old Japan hand sneered, surveying the shacks and sheds of its war-wrecked cities.
The reviving Japanese domestic economy gave local manufacturers beginners’ slopes on which to practise: first to equip every home in the country with an electric fan, an automatic rice boiler and a motorised bicycle, later a colour TV, an air-conditioner and a car – all easily recognisable as the seedbed produce of the Japanese industries that would soon dazzle the world. War-razed factories were rebuilt with state-of-the-art technology, obsolete industries such as coal-mining resolutely discarded, cameras and binoculars, where Japan already had a war-stimulated lead, financed out of domestic savings.
A minimum of foreign exchange was needed for patents, raw materials and advanced machinery to kick all this off. US procurements for the Korean War (‘a gift from the gods,’ said Prime Minister Shigeru Yoshida), supplied hard currency, well before the Japanese export industry was able to earn its own. Reputedly, the first $200 million came from the earnings of Japanese ‘pan-pan’ girls entertaining US troops on R&R from Korea. Every dollar earned was hoarded and husbanded, although Japanese early-bird exporters were allowed to use part of their earnings to import lemons, still big sellers in citrus-hungry Japanese winters. Why were Americans so munificent to their former assailant? Japan’s geographical position, on the far side of an ocean the US needs to control for its own defence, and close to China and Russia, protagonists in the Cold War, supplied the sense of mutual advantage on which lasting international friendships are built. Japan has trodden its only important political frontier warily but, as long as the Cold War lasted, with considerable success. Apart from the martyred islanders of Okinawa, a fifth of whose arable land is devoted to American bases, training grounds and golf courses, few Japanese think of the US troops stationed in mainland Japan as an army of occupation, or indeed think much about them at all. Fewer still feel threatened by China or Russia. Americans have, in the meantime, grown rather fond of Japan, an untroublesome ally with safe streets and drinkable water, and unless the Japanese stop investing in US Government Bonds, this mood may well last.
The frontiers beckoning so invitingly to the Japanese of the 1960s are now either closed, closing, or in question. Japan’s demographic plight is close to calamitous, as adverse now as it was favourable to growth in the 1960s. On the latest figures, Japanese women are bearing 1.41 babies each, far below the accepted replacement level of approximately 2.2 (British women are averaging 1.74, American women 2.06). Japan, moreover, is fiercely determined to preserve its monoculture and reluctant to accept immigrants. It has the world’s longest life expectancy, 80 years overall, 84 for women. Low fertility and long lives have built a top-heavy age-pyramid, growing ever more cumbersome, with 14 per cent under 14 and 17 per cent over 65. These elderly voters keep conservative politicians in power: they resist change and hoard their savings unproductively in the local post office. Japanese social custom compounds the country’s demographic crisis. Almost every Japanese son is now an eldest son, destined to inherit the parental home, on condition that his wife cares for her long-lived parents-in-law as unpaid domestic help. Young women are reluctant to marry into this bondage, and half of Japanese women under thirty are now unmarried, are unlikely to marry, and are living at home with their own parents as, in current Japanese parlance, ‘parasite singles’. One result of this informal matrimonial strike is that new, green-field household formation, once the motor of Japanese domestic demand, has practically ceased. Living together, the all but universal prelude to parenthood in the West, has yet to reach high-rent, socially prudish Japan, as the low-to-vanishing illegitimacy rate, 1.1 per cent of births, indicates (Britain’s is around 24 per cent, Sweden’s nearing 60). Japan has more industrial robots than any country in the world; but robots don’t fall in love, have babies, or buy fridges and school uniforms.
In effect, Japan’s geographical frontier is now closed. There can scarcely be a corner of the planet that has not seen Japanese products, while many once promising markets – Africa, parts of Latin America and Central Asia – are now inaccessible because of poverty or strife. Where they are still open, Chinese, Korean and even Vietnamese competitors have arrived, offering the low-cost textiles, basic cars and cheap, serviceable electronics on which Japan’s earlier growth was built. The technological frontier is, as ever, trickier to read, but there are many signs that Japan is not on it. Robot toys, portable telephones and high-definition TV are desirable gadgets, but they are unlikely to change the way we live; and in any case Japan’s rivals make them too. The high-tech (and anti-competitive) consortia organised by Japanese bureaucrats in the 1970s with the aim of securing long-term world leadership had, by the 1990s, produced few world-beaters. Japan still leads in very large-scale integrated circuits, but nothing mass-marketable has come of artificial intelligence, machine interpreting, TRON (real-time computing in molecule-sized packets) and other visionary schemes. The revolution in information technology seems to have passed Japan by; the two-legged race of hardware and software favours the software side, and English, not Japanese, has become the programmer’s protocol, which accounts for the rise of such unlikely IT juggernauts as India and Ireland. There has been much talk in Japan of joining the IT revolution, but no real willingness to hire the necessary foreign teachers or to improve the country’s rigid, old-fashioned education system. Individual Japanese have not lost their ingenuity: Shuji Nakamura invented the blue laser, whose short wavelength makes possible the denser packing of information on CD discs, but last year Nakamura took his ingenuity to the University of California, Santa Barbara – part of a brain drain that a stagnating Japan cannot afford.
Something even more fundamental seems to be inhibiting the Japanese economy. ‘We have the bad luck to be in the downward phase of the fourth Kondratiev cycle,’ a Bank of Japan official told a press briefing last year, sending some of us scurrying to our economic history books. Nikolai Kondratiev,who unwisely disagreed with Stalin and died in the Gulag some time around 1938, to be fully rehabilitated in 1987, was an official in the Soviet Finance Ministry who thought that Communists should study market-based systems. In 1924 he announced that he had found a fifty to sixty-year cycle which appeared to go back at least to the dawn of the Industrial Revolution in Britain in the 1760s. His theory could have been read as forecasting the Great Depression of the 1930s, although he could only guess at the economic forces at work. Schumpeter rediscovered the Russian theorist in his 1939 book, Business Cycles, which was itself lost in the excitement that had greeted Keynes’s revelations. Kondratiev’s cycle, suggestive rather than scientific (like most economics), seems to involve the clustering of innovations – that is, the bringing of new ideas to market (as opposed to invention, which can happen at any time) – and the innovations that drive the cycle seem to be new forms of transportation, which both create demand for their own construction, and enlarge markets once they are up and running. The 1950s, when Japan was rising from the ashes of defeat, saw a new Kondratiev upswing, with the advent of jet aircraft, motorways, high-speed trains, container ships, supertankers. Resurgent Japan cleaned up on the last four, and was probably lucky that its conquerors kept it out of aircraft, where there seems to be room for only one global supplier, or at most two. There is now a world glut in shipbuilding, in cars and trucks, in steel for trains – and most of the excess capacity is in Japan. Whether information technology is market-expanding – or the book reinvented – is still to be seen. If it is, Japan is poorly placed to lead an IT revolution.
Another frontier on which Japan is plainly stalled is what we might call the Maine line. Sir Henry Maine (1822-88), the British founder of comparative jurisprudence, memorably laid down that a commercial, or as we might say capitalist, society evolves ‘from status to contract’. This implies a need for armies of lawyers to draw up the contracts, and bailiffs and judges to enforce them. Only with such professional help can business plans be formulated and followed, blunders weeded out by bankruptcy and bankers taught to judge the viability of propositions before they lend, recall or lend more. But that is not the way the Japanese economy evolved in its glory years, or how it limps along now. Many attempts have been made to draw up an organisational chart of modern Japan in order to locate the decision-making (or, as things now are, the decision-avoiding) centre. All have failed, because there isn’t one. Japan works rather by endless negotiation and deal-making between semi-autonomous interests, of which the bureaucracy, business and the politicians – who expect to be paid for their services as intermediaries – make up the ‘iron triangle’ misleadingly nicknamed ‘Japan Inc’. This can be a flexible and effective system provided there is a broad consensus about its aims, as in the 1960s, when almost all Japanese saw that only by expanding their export markets could they replace Japan’s lost empire. Negotiated in bars and geisha houses by boozy men who were at school and university together (and therefore all Japanese), these unwritten understandings are built on personal trust. In this model of transacting, as Maine understood, status is all-important – so-and-so is friendly with an important gang boss, X’s daughter is married to Y, a powerful bureaucrat. But when pain is to be shared, and there is no consensus on the need for, much less the nature of a change of course, there is no basis for negotiation and the system freezes up. Remaking Japan as a contract-bound commercial economy will be a long job, if it ever happens; there are simply not enough lawyers to go round. Japan has only 18,296 in all jurisdictions or, with judges and prosecutors thrown in, one for every 6300 potential litigants. The US has 941,000 lawyers, one for every 290 Americans, and even placid Britain has 83,000, one for every 710. There is talk of raising Japan’s yearly output of lawyers from 1000 to 3000, but even at this rate generations must pass before Japan crosses the Maine line into our litigious world.
Adam Smith, the founder of the gloomy science, was a Scot, and economists have tended to see in Britain, as the pioneer industrial nation, a logical point of reference, and hence to see industrialisation, expanding markets and economic growth as different aspects of the same process. There is, however, an earlier experience which looks more relevant to Japan’s present paralysis. While Britain’s was the first economy to use fossil energy to produce goods for market, the most characteristic institutions of capitalism were not invented in Britain, but in the Low Countries. The first miracle economy was that of the Dutch Republic (1588-1795), and it, too, hit a mysterious dead end. All economic success contains the seeds of stagnation, it seems; the greater the boom, the harder it is to change course when it ends. If Japan’s current problems are not so much technological as social and institutional, then pre-industrial experience, Japan’s included, could well be relevant.
When Spanish sea power went down with the Great Armada in 1588, the seven provinces of what were then the Spanish Netherlands were already preparing to expel Spanish soldiers, aristocrats and prelates. Netherlanders or, as I shall inaccurately call them, the Dutch, had long been bold seafarers and blue-water traders, exploiting their superb geographic position as a way station and entrepôt between the Mediterranean and the Baltic via the ocean route, the gateway to Germany via the Rhine, and the ideal place to land herring for trans-shipment to European Catholics foregoing meat on Fridays. The Dutch had already built ships big enough to preserve the catch at sea, had sold shares in the enterprise and through autonomous, locally elected town and village councils had pooled the cost of the dikes and dams that kept the North Sea out of their homes: here we see in embryo some of the characteristic devices of a market-based economy. So when the defeat of the Armada unlocked the trade routes of the world to the newly independent republic, open frontiers beckoned Dutch sailors from every corner of the seven seas. The Netherlands United East Indies Company (Verenigde Oostindische Compagnie, or VOC), founded in 1602, was the world’s first multinational, joint-stock, limited liability corporation – as well as its first government-backed trading cartel. Our own East India Company, founded in 1600, remained a coffee-house clique until 1657, when it, too, began selling shares, not in individual voyages, but in John Company itself, by which time its Dutch rival was by far the biggest commercial enterprise the world had known.
Dutch capitalism got off to a flying start. Amsterdam was Europe’s wealthiest trading city, Dutch wages the highest in the world. Amsterdam’s Beurs was the first stock exchange to trade continuously; and in its first few decades, Dutch market punters pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trusts and other speculative instruments, much as we now know them. With them came specialised offshoots – insurance, retirement funds and other orderly forms of investment – and the maladies of capitalism: the boom-bust cycle, the world’s first asset-inflation bubble, the tulip mania of 1636-37, and even, in 1607, history’s first bear raider, a canny shareholder named Isaac le Maire who dumped his VOC stock, forcing the price down, and then bought it back at a discount.
Where did the Dutch merchants get their money? The domestic products of the Dutch Republic were much what they are now: cheese, beer, bricks, pottery and various cottage crafts, sound but not sensational movers on an emerging world market. The action was out on the distant maritime frontier, where Dutch seamen were mopping up the remnants of the Portuguese Empire, particularly the islands where pepper, cloves, nutmeg and mace grew ready to pick. By 1621 the VOC had a base at Batavia (now Jakarta) and was eyeing the China trade. By 1624 jovial ‘Jan Compagnie’ had a trading post, Fort Zeelandia, on Taiwan. After 1641 the Shoguns allowed the VOC to trade (and reside) on a tiny artificial island in the harbour of Nagasaki, from which the last Portuguese had been expelled four years earlier for preaching Catholicism (‘We’re not Christians, we’re Hollanders!’ the newcomers are alleged to have shouted, when they arrived to set up shop).
Guarded like convicts, the Dutch never made a net profit in Nagasaki, where Japanese officials set the selling prices, much as they prefer to do now. The attraction for the VOC was silver, Japan being the only major source outside the Catholic Spanish Empire available to the Protestant Dutch. With silver they purchased Chinese silk, eagerly sought by the standoffish Japanese, and with their silk earnings, the spices that made Holland the corner grocery of Europe. Between 1630 and 1680 the VOC was clearing three million guilders’ worth of precious metals a year from Asia alone. This financed more voyages, and the beginnings of what might have been the first temperate-climate world empire: New Amsterdam (now New York) in 1623, the way station at Cape Town, claims on New Holland, later New South Wales, and Nieu Zeeland, now New Zealand. But by around 1710 the Golden Age was over, and the world’s first miracle economy had begun a slow decline. The reasons for this are to be found in scattered VOC records in a language that most people can’t read. In retrieving the pieces, Professors de Vries of Berkeley and van der Woude of Wageningen in the Netherlands combined the French Annales approach of ‘eventless’ daily life and American econometrics to describe a disturbingly modern rise and decline.
The story is not unlike Japan’s now. Success generated vested interests, which went on to dominate the loose, informal system of government; competitors took over Dutch-pioneered markets (there were four Anglo-Dutch wars over colonies and trade), the birthrate fell as farmers flocked to the booming cities; high wage levels made Dutch exports uncompetitive; the VOC ceased to turn a profit, but remained so central to the Dutch economy that it was nationalised and state-subsidised before it finally sank under the weight of debt in 1795. Holland was stalled, too, on the technological frontier that had opened up just across the North Sea, with James Watt’s 1769 patent of the separate-condensing steam engine. Holland had extensive peat deposits, good enough to distil gin (more glow per guilder, less bulky than beer) but not to smelt steel or to drive ships, and little in the way of coal. In 1596 Cornelis Cornelisz van Uitgeest came up with the wind-powered saw, easing the worst bottleneck in merchant fleet expansion: the hand-sawing of ships’ timbers. Dutch drainage boards were among the first purchasers of steam engines, and Newcastle coal cost the same in Rotterdam as it did in London. But the wind-saws and the peat fires – and their owners – were too well established. The bold Dutch venture capitalists of two centuries earlier had become the world’s wealthiest investors, and had become risk-averse in the process.
When the Stadthouder Willem III of Orange ascended the English throne as King William I with his wife Mary, a condition was set by Parliament that he relinquish control over public finance. The English and then the British national debt was the first to be guaranteed by an assembly with the power to levy taxes, not by the credit of the King. Risk-free British Government Bonds paying 6 per cent proved far more attractive to Dutch investors than voyages to the Far East on which two ships out of every hundred foundered on the way out, four on the return, and only a third of those who took to the sea ever came home. Investors in Amsterdam real estate had no need to leave home at all. There was no shortage of proposals for reform but no will to implement them in a society divided between a new aristocracy of wealth (the Dutch call it the Periwig Age) and a discontented urban population that was denied real political influence. Simultaneously assailed by reformist Patriots and invading French Revolutionaries, the Dutch Republic, unmourned and awash in public debt, collapsed in 1795. Like present-day Japan it was ‘rich without being prosperous’, an economy going nowhere.
Visitors today find a well-scrubbed little country, only 175 miles by 110, population 15.9 million, important in shipbuilding, agriculture and brewing, with a world-class electronics concern, Philips’s Gloeilampenfabrieken at Eindhoven, but little else to show that it was once a world power. (Much the same might be said of the larger and scruffier archipelago across the North Sea, now well on the way to the world’s first systematic deindustrialisation). Does the Dutch Republic’s decline foreshadow a future for Japan? The idea is tempting. Japan’s population is expected to peak five or six years from now at 127 million, and will then begin a long and, on present trends, not so slow decline. In 2050 it will fall below one hundred million. Eight hundred years from now – the long view, admittedly – the country’s 45,000 inhabitants will all fit comfortably into the Tokyo Dome, a popular rock music venue. More likely, after a time of troubles, Japan will settle down as a medium-sized, respected producer of popular culture, with a line of luxury products selling well in China, the nearby colossus. This future, as a Britain of the East, has often been seen in Japan’s horoscope.
What, however, if poor little rich Japan is not lagging behind but, on the contrary, leading us all towards a similarly stagnant future? De Vries and van der Woude draw an important conclusion: ‘Modern economic growth … is not self-sustained, exponential and unbounded and – not to mince words – the [Dutch] Republic’s pioneering experience between the 16th and 18th centuries, including its experience with stagnation, may end up being a fair model for the process begun in most Western countries sometime between 1780 and 1850.’ Give or take a few decades, that list could include first in, first out Britain, its pupil the US, and make-haste Japan. We can already see two frontiers closing in the global, technology-driven market economics that now look so triumphant. First, while more and more fossil fuel deposits – coal, oil and gas – keep being found, with no limit in sight, there is only one atmosphere to burn them in; and last year’s attempts at The Hague to limit greenhouse gas emissions ended in sulks by the biggest and wealthiest of the polluters. Second, for more and more societies, there is no sound market reason to have babies, and the availability of labour from the Third World may not continue for as long as we think; it might even be cut off before an urbanised, industrialised world has been achieved. In spite of Krugman’s optimism, we have no real assurance that the instability of credit-based economic systems has really been tamed, or that some new version of tulip mania is not already sprouting among our latest crop of technologies. Those Dutchmen haggling on a herring wharf in Amsterdam four centuries ago were unknowingly devising the most potent agent of social change the world has seen, even when they transplanted it to the distant realm of the Shoguns. But is their invention, capitalism, a system for the ages, or only a transition to some as yet unknown way of sharing our pleasant planet rather than destroying it?