Japan's 30-Year Economic Slumber

Yes, bureaucrats can kill a modern economy.

The Wall Street Journal published "Lessons from Japan's 'Lost Decades'" which began:

The S&P 500 has soared 800% over the past 30 years, overcoming bear markets and a financial crisis. It almost seems as if stocks can't go down, at least not for long.

On Dec. 29, 1989, the Nikkei Stock Average closed at a record 38915.87. Then it fell. And it never came back. Thirty years later, the Japanese market languishes 39% below its all-time high.

And Japan isn't an easily dismissed outlier; it is a free-trading, technologically savvy developed market, in many ways not that dissimilar to the U.S.

The WSJ described a number of costly Japanese government policy initiatives which failed to help their economy, but for all their accumulated editorial wisdom, they missed the root cause of Japan's three decades of economic stagnation - bureaucratic overreach.

My parents took me to Japan in 1950.  I watched Japan rise from the wreckage of WWII, into the First World in 30 years.  In 1979, Prof. Ezra Vogel of Harvard wrote "Japan as Number One: Lessons for America" because he thought that the Japanese economy would soon be larger than ours.

That didn't happen.  Japan slid into the three lost decades instead.  The Japanese government kept too much control of the economy instead of letting go as Masahisa Naitoh, the head civil servant in the Ministry of International Trade and Industry (MITI), recommended.

To be fair, from the time right after WW II until the economic collapse of the Soviet Union, it wasn't clear whether capitalism or communism would lead to greater economic welfare for ordinary citizens.  There is no longer any doubt that a market-based economy outperforms a regulated economy, but the first 20 years of Japanese economic growth from 1945 until the early 1970's had been due in large part to "guidance" from government agencies such as MITI where Mr. Naitoh started in 1961.

It turns out that an honest, capable bureaucracy is a great help in moving from the Third World into the Second.  That's because second-world technologies like clean water and sewage disposal so babies live long enough to be worth educating; roads, railroads, fuel for trucks, and transport networks to move products around; reliable electricity so factories can run efficiently; and simple farm machinery require no research or creativity.  Those technologies were developed decades if not centuries ago and are well known.

All that implementing 2nd world technologies requires is sound planning and hard, focused work.  If a strong, honest guiding hand of government focuses solely on growing GNP as opposed to ripping taxpayers off, bureaucrats can prioritize roads, generating plants, and other infrastructure to generate economic activity to pay the bills.

Mr. Naitoh led the Japanese negotiations with Mr. Strauss, one of President Carter's associates, to limit Japanese TV imports and with Mr. Brock, President Reagan's trade negotiator, to limit Japanese auto imports.  He helped grow the internationally-facing economy to the point of exporting 15% of GNP.

Japanese penetration into American markets aroused hostility.  Few Americans realized that the Japanese imported 14% of GNP, and thus fed their children on a 1% nation-wide margin.

Prof. Vogel was not only wrong, he was too late - the Japanese had already lost international competitiveness by the late 1970s when he wrote his book, well-regarded though it was at the time.  Approaching retirement, Mr. Naitoh observed that, as Japan transitioned from the Second world into the First, its economy had become far too complicated for any government agency to manage it efficiently.

In meetings with his fellow bureaucrats, he argued that agencies should set the economy free and let the market work its wonders.  We see a reflection of this principle today, as President Trump's deregulation and tax cuts have done in America.

Giving up their regulatory power would be bureaucratic suicide, of course.  The Japanese swamp fought him as viciously as ours opposes Mr. Trump today.

For a time, things looked different: his "international faction" was winning the argument.  He was on track to head the agency and lead the deregulation efforts.  At the end of 1993, though, the political appointee over MITI did the unheard-of and fired Mr. Naitoh.  Mr. Naitoh's battle to free the economy which ended with this extremely unusual event is described in The Commanding Heights: The Battle for the World Economy, by Daniel Yergin and Joseph Stanislaw, Simon and Schuster, p 223

With the bureaucrats remaining firmly in charge, the Japanese stock market bubble burst.  To this day, many bankrupt "zombie" businesses are kept alive as agencies spend tax money bailing out their friends.  Regulations grew like kudzu as they always do when agencies aren't whacked back, taxes went up, and the Japanese economy has been moribund ever since.

The Japanese swamp is deep indeed.  Americans were surprised to find out that our FBI, NSA, CIA, IRS, and other agencies have been mobilized for illicit political purposes.  That's standard procedure in Japan as the case of Carlos Ghosn shows.

He was arrested in Japan and charged with vague crimes.  He originally intended to fight the charges, but saw that he had no chance of acquittal, jumped bail, and left.

One of his defense lawyers described his discussions with Mr. Ghosn:

Ghosn asked, "Can we hope for a fair trial?" I told him, "Unfortunately, in this country the defendants cannot expect a fair trial. Judges are not independent but part of a bureaucracy. The Japanese press are like flacks for the prosecutor's office. However, many Japanese don't realize it, and you didn't either. You've been the CEO of a Japanese corporation for two decades, and you didn't know anything about the reality of Japan's justice system."

"I never even thought about it," he answered.

"If you were arrested, did you expect to be released on bail immediately if you paid?"

"Of course."

"This country is different: Terrorists, thieves, politicians, and charming business executives, they're all detained for 23 days once arrested. And they will be interrogated five or six hours a day, even through the night, without their lawyer present. If they do not confess their crimes, they will continue to be detained. [But] everyone believes Japan is a civilized country where human rights are guaranteed."

"So I can't expect a fair trial?"

"You cannot expect it."

The Wellsprings of Power

All businesses hate competition.  American businesses routinely lobby for regulations like Dodd-Frank that put nearly 2,000 mid-size banks out of business and benefitted giant banks.  Data collection firms like Facebook, Apple, Google, and others are lobbying for new regulations to bless their current operations and make life more difficult for upcoming competitors.  Corporate officials tend to use whatever dirty tricks they think they can get away with against rival colleagues.  American prosecutors are getting involved in business disputes as the State of New York brought charges against Exxon for lying about climate change and against AIG for making risky investments.

The Japanese national bureaucracy has been around since Tokugawa Ieyasu became shogun in 1603.  It's far older than ours and Asian governments have never had much use for due process.  It should be no surprise that Mr. Ghosn's business rivals would use their connections to their "justice" bureaucracy to take him out, just as Mr. Trump's political rivals mobilized our "justice" department to take him out.

It's sad that my Japanese friends have essentially no grandchildren. The Japanese bureaucracy has squeezed so much life out of the nation that young people don't see a bright enough future to be willing to have children.  Japanese women are having an average of 1.1 babies, the country is losing population, and their culture is doomed.

As we know from observing our swamp, given a choice between losing power and destroying an entire society, bureaucrats will lie, cheat, and steal to keep power every time.

Parenthetically, the Chinese communist government is also a bunch of control freaks.  Like bureaucrats and tyrants everywhere; they're wrecking Hong Kong to keep control.

If they don't get a lot more economic growth, however, they can't supply air conditioning to the billion peasants who're still 3rd world and there will be regime change. They, too, need to set their economy free and relax regulations as Mr. Trump has shown the way but Chinese mandarins are no happier about the prospect of losing power by setting the economy free than the Japanese or American bureaucrats were.

Which example will they follow?  Will they control their economy into stagnation as the Japanese did, or finally set it truly free by getting government out of the way as Mr. Trump is trying to do?

This article was reprinted from a different site. Commentary may be added.  Read other Scragged.com articles by Guest Editorial or other articles on Foreign Affairs.
Reader Comments

I needed to be reminded of the last few decades of Japan history. Thank you.

February 17, 2020 9:35 PM

Hard to believe that Sony was once the electronic super power and Apple was a small fantasy of a couple guys named Steve. I remember a list of industries that Steve Jobs and the internet destroyed... think Kodak, Newspapers, TV networks, retail etc. Not many other societies would have allowed destruction of the sacred cow businesses. But what did we end up with ? 4 trillion dollar companies ... Microsoft, Amazon, Apple and Alphabet/Google that didn’t even exist when Japan was at it peak. Let’s hope the Bernie- boys don’t take over and kill progress to fund free stuff.

February 17, 2020 9:47 PM

Yet again, we get to see a living dinosaur: the Baby Boomer, still doodling the same old delusions he did 30 years ago.
Nevermind that the barmy ideology of deregulation gave us outsourcing, crippled infrastructure, predatory lending and the biggest redistribution of wealth to a global oligarchy in history.

March 12, 2020 2:04 PM

@Sprickoló Tömegek The article we linked about the book "Commanding Heights" at http://www.scragged.com/articles/the-commanding-heights-a-book-review-1 points out that globalization lifted many people out of poverty. The 2nd article in that series says:

Deng did something no one else in history has ever accomplished - he lifted upward of 300 million people out of poverty in just two decades.

Overall, more than a billion people have been relieved of extreme poverty since WW II. Income inequality INCREASED both in China and in the developed world, but overall income inequality DECREASED.

In effect, globalization taxed the American middle class, who are totally among the wealghy 1% on a worldwide basis, and lifted a billion people out of extreme poverty. Along the way, the rich business owners did well, too. Income inequality in the US and in Europe increased as it dropped worldwide.

Some American politicians want to tax "the rich" in favor of the less well off Americans. Globaliztion did that on a worldwide basis - American and European working people were "the rich" when "the poor" lived on less than $2 per day. They were taxed and "the poor" were uplifted. Isn't that what identity politics is all about?

March 16, 2020 1:32 PM
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