Back in the 1980s, a lot of best-selling books were written
about how the United States should emulate Japan. Pursuing free market
economics based on individual entrepreneurs was passe, so it was often said
by Ronald Reagan's critics. Instead, we should follow Japan's lead and
actively use government to pick winners and losers. Its all-powerful
Ministry of International Trade and Industry (MITI) was the wave of the
future, we were told over and over again.
This view of Japan's invincibility reached its peak with the
1993 movie "Rising Sun," which made MITI look like a combination of the CIA,
the Mafia and the world's best investment bank all rolled into one. However,
not much has been heard on this theme since, because Japan's economy tanked
just about the time "Rising Sun" appeared. It has been in the tank ever
For the first few years after Japan's economy collapsed, it was
assumed that it would quickly recover. But as year after year went by with
no sign of the old Japanese powerhouse in sight, expectations of recovery
have also collapsed. There is still no sign of recovery in Japan.
Ironically, some economists now view Japan's weakness as being as bad for
the United States today as its assumed invincibility was in the 1980s. The
CIA even had a conference on the subject last week.
The Japanese invincibility theory was always stupid, but mainly
because it completely misunderstood the true basis of Japan's economic
strength. It had nothing whatsoever to with MITI and everything to do with
the competitiveness of the Japanese economy. Gen. Douglas MacArthur deserves
more credit for this than any Japanese government official.
MacArthur was appointed Supreme Commander in Japan after World
War II. During that time, he virtually had dictatorial power, which he used
to reform Japan's economy and political system. In terms of the economy, his
most important contribution was to reform Japan's tax system. For the next
30 years, its taxes were considerably lower than in the United States and
structured to encourage growth to a far greater extent.
Almost as important was MacArthur's breakup of the corporate
cartels that dominated Japan's economy before the war. Known as zaibatsu,
these oligopolies made it very hard for new businesses to develop and grow.
By smashing the zaibatsu, MacArthur opened up the Japanese economy in a way
that probably could not have happened without such outside intervention.
In his book "Embracing Defeat" (1999), historian John Dower
notes that many of Japan's largest and most profitable companies in the
postwar era probably never would have emerged under the prewar constraints.
Harvard Business School Professor Michael Porter's book "Can Japan Compete?"
(2000) recently concluded that Japan succeeded in spite of MITI, not because
Unfortunately, MacArthur failed to reform one key element of the
prewar system -- banking. In Japan, businesses were encouraged to get most
of their financing from banks, and they were allowed to own equity in such
businesses. In the United States, banks were prohibited from owning equity
and businesses got most of their financing from bonds and stock. The result
was a heavy concentration of business ownership in Japan, versus the much
more decentralized ownership in America.
Eventually, Japanese businesses and banks became deeply
interlocked. In the 1980s, liberals like former Labor Secretary Robert Reich
saw this as a source of strength -- Japanese businesses, he said, could
manage for the long-term without pressure from shareholders for profits or
fear of hostile takeovers. But the result was that Japanese businesses had
no pressure to perform and eventually became complacent.
When the 1990-91 recession came along, American businesses
restructured; Japanese companies just rode it out without making significant
reforms. When the savings and loan problem hit the United States, banks were
closed, assets sold and the issue put behind us. When similar banking
problems hit Japan, however, no similar liquidation occurred. Banks were
reluctant to write off bad corporate loans because they also owned the
companies, so they continued throwing good money after bad.
Today, the Japanese banking system is paralyzed. It has so many
bad loans on it books, it cannot make loans to new businesses or existing
ones needing capital for expansion. The Japanese money supply is exploding,
but none of the money is getting where it is needed. Yet, rather than bite
the bullet and liquidate the bad loans, as we did with our S&L's, the
Japanese government just keeps hoping that the problem will take care of
Even if Japan pulls out of the worst of its current
difficulties, it is hard to see a return to high growth unless another
MacArthur comes along.