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Thursday, Sept. 16, 2010


1985 to 2010: All seems just the same

The whence and whither of Japan — How not to get caught in a never-ending time loop

Special to The Japan Times

"Who controls the past controls the future: who controls the present controls the past."

This passage from "Nineteen Eighty-Four," George Orwell's pseudo-futuristic satire on the totalitarian state, is a sinister comment on power-hungry men's attempt to rewrite history. However, at least the first part of the quote can be paraphrased into something less chilling by substituting knowledge for controls. "Who knows the past knows the future" is a reasonable enough proposition. Winston Churchill evidently thought so. For it was he who said: "The further backward you look, the further forward you can see."

It is not 1984 but actually 1982 to which this commemorative edition of The Japan Times looks backward. It is a backward look that is well worth attempting. For it was in the 1980s that the seeds of much that the Japanese economy struggles with today were sown. All in all, the 1980s was a strange decade. It was a strange decade in what one might call "the dog that didn't bark in the night" way: Things that should have happened at the time didn't happen.

This was particularly true in 1985, the year of the Plaza Accord. The accord was agreed upon on Sept. 22 at the Plaza Hotel in New York. The signatories were the finance ministers and central bank governors of the then G-5 nations, comprised of France, West Germany, Japan, the United States and the United Kingdom. The crux of the agreement lay in an orderly decline in the value of the U.S. dollar against the other G-5 currencies.

That decline was by no means a non-barking dog. The decline did indeed happen. But not in an orderly way. Having been given the go ahead by such an auspicious gathering as the G-5, the markets went gleefully on their way in dumping dollars, especially against the yen. From the pre-Plaza Accord level of ¥236 to the dollar, the yen immediately went soaring up to break the then magical barrier of ¥200 to the dollar. Thus the word "endaka" (strong yen) found its way into the global dictionary of economic terms. The rest, as they say, is history.

That history is the history of Japan's descent into the lost decade, or indeed the lost two decades as people feel inclined to call it now. It started out with a process of panic-stricken monetary easing to combat the supposed ill-effects of yen appreciation.

This coincided with the interest rate deregulation process that was in belated progress at that time to produce hitherto unseen ultra-low rates. Finding themselves adrift in a world without the customary and cozy perimeters of strict regulation, bankers went mad. They would lend to anybody and everybody for the asking. With so much money being thrown at them virtually gratis, the general public went mad as well.

This allowed the entry of yet another Japanese word into the global economic lexicon. That word was "zaiteku," meaning high finance. Everybody had to be in on it. You were considered an imbecile if you did not try your hand at financial wizardry or did not own a luxury flat or two for investment purposes. With both bankers and their clients in total euphoric mode, there was nowhere else for the Japanese economy to go but full steam ahead into asset inflation of a kind that people only thought existed in fantasy tales about the 1920s. Pink champagne flowed and the Nikkei average went up into cloud-cuckoo-land. The inevitable aftermaths of that period of craziness is not yet even history. We are still living out the consequences.

So in fact many things did indeed happen throughout the 1980s and the 1990s. Money grabbing dogs barked noisily in the 1980s, only to wail in misery in the 1990s. Yet those were the wrong dogs barking wrong barks. The things that happened throughout that time period were not the things that should have happened. What should have happened was for Japan to turn itself into an "endaka"-resistant and widely open economy in preparation for the giant wave of globalization that was lurking on the horizon. Instead, it buried its head in the shifting sands of monetary easing, only to have its butt kicked by the angry gods of asset deflation later on.

Indeed, a further paraphrasing of the George Orwell quote above may be in order here to say that those who forget the past lose the future and that those who cannot control the present cannot understand the past. Any time traveler who goes back and forth between periods of history and who finds himself in the Japan of 1985 and 2010 consecutively might think he had somehow got stuck in a time loop that keeps bringing him back to the same place ad infinitum. For everything is just the same. Everything that was there then is here now. All the whining and moaning about "endaka." All the outcry for the government to do something. All the accusations about the Bank of Japan doing nothing. All the doomsday speak about the death of export-led growth. And all of the panic-stricken running around of policymakers.

The only thing that is new about 2010 is that the governing party has thrown itself head on into a leadership race of all things at a time when a sideshow of this sort is so grotesquely inopportune. This fiasco in a teacup is sapping all the time and energy that ought to be concentrated on how to control this present for which a good memory and proper understanding of the past would be so useful.

Looking back at 1985 and looking at the present reality of 2010, it seems to me that the problem with Japanese economic management is a "3D" problem. Japanese electronics companies might still just have the edge on 3-D technology but not so Japanese policymaking. That is to say, three very important "D"s were singularly lacking in the response of policy toward the momentous developments of 1985; the same three Ds are very conspicuous for their absence today. Those three Ds are direction, determination and defiance.

A sense of direction is so critical when confronting major changes in the economic environment. Such a change was in progress in the early 1980s, culminating in the defining moment of the Plaza Accord. Had the Japanese policy radar screen been equipped with better direction sensors, such a massive and relentless drive toward monetary easing may not have taken place. In which case the bubble and its subsequent bursting would not have happened, and so on. Had those people had their heads screwed on the right way, more careful thought would have gone into how to live with a permanently higher plane for the yen's relationship vis-a-vis the dollar. Rather than trying to drown the effects of "endaka" in a sea of cheap money, structural changes should have been embraced that would have paved the way toward a Japan that was more open, more flexible and less vulnerable to external shocks.

To have worked toward a Japanese economy that was comfortable with a stronger yen in 1985 would have gone a long way in bracing us for the trials of 2010. As it was, everybody was looking in the wrong direction, dreaming of days gone by when all was orderly and the yen rate was stable at a comfortably competitive level.

Much dreaming of days gone by takes place today in 2010, with everyone talking about growth strategies and the capturing of overseas markets. To be sure, growth is a good thing and competitiveness is important. But a mature economy should have its own way of treating such things. One cannot carry on the way one did in one's 20s and 30s when one is a senior citizen of some long standing in the global economic age scale.

Even assuming that the 1985 people had the correct sense of direction, it is doubtful whether they would have had the determination to grasp the nettle in the way that it should have been grasped. It is certainly not much in evidence today. The present government came in on a platform of steering policy "away from concrete and toward people." It also made a point of saying that growth for growth's sake was nothing that would be embraced on their watch. None of this seems to have survived the hammering they received in the Upper House elections over the summer. Indeed, it may well have been the lack of determination to stick to their guns that deprived them of the votes that would otherwise have been handed to them on a plate.

Defiance, the last of the three Ds, is perhaps the most important and the most lacking element in the "3D" makeup of the Japanese policy, political and government psyche. To defy the odds, to aim for the impossible, to think the unthinkable. These things are so critical if one means to reach a new world. And a new world is what awaited us in 1985. It awaits us now. If only we had the guts to reach for it.

One other prominent thinker who wrote on the past, present and future is Eugene O'Neill, the American playwright, who wrote the following line in his play "Strange Interlude": "The only living life is in the past and future . . . the present is an interlude . . . strange interlude in which we call on past and future to bear witness we are living."

How we work our way through this current interlude will define how the future will bear us witness. Hopefully the future will have good things to say of this present when this newspaper celebrates its 50,000th issue.

Noriko Hama is an economist and a professor at Doshisha University Graduate School of Business in Kyoto.


Japan adrift in a changing world


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