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Sunday, Dec. 23, 2001


Rethinking the threat that never was

NO MORE BASHING: Building a New Japan-United States Economic Relationship, by C. Fred Bergsten, Takatoshi Ito and Marcus Noland. Washington, D.C.: Institute for International Economics, October, 2001, 328 pp., $23.95 (paper).

What a difference a decade makes. Ten years ago, the United States was widely viewed as an overextended superpower whose moment had come and gone. Japan was the primary challenger to Pax Americana, a nation whose superior manufacturing skills and unique cultural organization would provide the foundation for international supremacy in the 21st century. The two nations' changing fortunes created serious and unseemly friction between two governments that were not only allies, but that considered themselves part of "the most important bilateral relationship in the world, bar none."

In the decade since then, the U.S. has enjoyed unprecedented growth and prosperity while Japan has endured "the lost decade." There may still be a "Japanese threat," but the worry today is of Japanese weakness, not Japanese strength. While the Japan-U.S. relationship has been transformed, there is no indication that the bilateral policy framework has kept pace with those changes. The message of this important new study is that adjustment is overdue: Policy must adapt to these new circumstances. Quite simply, it is time that the U.S. stopped treating Japan differently from other countries. No more bashing, indeed.

Japan's unprecedented economic rise in the 1970s and '80s gave rise to a school of thought known as "revisionism." Its members argued that Japan behaved fundamentally differently from other nations and needed to be treated accordingly. While revisionism never became official U.S. policy, every administration in Washington developed Japan-specific policies (usually in the form of bilateral economic initiatives) to deal with "the Japan problem" -- rising unemployment and rising trade deficits in the U.S. while Japan enjoyed full employment and ever-increasing surpluses.

The authors of "No More Bashing," top international economists from both countries, argue that "Japan's 'decade of decline' makes it clear that it was never the threat that some Americans perceived it to be . . . The revisionists were simply wrong to argue that Japan was so 'different' and so important that Japan-specific policies were required for the U.S. to restore its economic progress."

The authors devote a chapter apiece to economic developments in each country. Nonspecialists should not be intimidated. The analysis is not numbing or overwhelming; in fact, the chapter on Japan is one of the best summaries of its sad fate in the 1990s.

It's a grim picture. "The growth of the Japanese economy during the last decade has been the slowest 10-year performance of any large industrial country in the postwar period, averaging about 1 percent a year . . . Between 1992 and 2000 (except for 1996), the growth rate each year has been less than 2 percent and the growth rate in 1998 was -2.5 percent (later revised to -1.1 percent when the price deflators used to calculate the national accounts were rebased), the worst in the postwar history of Japan."

The scale of the losses is scary. "Land and stock prices, which had risen three- and four-fold between 1985 and 1990, subsequently plunged by as much as 50-60 percent in a few years. The gains in stocks and land between 1985 and 1990 were completely wiped out between 1990 and 2000. Official National Accounts statistics indicate that Japanese households lost approximately 500 trillion yen (more than 100 percent of GDP) of their net wealth between 1990 and 2000."

How could this happen? In retrospect, it was simple. The authors conclude that "the slow growth of the 1990s can be attributed to a series of negative shocks to the economy, most conspicuously in the financial sector; inappropriate or insufficient policy responses to these shocks and structural rigidities, which prevented the economy from achieving its full potential." In plain language, Japan was hit hard by the bursting of the bubble, and the government's failure to respond quickly and forcefully to the problems it encountered only made things worse.

There is yet another reason to quit treating Japan differently: The country's economic profile is becoming more "normal." Foreign direct investment has risen rapidly in recent years, more than quadrupling between FY1997 and FY2000, and reached more than $25 billion at exchange rates prevailing in FY2000. The presence of foreign firms is increasing; prices are dropping and the international differentials (price differences between Japan and other countries, a sign of protection) are shrinking.

Some see clouds on the horizon, however. The recent U.S. economic troubles have triggered fears that bilateral relations are going to be rattled once again. The authors don't share them. They believe the U.S. downturn will be short-lived. They argue that the remarkable performance of the past decade was the product of structural change, not temporary factors. "Several careful analyses of the productivity pickup, some even taking account of the sharp economic (and thus productivity) slowdown of mid-2000 to mid-2001 conclude that there was very little cyclical contribution to the dramatic rise of 1995-2000." Moreover, "the prospect for continued solid U.S. expansion is strengthened by the even greater likelihood that globalization, the second major spur to the pickup in productivity growth, is still at an early stage." In other words, the ride is only beginning. And as growth continues, trade friction with Japan will continue to be unlikely.

There is another half to that equation: Japan's continuing weakness. Despite the mind-boggling income and national wealth losses of the last decade, the government has yet to come to grips with the problem. The struggle against vested interests is compounded by a political class that has shown both a failure of imagination and will. The single most important issue -- the nonperforming loans that threaten the financial system -- continues to burden the entire economy. Thus, "despite writing off 60 trillion yen in bad loans since the burst of the bubble -- a figure that is greater than the value of the Belgian and Dutch economies combined -- the outstanding amount of nonperforming loans has not markedly declined. Indeed, new 'bad loans' are appearing at roughly the rate at which banks are writing them off."

There is one more issue: the effectiveness of U.S. efforts to induce change in Japan. The record is poor. The authors conclude "the results of past U.S. efforts, even when U.S. leverage was considerably greater, were exceedingly modest in terms of the expenditure of U.S. effort and political capital." This argument is, in my mind, the most compelling. High-profile trade fights with Japan were lose-lose contests for U.S. administrations, especially after the debacle over luxury car tariffs in 1994.

Taken together, the implications are clear: "The unique 'Japan policy' conducted by the United States for a quarter century, from the early 1970s through the middle 1990s, now looks to have been largely a historical accident."

While there may be no need for a "Japan-specific policy," there are still issues to be addressed. As the authors note, "Both Japan and the U.S. maintain a variety of barriers to economic exchange, both globally and bilaterally. . . . The stakes are not trivial. The 1997 findings that comprehensive deregulation could increase Japan's GDP by 6 percent would be equivalent to all Japanese growth in the second half of the 1990s."

Bergsten et al argue that multilateral institutions should be smoothing economic wrinkles in the relationship. In addition, the trade agenda should be extended to include competition policy. For Japan, that means strengthening the Japan Fair Trade Commission. On the U.S. side, the authors advise the U.S. to give up its antidumping measures. (Their analysis suggests it will be no great loss.)

In the end, the Japanese people and their government should be the forces for change, not the U.S., or any other international institution or organization. The squandered wealth should have been a catalyst, but apparently the threshold for change has not been reached. Vested interests still dominate decision-making, and the authors believe that "if narrow sectoral interests continue to exert a disproportionate impact on policy, Japan will put its economic standing and international influence at risk." The failure to reform makes regional leadership impossible. It denies Japan the resources needed to conduct foreign policy -- witness the cuts in official development assistance -- and the failure to open domestic markets to Asian goods limits Tokyo's influence in regional capitals.

Although "No More Bashing" focuses on the bilateral economic relationship, it devotes considerable attention to the broader regional and global concerns. This expansive focus makes this an invaluable study of the entire range of Japan-U.S. issues. And indeed, as the authors conclude, "normalcy will lay the foundation for a relationship of true partnership rather than the patron-client norms that, for all the rhetoric to the contrary, have largely prevailed to date."

Brad Glosserman, a contributing editor to The Japan Times, is director of research at the Pacific Forum CSIS, a Honolulu-based think tank.

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