Judo and Go

Japan's strategies often utilize the techniques of judo (using the strength of the adversary against him) and go (avoiding a frontal attack but probing the adversary's weak spots, surrounding and outflanking him until he is squeezed into submission).  Employing judo in the face of rising American protectionism, for example, Japan utilizes America's chief strength--its democratic institutions and relatively open economy--to gain advantages for Japan's economic and political interests.  In Washington, it has the largest lobby of any foreign government, enabling it to exercise political influence such as no foreigner could aspire to in Tokyo.

Another example of judo technique is the way Japanese firms have induced American state governments to compete with each other in the size of the subsidies they offer to attract Japanese investment.  Out of self-interest, Japanese firms would perform an identical amount of investment in more or less the same locations without any subsidies whatever.  But in Kentucky, at a cost of $212 million, a Toyota plant was subsidized with new roads, low-cost loans, employee training, and 1,500 acres of free land.  Elsewhere, Japanese investment has been subsidized with tax privileges, industrial development bonds at low interest rates, special schools, and other incentives.

In foreign markets as well as domestically, Japan applies the tactics of collusive oligopoly in various forms, including dividing markets and fixing prices.  For example, in the fork-lift truck industry, "Toyota, the biggest Japanese producer, and Nissan, the biggest exporter to the U.S., shared out the market in an organized way.  Toyota based operations in California to reach the western part of the U.S., while Nissan set up in Kentucky to do the same in the east."  While prices were being driven down, among their U.S. competitors "retreat has been their chief response."(4)

Concerning another form of collusion, the Oversight Subcommittee of the House Ways and Means Committee opened hearings on July 10, 1990 to ascertain whether Japanese oligopoly activities in the United States extend to tax evasion and tax avoidance, by means such as transfer pricing (shifting profits from one subsidiary of a multinational company to another by shipping components between the subsidiaries at prices that are artificially low or artificially high).  According to the Wall Street Journal, while the sales of Japanese-owned companies rose nearly 50 percent in 1987, the reported income on which they paid taxes dropped by two-thirds.(5)

Adversarial trade practiced by Japanese oligopolies includes efforts to annihilate foreign competitors by dumping.  Japanese dumping accomplished the virtual extinction of all non-Japanese DRAM (dynamic random access memory) producers both in the United States and the EC during 1984-1986.  After September 1985, when the dollar depreciated by about 50 percent in relation to the yen, Japanese producers cut their dollar prices drastically in order to maintain market share until they could supply the American market from their expatriated plants.

Adversarial investment is a counterpart of adversarial trade.  In one of its varieties, it takes the form of investment in overcapacity.  Moreover, despite existing worldwide excess capacity of more than eight million cars a year, in June 1990 Toyota announced plans to increase its worldwide production by nearly a third to six million cars a year.  Similarly, in June 1990, ten of Japan's largest chemical producers threatened to create significant overcapacity in the production of ethylene by planning to increase their facilities for output of an additional three million tons.  In 1988, at a record high, Japan's total production of ethylene amounted to five million tons.(6)  In one way or another, deliberate investment in losses for the sake of ultimate domination of an industry is one of the characteristics of Japan's headquarters strategy.

An illustration of the application of go tactics can be seen in the practice known as "patent flooding," admissible under Japanese law but not under American.  When a foreigner files for a patent in Japan, he finds that the contents of his patent application become public information, whereas in the United States the contents of a patent application are secret.  Since processing of a new patent takes anywhere from three to six years in Japan, when he eventually receives the patent an inventor in Japan may find that patents are pending to others for all conceivable modifications and minor variations of his original idea.  Thus, for example, if he has received a patent for a pencil holder, he may find that he is precluded from producing green, yellow, blue, or black versions of his patented holder. 

Japan's export surplus with the United States will be phased out for various reasons:  growing U.S. protectionism, the expatriation of many low- and middle-technology Japanese companies to the United States, and the inevitable contraction by one means or another of the U.S. federal budget deficit, which will in turn curtail the U.S. propensity to live beyond its means.  Above all, however, the evolution of Japan's strategy as a headquarters nation in the world economy will ensure that it will reduce its overdependence on the United States as a market for its exports.  To achieve economic security, Japan will diversify both its markets and its sources of supply, outflanking America in the process.

Unlike the United States, Japan does not plan to continue competing indefinitely with the tide of products from newly industrialized countries (NICs) in the low and middle technology range (parts of the steel, paper, nonferrous metals, textile, and consumer electronics industries for example).  Instead, it attempts to direct the flow of that tide by establishing partnership relations as entrepreneur and rentier in NICs.

For example, as a world leader in the price-sensitive primary product and industrial materials sectors, Brazil could supplant the United States in the Japanese market.(7)  Brazil would reciprocate by purchasing Japan's manufactured goods.  With the help of Japan, NICs like Brazil will not only reduce their dependence on the United States but will also become direct competitors of the United States in the products of middle technology industries in the world at large.  While these industries are being phased out in Japan, in the United States they are being preserved and protected for the maintenance of employment.  The NICs, then, may act as proxies for Japan in waging economic warfare with the United States.

Japan also plans to reduce overt confrontation and trade friction with other nations by transforming its bilateral trade surpluses into income from invisibles.  Japanese firms such as Toyota and Mitsubishi "plan to make diesel engines and electrical equipment in Thailand, then trade them for transmissions built in the Philippines or steering gears in Malaysia.  The result will be complete cars--most of them for sale in Asia, some for export to the United States and Europe--that never pass through Japan...."(8)  While it is true that American firms like Ford and General Motors have pursued similar practices for decades, they have not done so in the context of a national strategic plan--and that distinction is a vital one. 

Japanese Financial Strategy

Besides outflanking the United States in primary and secondary sector (low value-added) categories, Japan is likely to assert its role as a headquarters nation in the services sector by means of financial hegemony.  As the world's leading foreign investor, the magnitude of Japan's foreign assets and investment flows are such that "even relatively modest shifts can have significant impact on asset prices in international markets including, of course, exchange rates."  Moreover, Japan's role as an international investor and its influence in foreign markets "are much greater than implied by growth in the nation's net external assets."(9)  Japan's net assets at the end of 1988 were approximately $300 billion, compared with U.S. net foreign indebtedness of some $530 billion.  According to Daiwa Securities Company, Japan's net external assets could amount to one trillion dollars in the decade of the 1990s and yield annual returns of over $100 billion, far above the 1989 trade surplus of $64.4 billion.

During the negotiated descent of the dollar following the Plaza Agreement of September 1985 between Western finance ministers, Japanese investors took enormous losses in their holdings of American securities that sensitized them to currency expectations.  The size and liquidity of their portfolio holdings are therefore a potential threat to the stability of American financial markets.  (Portfolio investment in securities accounts for three-quarters of Japan's total foreign investment.)  According to the U.S. Treasury, $2.26 trillion of its securities were outstanding at the end of 1989; of these, Japanese holdings accounted for $89.3 billion, or almost 40 percent of the total.

The hegemonic potential of Japan's international banking role is also suggested by the size of its international banking assets.  At the end of 1989, Japan, as the world's leading lender, held 38.2 percent of all international bank assets, compared with 14.2 percent for U.S. banks.(10)  Japan's rising share is partly attributable to the high volume of foreign currency business between its banks and Japanese residents, which is classified as international lending.  However, American banks are daunted by the emerging prospect of a global market dominated by a handful of giant Japanese banks, whose sheer business power enables them to grow ever larger by ruthless price cutting.(11)