In his book Dead Right, David Frum tells a story about two Viennese Jews reading newspapers in a coffee shop at the end of the nineteenth century. When the man with the respectable daily sees the other holding a scurrilous anti-semitic rag, he asks in astonishment: "What's come over you?" The other responds, "I'll tell you...In your paper, I read about old Jewish men murdered in Romania, about Jewish women raped by Cossacks in Russia, about Captain Dreyfuss unjustly accused in France. In this one, I read that Jews control the banks and stock exchanges, that we hoard sacks of gold in our cellars, that every government on earth trembles at our orders. I prefer good news." While Frum had a different purpose in mind, the joke would undoubtedly seem wonderfully apt to officials of Japan's Ministry of Finance (MOF) in light of the awe with which they have often been viewed in Washington.

The MOF presides today over an economy in its fourth straight year of next-to-no growth. Unemployment is at a post-1950s high. The stock market has teetered since 1991 on the edge of an abyss that could wipe out the reported capital of most Japanese banks. These banks have piled up more bad debts than the existing financial assets of any of a half-dozen developed countries; no one believes the semi-official estimates of only fifty trillion yen (five hundred billion dollars). Japan's real estate market, accounting at current prices for at least one half the real estate value of the entire planet, is, like its stock market, a fathomless black hole where "price" and "value" are meaningless chimera. Japan runs the largest current account surpluses of any country in history but cannot re-start the engines of growth. It is unable to finance the deficits of its trading partners without chronic losses on the securities--mostly denominated in dollars--it buys to finance those deficits. As a result, its currency soars to levels that make it impossible for many of its exporters to earn enough on each exported item to cover the labor and supplies necessary to make it (variable costs), not to mention the item's pro-rata share of overhead (i.e., fixed costs).

Nor do the seemingly endless economic crises tell the whole story. The MOF finds itself for the first time the subject of extensive scrutiny in the Japanese press. Mainstream publications complain about the proliferation of retired MOF bureaucrats in Japan's ostensibly "private sector" financial institutions. Articles on cozy links between MOF officials and two failing credit unions with gangster connections complicate efforts to rescue these unions. In December, Shinozawa Kyosuke, the MOF's administrative vice minister vacated his seat at the pinnacle of the bureaucratic hierarchy a mere eight months into his term, attempting without much success to explain his resignation as a gesture aimed at ending controversy over the Ministry's handling of seven bankrupt housing-loan companies (jusen), whose problems stand at the center of the country's financial mess. The settlement itself has been widely seen as a humiliating defeat for the MOF. While the MOF dips into public funds to bail out the jusen, the agricultural cooperatives who were their principal lenders get off nearly scot-free, thanks to formidable backing from the Agriculture Ministry--one of MOF's long-standing bêtes noires--and the Liberal Democratic Party.

But like the Viennese Jew in Frum's joke, the harried MOF official can take comfort in the mixture of envy, resentment, and admiration he still provokes in Washington. A series of books and articles with great influence there place the MOF on the verge of a triumph more complete and more glorious than that accorded any group of bureaucratic officials ever. These writings depict the MOF as the central directing organ of the most productive and advanced economy in history, one that has already overtaken the United States in most significant respects and will surpass it in all remaining ones--including sheer absolute economic size--by the end of the century. Thus Eamonn Fingleton salutes MOF officials as the creators of an economic system far more advanced than capitalism, a system that represents "as sharp and portentous a break from capitalism as capitalism was from feudalism."¹ Japan's "ascendancy" over the global economy, to quote Chalmers Johnson and E.B. Keehn, is already established and awaits only the proper timing to be revealed to East Asia and the world.² The most widely used term for this school of writing is "revisionism." The label was originally applied by Business Week's former Tokyo bureau chief, Robert Neff, to a series of books and articles that emerged in 1988-9, a time when it was obvious to all but the willfully blind that the explosive phenomenon of Japan required revised thinking. That was a moment in history when hegemony over the world's economy seemed indeed to have passed to Japan. Tokyo's stock exchange had outstripped New York's to become the world's largest, while even Osaka had bumped London to fourth place. The market appetites of Japanese investors virtually determined the price of U.S. Treasury bonds. Japanese companies, secure in their dominance of most of the world's important manufacturing industries, had gone on a global buying spree, snapping up prize U.S. assets from MCA to Rockefeller Center to Firestone, while their banking counterparts bought four of California's top eight banks and controlled one quarter of all credit extended in that state. Meanwhile, like a great conductor leading an orchestra with the subtlest of cues, the MOF had skillfully played the U.S. bond market to suppress dollar interest rates in the fall of 1988, thereby helping to avert a potentially serious obstacle to Japan's glide to global pre-eminence--a White House in the hands of Democrats with economic nationalist leanings.

The old, received wisdom on Japan was almost useless in helping policymakers grapple with this phenomenon. Such wisdom derived largely from the tenets of so-called modernization theory that itself grew out of the ideological battles of the early Cold War. Modernization theory was an ideological construct intended to counteract the grip of Marxism on developing country elites--like Marxism, it incorporated the logic of development; but unlike Marxism, it postulated American-style capitalism as the norm to which development necessarily aspires. Japan became the paradigmatic example of a successful modernizing society, moving inexorably toward an economic and political system indistinguishable in essence from that of the United States. All residual differences--the large business alliances known as keiretsu that dominate the Japanese economy, single-enterprise unions, "lifetime" employment, a low propensity to import, and the near total discretion of the bureaucracy in executing policy free of legislative or judicial oversight--were explained away as innocuous cultural phenomena on a par with Kabuki theater, flower arrangement, and the tea ceremony.

Modernization theory never enjoyed unquestioned acceptance in American academic circles, particularly after the Vietnam War opened up a generational rift between its older intellectual champions such as Walt Rostow and Edwin Reischauer and younger challengers grouped together at the leftist Committee of Concerned Asia scholars. But, at least with respect to Japan, it fit the needs of Washington's defense and foreign policy establishments like fine tailoring from Saville Row. Japan's military importance was obvious: it lay astride the Soviet Pacific Fleet's warm-water access to the open ocean, and a vast network of bases and installations from Okinawa to the northern tip of Hokkaido formed the linchpin of the American military presence in East Asia. Japan's political importance was equally great. It served as an icon of the prosperity awaiting countries that followed the capitalist path under American tutelage, instead of the poverty and backwardness of the Indias and Tanzanias seduced by the siren songs emanating from Moscow and Beijing. With the single-mindedness of white blood cells smothering invading bacteria, Washington's elites had for decades viscerally defended America's Japan policy from any challenge by those fretting over growing trade deficits and the steady loss of industry after industry to Japanese competition. Modernization theory proved an exceptionally useful tool to drain such challenges of their power to inspire fear. After all, if Japan was converging with the United States, why worry about trade imbalances that were bound to disappear with such convergence?

But the fall of the Berlin Wall and Japan's emergence in the late 1980s as an economic superpower undermined the rationale for this ideological construct, while destroying its pretensions. At a time when the United States was adding some one trillion dollars per presidential term to its national debt, watching its lower-middle class sink into poverty, and turning over its city streets every evening to gangs of fatherless youths with guns, it was getting harder to argue with a straight face that the world's leading creditor nation--a place of clean, crime-free urban centers, polite, literate, well-dressed children, and state-of-the-art factories--was somehow "converging" with the United States.

The End of Consensus

When American policymakers in the late 1980s began groping for a new conceptual framework for Japan policy, they found much of the groundwork already laid in the form of a 1982 book by the then-Berkeley professor, Chalmers Johnson, entitled MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975. The book contained a history of one of Japan's key bureaucracies--the Ministry of International Trade and Industry (MITI)--a bureaucracy that particularly in the 1950s and 1960s had been second only to the MOF in the power it enjoyed over economic decision-making in Japan. Implicit in the breathtaking mass of historical detail Johnson had assembled lay two intellectual time-bombs that ultimately blew up the American postwar consensus on Japan.

The first bomb was the irrefutable demonstration that MITI's tactics and what Johnson labeled the "institutions of high-speed growth"--industrial targeting, preferential access to credit by targeted industries, "overloan" (the practice by large Japanese banks of lending far in excess of their deposit bases, with the gap made up by the Bank of Japan), the keiretsu--were the product not of American guidance but rather of three decades of experimentation, beginning with Japan's 1927 banking crisis and running through the depression, the war, the occupation, and on into the 1950s. The United States had indeed played a critical role in fostering this experimentation, but not as a teacher. Rather, operating under the assumption that Japan's bureaucrats simply executed policies determined elsewhere, American occupation officials unwittingly concentrated power in the hands of the economic bureaucracies. They had created a power vacuum by breaking up the other prewar power centers--the military, the social-control bureaucracies, the giant trusts known as zaibatsu--and replacing them with the largely empty formal trappings of democratic government.

It was this vacuum that gave economic bureaucrats in the MOF, MITI, and such extra-government bureaucracies as the Keidanren (the National Federation of Economic Organizations, often misleadingly described as a "big business lobby") and the Keizai Doyukai (the Committee for Economic Development, a brain trust of bureaucrats and industrialists), the room to apply on a nation-wide scale economic methods that had first been tested in narrow sectors of the war economy. The roots of Japan's unique system of industrial financing lie, for example, in measures adopted in 1942 to ensure the munitions industry had priority access to funds, while the clusters of linked banks, large end-product manufacturers, and suppliers that dominate such Japanese economic beachheads as Malaysia, northern Wales, and southern California are following a pattern first visible in the colonial Manchuria of the 1930s.

Johnson's second intellectual time-bomb--one even more destructive of American illusions--lay in his elucidation of the assumptions informing the purposes and nature of economic activity implicit in this experimentation. These assumptions were at such variance with those that underlie conventional American understanding that they seemed outlandish when Johnson drew attention to them. Most Americans believe, for example, that markets are immutable facts of the human condition: witness the ubiquitous use of such terms as "the market" and "market forces" that only incidentally describe concrete markets existing in time and place, and that are examples of ideological rather than descriptive language. The notion that markets are indispensable preconditions to economic life sustains the popular presumption that while governments in Pyongyang, Havana, or wherever may succeed in suppressing "the market" temporarily, such efforts are as self-evidently doomed as, say, attempts by religious sects to suppress the sex drive.

Japan's powerholders, however, have viewed markets as tools, useful in some contexts but to be avoided in others. Markets were handy in purging less efficient companies from given industries, but they were rarely used to allocate scarce credit among industrial sectors, and they were certainly not allowed to determine which products Japanese companies would supply to Japanese consumers and which products these consumers would import. American commentators ignorant of history and geography--and thus unaware that societies in which markets form the overarching principles of social organization are limited to a small handful of modern countries--are now well into their fourth decade of waiting for supposedly "pent-up" consumer demand in Japan to burst the fetters of Tokyo's restrictive trade practices.

 Beyond the nature of markets lay the whole purpose of economic life. Questioning this seemed like questioning the purpose of lungs. For Americans, economic activity self-evidently existed to provide a better material life for people. But for Japan, economic activity is an instrument--the instrument in the postwar period--of national power. Improving livelihoods is incidental. As Johnson wrote, "Observers coming from market-rational systems (i.e., those like the American) often misunderstand the plan-rational system (i.e., the Japanese) because they fail to appreciate that it has a political and not an economic basis."³

Finally, Johnson contrasted the stance of governments such as the United States, on the one hand, and those such as Japan, on the other toward economic outcomes. The former, "capitalist regulatory states" in Johnson's terminology, sought to set the rules of economic activity and might intervene to ameliorate its results, but they did not fundamentally attempt to determine those results. The latter governments, "capitalist developmental states", directed economic activities in order to achieve pre-determined outcomes. (Leninist states formed a third category--planned economies that for purely ideological reasons eschewed market mechanisms).

To Americans, this all sounded at the same time reprehensible and vaguely familiar: reprehensible because so undemocratic--the concentration of bureaucratic power necessary to achieve predetermined outcomes could not easily be squared with democracy--and thus theoretically not possible in a country that had been supposedly re-made by a benevolent occupation into a kind of junior United States; vaguely familiar because it resembled the way Marxists talked. Americans knew that Soviet leaders used economic activity as an instrument of national power instead of a means of improving livelihoods. But to be told that America's foremost Asian ally engaged in state-directed economic planning, with bureaucrats steering credit toward heavy industry, was most disconcerting. In fact, as Johnson demonstrated, Japan's economic bureaucrats were intellectual cousins of the Marxists, drawing on the same Hegelian heritage that gave rise to the Gosplan. American social scientists have forgotten, if they ever knew, that the premises underlying democratic capitalism and liberal democracy are neither inevitable nor universal but reflect the conclusions of one Anglo-French philosophical tradition. This is a powerful tradition, but there are others. In one of the most celebrated passages in his book, Johnson wrote: "Japan's political economy can be located precisely in the line of descent from the German Historical School--sometimes labeled ‘economic nationalism', Handelspolitik, or neomercantilism."⁴

Despite its formidable scholarship, Johnson's book rested uneasily inside the universities. The carving-up of the academic landscape into mutually wary and heavily demarcated territories has been particularly destructive of area studies--including, conspicuously, Japan studies. One of modernization theory's most pernicious legacies is the notion that all places and all peoples are essentially alike--a notion that is fundamental to rational choice theory and neo-classical economics.⁵ Thus it was hardly surprising that American academics reacted to Johnson's book largely in terms of an opportunity to build reputations and careers by attacking it.⁶

Most of these attacks, however, suffered from the fact that they appeared in books written to secure tenure for their authors. This meant that they were written in dense, jargon-laden, footnote-studded prose that virtually guaranteed they would go unread in Washington. Instead, policymakers in need of help read that group of writers who used rather than attacked Johnson's analysis and came to be known as revisionists. Those writers, identified in these pages by Ivan Hall, include "journalists Karel van Wolferen and James Fallows, [Johnson], former trade negotiator Clyde Prestowitz, publicist Pat Choate, and others"--and the "others" would certainly include Hall himself.⁷ The revisionists had their differences--we will come back to them--but agreed on three fundamental points: First, an extrapolation of late-1980s trends would make Japan the world's pre-eminent economic power around the turn of the century; second, 1945 did not represent a clean slate, and the links between the 1950s and the 1930s were strongest precisely in those institutions that produced the "Japanese Economic Miracle"; and third, formal trappings to the contrary, Japan was not a liberal, capitalist democracy in which crucial decisions were made by politicians accountable to an electorate, while the market determined economic outcomes. Rather, power rested in an official bureaucracy not subject to political control and in an unofficial bureaucracy of linked banks, large industrial corporations, and trading companies free of the normal disciplines of a market economy: the fear of bankruptcy, suppliers' freedom to negotiate fair prices, and the pressure to compete for scarce financing through demonstrating an ability to turn a profit.

With the exceptions of Johnson and Hall, none of the revisionist writers had the credentials that, in the eyes of America's academic Japanology establishment, authorized them to take part in policy discussions.⁸ Nonetheless, revisionist notions on the structural origins of Japan's trade surpluses and the powerlessness of its elected officials quickly became the starting point for a new debate on Japan, most visibly in the 1992 presidential campaign and in the early attempts of the Clinton administration to overhaul Japan policy.

Nor was revisionist influence confined to the United States; a slew of similarly-minded Japanese writings soon followed. Among the most important of these are: Noguchi Yukio's best selling 1940 Taisei, in which the Hitotsubashi University professor and former MOF official demonstrates in relentless detail the origins of Japan's supposedly "unique" economic institutions in measures taken in 1940 to put the economy on a war footing; Ozawa Ichiro's 1993 manifesto, translated into English as Blueprint for a New Japan, in which he follows van Wolferen in making the case that establishing political oversight over the bureaucracy is Japan's central challenge; and the writings of economist Nakatani Iwao--particularly his recent "Japan Puroburem" no Genten--and Mikuni Akio, the head of Japan's only independent credit ratings agency and a well known establishment gadfly.⁹ These men are perfectly capable of working up their ideas on their own and no doubt did so; nonetheless, one would have to be deaf, dumb, and blind in the Japan of today not to be aware of Johnson and van Wolferen, and not simply because the Japanese mass media has succeeded in turning the word ribijinisuto (revisionist) into an all-purpose label for any critical foreign analysis of Japan. Van Wolferen's latest Japanese language book on the possibilities for achieving democracy there has sold some 250,000 copies to date, an extraordinary achievement for a serious non-fiction book.

Interpreting the Recession

But as the decade wears on, a long, debilitating, and seemingly intractable recession has cast doubt on at least one revisionist notion: Japan as the unstoppable economic juggernaut. What initially seemed a deliberate and well-managed exercise on the part of Japan's financial mandarins to take steam out of overheated asset markets now shows every sign of having become the first full-fledged deflation within the living memory of anyone under the age of sixty.

This has not gone unnoticed or uncelebrated; to the contrary, scarcely a week has passed during the past four years in which one or another prominent British or American publication has not proclaimed with barely disguised glee the coming collapse of the Japanese economic model. (Journalists associated with The Economist have been particularly resourceful in mining this seam; three of them have managed since 1988 to write no fewer than four Japan-will-collapse books).¹⁰ Of course, it is news when a stock market that had accounted for over 40 percent of total global equity capitalization loses more than half its value, when a banking system that boasts nine of the world's ten largest banks finds itself burdened with uncollectable loans amounting to half a trillion dollars, and when repeated attempts to restart the world's number two economy seem to go nowhere.

But the man-bites-dog story in the litany of Japan's economic woes--one resolutely ignored in the English-language media--is just how successful Japan's economic mandarins have been to date in containing a series of crises that would long ago have sunk any Western government. Try to imagine what the American political landscape would look like in 1998 if by then the Dow were at 1800, half of America's banks were technically insolvent, American real estate prices had fallen by an average of 40 percent from today's levels, the unemployment rate exceeded that of the 1975 recession, and there had been no GNP growth for three years.

Some revisionists are unwilling, however, to rest their case by pointing to Japan's crisis-management skills; instead they deny the existence of a crisis. Johnson writes in the introduction to his 1995 collection of essays, Japan, Who Governs? (W.W. Norton, 1995) that Japan's persistent recession is "primarily caused by public policies undertaken to discipline speculators and free riders, and also by the beginnings of a planned transition from a producer-oriented, high-growth economy to a consumer-oriented, headquarters economy for all of East Asia." The most articulate recent exponent of this view--that what looks from the outside like a crisis is in fact a well-thought out plan to establish Japanese hegemony over the global economy--is Eamonn Fingleton, whose book Blindside played a major role in shaping Washington's perceptions of Japan on the eve of the Spring 1995 auto talks.

Fingleton makes an important contribution in linking the Japanese approach to manufacturing costs with overall industrial policy and its essentially political goal of achieving for the country what the late Prime Minister Ohira once defined as "comprehensive economic security." Fingleton starts with the common observation that profit-killing price wars are a feature of high-fixed cost industries. The classic example is the semiconductor industry; the variable cost component of a semiconductor chip amounts to little more than what one would pay to haul in some sand from a beach. Thus manufacturers who have spent billions building factories will sell their chips, if they must, for prices far below those that reflect costs, in order to recover at least something of their investment.

Fingleton shows how Japanese companies have targeted just such industries for dominance; they have also gone after businesses (e.g., automobiles, consumer electronics) in which Japanese companies can create these conditions for themselves. Industries not easily turned into high fixed-cost businesses (e.g., writing software) are largely left to Japan's trading partners; service industries that cannot translate into global monopolies are, as a matter of policy, starved of capital. Fingleton notes that Japan's famous lifetime employment system effectively forces Japanese executives to treat labor as a fixed cost. Thus, General Motors deals with a downturn by laying off thousands of people, Toyota by squeezing cost reductions out of its plants and suppliers. The same could be said of the implicit requirement that large Japanese manufacturers underwrite the liabilities of their keiretsu-linked suppliers. A General Electric can simply stop placing orders; a Toshiba must find ways to keep its suppliers afloat. Competition between a company that makes pricing decisions as if it were in a high fixed-cost business--pricing below costs when needed--and one that prices as if it were in a low fixed-cost business--selling only when profitable--will see the latter, unable to turn a profit, cede market share. Of course, for its strategy to work, the high fixed-cost company must have financial backing prepared to endure long periods without profits; Fingleton joins all his fellow revisionists in highlighting the MOF's central role in guaranteeing the availability of such financing.

Japanese companies have, as a result of all of this, achieved such dominance in so many industrial sectors that, as Fingleton put it, "no advanced Western country can now raise barriers against Japanese goods without causing industrial dislocation in their domestic economies." It is no longer possible to make a complex machine--a Ford Taurus, a Macintosh computer, a Boeing 767--without Japanese components. Japan's savings pool accounts for over half the industrialized world's available capital, giving the country extraordinary leverage, not simply over global finance, but over anything that can be bought, from the services of Washington's best-connected lobbyists to a favorable image among Third World elites.

But having made an unassailable case that Japan has accumulated enormous economic power, Fingleton then implies that the country faces no serious economic challenge. He dismisses the woes of Japan's stock market as deliberately "engineered. . . to effect the transfer of wealth from rich private citizens to corporate Japan." He terms the banking crisis "rumors" useful in creating a public relations facade behind which banks can "conduct a ruthless purge of small-time real estate speculators who could not pay their interest bills." The strain on "lifetime" employment he labels a "red herring"; while the recession itself he calls a "pause" that was "overdue." Indeed, he concludes that by 1994 "Japan was girding itself for a new leap forward."

Fingleton is a well-respected financial journalist and, coming on top of a process that had seen the image of revisionism in Washington move from the kooky to the conventional, Fingleton's conclusions seemed plausible to many. But they jostled for the attention of policymakers with the unending stream of books and articles describing a Japan on the edge of deflationary collapse. Not since the early 1980s, when the Reagan administration portrayed the Soviet Union as simultaneously a menace demanding a huge defense build-up and a society bound for the ash-heap of history, had so many seemingly contradictory observations about an important foreign country been bandied about. These contradictions were reflected in policy. The same Clinton administration that launched trade initiatives specifically aimed at compensating for the apparently unbeatable competitive edge of Japanese industries found itself in August 1995 joining Japanese bureaucrats in helping avert what it had been scared into believing was an imminent meltdown of the Japanese banking system.

This policy schizophrenia may reflect simple incompetence. This is, after all, an administration that allowed six months to pass before filling a single important second-tier policy position involving Japan. It appears to rely for its analysis of financial developments in Tokyo on alarmist editorials in The Economist and Far Eastern Economic Review rather than the views of its own overworked but knowledgeable Tokyo embassy officials. But to the extent White House officials are genuinely puzzled rather than simply overwhelmed, they could benefit from taking another look at the original revisionist writings, in particular at Karel van Wolferen's The Enigma of Japanese Power (Knopf, 1989).

Strong State or Stateless Nation?

The uproar surrounding the initial appearance back in 1988-9 of revisionism drowned out a profound difference of opinion within the revisionist camp over the structure of the Japanese political order. Implicit in the work of Johnson, Fingleton, Hall, and Leon Hollerman is the idea that the Japanese political economy is directed and planned from a central core; a core that manages and wages what Hall called "a deliberate, humorless, and relentless economic war" against the United States; a core motivated over the course of centuries, claims Fingleton, by a ruthless "will to win" that single-mindedly judges every conceivable policy agenda with the criterion of "a burning desire to be number one." Johnson, simply and elegantly, calls this core "the strong state." "Lying behind industrial policy is the strong Japanese state itself", he writes. "It is the sine qua non of Japan's economic achievements."

But van Wolferen subtitled his book Enigma, "People and Politics in a Stateless Nation" (emphasis added). He argued that Japan's modern history had left its governing system with a flaw: the lack of a center of political accountability. The notion of a "truncated pyramid"--that no institutional arrangements exist for formal decision-making binding on all elements of the Japanese power structure--is not new. Indeed, it is a commonplace observation in discussions of the origins of the Second World War in Asia; the lack of such arrangements permitted officers in the Imperial Army, formally answerable to the emperor but in fact answerable to no one, to invade China on their own initiative. Nor has this notion ever disappeared from serious Japanese political discourse; it was stressed by Maruyama Masao, Japan's most important political thinker, and is implied in Ozawa Ichiro's call for Japan to become a "normal country."

It had, however, been largely forgotten in the United States until van Wolferen (who, significantly perhaps, is not American) drew attention to it. Part of this historical amnesia undoubtedly reflected the baleful influence of modernization theory; wishful thinking probably contributed more--after all, what administration would want to believe that it had spent energy and political capital dealing with officials who lacked the power to make and deliver on commitments? But the critical factor in masking from the American policy elite the flaw that van Wolferen analyzed was surely that, for fifty years, Washington has been carrying out for Japan functions that practically define the state: providing for the nation's security and managing its foreign relations.

When he drew attention to it, however, he introduced a subtle and important revision. While Maruyama had noted the absence of a center of political responsibility in discussing the policies of prewar and wartime Japan, van Wolferen believed it more accurate in the postwar period to speak of the lack of a center of political accountability. Accountability happens when people or institutions are forced to explain what they are doing. The demand for an explanation can originate with an electorate, a board of directors, a ratings agency, a fully independent press, a congressional committee, a parliamentary opposition, a disinterested accounting profession, a judicial review. It can even--as with an entrepreneur or dictator--be internally generated. But the demand for accountability disappears in a political system where power is fractured among groups of semi-autonomous official and unofficial bureaucracies who pretend that they do not have power, where bureaucrats write both questions for legislators to ask and answers for ministers to give, where companies and ministries choose their own senior officials without external oversight, where companies own each other, where the gates to the legal and accounting professions are kept deliberately at needle-eye size, and where serious newspapers are muzzled by a news-gathering monopoly of accredited reporters' "clubs" that produce widespread self-censorship. The result, argues van Wolferen, is a system that in its essence is a faction-ridden bureaucracy run amok: deeply conservative, jealous of its prerogatives, unable to admit the possibility of institutional error, lacking the ability to articulate to itself or others what it is doing or why it is doing it.

Van Wolferen's writings were met with even less comprehension than had greeted the work of Johnson, at least in the United States. The notion of a "strong state" might seem alien and suspect, but Americans could at least conceive of tightly organized countries dedicated to global hegemony; they had fought a decades-long Cold War with just such a state. But the idea of a formidable economic power capable of laying waste to the American industrial base and wresting the crown of global economic and financial leadership from the American brow run by bureaucrats who didn't know what they were doing was a notion greeted with incredulity and disbelief. (Notwithstanding a determined and protracted smear campaign by powerful Japanese interests, Van Wolferen's analysis was received sympathetically by many Japanese; respected journals such as Toyo Keizai and the Nihon Keizai Shimbun have recently run essays explaining akauntabiritei (accountability) to their readers--but one indication of the extent to which van Wolferen's analysis has penetrated the Japanese consciousness.)

The clearest delineation of the differences between the central core/strong state thinkers and van Wolferen occurred in the pages of this magazine in a linked pair of articles that should top the list of required reading for any government official or business executive who deals with Japan. In the first of these, Leon Hollerman labels the country's central core a "collusive oligarchy" and discusses an array of tactics by which this oligarchy is implementing a strategy aimed at turning Japan into "The Headquarters Nation" for the global economy.¹³ Hollerman has devoted many years to analyzing the institutional arrangements by which linked networks of Japanese banks, trading companies, and manufacturers achieve dominance of industrial sectors and establish economic beachheads abroad. He reviews many of these arrangements in his article and concludes that they amount to a well thought out strategy to achieve, if not global economic hegemony, then "comprehensive economic security", which is tantamount to the same thing.

His conclusion seems not only convincing but inevitable--until van Wolferen asks rhetorically in the following article "Are Japan's strategists gamblers?"¹⁴ Anyone who has ever dealt with Japanese institutions knows that, to the contrary, they are extremely risk-averse. A strategy by which a crowded island nation, bereft of most natural resources, hemmed in by watchful, resentful neighbors, supporting within its borders fifty thousand foreign troops under foreign command, attempts to wrest leadership of the global economy from under the noses of those same foreigners--foreigners who within living memory of much of the nation's elite had stripped it of its empire and reduced its cities to rubble--is, however good the odds may seem and however stupid and gullible those foreigners might have become, a huge gamble. But what other than a well-thought out strategy could have secured for Japan its extraordinary economic achievements? Japan might not yet have become the world's "headquarters", but by 1991, when the articles appeared, it looked pretty damned close.

Van Wolferen posited the notion that all those jealous, conservative instincts of institutional self-preservation that, according to observers from Max Weber to James Q. Wilson, define the nature of the bureaucratic beast have acted in the Japanese case to perpetuate a system whose origins lay not in a consciously conceived strategy but in a confluence of historical factors. These included wartime controls that had never been dismantled, the occupation's unwitting emasculation of any power centers that could check the economic ministries, the long and historically unprecedented indulgence of the United States toward Japan, and the obvious need for postwar reconstruction that "required no political discussion." The result was a system whose essence lay in a drive to accumulate production capacity without regard to profitability, consumer welfare, or any kind of clearly articulated understanding of what the capacity was supposed ultimately to buy for Japan.

A Four Year Test

The Hollerman/van Wolferen diptych appeared in the fall of 1991; the intervening four years have given us about as good a test as we're likely to get of the underlying assumptions. It is still conceivable that Hollerman, Johnson, and Fingleton are right; that Japan's wise and far-seeing economic mandarins are, even as we speak, in the final stages of bringing about the most brilliantly conceived and implemented national strategy in history. Perhaps when Euromoney awarded Takemura Masayoshi the title "Worst Finance Minister of the Year", his nominal subordinates grinned at one more testimonial to their unparalleled ability to dupe the gaijin. Maybe when Japan's current prime minister, Hashimoto Ryutaro, led a successful lobbying effort before assuming office to gut the official apology the world had awaited on the fiftieth anniversary of the end of the Second World War, Japan's diplomats and business leaders congratulated themselves for their prescience in getting other Asians used to the subordinate role they will be playing when Japan's "ascendancy" is revealed to East Asia and the world. And it could be that the avalanche of recent books and articles in Japan portraying widespread bureaucratic incompetence point to the devious tactics by which Japan's top officials have hidden all evidence from their fellow Japanese of well thought out plans to bring about that ascendancy.

But I don't think so. Far more likely, the last four years bear out van Wolferen's thesis. Rather than any sort of transition, planned or otherwise, from the postwar setup, these years have witnessed the latest chapter in a quarter century of heroic efforts to preserve the existing system. Mikuni Akio put his finger on the heart of the matter when he wrote:

 There were two motives behind [Japan's economic] system. The first was to expand Japan's productive capacity as quickly as possible. The second was to keep control of Japan's productive assets out of the hands of foreigners. The strains in this system first started appearing in the late 1960s, when Japan began running chronic trade surpluses. The result has been constant upward pressure on exchange rates. The increasing value of the yen should have served as a signal to Japan's policy elite that it needed to shift the driving force of the economy from exports to domestic demand. But Japan, alas, has lacked the political infrastructure capable of carrying out such a wide-ranging shift.¹⁵

 The notion that Japan can easily engineer a "transition" to a "headquarters economy" ignores both the lack of this political infrastructure and the extraordinary interdependence of the United States and Japan, an interdependence now critical to maintaining domestic power balances in both countries. It is this interdependence that allows Japan to avoid dealing with the "wide-ranging shift" that economic developments would seem to dictate; it is this interdependence that permits the United States to maintain superpower pretensions and a level of consumption it could not afford on its own. Its essence lies in the role of the dollar in underpinning economic relations between the two countries; and the accumulating strains are, as Mikuni suggests, at their most visible in the history of dollar/yen crises.

These crises--there have been five since the yen was cut loose from the dollar in 1971--all bear a family resemblance, most particularly in the near-hysteria they seem to induce in Japan when the yen soars to previously unimaginable levels. Companies go into paroxysms of cost-cutting and automation financed by easy money as the authorities open the monetary spigots; MOF officials rush to Washington prophesying global collapse unless they get help in bringing down the yen; the Bank of Japan ("BOJ") buys billions of dollars in the foreign exchange market; Japanese insurers and banks are "guided" into joining the BOJ in its dollar buying.

The contention that this hysteria is all a put-up job aimed at forcing Japanese industry to pare costs overlooks the tremendous price that Japan has paid. Japanese institutions have sustained direct losses of a least a trillion dollars in propping up the American currency over the past two decades. The dead weight of bad loans on the books of Japan's banks (and thus the seemingly endless recession) stems directly from a "bubble economy", deliberately created by the mof to cope with the aftermath of the 1985 Plaza Accord that saw the dollar drop from 240 yen to 140 yen in less than two years.

A willingness to saddle Japan with such burdens can only come from horror at the thought of the alternative: insisting that foreign countries conduct their business with Japan in yen. Countries seeking to finance their government deficits with Japan's savings would have to borrow in a currency Japan could control. Foreigners buying Japanese products would be billed in the currency Japanese manufacturers must use, in turn, to pay their own workforce and suppliers. This is the way the world usually works: Stronger countries--a Victorian Britain, a postwar United States, a reunified Germany in today's Europe--demand that others take the risk that currencies will fall in value, rather than forcing their own businesses and household savers to shoulder such risks by accumulating and holding foreign currencies.

 Because the notion of a "headquarters nation" that does not control the currency of its trade and investment flows is ultimately inconceivable, many have assumed it only a matter of time until Japan too establishes such control, giving rise to much talk of the "internationalization of the yen" and the "emergence of a yen bloc." But to date, this has been only talk, for any genuine internationalization of the yen--any widespread move to require foreigners to pay for Japanese exports in yen or to borrow in yen--would make it instantly apparent that foreigners do not have sufficient opportunity to earn yen by selling into the Japanese market. Unless foreigners can sell freely into Japan, they cannot earn yen to pay for Japanese goods or service yen debts.

The problem today, however, goes far beyond market access and cannot be solved simply by dismantling Japan's myriad cartels and other market access-blocking mechanisms, although this remains a critical first step. Japan's control of so much of both the world's industrial capacity and its savings has been equaled by only two countries in history: Great Britain in the opening decades of the Industrial Revolution, and the United States in the years following the Second World War. Both faced the same dilemma that Japan does today--the only way to restart domestic economic growth was to create purchasing power in the economies of trading partners. Both countries ended up doing so, but only after crises that shook up their respective political systems. In Britain's case, the crisis was the Irish potato famine. The repeal of the corn laws in 1846, which allowed other countries to earn pounds sterling by selling agricultural produce to Britain, ushered in Britain's golden age, but not before destroying the economic base of the landed gentry. And it was only the postwar threat of militant communism that convinced the United States it had no choice but to promote the rebuilding of production capacity in Western Europe and Japan through such measures as the Marshall Plan.

For Japan to create purchasing power abroad sufficient to reverse its domestic slump it would have to yield a good part of its domestic industrial capacity to others--just as Britain let much of its agricultural capacity go fallow one hundred and fifty years ago, and the United States gave up many of its low-value added industries in the decades following the Second World War. For until the capacity goes in Japan, it will be impossible to finance its rebuilding abroad.

Simply to mention such things points to the dilemma they pose. Foreign goods pouring into Japan terrify Japan's bureaucrats with the prospect of fundamental political challenges to the prevailing order. It is not simply their effects on cozy domestic price-fixing arrangements--the "price destruction" they cause, to use the term coined in Japan for what has temporarily happened in a few narrow sectors such as gasoline, men's suits, and personal computers. To rely on foreigners for important, high value-added manufactures defies the entire weight of the institutional and personal memories of Japan's economic mandarins. And any large-scale scrapping of Japan's existing industrial capacity--capacity which in Japan includes so-called "lifetime" employees--would bring unimaginable political consequences and threaten whatever legitimacy the bureaucrats have. For it is the ability of the bureaucracy to protect the institutions and livelihoods under its purview that justifies its power.

Instead, every few years the yen ratchets up in value. After soaring to unimaginable highs (most recently, ¥79 to the dollar), heroic efforts in Tokyo and Washington stabilize the currency at a rate below the peak but well above the previous plateaus. Japanese companies have been forced to cope by investing heavily overseas, in places where costs are lower.

Because these investments are under Japanese control, they represent the only politically acceptable means in Japan by which purchasing power can be created abroad. But they train another spotlight on the absence of a center of political accountability. Never in history has a country allowed large amounts of its wealth to flow overseas without taking steps to protect that wealth. The U.S. military now protects Japan's overseas investments, but it is unlikely that either the will or the ability to do so can last much longer, notwithstanding the sort of protestations to the contrary embodied in the recent Nye Report. Protecting its overseas assets on its own would require Japan to build a political infrastructure capable of overseeing and bridling a military establishment--the missing center of political accountability. But an institution that could not also bring the Ministry of Finance under its thumb would not constitute such a center. Since this most powerful of the world's bureaucracies would meet any attempt to construct an outside force to hold it to account with implacable opposition, no one is seriously trying. It is simultaneously not easy to conceive of a more visible military that would long remain under the budget bureau of the MOF, its current restraint.

What could happen, if despite every desperate measure, the existing order collapses? A final global flight from the dollar, bringing an abrupt end to the Japanese surpluses, might do this. So could a national security challenge to Japan that the United States is unwilling or unable to handle. If forced into a corner, the mof is likely to prefer sharing power with a rehabilitated military rather than surrendering that power to ordinary Japanese citizens--a prerequisite to establishing genuine political control over the bureaucracy. And it would surely prefer to deal with a Japanese military than to reverse a century-long effort to free Japan from dependence for key industrial components on unpredictable and capricious foreigners, foreigners all too often beyond the reach of the extra-legal guidance and intimidation used to keep order in Japan. But it is precisely such a reversal that is implied in any genuine effort to dismantle bureaucratic controls.

The gloating that lies behind the Japan-is-collapsing school--the Japanese have defied market forces and now market forces are taking their revenge--ignores the fact that Japan represents prodigious economic and political might; Fingleton, Johnson, and Hollerman are absolutely right about this. Just as the Soviet Union did indeed turn out to be headed for the ash-heap of history while being nonetheless a dangerous country, Japan has very real economic woes that do not in any way lessen the immense economic--and thus political--power it has accumulated. Indeed they render that power even more of a threat to the framework of global prosperity. For the lack of a strategy, the absence of a center of political accountability, makes Japan exceedingly difficult to deal with. It is one thing to reach a group of power-holders executing a well-conceived plan to establish their country's "ascendancy" by demonstrating that it cannot work or by negotiating a compromise. But when no such group exists, to whom do you talk? What do you say?

Since Japan first burst into the West's consciousness in 1905 with its victory in the Russo-Japanese War, the West has been unable to make sense of the country. Japan's impact on the history of this century has been unimaginably large. It helped bring about the Russian Revolution and was the direct progenitor of the Chinese. The British Empire ended in the rubble of a fallen Singapore, while the Soviet Union collapsed in the face of an American military build-up financed by Japan. Japanese money permitted the second great American political realignment of this century, as the Republican Party discovered by accident in the early 1980s that it could borrow that money to entice votes. Japan provides the last remaining prop for the dollar's role as the world's currency, and with that role all of America's superpower pretensions.

The concentration of power Japan represents should elicit on the part of America's policy elite a supreme effort toward understanding and coping. Anything else will represent abdication of responsibility on a monumental scale.

¹Eamonn Fingleton, Blindside (Boston: Houghton Mifflin, 1995), p. 4.

²Chalmers Johnson and E.B. Keehn, "The Pentagon's Ossified Strategy", Foreign Affairs (July/August 1995), p. 104.

³Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy 1925-1975 (Stanford: Stanford University Press, 1982), p. 24.

⁴Ibid., p. 16.

⁵See Chalmers Johnson and Barry Keehn, "Rational Choice and Asian Studies", The National Interest (Summer 1994), for more on the subject.

⁶Among these would be Strategic Capitalism (Princeton: Princeton University Press, 1993) by Princeton's Kent Calder and Japan's Political Marketplace (Cambridge: Harvard University Press, 1993) by Yale's Frances Rosenbluth and the University of Chicago's Mark Ramseyer. The former book is discussed in Karel van Wolferen's "Wrong on Japan", The National Interest (Fall 1993); the latter in Johnson and Keehn, The National Interest (Summer 1994).

⁷Ivan Hall "Samurai Legacies, American Illusions", The National Interest (Summer 1992).

⁸I was one of the "revisionist" writers condemned for inadequate credentials. In both Japanese and English publications, the British Japanologist Ronald Dore questioned my qualifications to write an article on the implications of Japanese control of global finance for the Harvard Business Review.

⁹Noguchi Yukio, 1940 Taisei (The 1940 System) (Tokyo: Toyo Keizai, 1995); Ozawa Ichiro Blueprint for a New Japan: The Rethinking of a Nation (New York: Kodansha International, 1994); and Nakatani Iwao "Japan Puroburem" no Genten (The Roots of the "Japan Problem") (Tokyo: Kodansha, 1990), respectively.

¹⁰These are: Bill Emmott, The Sun Also Sets (New York: Times Books, 1989); Brian Reading, Japan: The Coming Collapse (London: Weidenfeld and Nicolson, 1992); Christopher Wood, The Bubble Economy-The Japanese Economic Collapse (London: Sidgwick & Jackson, 1992); and Christopher Wood, The End of Japan Inc. (New York: Simon & Schuster, 1994).

¹¹Hall, p. 22.

¹²Johnson, Japan: Who Governs?, p. 66.

¹³Leon Hollerman "The Headquarters Nation", The National Interest (Fall 1991).

¹⁴Karel van Wolferen "No Brakes, No Compass", The National Interest (Fall 1991).

¹⁵Akio Mikuni "A New Era for Japanese Finance", The Asian Wall Street Journal, July 2/3, 1993.