Japan may soon dominate the world economy--but not as a result of a conspiracy.  Its strategy is not written down in any of its official planning documents or in the "Visions" published from time to time by the Ministry of International Trade and Industry (MITI).  Rather, it is implicit in Japan's national interests, national goals, and institutional arrangements for achieving those goals. 

Japan is a centralized society that pursues the goal of comprehensive security by making the country a "headquarters nation" in the world economy.  As I shall use the term, a headquarters nation is one that has a global economic and political strategy based on its authentic national interests, that mobilizes and integrates its public and private sectors on behalf of those interests, and that implements its strategy by the establishment and coordination of global institutional arrangements.  Japan's headquarters strategy is not a policy of world domination; no nation has been coerced into accepting its leadership.  The nations that accept Japan's guidance, trade, finance, and direct investment do so willingly out of self-interest.  In serving their own aspirations, they serve those of Japan.

This view conflicts with that advanced by Karl van Wolferen in his influential book, The Enigma of Japanese Power, which sees Japan as a paralyzed entity incapable of generating a global strategy.  Van Wolferen's important work sheds light on the dark side of Japan's postwar "miracle."  However, his analysis of the sources and uses of power in Japan is preponderantly political rather than economic.  The imbalance needs to be redressed.

According to van Wolferen, the Japanese "system" is a "truncated pyramid" composed of semiautonomous groups that share power in a mutually offsetting way.  He asserts that the contending power centers can only stalemate each other; none is able or allowed to upset the balance by superseding others, none bears responsibility for national decision-making, and the power centers cannot be mobilized collectively.  They not only "lack a mechanism to set new priorities" but they cannot even set a common direction at the outset because "no one is ultimately in charge."  Externally, Japan seeks turf in a mere "politically motivated drive for ever greater international market shares."  In short, Japan's foreign policy is a reflection of its domestic turf battles.

Van Wolferen's thesis is inconsistent with both his own views and recent history.  For example, while insisting on the absence of a central policy-making machinery in Japan and thus on its inability to change course, he simultaneously subscribes to Chalmers Johnson's concept of Japan as a "developmental state" that undertakes responsibility for economic modernization.  But such a state must have both central direction and the capacity for coordinated policy change.  Profound and deliberate changes in Japan's national policy of the kind implied by the term "developmental state" have indeed occurred during the postwar period.  Until the OPEC oil embargo of October 1973, for example, it was consistent with Japan's strategy to maintain the "separation of economics from politics."  As a result of the embargo, however, it hastily combined the two, announcing its pro-Arab, anti-Israel policy on November 22, 1973.  Since then, Japan's international economic relations have become increasingly politicized as it has adopted a "high posture" and assumed geopolitical initiatives in accordance with its emergence as a headquarters nation.  Other examples of central policy changes include Japan's partial shift from export promotion to import promotion in foreign trade,(1) and the dramatic liberalization of the Foreign Exchange and Foreign Trade Control Law in December 1980.  Changes like these demonstrate conclusively that Japan does have a national strategy and the instruments with which to pursue it.

The Domestic Base

The "enigma" of Japan's power, as described by van Wolferen, can be dispelled by recourse to the economic concept of oligopoly, defined as a market dominated by a few large suppliers.  Economic concentration in Japan has produced enormously powerful firms and a society controlled by oligopolies.  Japan's government is itself an oligopoly, dominated by a few major players, and this small group of political power centers interacts with the power centers of big business.  The Japanese pyramid is not truncated: its summit consists of this collusive oligopoly.

Japan's institutional arrangements reflect the structure of its national interests.  In contrast with some other countries, Japan takes its national survival and independence pretty much for granted.  But it is obsessively concerned with achieving economic stability and security.  As expressed in a phrase attributed to the late Prime Minister Masayoshi Ohira, it seeks "comprehensive economic security."  That concept includes security in national defense (provided by its treaty with the United States); stability in its foreign markets and sources of supply; suppression of financial, technological, and political risk; and a position of acknowledged leadership in both a regional and a global context.  Japan's passion for security arises from its extreme dependence on the world economy.  After World War II, the slogan "Export or Die" explicitly affirmed that no domestic policy could be formulated without reference to its international implications.

At the outset of the American occupation under General Douglas MacArthur, rules placing the Japanese economy "off limits" to foreigners were established.  During Japan's recovery and rehabilitation, foreigners were not allowed to acquire real estate or engage in domestic business; they were not even allowed to engage in foreign trade with Japan without the intervention of occupation authorities.  These central controls were elaborated and augmented by the Japanese bureaucracy to which they were bequeathed following the occupation.  Reinforced by prewar and wartime precedents, the comprehensive control assumed by Japan's ministerial bureaucracy set the tone for its postwar economic policies.  Foremost among these was an industrial policy that was implemented on both the domestic and international planes.  This represents the operational core of Japan's strategy as a headquarters nation.

Japan's industrial policy was not designed to identify "winners and losers"--as defined in American terms--among individual firms and industries.  Rather it was meant to identify and develop "key industries" that were important not only in terms of their own products but because of their active or potential control of "downstream" industries for which those products are essential.  In the early postwar period, these industries were primarily "materials" industries that were highly dependent on imported raw materials--particularly steel, nonferrous metals, chemicals, ceramics, paper and pulp, gravel, and textiles.  Later, under the impact of the oil crises and rising energy costs, the materials industries were superseded in Japan's industrial structure by the "fabricating and assembling" industries--including transportation equipment and general, electrical, and precision machinery.  Facilities of the materials industries were scrapped, with legislation being passed to facilitate the process.

In 1960, MITI decided that computers were essential to the centralization and control of Japan's communication networks.  Accordingly, the government took the risk of investing heavily in research and development and in plants and equipment.  Without such support, the infant companies would surely have collapsed on several occasions.  In creating the computer industry, MITI demonstrated the role of government in a headquarters nation in an even more essential respect: it compelled the assistance of IBM.  As a condition for allowing IBM to manufacture computers in Japan and to repatriate its profits, not only was the number of machines it could sell severely limited, but IBM was obliged to release its patents to Japanese companies.  Shigeru Sahashi, MITI vice minister, is reported to have advised IBM that "We will take every measure possible to obstruct the success of your business unless you license IBM patents to Japanese firms and charge them no more than a 5 percent royalty."(2)  This was "Japan, Incorporated" in action with a vengeance.

By 1980, Japan's high technology priorities included nuclear power, aircraft and space technology, ocean development, life science, computer software, systems engineering, and new data processing systems.  These involved great technical risks and huge investments over a long period of time.  Keidanren--the Federation of Economic Organizations, Japan's foremost organization of business interests--requested that the government expand its science and technology budget to provide greater support to the private sector.(3)

Economic concentration and cartels in the domestic economy--including their associated networks of privileged information, contacts and channels--provide the underpinnings for transposition of Japan's industrial policy to the international arena.  From the early days of the post-occupation period, the Japanese government took steps to promote economic concentration both in its own interest and in the interest of the private sector.  For efficiency and convenience, the government prefers to coordinate its policies with large rather than small units in the private sector (large firms being more useful in conveying the government's policies downward in the industrial hierarchy).  Similarly, the government favors cartelization of markets, because cartels facilitate the maintenance of covert government control.

Within Japan, most market sectors are rigidly controlled by distribution cartels organized by manufacturers.  These are known as "Fair Trade Councils" and are authorized by the Japanese government to establish marketing practices that preclude entry by domestic outsiders as well as foreign rivals.  The cartels are comprised of loyal distributors, as for example in the wholesale and retail networks controlled by the Suntory Company or the Matsushita Electrical Industrial Company.  They are adept at maintaining control by the manipulation of bottlenecks, such as warehousing and transportation facilities.  Well-established relations among importers, warehousers, and truckers often make it impossible for foreign firms to store or transport their products within Japan.  This is a clear example of adversarial trade on the import side, arranged by collusion between government and business.

Following the occupation, one of Japan's earliest priorities was regrouping the dismembered zaibatsu--the large industrial and financial "cliques" formed during the Meiji era and coordinated by their top holding companies (a device that was banned during the occupation and remains illegal).  The successors to the prewar zaibatsu are the keiretsu, which are usually coordinated by a trading company or bank, but may also be coordinated by presidents' clubs, interlocking directorates, and cross-shareholding arrangements.  The major keiretsu include Mitsubishi, Mitsui, Sumitomo, Fuyo, Dai Ichi Kangyo, and Sanwa.  In their international power, they far transcend the prewar zaibatsu, especially in terms of their global financial and trading company capabilities.  Among their incentives for collaboration with the government is the fact that they implement, and profit from, Japan's policies as the world's leading provider of foreign aid.

Many of Japan's instruments for market domination are applied collusively within the oligopoly structure of its keiretsu networks.  Their enormous competence may be defined in terms of their scale, their diversity, their privileged access to capital, their management and organizational capabilities, and their information sources.  Strategically, the keiretsu take cognizance of the fact that, for purposes of control, dominance in distribution and finance is often more important than domination at the manufacturing level.  This is why keiretsu themselves are usually coordinated by either a trading company or a bank.  Japanese trading companies perform the coordinating function with the help of exclusive information "channels" and global communications facilities that rival those of the Pentagon.  In their collective mode of operation, the keiretsu share the risk of major projects as well as the profits.

Another institution, the sogo shosha, or general trading company, has recently ventured from its traditional functions of information gathering and brokering into new fields, including manufacturing, development projects, and managerial and consulting services.  As the eyes, ears, and arms of the Japanese government, the sogo shosha and the financial institutions of the keiretsu bestride every one of the world's rising regional blocs.

Another step toward economic concentration came in the early 1960s when the government promoted a flood of mergers based on the rationale of achieving economies of scale, reducing "excessive competition," and generating business power equivalent to that of giant American firms.  From the point of view of industrial policy, it was argued that maintaining free competition in the domestic economy would handicap Japanese exporters in foreign markets where free competition did not prevail.  Likewise, in cooperation with MITI, the policy of the Ministry of Finance was to create fewer, bigger, and stronger banks to meet foreign competition at home and abroad.  Deregulation in banking was regarded as a license for the largest banks to squeeze and swallow their minor rivals.  As a result, Japanese banks participated prominently in the merger and acquisition movement in Europe and America in the 1980s.

An Adversarial Strategy

In a strategic context, Japan's international industrial policy forms a natural counterpart to its policy of unbalanced growth in the domestic economy.  Ever since World War II, the Japanese government has promoted the construction of industrial plants at the expense of infrastructures or higher living standards.  The resulting economic imbalance stimulated savings and commercial investment which, in turn, gave rise to export-oriented output.  This has been the dynamic core of Japan's economic "miracle."  In accordance with the transformation of Japan's industrial structure, the surpluses generated by these policies are now being invested abroad.

Japan's enormous trade surpluses, which far exceed those of OPEC in its most opulent years, have been bitterly resented by the United States and other nations as having been gained partly by unfair methods.  Today Japan's headquarters strategy is to recycle its surpluses in the form of foreign investments and foreign aid, both of which increase its control of world economic networks and its policy influence in advanced and developing nations.

Japan's current account surplus has been achieved by free market as well as by oligopolistic or anti-market means.  The Japanese have been extremely efficient in identifying market opportunities, especially for products with rapid growth and high volume potential.  They realize these potentialities partly by excellent management, research and development, quality control, inventory control, and other well-known instruments of Japanese competitive power.  Partly, however, and to an increasing extent, Japan's oligopolistic business community wages economic warfare both by adversarial trade and adversarial investment, and it does so with the aid of the Japanese government.  If "Japan, Disincorporated" describes Japan during the phase of partial economic liberalization under American pressure in the 1970s and 1980s, then "Japan, Reincorporated" may symbolize the emergence of Japan in the 1990s as a headquarters nation.

Whether "Fortress Europe," "Fortress America," or any other discriminatory bloc is formed, Japanese institutions will be found within every one of them.  Thus in its headquarters strategy Japan is prepared to play the global game either in a regionalized or in a wholly multilateral world economy.  Japan can already be seen as an insider in the proposed U.S.-Canada-Mexico free trade arrangement--Japanese producers, for example, are expanding their operations in Mexico to produce goods for sale in the United States and also parts for Japanese car and electronics companies.  Of course, American firms are likewise represented by their own establishments abroad.  These, however, are not supported by government policy and the United States does not sponsor government cartels for the benefit of exporters.  (SEMATECH, a projected high-tech research consortium to be sponsored by the U.S. government, is an example of an abortive American effort to imitate the Japanese.)

The Japanese government guides Japanese firms in choosing foreign direct investment locations and helps them establish their businesses abroad.  For the guidance of prospective Japanese investors in America, information is collected by the Japan External Trade Organization (JETRO).  JETRO keeps track of the location of Japanese investment in the various states, the nature of investment, and the extent of available subsidies.  The government discourages the "overpresence" of Japanese investment in particular localities.  The Japan Export-Import Bank collects information about the intentions of various state governments.  The bank is now authorized to extend loans for large projects abroad at either the government or private company level.  In Europe, information is comprehensively collected by Japanese trading companies, Japanese international banks and securities houses, and Japanese government agencies that maintain representative offices abroad.

At the private level, major Japanese firms set up listening posts and representative offices in Europe.  Many of these do no business but merely collect information.  For example, the Chubu Electric Power Company of Nagoya, which sells no electricity in Europe, has a representative office in London.  At the government level, the Japanese Ministry of Finance, the Japan Export-Import Bank, and other official agencies have offices in Europe whose function, according to a Ministry of Finance official in London, is to "keep a close watch on developments."  The trading companies are well established in every major European center.  Mitsui, for example, has 50 subsidiaries in the EC region.  (In future, most trading company activity in Europe will be in foreign direct investment rather than in trading.)  In Tokyo, the Japanese government coordinates Japan's entry into Europe.  Guidance and advice are provided by the Economic Planning Agency, MITI (which is creating a pan-European division), the Export-Import Bank, and others.  Besides major firms, small- and medium-sized firms are also assisted in choosing foreign investment locations and in making contacts, and sometimes these smaller firms serve as guinea pigs for large patron firms.

The oil crises of the 1970s strengthened Japan's resolve to control its own sources of essential imports by means of foreign direct investment and foreign loans.  MITI utilized the rise in the price of oil to promote one of the main goals of its industrial policy, namely the transformation of Japan's economic structure in favor of high technology industries that require fewer inputs of imported raw materials.  Adversity was thus used to work in favor of Japan rather than against it.  The domestic transformation was collateral to Japan's international strategy of expatriating its declining low- and medium-technology industries.  This strategy was further abetted by the world trend toward regionalism and protectionism which has likewise promoted the expatriation of declining industries. 

For example, Japan seeks to phase out its export surplus in trade with the United States before the latter adopts rules for "reciprocity."  For similar reasons Japan is rushing into Europe.  First, Japan seeks to establish insider positions before the European Community's "transitional period" begins--a period in which outsiders will be restricted while economic concentration and economies of scale are being pursued and market shares assigned.  Second, Japan seeks an insider position in Europe in order to reduce dependence on America as its principal export market.  Indeed, Japan aims to export to America from Europe, as well as to Europe from America, thus reducing its own surpluses and shifting the locus of trade friction elsewhere.  This is part of Japan's strategy for indirect, as opposed to direct, confrontation with the United States and Europe.

Third, Japan's race against time in Europe is conditioned by its rivalry as well as collaboration with Germany, which may transcend its bilateral rivalry with the United States.  By the mid-1980s Japanese firms--which normally prefer to design plants according to their own specifications and corporate culture--were displaying their pragmatism by performing mergers and acquisitions and arranging joint ventures with partners in Europe.  The joint venture between Mitsubishi and Daimler-Benz proposed in 1990 is an example.  By January 1989, according to JETRO, there were 411 Japanese companies operating in Europe, about triple the number in 1984.  During 1989, Japanese firms performed 114 mergers and acquisitions in the EC, an increase of 81 percent over the preceding year.  This rush into European investment contrasts dramatically with Japan's traditional procedure of step-by-step and case-by-case deliberation in major policy decisions, and is further evidence, if it were needed, that organized change in policy direction is indeed possible in Japan.

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)

At the end of 1988, Japanese banks accounted for more than 50 percent of the total assets of all foreign banks in the United States, or 12 percent of the total assets of all U.S. banks.  By that time, Japan was also the leader of the Eurocurrency markets, holding 36 percent of the total assets of all foreign banks in London, the center of those markets.  At the same time, American banks held 13 percent of foreign bank assets in London.(12)  In Japan itself, U.S. banking assets have declined from 3 percent of the total market in 1981 to 1 percent in 1990.  In the United States, of course, the cost of capital would decline and the competitive power of American banks would rise if the U.S. savings rate were to increase.  This simply means that in this as in other ways Japan's emergence as a headquarters nation is partly attributable to American policies and practices.

In financing developing economies, Japan has clearly overshadowed the United States.  Whereas formerly the United States was a major source of capital to developing nations, now it is a financial black hole, draining savings from Japan, Europe, and elsewhere.  As the world's leading debtor, the United States crowds out the capital needs of poor countries, while Japan appears as their benefactor.  This image is enhanced by Japan's status as the world's leading provider of foreign aid.  Even within the United States, small start-up firms find Japanese venture capital available after they have been turned away from domestic sources.

Relatively minor shifts in the disposition of its portfolio give Japan a hegemonic power in global financial markets.  A case in point is Wall Street's "Black Monday" episode on October 19, 1987.  In the opinion of Treasury Secretary Nicholas Brady, the stock market crash on that day was caused by Japanese sales of U.S. Treasury securities:

People ask me, "What was it that blew it off on the 19th of October?  Was it the twin deficits [budget and trade]?  Was it the Rostenkowski [tax] legislation?  What was it?"....I don't think it was any of those things....The real trigger was that the Japanese came in for their own reasons and sold an enormous amount of government bonds, and drove the 30-year government bond rate up through 10 percent.  And when it got through 10 percent, that got a lot of people thinking, "Gee, that's four times the return you get on equity.  Here we go, inflation again."  That, to me, is what really started the 19th--a worry by the Japanese about U.S. currency.(13)

By contrast, the Tokyo stock market's "Black Tuesday" (October 20, 1987) was a pale reflection of the Wall Street crash because the Ministry of Finance (MOF) instructed Japan's leading stockbrokers and institutional investors to stage a buying campaign.

As a result of liberalization, some of the traditional means by which the MOF formerly controlled the financial community have been watered down; replacing some of the traditional controls, however, is a new milieu of common interests between the MOF and the highly concentrated financial community.

The continuing power of the MOF can also be seen in the Japanese response to the Latin American debt crisis, which began on August 20, 1982 when Mexico declared itself insolvent.  Rescheduling and write-offs for Mexico, as well as for Argentina and Brazil, became an ordeal for international bankers.  In this case, the Japanese private sector was reluctant to embrace the national interest.  But the ability of the MOF to impose "consensus" on the Japanese banking system was revealed in the near unanimity of the response to its request that all banks join in the bail-out process.  As of 1988, the total exposure of U.S. banks in Latin America was $63.3 billion; that of Japan was $34.6 billion.  In the case of Mexico alone, U.S. bank exposure was $17.3 billion; that of Japan, $11.4 billion.

Japan is not, as Karl van Wolferen and others have implied, a country rendered incapable of pursuing a global strategy by a domestic political deadlock.  On the contrary, Japan is an oligopolistic society, conditioned by traditions of centralized feudalism, bureaucracy and imperialism, in which state and business collaborate to promote the comprehensive security of their country.  By orchestrating and manipulating the economic complementarities of other countries with each other and with itself, Japan seeks to emerge as a headquarters nation in the world economy, while the United States acts as a puzzled bystander.  Preoccupied with "the most important bilateral relationship in the world," the United States tends to be oblivious to the fact that if things continue along their present course, its bilateral relationship with Japan will soon be only one element of a larger, Japan-centered framework.  In light of this development, the implications of Japan's global strategy for America are the chief issues with which the United States should be concerned.

Leon Hollerman is a visiting scholar at the Hoover Institution on War, Revolution, and Peace.

Footnotes

1) Both the name and the mission of the Japan Export Trade Promotion Agency (JETRO) have been changed.  In 1961, its acronym was redefined as the Japan External Trade Organization, and its mission was changed to "import promotion."  The new policy was accentuated by Japan's "self-restraint" in the adoption of export quotas.  These quotas were consistent with the policies of expatriating production of items under quota.

2) Martin Fransman, The Market and Beyond, (New York: Cambridge University Press, 1990), as reported in the Financial Times, June 8, 1990.

3) Keidanren represents big business rather than small or medium-size enterprises.  Its membership includes over 100 organizations representing major industries (such as manufacturing, banking, insurance), regional interests, and approximately 800 of the major individual corporations of Japan.  Keidanren performs research on domestic and international issues as a basis for recommendations to government agencies, often takes initiatives and adopts positions in foreign as well as domestic affairs, and acts as a mediator in disputes among major interest groups.  It has a close relationship with the dominant Liberal Democratic Party, to which it makes substantial financial contributions, and, within the government, collaborates most closely with the MITI.  Its junior rival is the Japan Committee for Economic Development, whose members are individuals rather than organizations or firms.

4) Nick Garnett, in the Financial Times, July 29, 1987.

5) Wall Street Journal, July 10, 1990.

6) Journal of Commerce, June 6, 1990.

7) In 1989, the United States supplied 36 percent of Japan's agricultural imports.

8) New York Times, May 10, 1990.

9) J.P. Morgan, World Financial Markets, November 10, 1989.

10) Bank for International Settlements, 60th Annual Report, June 11, 1990.

11) International banking in the United States is likewise concentrated in the hands of a small number of American banks.  Four out of the 10,000 U.S. banking organizations account for roughly half of U.S. international assets; 10 of them account for a little over 80 percent.  Testimony of Alan Greenspan before the Financial Institutions Supervision, Regulation, and Insurance Subcommittee of the House Committee on Banking, Finance and Urban Affairs, May 14, 1990.

12) Nobuyuki Ueda, "The Considerable Monetary Strength of Japan," Economic Review, March 1990.

13) Los Angeles Times, May 7, 1989.