Like a torpedoed ship, Japan is sinking fast. A bad debt crisis has paralyzed its economy, and trillions of yen worth of “pump-priming” public works projects have failed to keep it afloat. From 1992 to 1997 economic growth averaged only around 1 percent a year, compared with 2.9 percent in the United States.
Only 10 years ago, Americans worried that Japan had become the terror of the seas. Major U.S. industries — automobiles, consumer electronics, semiconductors and steel — were giving way to Japanese competition. Trophy assets, from Rockefeller Center on one coast to Pebble Beach Golf Course on the other, were falling into Japanese hands. Many believed that a rising Japan and a declining United States were “trading places.”
Leading the chorus of doom was a group of commentators known as “revisionists.” Three American figures stand out: political scientist Chalmers Johnson, whose 1982 book MITI and the Japanese Miracle laid much of the intellectual groundwork for later writers; former Reagan administration trade negotiator Clyde Prestowitz, who authored Trading Places: How We Are Giving Our Future to Japan and How to Reclaim It and later founded the Economic Strategy Institute to advance the revisionist viewpoint; and former U.S. News & World Report editor James Fallows, who cast U.S.-Japan relations in Cold War terms.
Revisionists correctly observed that Japan practiced a unique form of state-directed insider capitalism that differed from America’s open-market system. The Japanese model, they declared, was beating the pants off free-market economies. As Johnson was fond of saying, “The Cold War is over, and Japan won.”
Revisionists thought that the heart of the Japanese economy’s superiority was its long-term focus. Japanese banks allocated capital according to government policy or long-standing corporate relationships, and companies and banks owned each other through cross-shareholding. That “patient capital” system allocated funds, not to achieve a high short-term return on investment, but to gain market share in strategic industries and thus, supposedly, to maximize long-term returns.
The revisionists’ big mistake was to believe that a handful of government planners could outthink millions of private decisionmakers.
Indeed, Johnson wrote that “Japan is dynamic because its managers devote themselves to competing with other companies at home and abroad, without having to serve the parasitic interests of shareholders or the passive interests of workers who have no stake in the viability of the company.” Prestowitz agreed, saying, “The single greatest weakness of U.S. industry in competing with Japan is lack not of management effort but rather of financial staying power. Our capital is both too expensive and too impatient.”
America, revisionists said, should emulate Japan. “In order to meet the competition of Japan,” Johnson warned in 1995, “other countries must copy or match Japan’s ‘keiretsu’-type company structures, its mercantilist industrial and trade policies, its ability to make capital available on a preferred basis to strategic industries, and its managerial incentives that impose long-term perspectives on company operations.”
Today, the revisionists’ assessment of the Japanese “threat” and their recommendations for U.S. policy look downright silly. Japan hasn’t attained worldwide dominance; on the contrary, it has suffered a “lost decade” of economic stagnation. The “Japan, Inc.” model hasn’t eclipsed Western-style capitalism; instead, there is an emerging consensus on both sides of the Pacific that the Japanese model has failed. Countries up and down the Pacific Rim are embracing market-oriented reforms in the wake of an economic crisis blamed widely on Japanese-style “crony capitalism.” Meanwhile, the United States, far from declining, is enjoying record-setting prosperity, despite the fact that at most it only toyed with the policies that the revisionists were pushing.
While none of the revisionists has explicitly renounced his views, Japan’s problems have caused some to change their tune. Prestowitz, for example, now says that the whole Asian model — once the supposed wave of the future — must be scrapped, and the sooner the better. “With much of Asia now on life support,” he writes, “it is time to recognize that the Asian brand of capitalism is dangerous to the world economy’s health and that it must be abandoned, particularly by Japan.”
Better late than never, Prestowitz finally has it right. To revive its fortunes, Japan must move to a system under which capital is allocated in response to clear and undistorted market signals. In sum, Japan needs to abandon the very elements of its system that the revisionists singled out as its greatest strengths.
The revisionists’ big mistake was to believe that a handful of government planners could outthink millions of private decisionmakers — could pick “strategic” industries, allocate capital in defiance of market signals and prop up the stock market and real estate values. Like so many others before them, they prided themselves on being sophisticated realists, when in fact their faith in bureaucratic miracles was hopelessly naive.