The System That Soured Toward A New Paradigm To Guide Japan

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Richard Katz
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The System that Soured:
Toward a New Paradigm to
Guide Japan Policy

A,

J l policy is driven by paradigms. Sometimes, as in the "containment" of the Soviet Union, the paradigm and its premises are quite explicit. Just as often policymakers operate via an intuitive mental map of
"how things work." But without some kind of mental compass policy cannot be made. And if the compass points in the wrong direction, rocky shoals lie in wait.
What makes America 's policy toward Japan special is that for the past two decades it has been "blessed" with not just one, but two paradigms. One has been given the label "revisionism" and the other "traditionalism." The bad news is that the two paradigms are diametrically opposed, fraught with bitter emotionalism, and wrong. Neither paradigm either predicted or can even explain in hindsight how the greatest economic miracle of the postwar era suddenly stopped dead in its tracks. Neither offers reliable guidance on how to respond to Japan 's current paralysis.
How is it that American Japanology got so far off course? The answer is that in the midst of the fierce U.S.-Japan trade wars, the cart of policy started leading the horse of analysis. Back in the 1950s and 1960s, scholars presented Japan as a complex, multifaceted country. By the 1970s analysis was increasingly shoehorned into one narrow and artificial confine: was or was not Japan "different" from the United States?
At one pole, the revisionists argued that Japan 's economic system was so
"different," so "superior," and so "threatening" that extraordinary remedies were needed. At the other pole, the traditionalists, seeking to maintain economic harmony with a vital ally, insisted that no special measures were neeRichard Katz is senior editor of the Oriental Economist Report, a monthly
English-language newsletter about Japan published in New York. This article is adapted from his new book, Japan: The System That Soured—The Rise and Fall of the Japanese Economic Miracle, published by M.E. Sharpe.
Copyright © 1998 by The Center for Strategic and International Studies and the
Massachusetts Institute of Technology
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I Richard Katz

essary, because Japan followed the same free market and free trade patterns as the United States.
As the years passed, the debate became increasingly acrimonious. Epithets like "Japan basher" and "intellectual geisha" were tossed back and forth. Pat Choate accused traditionalists of being Japanese "agents of influence" and was answered with charges of McCarthyism. Even in the worst moments of the 1980s, many academics produced illuminating new multidimensional portraits of Japan. Unfortunately, their work remained in the ivory towers, while the two polar views captured the op-ed pages, the White House, and
Capitol Hill.
Japan s economic
In the revisionist paradigm, Japan was a setup became an
"bureaucratic-authoritarian developmental ideological weapon. state" led by a super-rational, monolithic bureaucracy. Insulated from pressure groups, this bureaucracy issued edicts aimed at aggrandizing Japan 's national wealth and power.
The "puppet Diet" rubber stamped these edicts, while big business—which colluded more than it competed—reacted with "responsive dependence."
By skillful use of neomercantilist industrial and trade policy, Japan was steadily supplanting America in a world where trade was a zero-sum headto-head battle among nations.1
How, then, do revisionists explain Japan 's terrible economic straits today?
To their credit, some, like Clyde Prestowitz, "admit frankly" that their predictions about Japan 's economic prowess were wrong.2 Others, like Chalmers
Johnson, claim Tokyo is practicing a grand deception:
Within a few years they [the Japanese] will either offer their own leadership in Asia or else guide their people into accepting Chinese hegemony.
In order to buy time, Japan sends out messages of change, disarray, or catastrophe whenever it looks like the Americans might be about to take action.3 The traditionalists ' Japan is a mirror-image of the revisionist caricature. In their portrait, business collusion and pervasive protectionism are airbrushed away; Japanese politics is a case of a simple, pluralist, free-market democracy; and the role of industrial policy lies somewhere between irrelevant and deleterious. Japan 's past economic success was based on nothing more exotic than high savings, technology, hard work, and fierce competition as "individuals and enterprises respond [ed] to the opportunities provided in quite free markets for commodities and labor."4
How, then, do traditionalists explain Japan 's economic crisis? Some discount it as the "temporary aftereffect" of the late-1980s ' financial bubble.
But eight years is a long time for such a temporary effect. Moreover, this ex44

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planation begs the question, Why did the bubble occur in the first place?
Beyond that, many of those who only yesterday held up Japan as a paragon of free enterprise today say the opposite: that Japan suffers from excessive government involvement in the economy.
With such distorted maps, no wonder American policy so often veered off in wrong directions. Revisionists contended that, if American trade negotiators demanded "numerical results" and threatened economic sanctions, Tokyo would cave. Clyde Prestowitz even gave assurances, based on private conversations with Japanese leaders, that Tokyo would agree to specified import goals.5 Clinton tried it out and it blew up in his face. Since then Tokyo has become even more intransigent.
Traditionalism has fared no better. Traditionalists typically minimized trade issues as a mere irritant in an otherwise sound relationship. But the impotent trade policies resulting from this view created the opening that revisionism filled. The very posture that traditionalists adopted to maintain good U.S.-Japan ties helped lead instead to their corrosion.
Today, while Asian economies burn, Japan fiddles around. Politically too paralyzed to save even itself, Japan has no inclination to rescue its stricken
Asian neighbors. Global financial markets become increasingly anxious as
Tokyo stands aside while its banks sink further into the morass. And yet neither the revisionists nor the traditionalists can suggest any good way for
Washington to get Japan to move off the dime or even to reliably indicate what is and is not achievable.
Clearly, we need a new paradigm to guide policy, one that coherently explains both Japan 's economic ups and downs, its past successes and its current policy paralysis. In my view, such a paradigm would include the following elements:
A "system-that-soured" economic model. The so-called Japanese economic model was a marvelous mechanism for turning a poor country into an industrial powerhouse in record time, but it became counterproductive once
Japan achieved economic maturity. By the 1970s the focus of industrial policy had shifted from promoting future winners to protecting current losers.
A "governance-by-negotiation" political model.6 Japan 's political system allows all the special interest Lilliputians—from gas station owners to construction firms to small retailers and even veterinarians—to hog-tie the
Gulliver of national interest in millions of tiny threads. During the highgrowth era, this system helped to ensure that the rapidly growing economic pie was shared by all. But it has left the government unable to shift gears even when vital national interests demand that it override all the special interests. Japan was unable to end its obsolete industrial policy regime in the
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tive politics today.
A road map to the political dynamics of the future. The need for wholesale reform and resistance to it will dominate Japanese politics for the foreseeable future. Japan 's current stalemate gives rise to powerful internal forces, which seek major renovation in both economics and politics, including more market-opening to the outside world. But true reform will take many years.
A guide to policy. In light of the above, the United States should reposition itself and change from the perennial demandeur pounding on Tokyo 's door to the ally of the "new Japan" seeking to emerge from within the "old
Japan."
This essay is part of the search for the new paradigm. But this search cannot get off the ground without understanding why Japan analysis went off course in the first place.

The Web with No Spider
Back in the 1950s and 1960s, before the trade wars erupted, descriptions of
Japan 's political economy were both more nuanced and more straightforward. Evaluations differed, of course, but the basic descriptions did not. No one at the time would have thought of denying the intrusive role of the state in the economy or the complex combination of collusion and competition prevailing in the corporate world. On the other hand, few experts would have argued that these features added up to a monolithic authoritarian state.
Surely, if anyone stood for orthodoxy in that period it was Edwin
Reischauer, John Kennedy 's ambassador to Tokyo and the co-teacher of
Harvard 's famous "rice paddies" classes. His magnum opus, East Asia: Tradition and Transformation, has been the standard classroom text for three decades and was recently named by Foreign Affairs as one of the most important books of the past 75 years. In the chapter on "The New Japan" in the 1973 edition Reischauer reports matter-of-factly:
A final factor of great importance for economic growth was the particular
Japanese combination of free enterprise and government guidance. . . . A number of points may be noted: 1) Banking credit, backed ultimately by the government, made heavy capital investment possible. . . . 2) The government was more deeply involved in planning than the government of any other nonsocialist state. . . . Growth industries were targeted, production goals were set, and foreign markets were estimated. Growth was rewarded with high depreciation, cheap loans, subsidies and light taxes. . . .
3) Infant industries, particularly in new technologies, were protected by successive walls of tariffs, quotas, currency controls, foreign investment
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controls, and bureaucratic red tape. . . . 4) Japanese businessmen often chafed at bureaucratic regulations and government interference and argued that it was their own efficiency and hard work that was responsible for their success. This was not untrue... . Yet the attitude of businessmen toward the government took for granted a favorable supportive business climate such as did not exist in most countries.7

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In a 1965 essay in one of the first authoritative collections on Japan, economist Martin Bronfenbrenner reported on the pervasive role of industrial cartels:
What are those "peculiar institutions of the Guided Economy?" . . . [I]n resistance to Occupation nudges toward free competition, they consist of alliances between trade associations (cartels) and the appropriate sections of a
Ministry, normally MITI [the Ministry of International Trade and Industry].
These alliances divide responsibility for maintaining profitable prices and allocating output limitations in case excess plagues the industry.8
The complexities of Japan were best captured by economist William
Lockwood in his very influential 1965 essay, "Japan 's 'New Capitalism '":
The metaphor that comes to mind is a typical Japanese web of influences and pressures interweaving through government and business, rather than a streamlined pyramid of authoritarian control. . . . A web it may be, but a web with no spider . . . .The industrial bureaus of MITI proliferate sectoral targets and plans; they confer, they tinker, they exhort. This is
"economics by admonition" to a degree inconceivable in Washington or
London. Business makes few major decisions without consulting the appropriate governmental authority; the same is true in reverse.9
What does this "web with no spider" look like?
To start with, Japan was a highly politicized economy. Particularly in the high-growth era, major decisions about what industries existed, what companies entered those industries, where investment levels and prices should be, and how to save jobs in declining sectors were shaped by negotiations and lobbying rather than either the market alone or bureaucratic edict.
Where both revisionism and traditionalism go wrong is in their presumption that the political process in Japan automatically allows the country to shift gears in accordance with changes in the national interest.
In the revisionist schema, a bureaucracy that understands the national interest simply imposes itself on a Confucian society, which willingly submits to rule by the mandarins. The traditionalist schema posits a kind of Darwinian survival-of-the-fittest scenario in the form of an atomistic market and pluralist politics. These supposedly combine to make steady incremental shifts in the national scene.10
In reality Japan 's politics is a more complex "governance by negotiation," which combines heavy government intrusion with powerful societal pressures on the government and "consensus politics" that virtually force Tokyo
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to accommodate all special interests. Rather than a Darwinian struggle, the political economy is a communal mineral bath, in which no important constituency, no matter how inefficient, is allowed to drown. Japan is not so much a pluralist as a bargaining democracy.
To see how this works, it is necessary to switch metaphors and to peel the layers of the onion representing MITI 's control over foreign exchange during the high-growth era. Until 1964 not a single good could be imported, not a single patent licensed, not a single foreign investment made without the express approval of MITI. At first glance this seems like simple trade protectionism, a tool of industrial policy. For example, during a brief interlude of free trade after the end of the postwar U.S. occupation in 1952,
Japan 's embryonic auto industry was almost wiped out by cheap European imports. MITI quickly slammed on the brakes and allowed only negligible imports until 1965. By then the industry could hold its own and even exported 10 percent of its output. Even so, the quota system was replaced by a prohibitive tariff.
But peel off another layer of the onion and currency rationing can be seen to have deeper ramifications. Forty percent of all industrial output in
1971 consisted of products—from color TVs to petrochemicals to air conditioners—that did not even exist in the Japanese market in 1951. These new products required foreign technology, and that meant foreign exchange for royalty payments. Between 1950 and 1960, 28 percent of all investment by importing firms consisted of technology imports. Thus until the system ended in 1964, the power to allocate or deny foreign exchange was the power to determine which industries-and even which companies-got off the ground. There is, of course, a famous story that it took Sony six months to convince skeptical MITI officials that it would not be a waste of $25,000 to license the transistor. After all, even the product 's American inventor,
Western Electric, thought it had little commercial value.
But Sony 's case is far from unusual. In the effort to ensure economies of scale that were indispensable to infant industry promotion, MITI usually tried to limit entry to a new industry. Only four firms were initially let into automobiles, and the same was true of televisions. Only one company, Toyo
Rayon, was initially given a license to import nylon technology. As the market expanded additional firms were allowed in. For polyethylene the first licenses went to three of the big keiretsu (corporate groupings): Sumitomo in
1958, Mitsubishi in 1960, and Mitsui in 1962. By the end of the decade 10 firms were involved.
More often than not, political lobbying made such fine-tuning impossible.
Once MITI designated an industry as strategic, major firms had a virtual
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guarantee against bankruptcy. Thus such industries always attracted far too many entrants to maintain economies of scale. Yet MITI was often unable to resist when each powerful keiretsu lobbied for its own contender. If growth and increases in efficiency were fast enough, as was often the case in the catch-up era, the policy worked out anyway. Automobiles are a classic case.
In other industries, such as petroleum refining, it led to costly white elephants. Getting in on the ground floor was always critical, because in
Japan 's corporate setup—where financing and distribution ties are often locked in—entrenched industry leaders are often able to block latecomers.
For example, hardly a major new consumer electronics firm has entered since 1960.
Once a firm is in the tent, it has protection,
I here are many but it is hard to get in. spiders in the
Japan 's corporate setup is not the "liveand-let-die" capitalism we associate with a
Japanese web, often free market. Instead, it is a complex interplay with conflicting of collusion and competition best captured by agendas. Eleanor Hadley 's famous phrase, "cut-throat oligopoly." The government regularly authorized firms to form cartels so as to avoid bankruptcy during periodic downturns or bouts of excess capacity. The rationale was to reduce risk, thereby inducing firms to invest at higher rates. Cartels fixed prices and imposed limits on capacity and output. Companies that did not want to join were often coerced into doing so. After all, a cartel cannot operate if a "betrayer" (in Japanese corporate parlance) is undercutting its monopoly prices. In a famous case in
1978, Tokyo Steel, an efficient minimill, was threatened with fines because of its resistance to joining a cartel.11
But this solution created its own problems, because during slumps production quotas were assigned pro rata based on market share. Consequently, every time the industry recovered, firms raced to build new capacity so as to enlarge their share. This would create yet another cycle of overcapacity and the need for yet another cartel. Industries such as shipbuilding, cement, steel, chemicals, machinery, electronics, and textiles formed cartels over and over again.12
Both revisionists and traditionalists limit themselves by sticking to fixed categories: "it 's the government"; "no, it 's the market." But in Japan 's system the market and the government are not hermetically sealed entities. Consider the rebellion by Sumitomo Metals in 1965, when MITI ordered a 10 percent production cutback on all members of the steel cartel. Sumitomo claimed that MITI was biased in favor of older steel firms at the expense of
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newer, more efficient ones. When MITI threatened to deny Sumitomo the foreign exchange needed to import coking coal, Sumitomo caved in. From
Sumitomo 's standpoint, MITI was the hired gun of Sumitomo 's inefficient competitors. From the standpoint of the steel cartel, MITI was the "long arm of the law," enforcing collective industry interests on a selfish "free rider."13 The ostensible rationale for cartels during the high-growth era was to promote investment in rising sectors. In many cases it probably helped. But companies liked cartels because they limited price competition and helped entrenched firms to keep out newcomers—especially foreigners, who might cause "confusion in the market." Over time the economy became increasingly cartelized, especially among the least competitive sectors. By 1970, 30 percent of manufacturing was cartelized. As a result, in half of manufacturing market-determined prices did not prevail.
As early as 1975, economist Hiyora Ueno warned that cartels could become a Frankenstein monster:
[GJroups and organizations that were artificially created to meet the need of a specific system tend to grow with this system into powerful champions or political pressure groups that no longer be controlled by this system.14
Of all the cartels in place in the early 1980s, almost half had been in place for 25 years and more than two-thirds for longer than 20 years.
No one denies that there were powerful "spiders" (ministries) in the Japanese web. But there were many spiders, not just one, and they often had conflicting agendas.
The classic case is MITI 's perennial battles with the Bank of Japan over state guidance of private credit. In those capital-scarce days, companies depended on banks for funds, and the banks in turn depended on the Bank of
Japan. This gave governmental and industry authorities great leverage over the lending activities of private banks. Through the mid-1960s, MITI, the
Bank of Japan, and the Federation of Bankers Associations all had official lists in which industries were prioritized for receiving, or not receiving, bank funds.
Unfortunately for the banks, the respective lists often conflicted. MITI was partial to the emerging capital-intensive heavy industries such as auto and steel, which would be future earners of valuable foreign exchange. But the more cautious Bank of Japan preferred that scarce capital be reserved to light, labor-intensive industries such as textiles, which were current exporters. In one of the more famous fights, which lasted two years (1949-51), the Bank of
Japan fiercely resisted MITI 's efforts to promote the auto industry.
Another famous early fight occurred when the Bank of Japan successfully pressured banks not to lend to then-tiny Kawasaki Steel in 1950. Kawasaki wanted to build a new plant to make steel sheet for the emerging auto and
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consumer electronics industries, rather than the heavy plate still favored by
Japan 's big three steelmakers. MITI officials close to the big three backed the Bank of Japan 's obstruction. Yet other MITI officials who favored the new industries lobbied for Kawasaki. The finance minister—and future prime minister—Hayato Ikeda helped Kawasaki outflank the Bank of Japan by securing funds from both the securities industry and the World Bank.
The bottom line is that Kawasaki 's ability to finance a new product was decided neither by the cash flow projections of atomistic profit-maximizing banks nor by the cool-headed developmental strategies of apolitical officials.
It was decided by politics—by lobbying and negotiations.

Governance by Negotiation: Strategy versus Compensation
Lobbying and negotiations were common throughout the political economy.
In hindsight this should not be surprising. How else could a purported "developmental state" resolve the central political problem of rapid development, that it creates losers as well as winners? In a free market economy leaders can lay the blame on impersonal market forces. But the very nature of state-promoted development is that human beings decide who receives what benefits at whose expense. This being the case, why are steel company profits are more deserving than coal miners ' jobs?
In a democratic state the claims of the losers cannot be denied by government edict. If worse comes to worse, the losers could always vote for the socialists and communists. And if the government 's party, the Liberal
Democrats (LDP), were to fall from power, what would become of all the officials ' grand plans?
This was no idle threat. In the early 1970s, with the rise of urbanization and leftist victories in several cities, an extrapolation of voting trends portended the end of LDP rule. To stay in power the LDP had no choice but, in
Kent Calder 's term, to "compensate" the losers.15
One of the losing sectors was small businesses, a traditional LDP bastion twice as large as the vital farm vote. During the late 1950s and 1960s, when the LDP majority seemed secure, the government had favored larger modern companies over small businesses. Many small business owners resented this. By 1971 one-sixth of all small businesses were involved with the communist-affiliated small business federation, Minsho, and even more were voting for the socialists or communists.
To counter the threat, the LDP offered a crass payoff. It distributed billions of dollars disguised as no-collateral government loans to more than haif of the nation 's small businesses. Meanwhile, the Finance Ministry overlooked largescale tax evasion by small businesses on as much as 40 percent of income. On
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the legislative front, in 1973 the LDP passed the famous Large-Scale Retail
Store Law, which allowed small retailers to obstruct the expansion of department stores, thereby enabling them to raise prices. The LDP even prohibited pharmacies from opening up branch stores. When the Supreme Court declared this move unconstitutional, the Health and Welfare Ministry issued a sub-rosa directive for the drug producers not to sell to any such pharmacies.
Drug companies who did not wish to see their drug approval applications drag on for years in the Health and Welfare Ministry obliged.
From the LDP 's standpoint, it worked beautifully: Minsho membership declined after 1973. Meanwhile, to retain the farm base the LDP bought votes with billions of dollars of subsidies. By the 1980s more than 75 percent of all farm income came from subsidies and price support programs—a percentage far higher than in any other industrial state, including France. The LDP repeatedly turned down requests by the big business federation, Keidanren, to lift restrictions on agricultural imports.16
The ministries, far from being insulated from societal pressures, are often captives of the very industries they are supposedly guiding. Avoiding "confusion in the market" is a leading principle. Until recently Japan restricted gasoline imports and banned self-service gas stations. The consequent price-fixing not only subsidized Japan 's notoriously inefficient refiners but also sustained
60,000 gas stations, twice the free market level. When MITI official Morihisa
Naito tried to call a halt to this, his own colleagues at MITI berated him for jeopardizing their futures. Like most officials, they expected to get cushy postretirement sinecures at the very companies they now oversee.
Another instance, laughable in its own right, illustrates how millions of
Lilliputian threads bind Japan. Recently a Health and Welfare Ministry official proposed ending the mandatory annual distemper shots for dogs, arguing that no case had been seen for decades. When veterinarians pleaded to higher-ups that this would hurt their income, the regulation was preserved.
The bottom line is this: even if all sections of the Japanese state had been single-mindedly devoted to development—which was not the case—it nonetheless could not have acted solely on that priority. Government policy was continually confronted with the trade-off between promoting winners and compensating losers, between producing wealth and distributing it.
Tokyo did not choose between these two options—it did both. As James
Vestal documents, Tokyo 's "pro-growth" measures gave aid to such key export industries as shipbuilding, steel, synthetic fibers, and automobiles.
Meanwhile, its "anti-growth" policies handed out heavy subsidies and abundant government loans to preserve employment in such flagging sectors as coal mining, sake breweries, farming, and small business. Over time the balance shifted. Pro-growth elements predominated before 1973, anti-growth
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elements after 1973.17
The trade-off between strategy and compensation permeated even the core operations of Japanese business. This is shown in one example from the energy industry documented by Richard Samuels.18 During the 1950s the heavy industries being promoted by MITI had a great desire to switch from expensive domestic coal to cheaper imported oil. And yet this would end the jobs of hundreds of thousands of coal miners, who made their displeasure felt in long and sometimes violent strikes.19 The political pressure was so strong that in 1955 MITI restricted the number of oil-fired plants that the utilities could build—at the very time that other sections of MITI were trying to promote domestic oil refiners. At various times MITI told the steelmakers and utilities that to get vital foreign exchange they had to come to an agreement with the coal association on purchases of certain amounts of domestic coal at high prices. Eventually the users rebelled and direct state subsidies had to replace pressure on consumers. While MITI claimed its program was aimed at "easing" the downsizing of coal, the "easing out" subsidies lasted until 1986.
The same pattern continued into the 1970s and 1980s. While one part of
MITI was protecting Japan 's inefficient oil refiners through import restrictions, the petrochemical industry had to lobby another part of MITI for either the right to buy cheaper foreign feedstock or lower prices for the domestic product.
Not all industries functioned in this manner, of course. And once MITI 's control over foreign exchange lapsed, its leverage plummeted. But meanwhile, the basic character of Japanese politics, the economy, and the Japanese company had been shaped. As John Haley aptly sums it up in his essay
"Governance by Negotiation":
This process of negotiation with bureaucratic accommodation to interests with access to the Diet or other sources of power is, I believe, an accurate paradigm of the Japanese patterns of governance. Consensus was necessary to achieve compliance and compromise was necessary to achieve consensus.20

Why the System Soured
As long as strategy and compensation remained in balance, the system worked. But beginning in the 1970s the demands for compensation rose beyond the ability of economy to meet them. The parasite began destroying the host.21
Japan 's economic maturation set the stage, but it was Japan 's poor response that sealed its doom. It is now clear that the so-called Japan ecoTHE WASHINGTON QUARTERLY • AUTUMN 1998

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nomic model worked solely when it was used as the "economics of catch ' up." It led to success only when it was applied to genuine infant industries, that is, industries that had not yet acquired the economies of scale or learning 'by-doing efficiencies necessary to becoming world-class competitors.
These were industries such as automobiles, electronics, and steel that, if given a jump-start of protection and promotion, could eventually become powerful exporters without further government aid.
The very nature of an economy in the state of catch-up is that it contains a plethora of true infant industries. Consequently, on balance, catch-up era industrial policy benefited Japan. But by the 1970s and 1980s, when Japan had became a more mature economy, there were no more infant industries.
"Developmental state" policies make sense only for an economy still in the state of development, but Japan refused to let go of the industrial policy model. Even worse, the tactics of protection and promotion were now used to shield losers from competition at home and abroad.
As this happened, Japan turned into a deformed dual economy—a dysfunctional hybrid of super-strong exporting industries and super-weak domestic sectors. The dual economy could be sustained only as long as the efficient exporters earned enough to keep propping up the weak domestic sectors—in other words, only as long as "strategy" was sufficient to pay for
"compensation." But over time the burden became too great. In response, many of Japan 's efficient exporters fled offshore. Already more Japanese consumer electronics are made outside of Japan than at home; soon the same will be true of cars. As Japan 's efficient sectors hollowed out, the domestic economy became increasingly dominated by its low-productivity sectors. As a result, even if Japan were to operate at full capacity today, the fastest it could grow is 2 percent—half the rate of 1975-90.
But the macroeconomic pathologies created by the dual economy mean
Japan cannot even reach full capacity and a 2 percent growth level. Due to the high prices engendered by cartelization, the capital share of national income is too high and the labor share too low. Moreover, too little of the profits are returned to households via dividents and/or interest. The result is that Japan is chronically incapable of consuming all that it produces; it suffers a kind of "economic anorexia." Corporations still rake in cash and therefore pile up business savings at the same rates as in the high-growth era. But they now have far fewer outlets for profitable investments within
Japan. Thus every year excess cash flow to the tune of 3—4 percent of GDP piles up in corporate treasuries and bank vaults, whence it is desperately thrown into every foolish property venture in sight from Tokyo to Thailand.
Excess business savings mean that purchasing power is drained from the economy but is not being plowed back into it.
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The only way for Japan to make up the shortfall in demand is to run either big trade surpluses or big budget deficits—or both. In fact, during most of the period between 1973 and 1985, nearly half of all GDP growth came from a growing trade surplus. When Japan cannot expand the budget deficit or trade surplus sufficiently—as is happening now—then it cannot grow.
The 1980s bubble was Japan 's false answer to anorexia. In 1986, as a soaring yen brought an end to export-led growth, the authorities switched to excessive monetary stimulus to artificially boost investment. Once the bubble popped, anorexia returned with a vengeance, as did a huge amount of bad debt created by the bubble. That bad debt, estimated at $1 trillion, or about
30 percent of GDP, has now combined with anorexia to stifle growth.

The Rise of Tanaka: Compensation Seizes the Throne
All of this begs the question, Why did Japan respond so inappropriately?
Why did compensation triumph over strategy? It is not as if no one sounded the alarm. In 1975 economist Hiroya Ueno had warned:
One might say that this [the late 1960s] was a period in which Japan was drunk with the spectacular results of its industrialization plan and its industrial policy. . . . We should have recognized that industrial policy, which had been justified until then, and systems adopted on its behalf, had already finished their roles.22
The initial impetus for Japan 's renewed wave of protectionism and cartelization was the deep industrial slump that followed the 1973 oil shock and the global economic slowdown. Industries such as aluminum, petrochemicals, shipbuilding, textiles, and basic steel were now permanently priced out of the market. From 1973 to 1982 troubled industries, accounting for half of
Japan 's manufacturing output and a third of its factory workers, suffered virtually zero growth.
Rather than accept downsizing, companies and workers cried out for relief. Tokyo gave it to them. The reason was that the economic crisis of the
1970s coincided with a political crisis for the LDP The very success of statepromoted growth had undercut the demographic voter base for the government 's party. LDP rule had always depended on solid support from farmers, mom-and-pop retailers, and similar groups—along with gerrymandered districts that gave farmers up to five times as many Diet seats per capita as urban voters. Of all the LDP diet representatives elected in 1972, only 10 percent came from the main metropolitan areas.
Urbanization, however, was gradually eliminating the farm vote at the same time that the government 's favoritism toward big business was alienating small business owners. The LDP 's share of Diet vote steadily fell from 60
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percent in the 1950s to an even split with the opposition by 1969 and to less than the combined votes of the splintered opposition during the entire
1970s. The LDP had to find a way to shore up its existing base while searching for ways to appeal to rising new demographic groups formed by the urban white-collar "salarymen" as well as blue-collar workers hit hard by the
1970s downturn. The LDP did find a way and, with one brief interruption, it has stayed in power ever since. But the economic cost was severe.
The LDP 's solution was the corrupt "money politics" of Kakuei Tanaka.
In 1972, over the objections of big business, the
LDP made Tanaka prime minister. For the next two decades, even after Tanaka was jailed in a
Narrow groups corruption scandal, the Tanaka faction would be can hold the the "shadow shoguns" ruling Japan.23 It could nation hostage. make or break prime ministers. Even today not only Prime Minster Ryutaro Hashimoto, but most opposition leaders other than Naoto Kan are scions of the Tanaka faction.
By elevating the Tanaka faction, Japan 's leaders greatly exacerbated the ability of small interest groups to hold the entire nation in thrall. Throughout the postwar era the voting system in Japan has acted to promote special interests ("compensation") over the general interest ("strategy"). Given the degree to which the system skewed things toward big business in the highgrowth era, perhaps this mechanism served as a useful way to redress the balance. However, what was tolerable in the catch-up era became a recipe for disaster after 1973.
Up until the 1994 electoral reform, Japan had a unique electoral system.
Instead of a single Diet member representing an entire district, each district in Japan elected three to five members of the Diet, with every voter getting one vote. That means a Diet member can win an election with only 15-20 percent of the vote instead of 51 percent as in most countries. Because this system splinters the opposition, it has contributed to the LDP 's monopoly on power. In a five-member district the LDP might win three seats, the socialists one, and another party one.
The downside is that this system promotes parochial thinking and vested interests. The key to winning with such a narrow slice of the vote is not by focusing on national issues, but by assembling organizations of personal support groups, called koenkai. The koenkai are based on local vested interests groups that benefit from state largesse, such as farmers, retailers, doctors, construction firms, local banks, or even social groups. Individual Diet members may have dozens of different koenkai in their district. They secure reelection by mediating with the ministries to secure goodies for their koenkai.
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Leonard Schoppa comments:

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Such clientelism, not uncommon in democracies of all types, might not have been a large problem had it been pursued only be a few politicians in a few sectors. When such strategies were pursued by hundreds of Dietmen in a wide range of issue areas over an extended period of time, however, they created a system that was extraordinarily biased toward private goods
[i.e. special interests]. Over time, whole Ministries were sucked into this particularistic system.24
The common myth is that in Japan, Inc., individuals, companies, and special interests are all subordinated to the needs of the nation. The reality is often the opposite. All too often very narrow groups can hold the entire nation hostage. Japan 's embargo on rice imports is just the most famous case. This, suggests Schoppa, is one reason why crisis and foreign pressure (gaiatsu) are often needed to overcome incredible inertia.
As long as the LDP held a stable majority, the koenkai merely had seats at the table of power. Those with broader concerns, mostly aristocratic former bureaucrats, sat at the head. With the arrival of Tanaka the koenkai moved up. The number of cabinet posts held by former bureaucrats declined from 50 to 30 percent. In addition, more and more of the ex-bureaucrats serving in the Diet came from compensation-oriented ministries, such as
Posts and Telecommunications, Construction, and Agriculture, rather than the elite MITI and Finance and Foreign Ministries, as in the old days.
The government was now controlled by a political machine far less interested in economic strategy than in political compensation—especially compensation for themselves via huge kickbacks worth up to 3 percent of the gross value of public works projects. Consequently, at the very time when voters ' demands for compensation were rising, so was the willingness of the
Japanese state to supply that compensation.
To grab the new electoral base without losing the old one, Tanaka spent the government 's money like water. Money was lavished on the traditional government loans to small business, farm price supports, construction projects, and so forth. At the same time, expensive new programs were introduced to satisfy the demands of the urban middle class: health insurance, social security and education, parks and anti-pollution measures.
Not content to spend real money, Tanaka pressured the Bank of Japan to print more. This set off a round of 30 percent inflation known as "crazy prices," creating Japan 's first bubble. The budget, which had shown a small surplus in 1973, quickly ballooned into a deficit equal to 5.5 percent of GDP in 1978. Since the deficit also filled a need for fiscal stimulus in the post-oil shock slump, few people objected. By 1980, however, the LDP had secured its rule, and a growing trade surplus was providing enough economic stimulus.
Thus in the early 1980s big business demanded, and won, fiscal austerity.
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With spending now constrained, the LDP turned to a new, less transparent method to support the koenkai: high prices in the private market. Such regulations as the Large-Scale Retail Store Law, a proliferation of "recession cartels," and dango (bid-rigging) in construction allowed Japan 's inefficient sectors to charge monopolistic prices and maintain employment. Japan 's notorious high prices are a form of disguised unemployment and an income transfer mechanism. Consumers pay high prices to producers, and efficient producers pay high prices to the inefficient. High prices, the corporate cartels required to sustain high prices, and the import barriers required to sustain the cartels are all "off-budget" LDP support for the koenkai.
The LDP 's ability to rule as a catch-all coalition of the efficient and inefficient always depended on good growth. But as time passed, Japan 's dual economy exacted the price that most "distributional coalitions" exact. It did not just redistribute income; it reduced efficiency and lowered social wealth.
The koenkai eroded the resources needed to pay them off. In 1990, with the crash of the stock market, Japan 's political-economic system keeled over.

The Crisis of American Japanology
Although there might be some disagreement with our analysis, very little in the description given here would seem unfamiliar to an American
Japanologist of the 1950s and 1960s. Back then few of the defining characteristics of Japan 's political economy—the state 's role in the economy, industrial cartels, the power of vested interests—were surprising or exotic or even particularly Japanese. Nor were they expected to last.
This was because, although Japan operated very differently from the
United States, it had much in common with other newly industrializing countries. And that is exactly what Japan was at the time. In 1960 its per capita GDP was no higher than Chile 's. Everyone knew that in newly industrializing countries all over the world, government played a strong role and monopolies were common. Under conditions of scarcity and a dearth of modern market institutions, the government, for better or worse, tended to fill the gap.
This understanding was even incorporated into the rules of the Organization for Economic Cooperation and Development, the International Monetary Fund, the World Bank, and the General Agreement on Tariffs and
Trade. Developing countries, including Japan, were removed from the tougher strictures applied to advanced countries. Infant industry protection and promotion by these countries was accepted. But those same rules said that as a country grew richer, it would have to graduate and adhere to international norms of free trade, currency convertibility, national treatment of
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foreign investment, rules on government subsidy, and so forth.
The consensus among scholars of the 1950s and early 1960s was that once Japan graduated—as it began doing in the mid-1960s—it too would become a normal, modern, capitalist nation. In short, Japan 's many differences from the United States were not an artifact of Japanese culture, but a result of clear and identifiable rules and policies. When the rules changed, so would the practice.
Typical of the thinking in this era is this 1972 passage by economist Gary
Saxonhouse:
While these [trade and investment] restrictions may well have once played a central role in calling forth a more socially optimal amount of modernizing activity on the part of Japanese management, why do they remain important today? . . . The very low ratio of manufacturing production, the lack of intra-industry specialization, the high ratio of raw materials to total imports, cannot be explained simply by Japan 's resource endowment, its physical distance from other countries. . . . Other developed countries with comparable resource bases do not exhibit this Japanese phenomenon. Similarly, as distance and cultural distinctiveness present no problem for Japanese manufactured exports and raw material imports, why should manufactured imports present a special case? Japanese trade restrictions probably play an important role in explaining this unusual pattern."25
Saxonhouse quoted Japanese officials, who gave assurances that once Japan adhered to international rules there would be "a radical change in [its] import structure."
Then in the late 1960s and early 1970s something very surprising happened: Japan 's rules did change. By the mid-1970s it had pretty much graduated in formal terms. Yet the real operation of both the internal economy and international trade patterns did not change nearly as much as had been expected. Japan still barely imported any manufactured products that competed with domestic producers. Foreign investment remained negligible (and still does). And yet its exports flooded U.S. markets, seeming to decimate one industry after another, from television to steel to computer chips to automobiles.
This unanticipated situation not only set off chronic and bitter trade frictions quite unlike U.S. disputes with any other country; it also created a huge intellectual dilemma. Why was there so little change in Japan even though it seemed formally open? Why was Japan able to grow so fast even though it seemed to violate the norms of free market economics? How should America respond to this unanticipated development?
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came an ideological weapon on both sides of the trade debates. In 1970 business consultant James Abegglen came up with an explanation of Japan 's unique behavior that immediately caught fire: the "Japan, Inc." theory. In
Japan, unlike America, argued Abegglen, corporations and employees did not strive to maximize their own welfare. Rather, they all played assigned roles in a unified national effort:

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Perhaps "Japan, Inc." . . . best indicates how the system functions. In this analogy, the Japanese government corresponds to corporate headquarters.
. . . The country 's large corporations are thus analogous to corporate divisions. . . .Moreover, "Japan, Inc." is a special kind of corporation: a conglomerate in U.S. terms. A conglomerate can channel cash flows from low-growth to high-growth areas. . . . The result is that the conglomerate is in position to dominate a new industry by setting prices so low that existing competitors cannot finance adequate growth. . . . In all these senses, "Japan, Inc." is indeed a conglomerate, a zaibatsu of zaibatsu. The
Bank of Japan is the financial center, and with the Bank 's help each rapidly growing industry can incur more debt than it could on its own. . . .
Hence the economy as a whole funds new enterprises, holds prices down, competes successfully in the world market, and earns large profits.26
Suddenly, the Japanese web had a very big spider.
In the United States the Japan, Inc. concept was quickly adopted by both industry lobbyists and government officials. In 1971, the year America devalued the dollar and applied a 10 percent import surcharge, Nixon 's Assistant to the President for International Economic Affairs Peter Peterson described Japan in language straight out of Abegglen 's text. Japan, said
Peterson, is: a type of informal conglomerate . . . a form of business organization which, through strong financial management, can channel cash flows rapidly from low-growth to high-growth sectors. The Bank of Japan is the financial center and, following guidelines of the Planning Agency, determines the nature and direction of growth.27
(Ironically, Peterson later became chair of the New York Japan Society and
Abegglen now criticizes American businessmen who complain about Japan 's closed market.)
Once the Japan, Inc. concept caught on, the whole nature of discussion about Japan changed. Almost overnight, simply to acknowledge what had previously been standard—that Japan 's government had been effective in promoting industry and that Japan practiced pervasive protectionism— seemed the equivalent of acquiescing to the cries for special measures to deal with Japan. Even domestic U.S. policy and analysis of Japan became hopelessly intertwined. Chalmers Johnson argued that industrial policy had worked so well in Japan that America should emulate it. Charles Schultze of the Brookings Institution, determined to see that the United States not
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adopt industrial policy, contended that it had not worked in Japan either. It was in this heated atmosphere that the polarization of traditionalism and revisionism developed.

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Revisionism Round I: "Japan Is Just Like Us"
What is now known as traditionalism got its start in 1976 when the
Brookings Institution published a huge volume entitled Asia 's New Giant.
Edited by two prominent scholars, Hugh Patrick and Henry Rosovsky, it was the product of years of study by two dozen researchers. As neoclassical economists, Patrick, Rosovsky, and other contributors had an innate skepticism that industrial policy could improve on the market.28 Beyond that, there was a clear intent to discredit the Japan, Inc. caricature and its justification for special treatment of Japan.
Anti-Japanese articles have been easy to find in newspapers and magazines, especially amid the tension of 1971-72; often these featured sinister descriptions of 'Japan, Inc., ' that mythical, all-powerful instrument of the national will. If it really existed, presumably no one could compete with it according to gentlemanly rules of the game and therefore special rules might be permissible and desirable.29
Into this effort Patrick and Rosovksy, joined by former Assistant Secretary of
State Philip Trezise and some of the other contributors, introduced the necessary correction—and then went far beyond it.
And that is the great irony. The analysts, now known as traditionalists, were in fact the original revisionists. They loudly proclaimed that they were iconoclasts out to revise what Trezise called "a more or less standard political model."30 Unfortunately, in targeting the Japan, Inc. theory they also overturned much of the traditional analysis of the Reischauer-BronfenbrennerLockwood variety. They threw the baby out with the bath water.
The Brookings authors insisted that "what happened to the Japanese economy after World War II cannot be described as miraculous. . . . We need not live in awe or fear of Japan." Traditional descriptions of industrial policy were "subject to so substantial a discount as to make them largely valueless";
Japan had been more or less a free market economy all along. The government provided a "supportive environment" rather than a guiding role. There is "very little cooperation among companies," and in any case, "where collusive practices were permitted . . . no particular benefits to growth ensued."31
It would have been understandable if these scholars had taken the view that Japan now operated as a free market economy because its overt control mechanisms had been dismantled. But they insisted that, even in the 1950s and 1960s—the era of MITI 's foreign exchange allocation and Bank of JaTHE WASHINGTON QUARTERLY • AUTUMN

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pan credit allocation—Japan had always adhered to the free market paradigm. As Patrick put it:

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I am of the school which interprets Japanese economic performance as due primarily to the actions and efforts of private individuals and enterprises responding to the opportunities provided in quite free markets for commodities and labor. While the government has been supportive and indeed has done much to create the environment for growth, its role has often been exaggerated.32

R

By the 1990s economists in the traditionalist camp, such as David Weinstein and Richard Beason, went even further, claiming that industrial policy actually held Japan back, because it supposedly "transferred resources out of high growth sectors and into low growth sectors." In other words, had it not been for industrial policy Japan 's unparalleled economic takeoff growth might have been even more spectacular.33
Patrick and Rosovsky did acknowledge that
"protection was certainly important" in the

originally began as

1950s a n d 1960s B u t t h e y insisted t h a t

'

h the

v

mid-1970s Japan was now "one of the more liba corrective. e r a j Qf t ^ e a d v a n c e c ] industrial nations. . . .
There appeared to most policymakers to be no serious bilateral economic problems."34
Soon the insistence that Japan was fully open to competing imports became a shibboleth. In 1982 Gary Saxonhouse produced an econometric model supporting this claim. The very arguments about distance and resource endowment that Saxonhouse had so sharply dismissed 10 years previously were now resurrected. He candidly acknowledged the U-turn. 35 Critics pointed out that Saxonhouse ' equations made
Japan look like a liberal trader even in rice, whereas in reality the country banned the import of even a single grain. Moreover, after economist Robert
Lawrence proved in 1987 that Japan did underimport manufactured goods, his finding was repeatedly confirmed by almost all American economists doing original empirical work on the issue.36
Nonetheless, most economists who were not experts in Japanese trade gave credence to Saxonhouse ' claims. After all, their training implied that a country that violated free trade norms could hardly have grown so fast. In
1993 Jagdish Bhagwati lined up dozens of illustrious economists to condemn the allegedly "crude and simplistic view that Japan is importing too few manufactures owing to structural barriers."37 The Saxonhouse analysis was also embraced by political-military experts looking for a reason to downplay trade issues. Having won the hearts and minds of the academic and policy elite, the Brookings-Saxonhouse view took on the aura that it had been the traditionalist view all along.
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Revisionism, Round 2: Japan Has a Superior, Threatening Model
Just like traditionalism, revisionism originally began as a corrective. It emerged in 1982 when Chalmers Johnson published his long-awaited book,

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MITI and the Japanese Miracle: the Growth of Industrial Policy,

1925 '1975.

Johnson was given the title "godfather of revisionism" by Business Week 's
Robert Neff. But Johnson himself always claimed to be a "restorationist," reviving once-standard appreciation of state-led industrial policy. He even dedicated his book to Lockwood. But with the Brookings-Saxonhouse assertions now misperceived as traditionalism, it was perhaps inevitable that
Johnson would be perceived as a revisionist.38
Johnson 's most important theoretical contribution was his notion of the
"capitalist development state," which was needed by follower countries such as Japan so they could catch up:
In states that were late to industrialize, the state itself led the industrialization drive, that is, it took on developmental functions. . . . The U.S. government . . . does not concern itself with what industries ought to exist and what industries are no longer needed. The developmental, or planrational, state, by contrast, will give greatest precedence to industrial policy, that is, . . . with promoting the structure that enhances the nation 's competitiveness.39 Just as Patrick and Trezise over-reacted to Japan, Inc., so, too, Johnson went too far in remedying the Patrick-Trezise swing of the pendulum. In Johnson 's
Japan, "the bureaucrats rule and politicians reign." Moreover, these apolitical bureaucrats supposedly gave Japan the world 's most effective policy for both entry into sunrise industries and exit from sunset ones.40 Moreover,
Johnson portrayed industrial policy not as the temporary economics of catch-up but as a permanently superior form of capitalism. He even proposed that America create its own MITI-like pilot agency and reduce its elected representatives to a mere "safety valve" for popular discontent.41
Soon the revisionists ' Japan turned from model to threat. In his 1988 book, Trading Places: How We Allowed Japan To Take the Lead, Clyde

Prestowitz argued that stock market crash of 1987 "signaled as clearly as any bugle call the most serious defeat the U.S. has ever suffered."42 James Fallows wrote of "containing Japan."43
The hysteria infected even nonrevisionists. In 1989 economist Lawrence
Summers—who is now the Deputy Treasury Secretary—endorsed the notion that "Japan is a greater threat to the U.S. than the Soviet Union." The head of the CIA 's Japan Desk, Nathan White, spoke at a 1992 closed door conference of a "collision course" between Japan and the United States.44
The nadir of revisionism came in 1995 with Eammon Fingleton 's book
Blindside: Why Japan is Still on Track to Overtake the United States by the Year
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2000. Fingleton contended that Japan 's "collapse that never was" was part of a timeworn strategy of "acting out pantomimes of exaggerated anxiety" to
"foster complacency among the foreign rivals." It was, in other words, an effort to get America to drop its guard until Japan was ready to "blindside" it.
At the time this book was praised in Business Week and excerpted in both

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Fortune and Foreign Affairs.45

A key revisionist claim is that Japan operates with a different species of capitalism than America or Europe. In support of this, James Fallows, in his book Looking At the Sun, contends that
Japan 's economic system was inspired by the nineteenth-century nationalist German ere is nothing economist Friedrich List, whereas America 's particularly Japanese capitalism descends from List 's bete noir, about protectionism.
Adam Smith.46 Now it is certainly true that
List was influential in Japan after his work was translated in 1889. But so was Adam
Smith. Moreover, Fallows fails to mention that List and his Japanese followers saw trade protection as just a temporary tool of catch-up, and that List warned of the inefficiencies ("indolence") caused by overextended protectionism:
At first . . . by free trade with nations of higher culture, [countries] emerge from barbarism, and improve their agriculture; then, by means of
[trade] restrictions, they give an impulse to manufactures, fisheries, navigation, and foreign commerce; then, finally, having reached the highest degree of skill, wealth, and power, by a gradual return to the principle of free trade and free competition in their own and foreign markets, they keep agriculturists from inaction, their manufacturers and their merchants from indolence, and stimulate them to wholesome activity, that they main maintain the supremacy which they have acquired.47

Th

Similarly, List 's first Japanese translator, Sadamasu Oshima, who is not even mentioned by Fallows, argued that:
By the time that the people . . . wish to become acquainted with the modern way of manufacturing things, protectionism should be adopted. Once the country has developed modern manufacturing with a solid enough foundation to compete with others, then a free trade policy should again be adopted.48
Nor does Fallows mention List 's American roots, perhaps because it might undermine his thesis that List 's German ideas are more conducive to the
Asian mindset than are Anglo-American economics. List lived for years in the United States as a political exile and in 1827 published Outline of American Political Economy. Influenced by American nationalists such as
Alexander Hamilton and Henry Clay, List was an associate of the American
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protectionist Henry Carey. Carey 's own disciple, E. Peshine Smith, spent nine years in Japan, beginning in 1871, as a State Department legal advisor to Japan 's Foreign Office.49
The point is that there is nothing particularly German or Japanese or
American about protectionist or developmentalist ideas. They are popular among late industrializers all over the world as they start to modernize.

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The Lost Middle Ground
Throughout the 1980s and early 1990s, there were many efforts to find a middle ground. Only one of these efforts was influential in the Bush and
Clinton administrations: the analytical work of Robert Lawrence, Ed Lincoln, Marcus Noland, and others showing that Japan was an underimporter of manufactured goods. The whole notion of "structural impediments to imports" as an object of trade negotiations—which was used with limited success in the Bush administration 's Structural Impediments Initiative
(SSI)—was the result of the work of these economists. Unlike the revisionists, these economists did not claim that pervasive protectionism benefited
Japan. Lawrence repeatedly stressed the need for free trade tools—that is, cartel-busting—to solve the problem.50
When it came to broader analysis of Japan, however, the middle ground was influential only within academia. One of the most far-sighted works was a 1982 essay called "Success That Soured" by University of Washington Professor Kozo Yamamura. Yamamura pointed out that Japan was still dominated by cartels, import impediments, and other vestiges of the high-growth era, but any positive role for them had ended:
MITI policy was successful in accomplishing its goals for nearly two decades. . . . However, the honeymoon ended. The conditions that were necessary for the continued success of the MITI policy began to disappear in the mid-sixties. . . . It was no longer possible deny that cartels beget more cartels, and that an increasing number of them were having a negative effect on the economy. But MITI could not and did not reverse its policy.51 Similarly balanced views that discussed Japan in an evolutionary context were expressed in books like The Competition, by Thomas Pepper, Merit
Janow, and Jimmy Wheeler, as well as essays by economist Eleanor Hadley.
These writings criticized both the Patrick-Trezise view and the Johnson view as one-sided.52 In the political science arena, such scholars as Kent Calder,
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terned pluralism," "governance by negotiation," and "creative conservatism."53 Unfortunately, in the heat of the trade wars, most of this middle ground was consigned to the ivory tower.
If both traditionalism and revisionism were so misguided, how then do we explain their strong intellectual hold? Both served a political need. Whatever other mistakes the traditionalists made, at least they did not confuse an ally with an adversary. During the Cold War, sacrificing some sales of steel and oranges seemed a small price to pay to keep the socialists and communists out of power. A school of thought justifying that policy held great attraction.
However, the ineffective trade policies resulting from the traditionalists ' view created a vacuum. The pain of millions of U.S. factory workers, as well as the challenge to high-tech industries such as semiconductors, could not be wished away by homilies on free trade—particularly once the Cold War ended. Revisionism filled this vacuum. But in practice, as seen in the debacle of the Clinton administration 's Framework Talks, revisionism had no better advice for handling the economic frictions. Yet the clock cannot be turned back to traditionalism either. It is increasingly recognized that something new is needed.

The System-That-Soured Paradigm Emerges
Today, as people try to understand why the Japanese miracle failed, new analysts are picking up the trail that disappeared in the heat of the 1980s.
As they do, a system-that-soured paradigm is gradually emerging. Seminal explorations along this line have been made by such analysts as James Vestal, David Asher, and Walter Hatch. Not all of these authors give the same answers as here, but all are driven by the same kinds of questions.54
Even some revisionists are having second thoughts. In a December 1997 op-ed in the Washington Post, Clyde Prestowitz writes: "As a catch-up machine, this [Japanese] model was unparalleled. But," he acknowledges,
"once Japan caught up and several of the other [Asian countries]—South
Korea, Indonesia, Malaysia, Thailand—reached advanced stages of development, problems began to arise."55
The system-that-soured view has even entered into a recent U.S. Commerce Department report, Prospects for Growth in japan in the 21st Century.
In the preface Everett Ehrlich, Undersecretary of Economic Affairs, notes:
The structural opening of Japan 's economy is inevitable. When it happens, not only will U.S. exports find a new and welcome home, but then and only then will Japan 's economy finally find the basis for the new and sustained round of growth that has eluded it in this decade. . . .
From the 1950s onward, Japan pursued an extremely successful growth
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strategy, one that has been emulated by other countries in Asia. This strategy was based on high levels of savings and externally driven (export demand) growth, and was supported by a variety of government policies, including restrictions on imports, maintenance of an undervalued currency, incentives to save, targeted investment, and promotion of key traded sectors of the economy. . . . [But] the Japanese created in some ways a dual economy, with less efficient industries that supply domestic customers—private and public—along with a competitive export sector. . . .
So there are four growth policies [that Japan needs]—reform of retail and distribution, land use and construction, and financial markets, and a greater culture of openness. What is remarkable about this list is that they are all among the highest priorities of U.S. trade policy. That is the point.
We have too often thought of these polices as unilateral concessions we demand of the Japanese. It is time to think of them instead as tonics for what ails Japan.56
What kind of a road map would the new paradigm give us? While there is certainly no uniform view among "system that soured" adherents, the following elements seem clear:
• Japan cannot recover economically without major structural overhaul that goes far beyond deregulation. To grow Japan must overcome both its supply-side obstacles (the dual economy) and its demand-side obstacles (economic anorexia). Otherwise Japan is doomed to years of low growth, financial turmoil, rising unemployment, and political paralysis.
To revive Japan needs to dismantle all of the private obstacles to growth, from industrial cartels and collusion, to an obsolete finance system, to its one-party political system. Since domestic cartels are shored up by import impediments, successful reform requires trade opening.
• The political obstacles to reform are so great that thorough reform will take years. The main obstacle is not a powerful bureaucracy trying to hold onto power—it is the crowd of special interests that would be hurt by reform. The efficient and inefficient sectors are represented in the opposition as well as the LDE Thus no opposition party has yet been able to come up with a coherent alternative program to the LDE What makes change especially difficult is that there are few government safety nets strong enough to deal with the enormous dislocation entailed by reform, including the redundancy of 11 million jobs. For safety nets Japan has always relied on private "webs of mutual support": Strong banks support weak banks; banks support weak borrowers; strong companies support banks; big companies provide lifetime employment and buoy up small suppliers in time of trouble. Just changing one part of the system— for example, forcing banks to look at rates of return in lending—threatens to bring the whole house of cards crashing down. Cleaning up bad
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debt means foreclosing on thousands of bad borrowers heavily concentrated in construction and real estate, which are bastions of LDP support and funds. Hence every time the government takes a step toward reform it foresees chaos and quickly backtracks to shore up the existing system.
• Japan 's present political leadership is incapable of instituting the necessary reform and instead tries to muddle through. Tokyo neither wholeheartedly pushes reform nor adamantly resists it. Instead it wavers.
The government is continually indecisive and paralyzed. The handling of the banking crisis is typical.
Until the elections for the Diet 's upper house on July 12, 1998, the
LDP leadership figured that the political cost of muddling through was less than the political cost of resolute action. The latter would not only require action against the LDP base in construction and real estate, but also create higher unemployment in a country without a sufficient social safety net. Unfortunately, delay just exacerbated the economic problems, making them even harder to fix later on. Japan 's voters changed the political calculus in July by raising the political price of muddling through.
Handing the LDP a stunning defeat, the voters—particularly urban voters not tied to the LDP koenkai—demanded solutions. But the LDP bosses chose to defy the voters by installing party apparatchik Keizo
Obuchi as prime minister. Not only is the populace disgusted, but even elites among business, bureaucratic, and banking circles are saying that
"the LDP is dying." The party machine cannot be the solution, as it is a big part of the problem. Meanwhile, bureaucrats in the finance ministry spend their days trying to avoid mistakes rather than getting anything accomplished. There is a leadership void.
• Muddling through is untenable; it just sends Japan lurching from crisis to crisis. Tokyo consistently underestimates the adverse effects of muddling through. Every time Tokyo plugs one hole in the dike, it just causes another one to appear. For example, when the Bank of Japan lowered interest rates to almost nothing (0.25 percent) to shore up the banks, the move decimated the regulated insurance companies, which could no longer earn enough interest to pay their pension obligations.
Nissan Life has already gone bankrupt and other failures loom. Meanwhile, the Nissan Life failure policyholders lost their retirement annuities. As a result, many Japanese are now withdrawing their policies. In
1997 insurance premiums actually decreased for the first time, pushing the weaker insurance companies even closer to failure.
• Cracks in the webs of mutual support are widening. There were always conflicts within "Japan, Inc." But, as long as growth was good, the bureaucracy and LDP could smooth over these conflicts and the LDP could
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rule as a catch-all coalition. That is no longer possible. Corporate pension funds are abandoning weak life insurers and shaky banks. Fragile banks are abandoning weaker borrowers and big firms are abandoning smaller suppliers. Bankruptcies and unemployment are at record levels.
Lifetime employment is fraying at the edges.
For now the danger is not cataclysm but drift. Not being dependent on foreign capital flows, Japan does not face a Korea-style cataclysm as a consequence of its mistakes. It can print all the money its banks need. It can hike public works and cut taxes—not indefinitely, but at least for a few more years.
Ultimately, to solve the problem thorough political and economic reform will
Kecognizing that have to occur. Just as no one in January
Japan has gridlocked
1993 predicted the LDP 's imminent fall, so no one today can chart exactly how the
QOGS PlOt m e a n new realignments will occur. But somehow accepting it. a new break will occur. The LDP will split again, or a new opposition coalition will come into being and win. There may be several rounds of such breaks and realignments, with the resolution occurring in several steps rather than one fell swoop. But one way or another reform will have to occur, because if it does not, Japan will never regain its vitality. It will not happen in the next five years; it will almost certainly happen within the next ten or twenty. Cynics point to past forks in the road that failed to precipitate change. Why is today different? The answer lies in the saying, "If it ain 't broke, don 't fix it." Earlier, the system was suboptimal but not broken; today, it is. Not only does the populace lack confidence in the mandarins; the mandarins increasingly lack confidence in themselves. That is when regimes fall.
The most likely supporters of reform are those forces representing the efficient part of the dual economy, such as exporters, the urban middle class and enlightened bureaucrats and academics. These forces supported and financed the aborted reform effort in 1993-94. Today, however, they are demoralized.
None of this implies that Japan is about to embrace the American model. Saying that Japan is embracing the American model because it gives the market more sway is like saying Franklin D. Roosevelt adopted the Japanese model because he created the New Deal. In America, especially since the Reagan era, the dominant philosophy has been to let the train of economic efficiency roll on regardless of who gets crushed. That

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is hardly a compelling model for a country with a communitarian social ethic; nor is Europe an alternative attractive. Japan will have to find its own path to combining efficiency with social security. Twenty years from now Japan will look very different, but it will still be Japan.

What Can the United States Do?

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Not everyone will agree on the exact policies that flow from a system-thatsoured paradigm. But clearly something different is needed. Rather than being part of the solution in Asia, Tokyo is spending all its time denying that it is part of the problem. Rather than fixing its fragile banking system, Tokyo is relying on stop-gap measures, while pretending that lack of confidence is its main problem. That, in turn, is producing a frustration level in Washington not seen since the 1990 Gulf War. Even the traditional friends of Japan in the foreign policy elite are getting upset. There is a danger that the U.S. reaction will simply amount to a reflexive lashing out, which is at best ineffective and at worst counterproductive.
The current situation requires that the United States have a threepronged approach. The strategy involves the difficult task of doing several apparently contradictory things at the same time. First, Washington needs to base its planning on the unpleasant reality that, no matter what the
United States does, Japan will be adrift for years to come. The tasks that are necessary in Asia—from reviving troubled economies to integrating China into the community of nations to preventing a conflict in Korea—would all be far easier if Japan were actively engaged. But these tasks cannot be avoided or delayed just because Japan is paralyzed.
Second, recognizing that Japan is gridlocked does not mean accepting it.
The United States, along with Europe and the emerging countries of Asia, should seek as much engagement as possible by Japan. If Japan 's own drift were the only problem, more patience might be warranted. But the crisis in the rest of Asia makes prompt remedial measures by Japan urgent. Even before long-term reform kicks in, there are certain things that the present government could do that would be immensely helpful in the short term. One of these is further fiscal stimulation to restore a modicum of growth at home, which would automatically elevate Japan 's imports from Asia. Another is finally cleaning up the banking mess, which would both elevate growth and calm global financial anxieties. A third step is a government decision that it will only pay internationally competitive prices for public works, ensured by competitive bidding. That would not only ensure the biggest economic bang for the fiscal yen, it would also force Japanese contractors to seek cheaper sources of supplies, such as Korean steel and cement or
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Indonesian lumber. However, foreign approaches to Japan need to be informed by a realistic sense of what can and cannot be achieved; otherwise a backlash could be provoked. The art lies in finding a middle ground between acceptance of Tokyo 's fatalistic shikata ga nai ("it can 't be helped") and hectoring caused by America 's impatient can-do spirit.
The third prong involves the need for long-term reform. To find the useful levers of influence U.S. policymakers must understand that forces for reform do exist in Japan and that these will be increasingly evident as economic and social pressures mount. Only Japan can solve its own problems. But today, as in the past, reformers within Japan need the assistance of gaiatsu to tip the balance in their direction.
Under the best of
One model is the de facto alliance achieved rirn imcranrp^ between Washington and Japan 's corporate pension funds during the 1996 negotiations reform will take over financial services. Financial reform is many years. critical, because it can have enormous ripple effects as it breaks up the traditional ties that maintain the old system. The more that money flows on the basis of real return rather than outdated keiretsu ties, the more that the old system will unravel. Moreover, large sections of Japanese industry need a more modern financial system just to survive. In the negotiations over pension funds, U.S. negotiators received behind-the-scenes support from representatives of Japanese corporate pension funds, who could no longer tolerate the low returns they were getting from Japan 's life insurers.
Once regulations were eased, firms such as Honda immediately turned money over to such foreign firms as Goldman Sachs and Fidelity Investments. That puts more pressure on Japanese financial firms to seek better returns leading to still further internal change.57
Reforms in retail that increase consumer power can have an equally powerful effect in tearing down cartels all along the production chain. If cartel prices cannot be passed on to the final consumer, then cartels cannot survive. One precedent is the negotiations some years back to reform Japan 's
Large-Scale Retail Store Law. Japan 's own large stores were glad to use U.S. pressure to help them get what they wanted. The payback for the United
States came during the 1991-95 rise in the yen, when these stores bypassed the cartels, stocked imports, and lowered prices. In addition, the change in the law finally allowed Toys R Us and other retailers to get a foothold in Japan. After only a few years, Toys R Us has become the country 's largest retailer of toys. Increasing the power of retailers vis-a-vis the manufacturers promotes both Japanese reform and American exports.

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In sum, then, the United States needs to find and focus on agenda items in which America 's own desire for market access coincides with the reform agenda of powerful forces within Japan and where such changes create powerful systemic ripple effects. Japan is less of a political monolith than ever before. Economic pressures are tearing the formerly sturdy webs of mutual protection, especially where they divide the efficient exporters from the inefficient domestic sectors. In most countries exporters and multinationals have led the forces of anti-protection. U.S. strategists should be geared to looking for and amplifying such trends in Japan as well.
The "seek allies" perspective is already becoming more prevalent both in
Washington and among some business leaders. At the July 1997 meeting of the U.S.-Japan Business Council, the leader of the U.S. side, CBS Chairman
Michael Jordan, specified in great detail how aggressive deregulation would help both the Japanese economy and U.S. exporters.58
No one is naive enough to think this is a magic bullet. Japanese businesses have yet to identify domestic deregulation, which many support, with market opening to imports, which most do not. Moreover, due to the reluctance of Japanese to ally openly with foreigners against other Japanese, working out explicit cooperation is very difficult. Former U.S. trade negotiator Ira Wolf recalls a recent meeting of U.S. and Japanese business executives in which the Japanese side stressed the need for deregulation and indicated their great frustration with Japanese political leaders. The U.S. executives then suggested an alliance, with each side drawing up its list of deregulation priorities. Where the lists coincided, the two sides would work together. All the Japanese participants but one immediately rejected the idea, saying it would never work.
And yet, as the examples of insurance and big stores show, there is often cooperation sotto voce that can be very effective. Such behind-the-scenes support for the U.S. position was seen in the 1997 battle over port facilities.
Under the best of circumstances, reform in Japan is going to take many years. Effective action by the United States can make that interval a little shorter. But if U.S. action is to be at all effective, the first task is for American Japanologists to come up with a mental compass that finally points in the right direction.

Notes
1.

72

The application of the term "bureaucratic authoritarian" to Japan seems to have originated in Karel van Wolferen 's Enigma of Japanese Power (New York: Alfred A.
Knopf, 1989), 272. Taggart Murphy, in The Weight of the Yen (New York: Norton,
1996), writes: "What really drew brickbats, however, was the revisionists ' portrayal of Japan 's unchecked bureaucratic authoritarianism, which challenged [the notion]
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. . . that Japan was a functioning democracy" (281). The other terms in this paragraph—"developmental state," "puppet Diet," and "responsive dependence"— come from Chalmers Johnson 's 1982 book, MITI and the Japanese Miracle: the
Growth, of Industrial Policy, 1925-1975 (Stanford: Stanford University Press, 1982).
Johnson speaks of a state in which "the bureaucrats rule and the politicians reign."
2.

In an April 12, 1998, interview in Sankei Shimbun, Clyde Prestowitz said, "For many years I predicted and argued that unless measures were taken to check the power of the Japanese economic system, the United States would be defeated by Japanese economic competition. But I now admit frankly that my prediction was wrong."

3.

Chalmers Johnson makes this comment in a letter to the editor of Orbis (Summer
1996). In his letter Johnson accuses the journal of spreading Japanese
"disinformation" by printing David Asher 's essay, "Economic Myths Explained:
What Became of the Japanese Miracle" (Orbis, Spring: 1-21). In that essay Asher analyzes Japan 's bubble and bust and concludes that the former "developmental state" had become "anti-developmental." The financial frenzy of the late 1980s,
Johnson insists, was "not a bubble; this is governmental policy." The bubble and the high yen were really "a wonderful political cover" for a Finance Ministry scheme to
"recreate the Greater East Asian Co-Prosperity Sphere." In his letter, Johnson eventually resigned from the Orbis board over this matter.

4.

The quote is from Hugh Patrick 's essay, "The Future of the Japanese Economy:
Output and Labor Productivity," Journal of Japanese Studies 3 (Summer 1977): 239.
For views that industrial policy 's impact ranged from irrelevant to deleterious, see endnote 31. The political science counterpart to traditionalist economics is most prominently displayed in Mark Ramseyer 's and Frances McCall Rosenbluth 's oftencited book, Japan 's Political Marketplace (Cambridge, Mass.: Harvard University
Press, 1997). This book, which applies the currently popular "rational choice" theory to Japan to discredit the efficacy of industrial policy, is actually the mirror image of revisionism. Whereas in the revisionist view all power flows from the state to society, in the Ramseyer-Rosenbluth image all power flows in the opposite direction. The notion of a two-way flow is discounted in both. Robert Uriu, in Troubled
Industries: Confronting Economic Change in Japan (Ithaca, N.Y.: Cornell University
Press, 1996), 256-257, makes a similar observation about Ramseyer 's and
Rosenbluth 's one-sided view.

5.

In "Japan and the United States: Twins or Opposites," in the Aspen Institute 's Harness the Rising Sun (Lanham, Md.: University Press of America, 1993), Prestowitz argues: "U.S. policy should be aimed at jointly setting targets in the manner of the semiconductor agreement. . . . The proposals presented here have been discussed with MITI and Japanese industry leaders who in private conversation . . . even go so far as to proposed development of a kind of joint industrial policy. Thus, there is every reason to expect that the new policy can be successful" (97). In a recent interview with the author, Prestowitz contended that the problem lay not in the efficacy of the policy itself, but in its clumsy execution by the Clinton administration. However,
Leonard Schoppa, in Bargaining With Japan: What American Pressure Can and Cannot
Do (New York: Columbia University Press, 1997), 3-4, noted that the revisionists never explained how to enforce results if Japan simply refused to go along.

6.

This phrase is taken from John Haley 's 1987 essay, "Governance by Negotiation: A
Reappraisal of Bureaucratic Power in Japan," in The Trade Crisis: How Will Japan
Respond? (Seattle, Wash.: Society for Japanese Studies, 1987).

7.

John Fairbank, Edwin Reischauer, and Albert Craig, East Asia: Tradition and Transformation (Boston: Houghton Mifflin, 1973), 829-830.

8.

Martin Bronfenbrenner, "Economic Miracles and Japan 's Income-Doubling Plan,"
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in William Lockwood, ed., The State and Economic Enterprise (Princeton, N.J.:
Princeton University Press, 1965), 539-540. This volume was one of an authoritative series put out by Princeton University Press, edited by one of the nation 's top
Japanologists, and used by scholars and journalists and in university courses all over the country throughout the late 1960s and early 1970s.
9.

William Lockwood, "Japan 's 'New Capitalism, '" in The State and Economic Enterprise, 503.

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10. In one regard Karel van Wolferen differs from the other prominent revisionists.
While he conjures up a vision of an Orwellian "System" so powerful that it
"control[s] the thought and behavior of the salaryman" (Enigma of Japanese Power,
172), he argues that "the System as a whole is rudderless" (412). Not only is there no captain at the helm, there 's no helm. But like other revisionists, van Wolferen portrays an unstoppable economic juggernaut. In a monument to bad timing, he argues in his book, published just months before the bubble collapsed, that Japan 's
"Administrators" can so manage reality that it alone can have a "Bubble that does not burst" (399-400). Indeed, the "Administrators" could jack up land prices another twenty times if they chose to (405). Japan 's main political problem, the one that puts it on a "collision course" with the rest of the world, is that the rudderless system cannot change its goal of "unlimited industrial expansion" via "industrial dominance" at the expense of other countries (405-407). In other words, Japan 's main problem is that it can 't stop growing.
11. The best sources on Japan 's formal and informal cartels are Kozo Yamamura, "Success That Soured: Administrative Cartels in Japan," in Kozo Yamamura, ed., Policy and Trade Issues of the Japanese Economy: American and Japanese Perspectives (Seattle, Wash.: University of Washington Press, 1982); Mark Tilton, Restrained Trade:
Cartels in Japan 's Basic Materials Industries (Ithaca, N.Y.: Cornell University Press,
1996); and Robert Uriu, Troubled Industries.
12. And so MITI was both the hurricane and the Red Cross. MITI 's own policy helped create what it called "excess competition" in the first place. The worst excess supply problems almost always occurred in the industries that MITI was promoting. And then the "excess competition" required MITI 's further intervention to address it.
13. As Robert Uriu points out, the steel firms "will only cooperate if they know that other producers are similarly bound. . . . They thus sought government regulation as a necessary outside enforcement mechanism" (Troubled Industries, 251). Once
MITI lost its power to allocate foreign exchange, its ability to act as enforcer was greatly lessened. Incidentally, as part of the cartel system, each steel firm was allowed to sell only through one wholesaler for each product in a territory. The reason was to make it more difficult for members of the cartel to cheat by offering cheap prices to a competitor 's wholesaler. But it enshrined a system that made it more difficult for newcomers, Japanese or foreign, to find wholesalers for their products. This issue was at the heart of Kodak 's failed Section 301 action against
Fujifilm.
14. Hiroya Ueno, "Conception and Evaluation of Industrial Policy," in Kazuo Sato, ed.,
Industry and Business in Japan (White Plains, N.Y.: M.E. Sharpe, 1980), 415.
15. See Kent Calder, Crisis and Compensation: Public Policy and Political Stability in Japan
(Princeton, N.J.: Princeton University Press, 1988).
16. Importing more farm goods would tend to lower Japan 's trade surplus, which in turn would lower the value of the yen. That would allow Japanese industry to boost exports. At the end of the process, the trade surplus would go back to the original level, but with greater farm imports, more industrial exports, and an overall higher volume of trade. By protecting Japan 's farmers the LDP was hampering Japan 's exporters.
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This tendency would lead to "hollowing out" in the 1980s, as discussed below.
17. See James Vestal, Planning for Change: Industrial Policy and Japanese Economic Development: 1945-90 (New York: Oxford University Press, 1993).
18. See Richard Samuels, The Business of the Japanese State: Energy Markets in Comparative and Historical Perspective (Ithaca, N.Y.: Cornell University Press, 1987), chapter 3.
19. In 1959-61 a long and violent strike by a socialist-led coal miners union coincided with a big fight over renewal of Japan 's security treaty with the United States and weakened the government during that crucial period.

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20. Haley, "Governance by Negotiation," 185.
21. The economic processes summarized here are discussed more fully in my book, Japan: The System That Soured—The Rise and Fall of the Japanese Economic Miracle
(Armonk, N.Y.: M.E. Sharpe, 1998) and in my 1987 essay, "Japan 's Self-Defeating
Trade Policy: Mainframe Economics in a PC World," Washington Quarterly 20, no. 2
(Spring 1997): 153-181.
22. Ueno, "Conception and Evaluation of Industrial Policy," 415.
23. See Jacob Schlesinger, Shadow Shoguns: The Rise and Fall of Japan 's Postwar Political
Machine (New York: Simon and Schuster, 1997).
24. Schoppa, Bargaining With Japan, 98.
25. Gary Saxonhouse, "Evolving Comparative Advantage and Japan 's Imports of
Manufactures," in Kozo Yamamura, ed., Policy and Trade Issues of the Japanese
Economy, 244.
26. James Abegglen, "The Economic Growth of Japan," Scientific American 222 (3): 31-35.
27. Cited in Philip Trezise and Yukio Suzuki, "Politics, Government and Economic
Growth in Japan," in Hugh Patrick and Henry Rosovksy, eds., Asia 's New Giant
(Washington, D.C.: Brookings Institution, 1976), 756.
28. Referring to the Patrick-Trezise view, Bradley Richardson remarked, "Some studies in which the government role is downgraded also reflect normative preferences for free competition" (Japanese Democracy: Power, Coordination and Performance [New
Haven, Conn.: Yale University Press, 1997], 307). The instinctual impulse was to give greater credence to evidence that cast doubt on the importance and effectiveness of industrial policy.
29. Hugh Patrick and Henry Rosovsky, "Japan 's Economic Performance: An Overview," and "Prospects for the Future and Some Other Implications," in Asia 's New Giant,
916.
30. Trezise and Suzuki, 756.
31. Patrick and Rosovsky, Asia 's New Giant, 6, 20, 44-48, 57, 901-903. Trezise and
Suzuki, 756-757, 808-811. Patrick favorably cites arguments by Gary Saxonhouse that industrial policy was irrelevant in that the industrial structure of Japan seems to be no different than if industrial policy had never been applied in the first place.
He does concede the theoretical possibility that market-conforming industrial policy accelerated GDP growth by causing certain growth industries to develop more quickly than they would have by market forces alone (Hugh Patrick, "Japanese
High Technology Industrial Policy in Comparative Context," in Hugh Patrick, ed.,
Japan 's High Technology Industries [Seattle: University of Washington Press, 1986]
21-22). That is the view that I take in Chapter 6 of Japan: The System That Soured.
However, Patrick contends that there are no studies documenting such a thesis.
32. This quote is from Patrick, "The Future of the Japanese Economy," 239, in which he summarizes and updates the findings of Asia 's New Giant.

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33. David Weinstein and Richard Beason, "Growth, Economies of Scale, and Targeting in Japan (1955-1990)," a manuscript prepared in 1994. Their statistical techniques seem not to take account of the pro-growth/antigrowth "dualism" in Japan 's policy.
34. Patrick and Rosovsky, Asia 's New Giant, 47, 60.
35. Saxonhouse, "Evolving Comparative Advantage," 246-263.

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36. On Saxonhouse and the rice issue, see C. Fred Bergsten and Marcus Noland, Reconcilable Differences? U.S.-Japan Economic Conflict (Washington: 1993), 180-181.
Chapter 5 of this book reviews the literature on this issue. Robert Lawrence 's essay
"Imports in Japan: Closed Markets or Minds?" in Brookings Papers on Economic Activity, vol. 2 (Washington: The Brookings Institution, 1987), was quickly validated by other work. Just a few of the works include: Bela Balassa and Marcus Noland,
Japan in the World Economy (Washington: Institute for International Economics,
1988); Edward Lincoln, Japan 's Unequal Trade (Washington, D.C.: Brookings Institution, 1990); and Peter Petri, "Market Structure, Comparative Advantage, and
Japanese Trade under the Strong Yen," in Paul Krugman, ed., Trade With Japan: Has the Door Opened Wider? (Chicago: University of Chicago Press, 1991).
37.

Bhagwati 's letter was organized to criticize the Clinton administration 's trade tactics toward Japan. Even economists like Paul Krugman told this author that he knew Japan was closed but felt compelled to sign, fearing that failure to do so would misinterpreted as an endorsement of Clinton policies. Apparently it seemed too subtle for economic orthodoxy to say that Japan 's market was closed but that
Clinton 's response was counterproductive.

38. The term "revisionism" was first used in a Japanese context by Business Week writers in 1989. See Robert Neff, Paul Magnusson, and William Holstein, "Rethinking
Japan: The New Harder Line Toward Tokyo," Business Week, August 7, 1989, 44-52.
39. Chalmers Johnson, MITI and the Japanese Miracle: the Growth of Industrial Policy,
1925-1975 (Palo Alto, Calif.: Stanford University Press, 1982), 19 (emphasis in original). In this, Johnson was following the tradition of Alexander Gershenkron and others who posited a strong role for the state in late industrializers. In chapter
1 Johnson 's describes his relationship to other schools of thought..
40. Ibid., 24, 47-50, 274, 315-316.
41. Ibid., 315-316.
42. Clyde Prestowitz, Trading Places: How We Allowed Japan to Take the Lead (New York:
Basic Books, 1988), 6. When the paperback edition was published in 1989, just months before the bubble popped, the subtitle had escalated to "How We Are Giving Our Future to Japan and How to Reclaim It."
43. James Fallows, "Containing Japan," in Atlantic, May 1989.
44. Lawrence Summers, "The Ishihara-Morita Brouhaha," International Economy (December 1989): 52. Kent Harrington, the CIA 's national intelligence officer for Asia, disagreed with the White view. For background on the debates within the CIA about Japan, see Richard Katz, "Japan 2000 Controversy Reveals CIA Debate On
Japan," Nikkei Weekly, February 1993. In his 1996 letter to Orbis, Johnson labeled
Japan along with China "the only countries on earth that could threaten the national security of the U.S.".
45. Eammon Fingleton, Blindside: Why Japan is Still on Track to Overtake the U.S. by the
Year 2000 (Boston: Houghton Mifflin, 1995), 3. Fingleton proved too much even for others sympathetic to the revisionist view. Without naming names, Murphy wrote that by 1992, "It was getting harder and harder to claim, as a few clued-in observers had done a year or two earlier, that this was all some kind of show staged by the authorities for the benefit of gullible foreigners" (The Weight of the Yen, 262).
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Patrick Smith in Japan: A Reinterpretation (New York: Pantheon Books) also without naming names, blames certain revisionists for spreading "paranoia" of the sort contained in the view that "Japan did not really enter a recession in the early
1990s: It was 'blindsiding ' us, a sort of sneak attack, the better to achieve economic domination" (36).

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46. James Fallows, Looking at the Sun (New York: Pantheon Books, 1994), chapter 4.
47. Friedrich List, The National System of Political Economy, trans. Sampson S. Lloyd
(London: Longman, Creen & Co., 1885), 115. List 's book is out of print, but the entire text can be located on the Internet at <http://socserv2.socsci.mcmaster.ca/
~econ/ugcm/3113/list/>. It seems particularly strange that Fallows should omit this since almost all economic historians have stressed List 's "stages theory" of trade policy. For more on List in the context of his time, see Douglas Irwin, Against the
Tide: An Intellectual History of Free Trade (Princeton, N.J.: Princeton University
Press, 1997), chapter 8.
48. Oshima translated List 's National System of Political Economy in 1889. This passage, which both represents Oshima 's own view and summarizes List 's views, comes from
Oshima 's 1891 book, On the Present Situation. It is cited in Chuhei Sugiyama, Origins of Economic Thought in Modern Japan (London: Routledge, 1994) 103. This view was common among List 's followers in Meiji-era Japan and was enunciated by
Japan 's first post-Meiji leader, Toshimichi Okubo, following the 1872 Iwakura Mission, which toured the U.S. and Europe.
49. While List has earned general respect among modern economists, even among those who disagree with him, Carey is usually disparaged. Even John Stuart Mill, who brought the "infant industry" argument into classical economics, disparaged
Carey 's tract on protection as "about the worst book on political economy I ever read." Mill 's comment is cited in Irwin, Against the Tide, 132. See Sugiyama, Origins of Economic Thought in Modern Japan, 8, 10, 11, 71, and 102-104 for more on List and Carey 's influence in Japan, and 3 and Chapter 4 for the introduction of the ideas of Adam Smith 's disciples into Japan by Yukichi Fukuzawa.
50. See note 36 for sources. Noland served for a while in the Clinton White House while Lincoln became a special aide to Ambassador to Japan Walter Mondale.
While Lawrence himself stuck to free trade methods, not all those who cited his analysis did. In 1989 a report of the U.S. Trade Representatives 's corporate-led Advisory Committee on Trade Policy and Negotiations cited Lawrence to justify a policy of asking Japan to agree to numerical targets on imports, using the term
"temporary quantitative indicators." Lawrence disagreed.
51. Yamamura, "Success That Soured," 103.
52. Thomas Pepper, Merit Janow, and Jimmy Wheeler, The Competition: Dealing With
Japan (New York: Praeger, 1985), 135-136, 138, 140-142. For example, while the
Brookings authors cite Japan 's high savings as a key source of growth, Pepper,
Janow, and Wheeler point out that they never investigate the role of government policy in promoting high investment rates in the first place. At the same time, these analysts fault Johnson for "contradict[ing] himself" in suggesting that the
United States adopt Japanese-style industrial policy. In Japan, where "the economy is no longer in as much of a 'catch up ' phase," they argue, continuation of industrial policy would become increasingly costly to the domestic economy. For Hadley 's reviews of the Brookings and Johnson views, respectively, see Eleanor Hadley, " 'Industrial Organization ' By Caves and Uekasa: A Review Essay," Japanese Economic
Studies (Winter 1976-77): 64-81 and "The Secret of Japan 's Success," Challenge
(May-June 1983), 4-10.
53. See Calder, Crisis and Compensation ; Samuels, The Business of the Japanese State;
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Richard Katz

Haley, "Governance by Negotiation"; T.J. Pempel, "The Unbundling of 'Japan, Inc. ':
The Changing Dynamics of Japanese Policy Formation," in The Trade Crisis: How
Will Japan Respond?, as well as his forthcoming book, Regime Shift; Michio
Muramatsu and Ellis Krauss, "The Conservative Policy Line and the Development of Patterned Pluralism," in Kozo Yamamura and Yasukichi Yasuba, eds., The Political
Economy of Japan, vol. 1, The Domestic Transformation (Palo Alto, Calif.: Stanford
University Press, 1987); and Daniel Okimoto, Between MITI and the Marketplace:
Japanese Industrial Policy for High Technology (Palo Alto, Calif.: Stanford University
Press, 1989).

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54. See Vestal, Planning for Change; Asher, "Economic Myths Explained": Walter Hatch and Kozo Yamamura, Asia in Japans Embrace: Building a Regional Production Alliance
(Cambridge: Cambridge University Press, 1996).
55. In The Weight of the Yen, Taggart Murphy holds onto the revisionists ' bureaucratic authoritarian political schema but explores how Japan 's neomercantilism became self-destructive. 56. Sumiye Okubo, Prospects for Growth in Japan in the 21st Century (Washington: Department of Commerce, 1996).
57. Michael Hirsh and E. Keith Henry, in "The Unraveling of Japan Inc.," Foreign Affairs 76 (3): 15, report: "Japan 's major concession last April on pension fund deregulation, for example, was more the result of the rebellion of Japan 's multinational manufacturers than of pressure at the bargaining table. Although
Japanese life insurers howled that they sacrificed too much . . . hard-pressed Japanese multinationals saw deregulation as essential to introducing international competition to Japan 's financial sector, which had yielded abysmal returns."
58. See Michael Jordan, "What Deregulation Means for Consumers, Business and the
Government of Japan," a speech given to the July 8, 1997, meeting of the U.S.-Japan Business Council in Tokyo, as well as a report with the same title prepared by the U.S.-Japan Business Council.

78

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Cited: (Washington, D.C.: Brookings Institution, 1976), 756. free competition" (Japanese Democracy: Power, Coordination and Performance [New Haven, Conn.: Yale University Press, 1997], 307) Japan 's High Technology Industries [Seattle: University of Washington Press, 1986] 21-22) 33. David Weinstein and Richard Beason, "Growth, Economies of Scale, and Targeting in Japan (1955-1990)," a manuscript prepared in 1994 1988); Edward Lincoln, Japan 's Unequal Trade (Washington, D.C.: Brookings Institution, 1990); and Peter Petri, "Market Structure, Comparative Advantage, and Japanese Trade under the Strong Yen," in Paul Krugman, ed., Trade With Japan: Has the Door Opened Wider? (Chicago: University of Chicago Press, 1991). 38. The term "revisionism" was first used in a Japanese context by Business Week writers in 1989. See Robert Neff, Paul Magnusson, and William Holstein, "Rethinking Japan: The New Harder Line Toward Tokyo," Business Week, August 7, 1989, 44-52. 39. Chalmers Johnson, MITI and the Japanese Miracle: the Growth of Industrial Policy, 1925-1975 (Palo Alto, Calif.: Stanford University Press, 1982), 19 (emphasis in 42. Clyde Prestowitz, Trading Places: How We Allowed Japan to Take the Lead (New York: Basic Books, 1988), 6 44. Lawrence Summers, "The Ishihara-Morita Brouhaha," International Economy (December 1989): 52. Kent Harrington, the CIA 's national intelligence officer for Asia, disagreed with the White view 45. Eammon Fingleton, Blindside: Why Japan is Still on Track to Overtake the U.S. by the Year 2000 (Boston: Houghton Mifflin, 1995), 3