• The Contrary Asians: The Japanese and the Sinhalese
  What really happened to Japan? - Economics in Samsara

The reason why Japan became so important to the world was because of the strength of its economy. Japanese economic growth was one of the great wonders of the world in the post war era. Japan was the trail blazer in what has now become a general rise of prosperity in East Asia. But throughout the decade of the 1990’s the Japanese economy has been in the doldrums. And no measure adopted by the Japanese government seems to rectify the situation. While China, Korea and virtually all the East Asian countries enjoys unprecedented growth Japan alone flounders. What ails Japan? Has Japan become irrelevant?

The most convincing and thoroughgoing explanation for the Japanese economic recession I have read so far is that of Rob Steven an Australian academic. According Steven, the Japanese economy became a victim of its own strength. He characterises the Japanese economic crisis of being one of ‘overproduction’. The productive capacity of Japan increased to such an extent that no markets could be found for what it could produce. On the one hand the domestic market on which most manufacturers rely, was saturated with goods by the end of the eighties. There are limits to the number of cars, TV sets, radio’s, kitchen appliances, and other consumer items that an individual can use. By the beginning of the nineties, Japanese society had a surfeit of all this. Thereafter, only the replacement of existing stock would fuel the market. There was no virgin territory left in the Japanese economy to open up.

Then in the late eighties, the Yen appreciated sharply as a consequence of Japanese economic development. A high value currency is a reward for economic success. Yet this "reward" cut both ways in Japan. The high value of the Japanese currency gave Japan a new status in the world. Even Europeans think of the Japanese as being rich. A Danish friend of mine told me that in Europe, Japanese tourists are consistently overcharged because they are considered to be rich in much the same way that European tourists are overcharged in third world tourist destinations like Sri Lanka. But the same high value of the currency meant that Japanese manufactured goods became expensive on the international market. Hence Korea and Taiwan and other competitors producing cheaper goods, were able to take over market share in manufactured items which previously belonged to Japan. Because of the higher value of the Yen the Japanese now sell not on price but on quality.

Furthermore, the years of aggressive exporting had taken its toll. Japan saturated the world with its products throughout the post war era up to the end of the eighties. Countries like America at that time adhered to the free trade policy in order to keep the ‘free world’ on its side. Even though countries like Japan and Korea protected their own domestic markets while penetrating other markets, this was ignored by America for political reasons. But with the end of the cold war, this concessionary attitude disappeared. Europe has become overtly protectionist with the formation of the European Union. America too became nasty and wanted Japan to open its market for US producers while at the same time restricting the inflow of imports from Japan.

So there was a confluence of reasons to bring about the present economic downturn after the late eighties. The internal market became saturated, the Yen increased in value and made Japanese products expensive in the international market, and foreign countries became more restrictive of the inflow of Japanese goods. Thus there was a contraction of both the international and the domestic markets.

In the real world, there is nothing called unlimited expansion even though conventional economics may assume such a cycle of unending growth. Most of the developed countries in Europe and America stopped growing decades ago. After reaching a certain high level of development, economic growth levels off. Conventional economists fail to understand that all economic activity takes place within the ambit of samsara. Thus, while weakness is a problem, strength also becomes a problem. Sri Lanka lies prostrate due to its economic weakness. Japan lies prostrate due to its strength! In Buddhist philosophy, the human condition is characterised as ‘dukkha’ while the situation of god Sakra himself is also ‘dukkha’! There is no escape from suffering so long as one traverses samsara. That is the only way one can explain the present economic situation in Japan. Every religion even Christianity with its doctrine of man’s fall from grace has this element of the irretrievable condition of mankind. Somebody said that human salvation lies only in the "struggle" and not in the "attainment". This is a sentiment which would be immediately understood by most thinking Japanese. They were better off during the long climb rather than on the summit.

In places like Scandinavia, the lack of spectacular economic growth is no surprise. What surprises me is that so many people are surprised that Japan has arrived at a similar situation. I have always thought of this economic levelling off as an inevitable reality of the capitalist system. In my arguments against the anti-development Sinhala Buddhist ideologues in Sri Lanka who characterise economic development as an unending pursuit of material goods, I have pointed out that economic development is not an unending process, and that like everything else, development too has its limits and that as the history of every developed country has shown us, there comes a time when the economy can grow no further. Economic development has a glass ceiling. What I meant by developing a country was bringing it up to that glass ceiling. In fact, during the eighties and nineties the growth experienced by the US economy was around the same levels of growth experienced by say a country like Sri Lanka. Yet these low growth rates caused raptures of joy in the US. Why is a 4% growth rate considered wonderful for the USA while a similar growth rate for Sri Lanka is considered a disaster? The reason is that once one reaches the top, a situation of very low growth is the norm. This applies to all of humanity including the Japanese.

One of the reasons why so many people are surprised at what happened to Japan could be the spectacular manner in which the Japanese economy seemed to collapse at the beginning of the nineties. While Japan’s actual crisis is one of excess capacity and overproduction, the collapse came in the form of a classic speculative crash. According to Lord Rees Mogg, in a market system, speculative crashes are possible anytime anywhere. The market is driven by people’s expectations. And due to alterations in perception which are sometimes rational and sometimes completely irrational, things can change rapidly from a situation where there are no sellers - a market going up; to a position where there are no buyers - a market going down. All market bubbles have shown the same pattern, - a relatively long climb to unsustainable heights, a point of failure and disastrous losses. It is quite common for values to fall 80%-90% from the peak. In all such market crashes excess credit has played an important role. Credit is available so people borrow to invest in the new fad. Prices rise with the speculation so people have more collateral to offer their bankers. More is borrowed, more is invested. Prices rise still further... But in this cycle, a point is reached where things can go no further and that is the day of reckoning...

What happened to Japan in the early nineties was nothing unique. That kind of speculative bubble has occured in various places in various epochs. According to author George Beckman, in the seventeenth century, Holland which was then the premier economic power in the world with half the world’s shipping in its control was brought to its knees after a frenzy of speculation in tulips! Tulips were introduced to Holland (which is still the flower capital of the world) in the late sixteenth century and the fashion soon caught on. Growing tulips became a profitable business. People began to invest heavily in tulip cultivation and a speculative market arose. Soon tulips in seventeenth century Holland became like Japanese stocks and land in the late eighties. Speculation rose to such ridiculous levels that a single high grade tulip bulb was worth a king’s ransom! When the inevitable crunch came banks that had lent to tulip speculators went belly up, businesses failed, millionaires became paupers overnight and the whole of might Holland was thrown into unprecedented chaos all because of a humble tulip!

It was a similar kind of overspeculation in currency which precipitated the South East Asian financial crisis of October 1998. While the market is undeniably the best available mechanism for shifting resources around and guiding production, it being a human institution , is liable to experience failure due to "human error". This is an inevitable condition of our existence. One has to learn to live with these imperfections. (Its the samsaric aspect again!) The South East Asian economies were able to bounce back quite quickly after their speculative misadventures mainly because they, unlike Japan, had not yet reached the limits of growth. Japan is still unable to pick itself up because the speculative bubble in Japan happened to coincide with the maturing of the Japanese economy.

Once again, it was Japan’s enormous economic strength that laid the foundation for its downfall. Money poured into the stock market, into land and into the banking system in the form of deposits. The more money that flowed into the banks, the more they could lend for customers to buy more land and stocks and so on, in an ever ascending spiral of speculation. In 1988 alone Tokyo land prices rose by about 60-70%. By December 1990, the Tokyo Nikkei average peaked at an astronomical 38915. Millionaires were made overnight. The new rich used their money for more speculative investments and the rise in asset prices helped feed itself. Japan’s unprecedented economic growth in the post war years saw the expansion of the urban centres and a corresponding rise in land prices. Hence everybody thought that land prices would continue to rise indefinitely... As for stock prices, the price of the stock of a company depends on what investors think of the future prospects of that company. By the late eighties, Japan was brimming with confidence as the economy had been growing at a sizzling pace for decades and the prices of stocks went up and up... The crash of the Japanese land and stock markets in the early nineties was text book-perfect. They went through all the paces as outlined by Lord Rees Mogg without missing a single step!

So traumatic has Japan’s fall and subsequent stagnation been that Japanese policymakers seem to have forgotten that there are limits to growth and that Japan has reached that limit. Since the collapse of the bubble economy, the efforts of subsequent governments has been aimed at somehow trying to make the Japanese economy grow again. An article published by Sakiya Taichi the Director General of the Economic Planning Agency of Japan, epitomises this attitude. Firstly, he would see the Japanese economic crisis not as one of overproduction and a reaching of developmental limits, but as a "credit crunch" whereby, banks found themselves with a whole lot of non-performing loans in the aftermath of the bubble of the late eighties and therefore unable to lend enough money to the private sector. According to Mr Sakiya, the Japanese domestic sector has also been affected by a crisis of confidence in the wake of the bubble which has led to more savings and less spending, thus affecting demand in the economy. Mr Sakiya’s aims are, first and foremost to restore health to the financial institutions. Secondly to generate demand in the domestic market. And thirdly to implement measures for employment stability. Then Mr Sakiya goes on to explain the massive scheme put in place by the late Premier Keizo Obuchi to resuscitate the ailing Japanese economy. The availability of finance for small businesses was increased with no collateral requirements. The bad debts of failed banks were to be written off and capital was to be injected into healthy financial institutions in order to increase their soundness and so on... This has been described as the biggest financial bailout package in the history of mankind.

But other analysts like Rob Stevens would have a fundamental problem with this kind of approach since it tends to assume that a resurgence of economic growth will be possible if financial institutions are put back on their feet and more credit made available for Japanese businesses. If anything, such an approach will make Japan’s problem of overproduction and excess capacity even worse. In fact Mr Sakiya himself admits in his article that Japanese companies are still burdened with excesses in capacity and staffing levels. If that is so, how is the availability of more credit going to solve the problem of the viability of Japanese enterprises? From what can be seen, the Japanese will have to settle down to an economic plateau very much like the mature developed countries of Europe, North America and Oceania at a somewhat lower level than the peak reached during the bubble of the late eighties.

All governments since the bubble have tried to make the economy grow again by injecting government funds into the system. They were trying to jump start the economy by stimulating demand. In the eight years prior to the Obuchi government of 1998, Japan had spent 60 trillion Yen in an attempt to stimulate demand but to no avail. For the past ten years, the various programmes to stimulate demand in the domestic economy through government spending would have contributed towards righting certain imbalances such as making better housing, more parks and recreational areas and other social infrastructure available to the Japanese public. There were some glaring discrepancies in this regard when comparing Japan with the developed Western countries and the past spending would have contributed towards righting some of these wrongs.

The lack of response to injections of government funds is a clear sign that Japan is now a "mature economy". In the seventies and eighties, when the Japanese economy was growing and the Western economies were stagnating, many took this to be a sign that the Western economies were weak. (At that time Marxist analysts said that the world capitalist system was in terminal decline and that the socialist revolution was in the offing!) Similarly, today when the economies of China and Korea are growing while that of Japan stagnates, some see this as a weakness of the Japanese economy. That perception is wrong. The Western economies stagnated while Japan grew because the West had reached the limits of growth. Similarly Japan has now reached the limits of growth herself. Since this is the case, a fundamental re-orientation of the Japanese is on the cards. In the years to come Japan will be overtaken by China in terms of economic size, and with the increasing prosperity in many East Asian countries, Japan will lose its unique position as the only country outside the Western block to achieve Western standards of affluence. Japan in other words, will have to settle for a change of role from youthful prodigy, to a successful, middle age.

The Japanese are today going through the same painful processes that the mature economies of the West went through before they could make the necessary psychological adjustments to fit into their roles as mature economies. (Being called a "write off" is also a part of the readjustment process!) One of the chief characteristics of a mature economy is that there will be very low growth rates unless some new technological discovery fuels growth. In the US economy it was the new mood of optimism following the information technology boom which fuelled what for a developed country were quite substantial growth rates. New technologies tend to expand existing boundaries. When a mature economy remains stagnant at a given level of technology, a new technology expands the boundaries of what is possible and thus causes expansion in places where growth had otherwise virtually ceased...

In terms of sheer economic size, China may overtake Japan, but the Japanese people, have a lead in technology over the rest of Asia which will be virtually impossible to bridge. Japan will always be Asia’s technological leader. Like the Germans, the Japanese have a particular affinity with technology which cannot be easily replicated elsewhere. Its a national trait. Japan is above all a country of gadgets and gewgaws. One of the most infuriating experiences for a foreigner in Japan is that virtually everything appears more complicated than elsewhere in the world. Even the remote control of a TV or video has about three times the number of buttons in an international model. Models produced for the local market have more gadgets than the models marketed internationally because the Japanese people prefer machines with more gadgets! While the people of other countries want technology that is "people friendly" the Japanese are technology friendly. Even during the phase of feudal isolation from the seventeenth century onwards, one of the most popular entertainments of the Japanese elite was to gawk at all kinds of mechanical gewgaws made by Japanese inventors from the little knowledge gained from the Dutch who were allowed to maintain a small presence in the otherwise completely isolated Japan.

In terms of adapting technology for human use, the Japanese are just about the most innovative people in the world. And with more spending allocated to fundamental scientific research, it will not be long before Japan assumes its role as a scientific leader as well. Many people regard the Japanese as a nation of "imitators" who have an inborn genius for taking what others have discovered and turning out better and cheaper versions of it. It is certainly true that the Japanese grew prosperous through such a process. But such a condition was due to Japan’s particular historical circumstances. When Japan was opened up to the outside world in 1853 after two centuries of total isolation from the world, Sri Lanka was more technologically advanced than Japan because Sri Lanka had remained open throughout and European discoveries were being applied here by the colonial powers. By 1853, Japan had absolutely nothing by way of modern technology and they had to start from zero. Thus the emphasis was on assimilating what was already available and not on discovering new inventions.

Japanese skills were however not limited to this. As the Jewish scholar Ben-Ami Shillony has pointed out, the Japanese had avery early history of fundamental scientific research. A few decades after they were exposed to modern science, a late nineteenth century Japanese, Kitazato Shibasaburo discovered the bacteria which causes tetanus and the bacillus which causes the bubonic plague. The bubonic plague was the most "European" of all diseases and figured prominently in European history. Its an irony that the germ which caused it was discovered by a Japanese! Another Japanese, Hata Sahachiro collaborated with the German scientist Paul Ehrlich to develop a drug against syphilis. Takamine Jokiachi was the first to isolate adrenaline and Suzuki Umetaro was the first to extract Vitamin B. In 1888, a Japanese scientist developed a new and more powerful gunpowder which later helped Japan to win the war against Russia in 1905. Thus contrary to popular perception, the Japanese do have a very early history of fundamental scientific research. Thus, ( As in the case of the USA,) the future revival of the Japanese economy lies in technological and scientific innovation and not in its traditional role as the industrial manufacturer of the world.
To be continued on Friday