Japan’s enduring challenge

Seventy years ago this week, hundreds of Japanese fighters and dive bombers unexpectedly appeared on a clear Sunday morning over the North Shore of the main Hawaiian island of Oahu and prepared to drop their bomb loads on Pearl Harbor. Within minutes the U.S. Pacific fleet was decimated and the door appeared open for a ...


Seventy years ago this week, hundreds of Japanese fighters and dive bombers unexpectedly appeared on a clear Sunday morning over the North Shore of the main Hawaiian island of Oahu and prepared to drop their bomb loads on Pearl Harbor. Within minutes the U.S. Pacific fleet was decimated and the door appeared open for a complete Japanese conquest of the Pacific basin and the establishment of an enduring Japanese hegemony over the Asia-Pacific region.

As we now know, this great Japanese victory was a pyrrhic one, as its architect and main protagonist, Admiral Yamamoto Isoroku, had predicted it would be. Long before his bombers materialized over Hawaiian waters, Yamamoto had warned Japan’s leaders against the attack. He would succeed with the initial assault and would "run wild" for the first year of an ensuing war, he told them. However, he emphasized, if the war continued beyond a year, Japan would not be able to match America’s enormous productive power and would inexorably ground down be ground down and defeated.

This is, of course, exactly the series of events that ensued and that were brought to a close by the final event of the Japanese surrender on the decks of the USS Missouri in Tokyo Bay in August, 1945. Victor America appeared to have met and overcome the Japanese challenge.

But pre-war Japanese Finance Minister Takahashi Korekiyo knew that there is more than one kind of defeat and that their consequences are not all the same. In 1936, he had somewhat clairvoyantly commented that "the consequences of an economic defeat are much more difficult to nullify than those of a military defeat."

Japan quickly nullified its military defeat by developing and adopting rapid economic growth policies that have come to be known as the export led-strategic industry economic growth model. In this model, domestic consumption is suppressed while strong incentives and even compulsory measures lead to high savings rates. The savings are channeled through state owned or controlled or strongly guided banks and financial institutions into high rates of investment in designated key industries such as textiles, steel, machinery, chemicals, electronics, aerospace, and so forth. These industries typically have the potential to realize great economies of scale and to increase their technology content and value added while also serving as institutions that teach and disseminate skills. Because the domestic markets of Japan were relatively small at the time they could not provide the demand necessary to justify the large scale production facilities needed to obtain economies of scale and to be globally competitive. Thus there was a great emphasis on export growth. To that end, Japan managed the exchange rate of its yen to keep the currency undervalued while it protected the domestic market and provided a variety of direct and indirect subsidies to exports which were also often dumped in foreign markets even as prices were kept high in the domestic Japanese market.

This model worked so well that by 1964, The Economist magazine used a cover story to proclaim the Japanese Economic Miracle. By the late 1970s and early 1980s, Japan was again posing an enormous challenge to the United States. Its companies had already virtually taken over the U.S. textile, radio, recorder, television, shoe, and machine tool industries and were making big inroads in the auto, heavy machinery, tire, semiconductor, computer, telecommunications, steel, and other advanced industries. In 1984, for example, in fabled Silicon Valley, 100,000 people lost their jobs and the U.S. semiconductor industry lost $4 billion in the face of Japanese competition. Although it was still the world’s major creditor nation, the U.S. trade deficit climbed to $150 billion as the U.S savings and investment rates fell and living standards began to stagnate.

This resulted in almost endless "trade friction" between the United States and Japan and continuous negotiations over market opening and "unfair trade" in a wide variety of industries. Japan "voluntarily" agreed to limit its exports of autos and certain other products and to things like "trigger price mechanisms" to mitigate the impact of dumping. An agreement in the semiconductor industry gave "assurances" to the U.S. industry that it could obtain 20 percent of the Japanese market. Eventually, under the Plaza Agreement, the Japanese were pressured to and allowed the yen to appreciate by over 100 percent. This led to the great Japanese bubble of 1988-92 when the value of the Imperial Palace in the center of Tokyo was estimated to be greater than that of the entire state of California.

The collapse of the bubble in 1992 and the ensuing bad debt overhang and plummeting real estate values plunged Japan into what has become popularly known as its "lost two decades." This was accompanied by the ballooning in the United States first of the bubble of the late 1990s and then of the real estate bubble of 2002-08 which made it appear that the U.S. economy was robust and super competitive. Once again, it seemed, the United States had met and overcome the Japanese challenge.

Today, however, that is not clear at all. On the one hand, if we compare the GDP growth rates of the United States and Japan over the past twenty years and adjust for differences in inflation and population growth, they are not very different. Moreover, we have to recognize that the U.S. growth must be somewhat discounted by the fact that America became the world’s biggest debtor during this time while Japan was accumulating enormous trade surpluses and capital reserves. Furthermore, the United States never recovered in the industries taken over by Japanese producers and continued to lose production and leadership in an ever expanding array of other industries.

More important, however, is the fact that following then Singapore Prime Minister Lee Kuan Yew’s call to "look east" for its economic growth inspiration, the rest of Asia has adopted the Japanese model in, of course, a variety of versions. First the Asian Tigers, Korea, Taiwan, Singapore, Hong Kong, Malaysia, and Thailand, and now the last Tiger or, perhaps, the fist Dragon, China is also in the mix.

With these countries plus Japan, the United States now runs a trade deficit of around $400 billion annually while it continues to lose leadership in an ever wider array of technologies including solar energy, advanced materials, electronic displays, and nanotech. The U.S. growth of the late ‘90s and early oughties is now recognized to have been something of a Potemkin village. It was false growth. The United States is now the champion of both domestic and international debt and whereas in the 1980s it could force its client state Japan to do things like revalue its currency, it cannot do the same in the case of China.

So the Japanese challenge has morphed into an Asian challenge and continues to loom before the United States.

Trending Now Sponsored Links by Taboola

By Taboola

More from Foreign Policy

By Taboola