Any serious observer of the Japanese economy follows the work of Richard Katz.
In two closely argued, well-documented books, Japan: The System that Soured
(M E Sharpe, 1998) and Japanese Phoenix: The Long Road to Economic Revival
(M E Sharpe, 2003), Katz set out the view for which he is best known: that
Japan once had an economic system that worked brilliantly but no longer does.
Katz continues to elaborate this thesis in his writing for The Oriental
Economist, where he serves as senior editor. Katz argues that Japan's failure
to overhaul its political economy has led to the emergence of "two Japans" - a
hyper-efficient export sector and an inefficient, backwards set of companies
that primarily serve Japan's domestic market. He maintains that it was
these companies, protected by rigid, obsolete political arrangements, that
pulled the entire country down into a trough of stagnation and keep it from
fulfilling its potential.
Katz's "system that soured" take on events forms an immediately attractive
alternative to the once-dominant paradigms of thinking on Japan: the
increasingly threadbare reculer pour mieux sauter [to give way a little
in order to take up a stronger position] school that persists in seeing Japan's
recent difficulties as grossly exaggerated bumps on what remains a well-planned
road to global economic dominance; Eamonn Fingleton is perhaps the leading
representative of this view.
On the other side is the "rational choice" ideology of observers such as J Mark
Ramseyer who dismiss as a "myth" any notion that there was ever anything
distinctive about Japan's economic methods.
Katz's take on things, by contrast, seems like common sense, allowing one
simultaneously to acknowledge that at one time Japan really did pull off
something remarkable, but that things in the past two decades have not gone
well; and that the poor performance of recent years can be traced directly to a
failure to overhaul the political framework that once fostered something close
to an economic miracle but that now acts to block reform.
Katz's recent prominence is due, however, not simply to this common sense and
his many virtues as a writer and an economist. After the Japanese bubble ended
in the early 1990s, discussion of the country almost disappeared into the
shadows cast by China's rise and the resurgence of the American economy. With
the bursting of the US housing bubble and the implosion of American finance,
Japan has again become an object of attention - not so much because of what
Japan is or is not doing today (although the scary numbers coming out of Tokyo
are, to be sure, being noted worldwide) but because of the eerie similarities
between what seems to have happened in Japan 19 years ago and what is going on
now in the United States.
Katz has weighed in with his thoughts on the supposed parallels in the
March/April issue of the mouthpiece of the American policy establishment,
Foreign Affairs. The subject matter, timing and venue all assure a wide
hearing. Katz lays his cards right on the table with the title: "The Japan
Fallacy: Today's US Financial Crisis is Not Like Tokyo's 'Lost Decade'."
Anyone who knows Katz's writing thus looks forward to a vigorous dispelling of
all the hoary untruths that have somehow become conventional wisdom: that the
Japanese economy collapsed in the 1990s (it didn't); that one can accept at
face value the Western labels pasted on economic institutions in Japan such as
banks, bond markets, and corporate financial reporting (one can't). Above all,
one expects a debunking of the widespread notion that American policy makers
should use the actions of their Japanese counterparts back in the early 1990s
as a sort of perfect inverted guide - doing what they didn't do (that is,
moving fast to cut interest rates instead of "dithering") and not doing what
they did do (protecting "zombie" companies and banks that should have been
allowed to die) - that somehow by "learning" from Japan's "mistakes" the US can
avoid that country's "lost decade".
Katz starts off on the proverbial right foot by forthrightly labelling
comparisons between Japan's experience and what the US is going through as
"wrong". But when he moves on to write that the "scope" of the US crisis is
"far smaller" and that the response of policymakers has been "quicker and more
effective", one begins to wonder.
To be sure, last year the US Federal Reserve cut interest rates much more
quickly than the Bank of Japan did back in the early 1990s. The Obama
administration clearly understands the need for sustained fiscal stimulus to
pull the United States out of the downward spiral; its nominal counterparts in
the dizzying succession of cabinets that followed the fall of the Takeshita
government in 1989 gave every impression that they were not even convinced
Japan was truly in trouble. As Katz notes, this was not simply a matter of
foot-dragging on fiscal stimulus but also "a failure to address the loan
crisis".
But while the White House may be making all the right noises about fixing
American finance, a growing number of astute observers (see the Newsweek
article as well as the Simon Johnson piece in The Atlantic) worry that the
administration has fallen into the grip of what Willem Buiter of the London
School of Economics calls "financial capture".
Buiter writes that he had initially feared that people such as Lawrence
Summers, director of the National Economic Council, and Treasury Secretary
Timothy Geithner (not to mention President Obama himself) had become victims of
"cognitive capture". That is to say, well-meaning as they might be, they had
spent so many years in and around Wall Street that they were unable any longer
to conceive of how an economy not run by and for finance capital could possibly
function.
But watching the dissembling out of Washington and London, Buiter fears "it is
becoming increasingly hard to deny the possibility that the extraordinary
reluctance of our governments to force the unsecured creditors (and any
remaining non-government shareholders) of the zombie banks to absorb the losses
made by these banks, may be due to rather more primal forms of state capture."
If this is true - if key figures in the Obama White House are essentially
acting as shills for Goldman Sachs or, to put it more politely, if they are
unable to distinguish the interests of Goldman Sachs from those of the Obama
administration and the American public - then the differences between Japan's
policy response to the challenges of the early 1990s and what we are seeing
today out of Washington become more a matter of atmospherics than substance.
(Full disclosure: I worked for Goldman Sachs between 1989 and 1991 and was
asked to resign.)
To be sure, since the full dimensions of the current crisis first became
obvious in the spring of 2008, the American government has been a veritable
beehive of activity in its attempts to contain the damage. But if Wall Street
has a veto over potentially the most effective measures - nationalization,
regulation with teeth - then any real difference between all the buzzing out of
Washington and the distracted, ineffectual responses in Japan to the first
signs of that country's crisis back in 1990 may not amount to very much.
Katz is correct, of course, that the Japanese government failed to "address the
loan crisis" in any meaningful manner for some years. But if any real lessons
are to be learned from their response (or lack thereof) to that earlier crisis,
it is crucial to understand why Japan's policy officials refused to do what
received opinion at the time told them they ought to - and it is not a matter
of stupidity or obstinance.
Since 1927, Japan's financial institutions, most particularly the great "city"
banks and the long-term banks, had been wards of the Ministry of Finance (MOF).
That is to say, their actions and their well-being were seen by the MOF (and by
everyone else in Japan) as the MOF's responsibility. MOF bureaucrats were not
regulators with explicit powers delegated by law; within its recognized area of
responsbility, the MOF was effectively sovereign. The political framework and
mental universe in which MOF bureaucrats lived made it essentially impossible
for them to respond to the onset of the wider crisis in the early 1990s in any
fashion other than the one in which they did: to do whatever they saw as
necessary to keep their wards alive and functioning.
Arguments that the banks needed to be broken up quickly, with bad assets
separated from good, with the former written down and the latter repackaged and
reconstituted simply made no impact. To be sure, this did finally happen after
a fashion, but not until it had become evident to everyone including the MOF
itself that the ministry had lost at least some control over events; that it
simply lacked what it took to maintain the shape and integrity of Japanese
finance.
While one can argue (and many have) that Japan could have gotten "back on
track" more quickly if the MOF had acted in the early 1990s like, say, the
Swedes, to be anything other than idle conjecture - that is, to imagine that
something like the Swedish solution was a serious alternative in the Japan of
the early 1990s - one must presuppose that Japan's history, political culture
and power relations are something other than what they are.
And it should be noted that whatever their failings, MOF officials did pull off
something unprecedented in global financial history: steering their country out
of what to that point was the largest banking crisis ever without a system-wide
panic or a major recession in the real economy. (Between 1990 and 2002, Japan
suffered anemic growth and several quarters where growth essentially stopped,
but that was the worst it got.) It is by no means clear at this point that a
decade or two from now, Washington will be able to look back on today's events
and make a similar boast.
The people in Washington who collectively exercise powers roughly comparable to
those of the MOF and its offshoot, the Financial Services Agency (FSA), include
senior officials of the Federal Reserve, the US Treasury, the Comptroller of
the Currency, and the Securities and Exchange Commission, as well as the chairs
of the House financial Sservices and senate banking committees and their top
staffers.
In theory, there is nothing that prevents them from applying the same "Swedish"
solution today that so many were urging back in the early 1990s on Japan:
temporarily nationalize the banks, break them up, fire their managers, bring in
new ones, and re-impose regulation that would consign financial institutions to
their properly modest place in a healthy economy as handmaidens of genuinely
productive activity and stewards of savings.
But as noted above, growing evidence suggests that men such as Summers and
Geithner are realistically no more capable of doing so than were their MOF
counterparts back in 1990. Their personal fortunes - not just the money in
their bank accounts but their prospects for future earnings and stature, their
webs of personal associations, and above all the mental constructs that govern
what they see as possible, prudent, realistic - no longer permit them to
distinguish the well being of Goldman Sachs from that of the country that they
theoretically serve.
Here is the kind of lesson that the Japanese experience really might offer if
analysts could lift their heads for a moment out of their charts and numbers
and consider what it is that determines the actions of policymakers in a crisis
and how power reacts when it finds itself suddenly threatened by the
consequences of its own decisions and arrangements.
There are certain things that we can be sure that a Saito Jiro (the MOF
administrative vice minister in 1993 when Japan's crisis started to turn really
ugly) or a Henry Paulson - the former US Treasury Secretary and one-time
Goldman Sachs chief - will not do. They will not stick it to their friends,
former superiors and colleagues - the people whose opinions they hear all the
time and whose respect matters to them - whether those are ex-MOF officials
scattered throughout the upper echelons of Japanese finance and politics, or
Goldman Sachs alumni managing hedge funds, heading up banking behemoths, and
visible everywhere in the corridors of power in Washington and New York.
Of course there are crucial differences as well between the American and
Japanese situations - differences that can be equally illuminating. MOF
officials lived in a hierarchical universe where they sat on top; the banks
were their dependents, their wards. It may be an exaggeration to say that
things are neatly reversed in the US - the US Treasury does not yet function
solely at the beck and call of Goldman Sachs - but it is significant that the
closest parallel in the US to the career arc of a successful
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