ON THE JAPANESE THREAT An Interview with Chalmers Johnson Chalmers Johnson is the Rohr Professor of Pacific International Relations within the Graduate School of International Relations and Pacific Studies at the University of California, San Diego. He is the former chairman of the University of California, Berkeley's Center for Chinese Studies and its Department of Political Science. He holds A.B., M.A. and Ph.D. degrees in economics and political science from the University of California, Berkeley. He has written extensively on the subjects of East Asian political economy, revolution and social movements including such books as MITI and the Japanese Miracle, Japan 's Public Policy Companies and Autopsy on People's War. MULTINATIONAL MONITOR: What does it mean to refer to Japan as a capitalist developmental state? CHALMERS JOHNSON: The state provides opportunities for entrepreneurship and the state creates markets. In this sense, the state takes on developmental functions. Let me use two fundamental concepts--they're Marxist concepts, but they're also perfectly sound Adam Smith concepts--ownership and control. When ownership and control are both in the hands of the state, that is the command economy, classically, the U.S.S.R. A variation of this type of economy, one that is typical of reformist Leninist state, is to retain state ownership but recognizing the enormous inefficiencies in the command economy, and to devolve control to the level of the household enterprise. This produces the kind of pattern that one saw in China before June 4, 1989, or in Hungary before November 1989: so-called market socialism. It promotes efficiency, but it doesn't unleash entrepreneurship. The capitalist developmental state reverses these priorities. It provides genuine private ownership of capital and of property, and state control. This is important because here we see the Schumpeterian principle of entrepreneurship being released. The family is a perfectly logical focus of entrepreneurship, being the most intense form of social communication that we know, and the property has to be defensible in law and inheritable. The capitalist developmental state insures that the areas of entrepreneurship are those of state interest. The fourth possibility is private ownership and private control, of which examples would be the United States and, to some extent, Hong Kong. In my view this is the only model to which neoclassical economics applies. MM: And the capitalist developmental state is established in Japan through the Ministry of International Trade and Industry (MITI)? JOHNSON: There is a vast array of institutions, including the Ministry of International Trade and Industry, but also the Ministry of Finance, the Economic Planning Agency and other economic ministries. There is also a most unusual, unprecedented in this country, organization of the private sector, in an almost corporatist manner, headed at the top by Keidanren, the Federation of Economic Organizations. Keidanren has the ability to process private sector priorities, and to enforce them. So we don't have the sort of situation you have in America, where the private sector never, ever speaks with a single voice. In Japan there are thus a considerable number of institutions that contribute to the developmental state. The Ministry of International Trade and Industry is critically important because it is the agency in charge of so-called industrial policy. Industrial policy has become controversial among neo-classical economists because they don't want to acknowledge that such a thing exists. And yet, much of our economics today is unable to explain the growth of the Asian economies or the emergence of Japan as the world's richest nation. Japan is today the richest in terms of either per capita income or gross assets, and also the leading supplier of long-term capital on earth. This would suggest, among other things, that there's something wrong with our economic theory. But the reason we don't do much about that, in my view, is vested interests in the theory of the free market in America. We have been fighting the Marxists for so long that we no longer recognize challenges to our way of thinking based on non-Marxist, non-Smithian principles. MM: What do you think about what people refer to as the Japanese threat to the American economy? JOHNSON: Well, it is a threat in various senses. But it is not a threat in the sense of being malevolent. I think this should be understood. There may be a few Japanese who still believe that World War II isn't over, or something like that, but a much greater danger is the Americans who have the nerve to attempt to explain Japan, even though they have never been there, and don't read a single word of Japanese. Such people tend to project onto Japan what they think Japan's reactions and behavior ought to be, rather than actually studying it. Japan is today leading a campaign of foreign direct investment in the United States that is simply unprecedented in scope and velocity. And it is impossible to prove, as Kozo Yamamura has recently demonstrated in his new book on Japanese investment in the United States, that the jobs being created in Tennessee compensate for the jobs lost in Ohio. It is also a squandering of American resources for the State of Kentucky to spend $150 million in taxpayers' money to attract one of the world's richest firms, Toyota, to build a plant in Georgetown, Kentucky. Another problem with Japan's direct investment in the United States is the transfer of control. Control remains important because the trend today is not toward borderless economies, but more toward bloc formation. What with the single market in Europe in 1992 and the Canadian-American free trade agreement. The point is that if you believe Japanese investment in America has no consequences, you also would have to believe there is never going to be another recession, or that, if there were another recession the Japanese are going to fire Japanese before they fire Americans. I don't believe these are realistic assumptions. I also think that it is a matter of elementary reciprocity. We cannot invest in Japan without going through an elaborate licensing procedure. Such a policy is, in my view, completely justified. The question is, why we don't have a similar licensing procedure? Regardless of what the economists tell us, Japanese foreign direct investment is going to lead to some resentment here, and that will at some point become ideologized.The most common headline in Hawaii today is "Last Golf Course in Maui Sold to Japanese." And I want to say after a while, if you didn't want the last golf course in Maui to be Japanese controlled, don't always blame the buyer. You could have come up with a public policy that prevents that. Japanese say to me, "We would not have allowed you to impose such costs on us. It's up to you to come up with rules that say, Japanese investment is welcome, but it can only be in the old industrial heartland--that is, in Michigan, IIlinois, Indiana, and Ohio." And we don't do it simply because we are stymied by doctrine, by the Council of Economic Advisors, by the vestal virgins of St. Adam Smith who tell us it would be a sin. But we're perfectly capable of licensing and exercising our policing control; and we need to do it, it seems to me, in order to prevent worsening relations between Japan and the United States. We don't have a foreign investors registration law in this country. The information that we have about foreign investment in America comes from the private sector. I believe we do not have such a law largely because of lobbying by the banking community which does not wish to have its transactions scrutinized for reasons that are all too obvious given the rate of both S&L and bank failures in America. What I'm saying is that the Japanese threat to America is in some ways a self-inflicted wound. And the problem is not going to go away by harassing Japan. It basically is caused by incompetence in the American government. Since money talks, what fool would believe it isn't going to talk when it owns a major source of cultural diffusion? MM: And what you've been talking about here is rules, laws to control and direct the form that Japanese investment in this country takes? JOHNSON: Exactly. Let's talk about an issue that threatens the world as a whole: the fact that the 10 largest banks on earth today are Japanese. It would seem to me that anyone with any prudence--particularly as one looks at the amounts of money we are going to use to bail out the savings and loan industry in Texas--would be asking themselves: what are the quality of the assets of these banks, particularly when we know that Tokyo real estate prices look like they're undergoing a tulip-panic again? We know that this is a speculative bubble that's going to burst at some point. Similarly, I believe that any prudent investor or person with a fiduciary responsibility would be curious to know the quality of bank examiners and bank regulation in Japan. Well, the truth of the matter is that they are almost non- existent. Let us not forget that the Great Depression of the 1930s began with a failure of a major bank in Austria. I find it easy to imagine, particularly in light of the U.S. stock market collapse of October 19, 1987, that a bank in Japan could collapse, or that the bottom could fall out from under this huge speculation and borrowing against inflated real estate values. This is a severe threat that requires public policy. Managers and people in position of private sector responsibility in the United States are responding to the incentives that are put before them. The incentives are changed by legislators, not by economists. And this is where the problem lies. If you want a longer-term perspective on the part of American entrepreneurs, you've got to give them incentives that pay off better in the long run. Right now, they have the most extreme short-term incentives, largely legally imposed. The fiduciary responsibility of someone who invests the pension fund of the University of California is to shift out of National Semiconductor into Taco Bell if Taco Bell is performing better than National Semiconductors. The critical relationships between Japan and the United States are anachronistic. They were created during the Allied occupation of Japan, at the time of the Korean War and as a result of the security treaty struggle at the beginning of the 1960s, when America was a hegemonic power. Japan was a late- developing and then economically-recovering economy. Today, these relationships are outdated--they no longer have any reality to them, in the sense that we are defending a nation to which we are simultaneously going into debt. This is an unstable situation to say the least, and this is where the threat lies. How to deal with it depends, in part, on one's intellectual assumptions. If you assume, as most Americans have, that Japan and the United States are in some sense converging, that they are both becoming consumer-based, mass consumption, environmentally sensitive, haute bourgeois societies, then indeed the policies that we have pursued are accurate. These are the policies of the State Department, which are basically ameliorative, glossing over, painting over glitches and problems. If you believe, as I do, that Japan and the United States are very different places, are not converging, and that the difference between a capitalist developmental state and a capitalist regulatory state is real, then these policies are mistaken, because they are merely suppressing fundamental differences that will at some point badly explode. There is something utterly implausible about the idea that Japan and the United States are converging. The only reason the idea exists is because Americans know almost nothing about Japan; there are very few people in the U.S. government who are in positions of responsibility who can read a word of the Japanese language. Therefore they deal with Japan by defining it as another version of Italy or France, which it isn't. Both the Japanese and the American governments reflect vested interests built up in the 1950s and sixties to paper over differences and to suppress differences, rather than resolve them. Therefore we have a situation which is a bit like a pressure cooker that is slowly building up steam and becoming ideologized. We now have Americans who are using Japan as a scapegoat; and I can assure you as someone who reads Japanese, who has been reading the literature for the past 30 years, that there are Japanese who scapegoat the United States. These are the sort of issues that I think are becoming significant. They certainly surfaced in the recent Sony acquisition of Columbia Pictures. MM: In what sense? JOHNSON: Well, as you know, there was a good deal of alarm expressed in the United States over that deal. Japan is the world's richest nation. And it's the world's leading source of long-term capital today. And it's investing all over the world. Since money talks, what fool would believe it isn't going to talk when it owns a major source of cultural diffusion? Now, if you recall, there was a movie that won an Oscar a couple of years ago, "The Last Emperor," about the last Chinese emperor. When it was shown in Japan several sections dealing with the rape of Nanking had to be cut out. That's a Columbia (now a Sony-owned) movie. So are "The Bridge of the River Kwai" and "From Here To Eternity." Meanwhile Mr. Morita, who is the recently resigned chairman of Sony, has just written a best- selling book together with another serious Japanese neo- nationalist, Mr. Ishihara. Mr. Ishihara is a sort of Jerry Falwell of Japan but he also just ran for the prime ministership of Japan. In their book, these two make neo-nationalist arguments about how they resent their dependency on the United States, and about American attitudes and work habits. Now if the next day we read that one of the main producers of American culture has been acquired by Mr. Morita's firm, and the only assurance we have is that the chairman of the board says that he is not interested in influencing things, I think it's worth being alarmed. MM: What do you think about protectionist legislation? JOHNSON: Well, I think the issue should not be viewed exclusively in economic terms and we shouldn't use the concept of protectionism. Remember that international trade theory, which is based on neo classical economics, always makes at least two errors. One error is that economists don't recognize that institutions are an important variable. Economic theory, especially of the Nobel Prize variety, is extremely abstract, and has to be translated into reality through institutions. And institutions are things created by people, not by markets. Second, economic theory also fails to recognize that markets have rules and histories. The issue right now is not protectionism but how to maintain the global market. This means coming up with rules. The GATT rules are not something handed down by Adam Smith; they were written largely by Americans when we were the most powerful nation on earth. We are now trying to produce GATT rules that will keep the international trading system going in the 1990s. In a sense we ought to tell the economists to shut up. They have nothing intelligent to say on this subject because it is not an economic issue. Right now we are in our 21st year of bilateral trade deficits with Japan. We have tried all sort of things to reduce these deficits, from the Nixon surcharge to Ronald Reagan's devaluation of the dollar, all of which were based on good, sound economic theory, and yet they didn't work. We now have a $52 billion trade deficit with Japan--a deficit so big that it threatens the entire global trading system. International trade has made us all relatively wealthy, and it has made the Japanese and the Americans among the wealthiest people on earth. Obviously we would like to continue this, rather than see it destroyed. So we must attack the fundamental problems that cause this huge trade deficit to continue. In my opinion, there are really only two things to do about it. Either we quit buying so much from Japan, or Japan buys a great deal more from us. Now, I believe we should quit buying so much from Japan; it would be one of the easiest things on earth to achieve. We could simply dust off the Nixon surcharge again. Just as on August 15, 1971, when the Secretary of State called the Japanese Minister of Foreign Affairs, and said, "Watch TV tonight," the President could simply announce "There's a 25 percent surcharge on Japanese goods, because we Americans over- consume. And so we're going to force people to quit consuming so much." But I think that by far the more important issue is to expand domestic Japanese demand. One of the things that led to the loss of the upper house majority by the Japanese conservative party last July, is the phenomenon of "rich Japan, poor Japanese." The Japanese are statistically the world's richest people, but they never feel that way, except perhaps when they go on vacations abroad. Every Japanese citizen wants better housing, for example. And better housing could be had if the political payoffs to agricultural landowners were ended. Japanese domestic demand needs to be expanded in that way, much as the Americans did in the 1950s when they invented the 30-year mortgage, and the National Defense Highway Act. The result came to be known as the American Dream, but it's a dream that doesn't go back before the war. The idea that all citizens in the country should their own houses. It made us all wealthy and it saved the Western world because the Americans were not protectionist. It is obviously extremely dangerous to have our government financed by foreign savings, not just because of what the Japanese Ministry of Finance is doing, but because as you talk to American leaders today, you find American Senators realizing what they'd have to do if the Japanese fail to come to the next treasury auction. In the case of Japan, it's not so much a matter of our becoming protectionist, it's a matter of saying that Japan can no longer continue to behave as if it were a developing economy. What is really needed in the Pacific is not more producers, but more markets, and Japan must become a real market. Our objection to agricultural protectionism in Japan is not just that we might supply some of their food; I think ultimately Australia might supply more of it. But agricultural protection forces Japanese households to spend more than a third of their income on food. And this is absurd in a nation as wealthy as Japan. MM: What kind of role does organized labor play in Japan? JOHNSON: Well, one of the keys to the developmental state has been to restrict labor entirely. Labor in Japan does not play an important political role. This is a significant comparative advantage in making industrial policy. The people at the MITI do not have to ask themselves what is the position of labor on this or that issue. Labor is not truly exploited in Japan, but labor has no significant political role. Only now this is ever so slightly beginning to change. MM: What do you think of Japanese Socialist Party Chair Doi? JOHNSON: Well, we don't really know enough about her. On the one hand, she is that unique and exceptional Japanese politician, someone who is moderately charismatic. Most Japanese politicians are gray bureaucrats. Here is a smart, outspoken, telegenic, middle-aged woman who has a contralto voice. She's obviously interesting, and, in a world in which the media play a huge role, in which organized interests no longer command much voter respect, there is a huge middle class floating vote. Ms. Doi's victory may renew democratic development in Japan by forcing the breakup of the vested interests on which the uninterrupted rule of the Liberal Democratic Party has rested since 1955, and which has stood in the way of producing effective change in Japan. That's why I regard it as a terrible mistake for our government to come out and lament the loss of conservative monopoly in Japan. It actually means we may now finally see some changes. But if Ms. Doi is really going to become Prime Minister, she will have to put together a more stable coalition than she has right now. Clearly she is currently the beneficiary of a protest vote.