Thinking about Japan (1988) Jude Wanniski June 24, 1998

Memo To: Website fans, browsers and clients
From: Jude Wanniski
Re: Japan 10 years ago

[Ten years ago, during the 1988 presidential election between Republican George Bush and Democrat Michael Dukakis, the U.S. relationship with Japan was one of the topics of debate. Japan, at the time, was the most prosperous country on earth, with capital forming so rapidly, that its outflow gave rise to alarms that it could soon buy the world. On October 19, 1988, I wrote a Polyconomics client letter, “Thinking About Japan” that attempted to put our relationship with Japan into some perspective. Today, Japan is in its ninth year of economic stagnation. Instead of worrying that it will buy up the world, there is now the worry that its weak economy will drag Asia and perhaps the rest of the world into a depression. My 1988 commentary is a bit dated, but still captures the essence of how I believe we should think of Japan as a commercial and political entity.]

 

FYI: THINKING ABOUT JAPAN
October 19, 1988
by Jude Wanniski

It was a standard plot of a 1950s sci-fi novel or a Star Trek episode. The highly-advanced people of a far away planet discover their environment is gradually being deadened, unable to support life much longer. The aliens send spacecraft to explore other possible homelands, colonizing several, hoping to shuttle an entire population in the few decades they believe remain.
The parallel with modern Japan suggests itself as we reflect on the widening gulf between the presidential candidates on the issue of foreign investment; Bush and Quayle have been aggressive in defending foreign (alien) acquisition of U.S. assets, Dukakis and Bentsen have taken pronounced stances in favor of limiting such investment. In his debate with Quayle, Bentsen specifically singled out Japan as a threat in this area.

One of the problems of our time is that Japan has no choice but to seek survival through colonization of more hospitable lands. We think of Nazi Germany when we hear the word lebensraum, but it has been much more apt in this century to equate Japan with cramped living quarters. There are 125 million people living on an island the size of California, but without California's natural resources. The mountainous island is near saturation, unable to support much more life without squeezing living standards or converting its tiny agricultural base to higher value-added economic activities, freeing the rice lands. Emigration from Japan is well over 2 million annually, "colonies" spreading especially in Brazil, Australia and the U.S., plus millions of businessmen and students living "temporarily" in most countries around the world.

The problem was not much different for Japan in the 1930s, when it had but 65 million people. It could solve its "deadened planet" problem by exporting people, capital or high value-added goods. Immigration quotas prevented emigration from Japan to the U.S. in any meaningful numbers. In 1913, California passed a law restricting land ownership to Japanese awaiting citizenship, intending to prevent the Japanese, as Gov. Hiram Johnson put it, "from driving the root of their civilization into California soil." The perceived threat to the people of Japan was real.

The United States had been its main hope, its Asian neighbors with few exceptions tied to one or another of the colonial powers. When the Smoot-Hawley Tariff Act was enacted in 1930, it was as if the United States established barriers to all three of the Japanese solutions. The trade walls prevented them from trading higher value-added goods for lower value-added grains, timber, oil and minerals. They also prevented Japan from acquiring the capital to invest in the Planet U.S. After all, it had to run a trade surplus in order to acquire productive U.S. assets for reasons of national survival, not mercantilism.

The emergence of the militarists grew out of this dilemma. The invasion of Manchuria was initiated in September 1931, a year after Smoot-Hawley began impacting Japanese exports, the military wresting power from civilian leadership. Emulating the European powers, it would ruthlessly impose a quasi-empire, the Greater East Asia Co-Prosperity Sphere. When President Roosevelt responded by further isolating Japan, his oil embargo shutting off an important source of Japan's energy, the die was cast. It's hard to argue with history, but it should be no surprise that the current wave of historical revisionism in Japan is taking place. Younger Japanese are rejecting the U.S. explanation of Pearl Harbor as a simple act of pure military aggression. The failure of U.S. leadership in dealing with Japan from the early days of the century paved the road to the Japanese attack.

Many older Americans, of course, believe the young Hirohito "started World War II." That the Emperor is now on his deathbed makes the petition of the U.S. Rice Millers Association so poignant at the moment. The association is demanding, under provisions of the new trade law, that Trade Representative Clayton Yeutter find the Japanese subsidies of their native rice an unfair trade practice. The action is putting fresh attention in Japan on growing U.S. protectionism as a reminder of the root causes of WWII.

Yeutter, quite sensitive to all this, assured me last week that he would not act on the Rice Millers petition during this sensitive period. As long as the Emperor lives, and for a suitable period of mourning thereafter, Yeutter says he would not take up the petition and still hopes to work out a solution. It's clear that if Japan is to contemplate a free trade environment for goods and capital in the decade ahead, it has to find a way to phase out its subsidies. Yeutter and I talked of the parallel to England's Corn Laws, which the Prime Minister, Sir Robert Peel, finally succeeded in abolishing in 1846.

England's fix in the 19th century was roughly identical to Japan's in the 20th, an island nation whose prosperity was outstripping its agricultural base. As I wrote in The Way the World Works ten years ago:

Britain had become too rich relative to the rest of the world to produce the cheap grain she consumed. The Corn Laws not only kept out cheap grains from abroad, but in subsidizing domestic agriculture as it had been arranged in the eighteenth century — sharecroppers working for the landed gentry — the Corn Laws delayed capital intensive farming that eventually did produce more food with fewer people. In a real sense it was the planet that forced repeal of the Corn Laws, for when the Irish potato crop failed in 1846, the starving Irish could not be fed from the inadequate British granaries. The Corn Laws simply had to be ended to permit entry of grains from the United States. Even so, a half million Irish died of starvation in 1846-47.

The parallel Japanese problem will surely be solved in similar fashion. England after 1846 relied on its commercial strength, its navy, and the Commonwealth network to secure its food needs. Over the next decade, Japan will be able to phase out its rice subsidies as it strengthens its investment links in North America and throughout the Pacific region. Stanford economist Michael Boskin, likely to be chief economic advisor in a Bush administration, believes the immediate problem can be solved if Japan would go to 80% self-sufficiency in rice from 100%. The subsidized price, now 10 times the world price, would drop dramatically by removing the marginal acreage.

Boskin and others are working on innovative ideas to resolve the short-term impasse, but the Japanese leadership, having achieved a psychological breakthrough just recently on beef and citrus barriers, needs time to push further. Trade treaties with the U.S. and Canada will eventually be necessary to protect Japan against the kind of grain embargo that President Nixon shocked Japan with in 1971. They would persuade the Japanese citizenry that it can gamble on external supply lines, as England did in 1846. Until then, we should look upon Japan's persistent trade surpluses and its U.S. investments in this positive light. We should also be pleased that the Dukakis-Bentsen protectionist promises are making little headway with the electorate.