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(03/04/1999 - Prestowitz) PERSONAL VIEW - The Japan That Can Say Yes

PERSONAL VIEW - The Japan That Can Say Yes
By Clyde Prestowitz
1,146 words
4 March 1999
Financial Times
(c) 1999 Financial Times Limited. All Rights Reserved

Japan is beginning to change at last. The agents of reform are the foreign companies which are coming to buy up ailing buying local firms.

While most policymakers fret about Japan's deflationary recession, there is a little-recognised silver lining.

One example was the announcement last week that Robert Bosch, the German auto parts giant, had acquired a controlling interest in Zexel, a Japanese fuel injection specialist. Although little remarked upon, the acquisition constituted a milestone: it marked the first time since the beginning of the second world war that any Japanese auto-related company had come under foreign control.

Even more startling is the fact that Nissan, long a favoured national champion and darling of industrial policymakers, is openly on the block and may shortly wind up as part of DaimlerChrysler. What 30 years of jawboning and threats by trade negotiators could not accomplish in terms of opening the Japanese auto market is being delivered by the consequences of seven years of recession and failing financial institutions.

Of perhaps even more significance is the fact that no one in Japan seems to mind or even notice. A dozen years ago when T. Boone Pickens, the US corporate raider, bought into Koito, a Toyota lighting specialist, and demanded seats on its board, the whole of the Toyota keiretsu, along with most of the rest of Japan, rose with one voice to say "no" to the threat of foreign penetration of what was seen as a key Japanese industry. Indeed, at about the same time, a book entitled The Japan That Can Say No became a runaway best-seller. A few years earlier, the announcement by International Business Machines that it was moving a large part of its international staff to Tokyo elicited a spate of articles in the Japanese press darkly likening the arrival of IBM executives to the appearance of Commodore Perry's black ships in Tokyo bay in 1853 as well as to the arrival of General MacArthur to begin the occupation in 1945.

Against this background, what is happening in Japan today is dramatic. Delphi, the auto parts division of General Motors being spun off as in independent company, sold $1bn worth of parts to the Japanese auto makers in 1998 and plans to raise that by 50 per cent, mainly by way of takeovers.

Even more amazing is the story of Tenneco Automotive. Long a principal in the bruising negotiations over access to Japan's automotive market, it was accepted last year as a member of Keidanren, Japan's most influential business organisation.

Nor is the story limited to automotive companies. GE Capital has been systematically buying up distressed but promising properties and companies all around Japan, while Merrill Lynch took over the entire retail force of Yamaichi Securities.

Indeed, a high-ranking Ministry of Finance official recently told me the ministry is practically begging foreign financial companies to buy into the Japanese market.

For those who over many frustrating years have wondered whether Japan ever would or even could change its cosy, exclusionary business ties and practices, this is proof that the leopard not only can, but is changing its spots. It is also the best hope for the turnaround of the Japanese economy that exasperated US Treasury and other world financial officials can have. Their increasingly shrill demands that Japan stimulate its economy with easier money and bigger fiscal deficits have yielded little beyond rising frustration on both sides. Indeed, one top US Treasury official has been heard to say that Japan is finished as a great economic power.

At the same time, Japanese leaders who are already running the biggest budget deficits in world history without visible effect are asking "what more do they want us to do?"

What neither side has adequately understood is that the structure of Japan's economy is so distorted that the standard macro-measures are ineffective unless perhaps applied to extreme degrees that risk further damaging distortion. Ordinary Japanese citizens know it is no longer worthwhile to try to keep the old machine going with a bit more chewing gum and bailing wire. They will not regain confidence until it is clear that the old machine is being traded in for a new one. And that is exactly what the appearance of eager foreign investors and their integration into the inner sanctums of Japanese industry presages. The question now is whether it will continue and become permanent or be snuffed out by a reassertion of traditional, nationalistic views and policies.

There have indeed been rumblings on the right from such figures as Shintaro Ishihara, conservative politician and novelist (co-author of The Japan That Can Say No) who argues that the whole economic crisis is nothing more than an American plot to undermine Asia's heretofore rising influence. But these dissonant tones have not so far resonated with the Japanese public or mainstream policy makers. Nor are they likely to do so.

There has been a long-running debate as to whether the peculiarities of the Japanese economy that came to be characterised as Japan Inc. were cultural and thus largely immutable or matters of policy and convenience that might change to adjust to new circumstances.

Although always questionable from the point of view of long-run economic efficiency as well as international comity, Japan's adoption of policies that excluded foreign participation in its economy and emphasised national champions in key industries was understandable as part of its attempt to rebuild a national identity and reassert sovereignty in the aftermath of defeat. When these policies succeeded beyond all expectation, they were cloaked in the mantle of culture, thereby giving them an aura of uniqueness and permanency.

If the country was doing well, it was more satisfying to ascribe the success to innate national virtues than to subsidies, tariffs and cosy business practices. It also helped to ward off foreign pressure for market opening if the pressure could be characterised as an attack on Japanese culture. No country, after all, can legitimately be asked to change its culture.

But as success has turned to stagnation in the 1990s, Japan has come to realise that its very success created new circumstances to which the old model could not effectively respond. In the face of that realisation, the "culture" argument has given way to common sense and Japan has begun to do the unthinkable. It has begun to say "yes" - yes to deregulation, yes to consumer needs, and even yes to foreign investment. The more Japan continues to say "yes", the better both it and the rest of the world will feel.

The author is president of the Economic Strategic Institute in Washington, DC and a former US trade negotiator.

Copyright Financial Times Limited 1999. All Rights Reserved.


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