Japan: wounding the lead goose

with Eurasia, from Europe to the Pacifi c. Former presidential adviser and geostrategist, Zbigniew Brzezinski, put it bluntly:

… in terminology that hearkens back to the more brutal age of empires, the three grand imperatives of imperial geostrategy are to prevent collusion and maintain security dependence among the vassals, to keep tributaries pliant and protected, and to ‘keep the barbarians from coming together.’

It was an ambitious agenda.

JAPAN: WOUNDING THE LEAD GOOSE

One of the most pressing challenges to the U.S. role in the post-cold war world was the enormous new economic power of its Japanese ally over world trade and banking. Japan had built up its economic power during the postwar period through careful steps, always with an eye to its military protector, Washington.

By the end of the 1980s, Japan was regarded as the leading economic and banking power in the world. People spoke about the ‘Japan that can say no,’ and the ‘Japanese economic challenge.’ American banks were in their deepest crisis since the 1930s, and U.S. industry had become overindebted and undercompetitive. This was a poor basis on which to build the world’s sole remaining superpower, and the Bush administration knew it.

Prominent Japanese intellectual and political fi gures, such as Kinhide Mushakoji, were keenly aware of the special nature of the Japanese model. ‘Japan has industrialized but not Westernized,’ he noted. ‘Its capitalism is quite different from the Western version, and is not based on the formal concepts of the individual. It has accepted selectively only the concepts associated with the state, economic wealth accumulation and technocratic rationalism.’ In short, the Japanese model, which was tolerated during the cold war as a geopolitical counterweight to Chinese and Soviet power, was a major problem for Washington once that cold war was over. How major, Japan was soon to learn.

No country had supported the Reagan era budget defi cits and spending excesses during the 1980s more loyally and energetically than Washington’s former foe, Japan. Not even Germany had been so supportive of Washington’s demands. As it appeared to Japanese eyes, Tokyo’s loyalty, and its generous purchases of U.S. Treasury

debt, real estate and other assets, were rewarded at the beginning of the 1990s by one of the most devastating fi nancial debacles in world history. Many Japanese businessmen privately believed that this was the result of a deliberate Washington policy to undercut Japanese economic infl uence in the world. At the end of the 1980s, Harvard economist and later Clinton Treasury secretary, Lawrence Summers, warned, ‘an Asian economic bloc with Japan at its apex is in the making … raising the possibility that the majority of American people who now feel that Japan is a greater threat to the U.S. than the Soviet Union, are right.’

The Plaza Hotel accord of the G-7 industrial nations in September of 1985 was offi cially designed to bring an overvalued dollar down to more manageable levels. To accomplish this, the Bank of Japan was pressured by Washington to take measures that would increase the yen’s value against the U.S. dollar. Between the Plaza accord, the Baker–Miyazawa agreement a month later, and a Louvre accord in February 1987, Tokyo agreed to ‘follow monetary and fi scal policies which will help to expand domestic demand and thereby contribute to reducing the external surplus.’ James Baker, the Treasury secretary, had set the stage.

As Japan’s most important export market was the United States, Washington was able to put Japan under intense pressure. And it did. Under the 1988 Omnibus Trade and Competitiveness Act, Washington listed Japan for ‘hostile’ trade practices and demanded major concessions.

The Bank of Japan cut interest rates to a low of 2.5 per cent by 1987, where they remained until May 1989. The lower interest rates were intended to spark more Japanese purchases of U.S. goods, something which never happened. Instead, the cheap money found its way into quick gains on the rising Tokyo stock market, and soon a colossal bubble was infl ating. The domestic Japanese economy was stimulated, but above all, the Nikkei stock market and Tokyo real estate prices were pumped up. In a preview of the later US ‘New Economy’ bubble, Tokyo stock prices rose 40 per cent or more annually, while real-estate prices in and around Tokyo ballooned, in some cases by 90 per cent or more, as a new goldrush fever gripped Japan.

Within months of the Plaza accord, the yen had appreciated dramatically. It rose from 250 to only 149 yen to a dollar. Japanese export companies compensated for the yen’s impact on export prices by turning to fi nancial speculation, dubbed ‘zaitech,’ to make up for currency losses in export sales. Japan overnight became the

world’s largest banking center. Under new international capital rules, Japanese banks could count a major share of their long-held stocks in related companies, the keiretsu system, as bank core assets. As the paper value of their stock holdings in other Japanese companies rose, bank capital rose with it.

By 1988, as the stock bubble roared ahead, the ten largest banks in the world all had Japanese names. Japanese capital flowed into U.S. real estate, golf courses and luxury resorts, into U.S. government bonds and even into more risky U.S. stocks. The Japanese obligingly recycled their infl ated yen into dollar assets, thereby aiding the presidential ambitions of George H.W. Bush, who succeeded Ronald Reagan in 1988. Commenting on Japan’s success during the 1980s, New York financier George Soros remarked, ‘… the prospect of Japan’s emerging as the dominant financial power in the world is very disturbing …’

But Japanese euphoria over becoming the world’s fi nancial giant was short-lived. The infl ated Japanese fi nancial system, with banks awash with money, led as well to one of the world’s greatest stock and real-estate bubbles, as stocks on the Nikkei index in Tokyo rose 300 per cent in a space of three years after the Plaza accord. Realestate values, the collateral of Japanese bank loans, rose in tandem. At the peak of the Japan bubble, the value of Tokyo real estate in dollar terms was greater than that of real estate in the entire United States. The nominal value of all stocks listed on the Tokyo Nikkei stock exchange accounted for more than 42 per cent of world stock values, at least on paper. Not for long.

By late 1989, just as the fi rst signs of the collapse of the Berlin Wall surfaced in Europe, the Bank of Japan and Ministry of Finance began a cautious effort to slowly defl ate the alarming Nikkei stock bubble. No sooner did Tokyo act to cool down the speculative fever, than the major Wall Street investment banks, led by Morgan Stanley and Salomon Bros., began using exotic new derivatives and fi nancial instruments. Their aggressive intervention turned the orderly decline of the Tokyo market into a near panic sell-off, as the Wall Street bankers made a killing on shorting Tokyo stocks in the process. The result was that no slow, orderly correction by the Japanese authorities was possible.

By March 1990, the Nikkei had lost 23 per cent or well over $1 trillion from its peak. Japanese government offi cials privately recalled a May 1990 Washington meeting of the IMF Interim Committee, where a heated debate over Japanese proposals to fi nance the economic

reconstruction of the former Soviet Union was drawing strong opposition from Washington and the Bush Treasury Department. They saw that meeting as a possible reason behind the speculative Wall Street attack on Tokyo stocks. It was only partly true.

The Japanese Ministry of Finance had issued a report to the IMF, arguing that, far from being a problem, as argued by Washington, Japan’s huge capital surplus was urgently required by a world needing hundreds of billions of dollars in new rail and other economic infrastructure investment following the end of the cold war. Japan proposed its famous MITI model for the former communist economies. Washington was unenthusiastic, to put it mildly. The MITI model involved a heavy role for the state in guiding national economic development. It had proved remarkably successful in South Korea, Malaysia and other east Asian countries. When the Soviet Union collapsed, many began eagerly looking to Japan and South Korea as better alternatives to the U.S. free-market model. That was a major threat to Washington plans as the cold war drew to an end.

The Bush administration was less than eager to accept a leading role from Japan in rebuilding eastern Europe and the Soviet Union. Washington had other plans for its former cold war adversary, and the creation of a Japanese-fi nanced economic bloc with Russia was not on the list. To drive the point home, George Bush sent his defense secretary, Dick Cheney, to Tokyo in early 1990 to ‘discuss’ drastic U.S. troop reductions in the Asia–Pacifi c rim, a theme calculated to raise Japanese military security anxieties. Cheney’s barely concealed blackmail mission followed on the heels of a January trip by Japan’s Prime Minister Kaifu to western Europe, Poland and Hungary, to discuss the economic development of the former communist countries of eastern Europe. The message was clear—‘Do as Washington says, or we leave you poorly defended.’

By the time the Japanese prime minister met the American president in Palm Springs that March, he had got the point. Japan was not to compete with American dollars in eastern Europe. Within months, Japanese stocks had lost nearly $5 trillion in paper value. Japan Inc. was badly wounded. Little more was heard about a Japanese challenge to American fi nancial plans in eastern Europe. Washington economists proclaimed the end of the Japanese model. Privately, Tokyo politicians often used the analogy of a fl ight of geese, with Japan fl ying as the lead goose and the smaller economies of east Asia following in its path. By 1990, Washington had badly wounded the