CHAPTER THIRTY-FIVE

A Troubled Japanese Juggernaut

SEEN FROM THE UNITED STATES, Japan has a record—and mounting—surplus in her balance of payments and in her international trade. Seen from Japan, this “surplus” looks more like a record write-off of massive inventory losses.

Seen from the United States, the Japanese yen is the strongest among free world currencies, perhaps still undervalued at 250 to the dollar and kept from rising further only by the “dirty float”—large-scale intervention by the Bank of Japan. Seen from Japan, the strength of the yen looks transitory and illusionary.

Seen from the United States, Japanese economic policy looks only too successful—a commercial juggernaut that knows no bounds. Seen from Tokyo, Japan is now beginning to face up to the consequences of monumental economic and business blunders that threaten to sink, or at least slow, the juggernaut.

The Japanese businessmen and government officials who attended a round of seminars and meetings that I conducted in Japan in the summer of 1977—the tenth such visit in eighteen years—are all singing the blues. On the surface there would seem little evidence for their concern. Restaurants and bars are crowded; not a room was to be had in any resort, and planes and trains were sold out on National Culture Day, November 3; consumer buying is at an all-time peak; merchants expect a record Christmas selling season.

As to unemployment, the official figure is less than 2 percent. Yet Japanese businessmen and government officials may have ample grounds for their malaise, though not for the reasons they often give in public.

In the first place, Japan is grossly overstocked with high-priced inventories of industrial materials. “We usually keep five to six months of inventory of glass-making sand,” the president of one of the big glass companies told me. “Now we have enough for three years of full production.” The husband of a friend of ours, a middle-level executive in a textile firm, goes to work every morning and sits at his desk for ten hours doing little but reading detective stories; he is a production manager and the firm hasn’t produced anything in five months because all its warehouses are bulging with unsold merchandise.

In October 1977, Japan and Australia settled their “sugar war.” The Japanese sugar refi neries had contracted in 1974 to buy the entire Australian sugar crop for 1976 and 1977 at the high prices then prevailing—fi ve to eight times current prices. When the Australians started to deliver, the Japanese balked on their commitments. At one point 150 ships were tied up in Tokyo Harbor waiting to unload sugar.

The Japanese finally caved in after the Australians made a token concession to extend the payments period from three to four years. Now the Japanese are stuck with two years of supply at the highest prices ever recorded for sugar.

The same is true of copper, iron ore, pulp, sulphur, and coking coal. The Japanese, and above all Japanese officialdom, were seized by hysteria in 1974 when raw materials shortages were cropping up everywhere. They bought and bought and bought. Now they are frantically trying to get out of commitments to take delivery and have slashed raw materials imports nearly in half. Even so, industrial inventories are bulging with high-priced raw materials. (Apparently the same thing is happening with some finished goods: Another friend recounts that his government ministry still has a two-year supply of toilet paper as a result of the shortage scare several years ago.)

The second blunder by the Japanese was committed in 1975 and 1976. Japanese industry not only kept on producing when world demand went down, it actually stepped up production in many cases. The need to maintain employment was responsible only in part, and probably in lesser part.

The main reason was miscalculation. The Japanese, and, again, government officials in particular, expected a speeding up of world inflation and a very rapid recovery of demand in Japan’s markets, especially in Europe. “We made a deliberate decision to step up production,” says the executive vice president of a battery company. “We expected world prices to go up 30 percent. They have gone down instead, and by the middle of 1976 we had the equivalent of two full years of sales in our warehouses.”

When the banks began to put on the screws for repayment of inventory loans, Japan’s export drive went into high gear. But the inventories of finished goods for many industries—steel, textiles, consumer electronics—are still very high.

The final blunder was the Japanese response to their predicament. Partly by consensus among government, business, and labor unions, which are far more closely knit in Japan than in other industrialized nations, and partly because of the politics of the situation, the Japanese decided to keep domestic prices high and push exports. Exports are being priced to sell rapidly; higher returns from domestic sales are being used to compensate for export losses.

There have been exceptions. Akio Morita, for instance, the head of Sony Corporation, is known to have been highly critical of such a policy. Sony, perhaps alone among major Japanese companies, has lowered its prices in Japan while raising them in the export market.

Japanese business leaders realized that their strategy risked provoking extreme protectionist reaction from abroad. But politically the strategy was irresistible, particularly to the labor unions. It seemed to be the only way to enable business to keep on raising wages and benefits. In 1975, for example, wages and benefits went up almost 40 percent, enabling consumers to pay some of the highest prices in the world. (Low-grade beef sells for $15 to $20 a pound in Tokyo, fish is almost as expensive, and matsutake , the popular Japanese mushrooms, are going for as high as $40 a pound.)

Now, however, Japan faces a protectionist backlash of major proportions, as is rapidly becoming clear in the United States. And her own protectionist policies have pushed up the yen to where Japan is rapidly becoming one of the highest-cost producers among industrial countries. A good deal of excess inventory still hasn’t been worked down, and yet Japan faces the prospect of being forced to curtail exports sharply or lose permanent access to major world markets.

Easing agricultural protection—perhaps by switching from a system of restricting imports to a system of subsidizing farm incomes directly, as in the United States or Britain—would go some way toward shrinking Japan’s balance-of-trade surplus. It would also reduce the threat to Japan’s ability to compete posed by exorbitant food costs and consequent wage demands. So far, however, there have been only token concessions—to New Zealand, for example, which threatened to forbid Japanese fishermen access to her fishing grounds unless given better access to the Japanese market for meat and dairy products.

More heroic measures are needed. One may be to conduct a genuine clearance sale by selling a very large amount of inventory at low prices and on favorable credit terms to nonmarket countries, especially Red China.

This is the way in which the battery manufacturer mentioned above cleared his inventory. The trouble is that there isn’t too much that Japan makes that China needs in quantity; the Chinese demand for color TVs, for example, is likely to be limited, to say the least. Still, Japanese steel, chemicals, and plastics might find a market in China and perhaps also the Soviet Union. A major trade deal in the near future with those countries wouldn’t be a surprise.

But, above all, expect a period of turbulence in Japanese economic and currency policy. The adjustments that the Japanese have to make are fairly obvious—but they also are going to be very painful, financially as well as politically.

(1977)