This blog does not usually play war with other bloggers – but something in Ampontan’s criticism of me has got my goat. So if you do not want to indulge me a little flame-throwing just skip this post.
Ampontan (AKA Bill Sakovich) writes a wryly amusing but deeply nationalistic Japanese blog. He is – as far as I know – the only English language exponent of the virulent Japanese nationalism that initially gained power with the Meiji Restoration, waged and lost the second world war and – unlike the German equivalent – respectably survives to this day. My favorite comment on his blog – and one I do not think he resiles from is that he has “Hirohito’s nutsack lodged so far down his throat its amazing he hasn’t asphyxiated himself long since.”
Ampontan is surely the only native English speaker who simply denies the Japanese (war crime) of mass forced prostitution as “comfort women” happened (more precisely he endorses deniers). He regularly defends the Yakasuni Shrine (and by extension the visits to the shrine by any serving Japanese Prime Minister).
Not that I can complain about that. The Shrine was on my must-visit places list when I went to Japan. It is a dull Shinto shrine with a bizarre attached museum which with thoroughly revisionist history absolves Japan from all and Nazi Germany from much responsibility for any atrocities committed in the Second World War. I paid my admission fee – and by extension I supported that nonsense. The Shrine also memorializes war dead including those who died at the gallows after being convicted of war crimes.
It is not that Meiji era Japanese nationalism has nothing to recommend it. That view of Japan, how it should be administered and Japan’s place in Asia and the world is one of the most successful industrial-development ideologies ever invented. Not only did Japan grow into an industrial superpower twice (once before and once after the war) but the system was copied by Korea and it worked there too. Nazism too was a successful economic system in that it allowed Germany to build an industrial base large enough to wage total war from a relatively small country. Germany and Japan (and Italy) took on the UK (then the largest empire the world had ever seen), the US, Russia and China, and a host of other countries and had a military-industrial establishment that made more than a show of it. These ideologies worked at producing industrial goods (and a military-industrial complex).
They were also of course deeply nationalistic and racist ideologies. Colonialism always had an undertone of racism (as any modern reader of Rudyard Kipling should not fail to notice) but these ideologies were far more murderous than anything imposed by the Brits or French (even though the Brits occasionally and the French more often were murderous). The scale of the atrocities committed by the Japanese in China were only exceeded by Hitler at his worst (though they have also been exceeded by some murderous Post War regimes).
I said I find Sakovich’s blog wryly amusing. I would not find a German equivalent amusing but that was because I was raised to vicariously remember the holocaust. My grandmother ran a safe house in Warsaw and a man who was by repute her husband and my grandfather was murdered at Auschwitz. I was not raised to remember Japanese slave drivers on the Burma Railway, comfort women or Nanking – and so an unapologetic Japanese blog is amusing whereas an unapologetic Nazi one would be offensive. Propaganda about Asian co-prosperity zones was pure propaganda. The truth was that much of occupied Asia was a Japanese rape-and-plunder zone.
I can’t envisage a German leader visiting a memorial to Nazis hung after Nuremburg whereas Japanese Prime Ministers make a show of going to Yakasuni. But then that particularly rabid Japanese nationalism survives whereas the German equivalent is dead. Denazification is a word that appears in many modern history books (see for example Tony Judt’s excellent history of Post War Europe). I do not know the equivalent Japanese word…
That said – this is an economic/finance blog and not one to inclined to debate with a heartless denier of Japan’s less-than-glorious Imperial history. And I should outline the good-bit of the Meiji industrial system. I have done it before in a stylistic history of industrial Japan (one that a few Japanese economic professors endorsed as simplistic but essentially accurate). I will just repeat the key bits modified to fit the narrative (but you can find the original here):
First however I need a stylised history of Japan starting with the arrival of Commodore Perry’s black ships in 1853.
Before Perry Japan was almost autarkic. There was a relatively weak central government and about 300 “han” – being relatively strong feudally controlled districts. The Emperor did not effectively speak for Japan when Perry came in, guns blazing.
The Meiji Restoration changed this. Japan was reformed as a centrally controlled empire – with a ruling oligarchy ruling through the Emperor who claimed dominion over all of Japan. The “han” were combined to form (75?) prefectures with a governor appointed centrally.
The view of the new oligarchs was that Japan would get rich through (a) industrialization and (b) unequal trade treaties to match the unequal treaties imposed on Japan by Perry et al. To this end they invaded Korea and started the military industrialization that ended eventually with World War 2. There were major wars in Korea and against an expansionist Tsarist Russia (especially 1904-1905).
Ok – that is your 143 word history of Japan from Perry to World War 2. Like any 143 word history it will leave out important stuff. I just want to focus on how this foreign policy adventurism was financed.
Financing Japanese expansionism - and that financial system until today
Firstly it is simply not possible to expand heavy industrialization of the type required by an early 20th Century military-industrial state without massive internal savings. Those steel mills had to be funded. And so they set up the infrastructure to do it.
Central to this was a pattern of “educating” (the cynical might say brainwashing) young girls into believing that their life would be happy if they had considerable savings in the form of cash balances at the bank (or post office) or life insurance. Japanese wives often save very hard – and are often insistent on it. The people I know who have married Japanese women confirm this expectation survives to this day.
Having saved at a bank (and for that matter also purchased life insurance from an insurance company loosely associated with the bank) the financial institutions had plenty of lendable funds.
The financial institutions by-and-large did not lend these funds to the household sector. Indeed lending to the household sector was mostly discouraged and was the business of very seedy loan sharks. To this day Japan has a relatively undeveloped credit card infrastructure with very high fees. These high fees are a throwback to the unwillingness of the institutions to lend to households. [The Japanese establishment are willingly forcing these consumer lenders to bankruptcy as any Takefuji shareholder will tell you…]
Japanese banks instead lent to tied industry – particularly heavy industry. It was steel mills, the companies that built power plants, the big machine tool makers. Many of the companies exist today and include Fuji Heavy Industries, Kawasaki Heavy Industries and other giants such as Toshiba. Most of these super-heavy industrials were tied to the banks (and vertically integrated) called Zaibatsu.
Now steel is a commodity which has wild swings in its price. Maybe not as ordinarily wild as the last five years – but still very large swings. And these steel mills were highly indebted to their tied banks. Which meant that they could go bust.
And as expected the Japanese authorities had a solution – which is they deliberately cartelized the steel industry and used the cartel (and import restrictions) to raise prices to a level sufficient to ensure the heavy industry in question could service its debt.
The formula was thus (a) encourage huge levels of saving hence (b) allow for large debt funded heavy industrial growth. To ensure it works financially (c) allow enough government intervention to ensure everyone’s solvency.
When the Americans occupied Japan their first agenda was to dismantle the Zaibatsu. They were (in the words of Douglas McArthur) “the moneybags of militarism”.
Like many post WW2 agendas that agenda was dumped in the Cold War. The owners of the Zaibatsu were separated from their assets and some cross shareholdings were unwound – but the institution survived – and the Zaibatsu (now renamed Keiretsu) remained the central organizing structure of Japan. Dismantling Japan’s industrial structure did not make sense in the face of the Korean War. The pre-war Zaibatsu had more concentrated ownership than post-war Keiretsu.
Unlike in Germany there was no real attempt to dismantle the establishment ideology. Douglas McArthur may have appeared to tower over the Emperor in the famous photo – but Hirohito was not tried as a war criminal – even though he would certainly have been hung if put to a fair trial.
The point is that it was the similar structure before and after the war – and it allowed massive industrialization twice – admittedly the second time for peaceful purposes.
Now the system began to break down. Firstly by 1985 steel was not the important industry that it had been in 1950 or 1920. Indeed almost everywhere you looked heavy industry became less important relative to other industrialization. By the 1980s pretty well everywhere in the world tended to look on such heavy industries as “dinosaurs”. This was a problem for Japanese banks because they had lent huge sums to these industries guaranteed by the willingness of the State to allow cartelization. You can’t successfully cartelize a collapsed industry.
Still the state was resourceful. Originally (believe it or not) they opposed the formation of Sony – because they did not know how to cartelize a transistor industry. Fifteen years later the French Prime President would refer to his Japanese counterpart as “that transistor salesman” and he was not using hyperbole. Still the companies coming out of new Japan – technology driven mostly – did not require the capital that Japan had in plentiful supply. If you look at the companies coming out of Kyoto (Japan’s Silicon Valley) they include such wonders as Nintendo – companies which supply huge deposits to banks – not demand huge funds from them. [Incidentally in typical Japanese fashion the biggest shareholder in Nintendo is Bank of Kyoto. Old habits re-cross shareholdings die hard.]
The banks however still had plenty of Yen, and they lent it where they were next most willing – to landholders. The lending was legion and legendary – with golf clubs being the most famous example of excess. [At one stage the listed exchange for golf club memberships had twice the market capitalization of the entire Australian stock exchange.]
Another place of excessive lending was to people consolidating (or leveraging up) the property portfolios of department stores. Think what Bill Ackman plans to do to Target being done to the entire country – and at very high starting valuations.
Meanwhile the industrial companies became zombies. I have attached 20 year balance sheets for a few of them here and here. These companies had huge debts backed by dinosaur industry structures. They looked like they would never repay their debts – but because they were so intertwined with the banks the banks never shut them down. As long as interest rates stayed near zero the banks did not need to collect their money back from them. As long as they made token payments they could be deemed to be current. There was not even a cash drain at the banks at low rates. The rapid improvement in the zombie-industrial balance sheets in the past five years was the massive boom in heavy industrial commodities (eg steel, parts for power stations etc). Even the zombies could come alive again… only to return to living dead status again quite rapidly with this recession.
Anyway – an aside here. Real Japan watchers don’t refer to the banks as zombies. They refer to the industrial companies as zombies. (Although most of the Western blogosphere does.)
Most of the banks had plenty of lendable funds and a willingness to lend them. They did not have the customers – and the biggest, oldest and most venerable of Japanese companies were zombies. So were the golf courses, department stores and other levered land holders. I get really rather annoyed when people talk of zombie banks in Japan – it shows a lack of basic background in Japan.
Note how this crisis ended.
1). The bank made lots of bad loans – firstly to heavy industrial companies and secondly to real estate related companies (golf courses, department stores etc).
2). The loans could not be repaid.
3). The system was never short of funding because the Japanese housewives (the legendary Mrs Watanabe) saved and saved and saved – and the banks were thus awash with deposit funding.
4). The savings of Mrs Watanabe went on – indeed continued to grow – with zero rates.
5). Zero rates and vast excess funding at the banks made it unnecessary for the banks to call the property holders and (especially) the industrial giants to account for their borrowings. Everything was just rolled.
6). Employment in the industrial giants of Japan thus never shrank (Toshiba alone employs a quarter of a million people). The economy continued to sink its productive labour force into dinosaur industries and dinosaur department store chains.
7). The economy stagnated – but without collapse of any of the major banks and without huge subsidies to the banking system. [The number of banks – mostly regional banks – that failed during the crisis was not large given the depth of the crisis.]
They system is very good at funding heavy industry – but it is less entrepreneurial than you would want in a modern economy. The best Japanese tech companies tend to come from Kyoto (which is outside the Tokyo establishment). Toyota – what I think is Japan’s finest company – is in Aichi prefecture – well away from Tokyo.
Anyway – this industrialization structure worked brilliantly and the Koreans copied it (with radically different banking outcomes). It however is less good at low-capital but high-innovation industries. The tech-boom was an American phenomenon – encouraged and nurtured (for better and for worse) by the American system. It was not nurtured by the Japanese establishment though Sony and Toyota most certainly are by now… Many of the most innovative Japanese companies started away from the bosom of the establishment – though the establishment later embraced them.
The Japanese industrial structure and the ideology that drove it produced industrial goods really well – and innovation based goods less well. But – the system works.
Economic stagnation is not the greatest of Japan’s problems. Many a UK visitor has gone to Japan and observed that if that level of economic activity (and living standards) represents stagnation they they wanted some of it.
The real threat to Japan is demographics. Mrs Watanabe saved and saved and had fewer than two children. (Children are expensive – especially housing them in a place with land values where they were in the 70-90s). So an aging population became a dramatically aging population. Here is a projection of the median age of population in three OECD countries. Australia is an aging population offset by immigration, Italy an aging population exacerbated by emigration and Japan is a result of Japan’s military industrial policy and the booms and busts it has caused. The chart is from the Australian Treasury intergenerational report – but the numbers are broadly accepted:
Japan will have a median age of about 55. This means that the vast bulk of the Japanese population (or more precisely Japanese women) will be well beyond child-bearing age and given low fertility rates anyway (below 2.0 per woman) the population will crash. That is more-or-less baked in. Simple equation – most the women past child-bearing age and very low fertility amongst those who bear children anyway.
There is a solution – immigration. There are an endless supply of well educated and skilled young people (mostly) from the subcontinent who would happily move to a developed country. There are more than a few from China too. Australia will import them. Ampontan rhetorically asked where I expected them all to fit into Japan? Well that is easy – with a demographic like that I expect them to fit into the slots left by the dying warriors of Japanese industrialization.
If Japan does not do it then aging and death is inevitable. The working population will be stuck looking after and funding the huge numbers of retired. Japan’s industrial growth – now anemic – will collapse entirely with its population. The great Japanese industrialization experiment will walk slowly into the setting sun aided by a walking stick.
There is of course an alternative which is modest levels of immigration. New immigrants will – like it or not – be Asian – mostly from the subcontinent. Over time they will also include many Muslims. The Japanese will have to accept – as Australians have accepted – that their children will breed with these people. As a white Australian I have fully accepted that it is likely as not that my grandchildren will arrive as little brown babies. I do not have a problem with that.
But Japan is a country where they won’t let their hookers sleep with foreigners because – well they are foreigners. (It was that story in this post that got Ampontan all upset with me.) But it does not have to be that way. There can eventually be an Asian co-prosperity zone in Japan – it will be with Japanese children and other Asian children and eventually their joint grandchildren. The Meiji racist ideology does not have to end with a walking stick – it can end in a truly multicultural society that will lead Japan onto greater things than the original modern revolutionaries of the Meiji era could ever have imagined.
John
