The U.S. economy has extended its sparkling performance into a ninth year, albeit attended by sentiments of rising caution on Wall Street. The contrast with Japan’s decline in the 1990s is so strong that events in the United States look as though they are happening on another planet. In a global era, however, this is a patent illusion. The two economies interact closely, even now generating new stress points in the areas of trade and finance.
Advanced market integration has already virtually eliminated the options of either comfortable isolation or resistance carried on behind the shields of sovereignty or national systems and cultures, much less distance. One momentous consequence of the end of the Cold War is that today governments and businesses feel growing pressure to meet the largely U.S.-set norms of market-driven capitalism — momentous in the sense that the released forces of change directly test leaders’ claims to power and touch the everyday lives of people around the world.
The Japan-U.S. performance gap is there for anyone to see in terms of macro- and micro-economic numbers across the board, from growth and unemployment rates to consumer and business confidence and stock prices and corporate earnings. No less striking are the nuances shading leaders’ policy-shaping convictions and avowals.
Take, for example, the latest congressional testimony by Mr. Alan Greenspan, chairman of the U.S. Federal Reserve Board. While acknowledging the effects of wealth or higher equity values in boosting consumption, he consistently takes the position that it is the strength or weakness of the U.S.’ real economy that ultimately decides ups and downs in equity values, instead of the other way round.
Also impressive from a Japanese perspective is Mr. Greenspan’s nearly boundless faith in the power of the market. At the root of the remarkable U.S. capital gains, he says, is the ability of management and labor to adapt to broad advances in a wide variety of technologies. This leads to investor expectation that new investment by U.S. businesses to exploit critical technological synergy will bring a significant increase in rates of return.
Mr. Greenspan spoke of the “great churning of capital” — which he also called a process of “creative destruction” — that is flowing to more profitable sectors and businesses from less profitable ones. Anything that interferes with the market’s efficient allocation of capital must be repudiated, and that applies to U.S. President Bill Clinton’s proposal to invest Social Security funds in the securities market as well.
What happened in the ’90s in Japan was that mismanaged financial economics progressively strangled the real economy. Years were wasted as politicians and bureaucracy postponed needed but painful action on the banks’ bad-debt problem. Meanwhile, the attempt, launched two years ago, to regain a better budgetary balance with a large tax raise proved to have been disastrously timed. Members of the present Cabinet’s new economic policy team readily concede that their predecessors failed to foresee and limit the extent of the developing collapse in equity and property values and the subsequent damage to the economy.
Japan’s problem is clearly not just a matter of the real economy and the financial markets continuing to drag each other down; it is structural in nature. In today’s transformed business climate, financial efficiency should often collide with traditional practices such as cross shareholdings by the member companies, including a core bank, of major business groups. Old practices and institutions are now exposed to strong winds of change.
With the so-called Big Bang policy and a nearly total deregulation of foreign-exchange transactions having gone into effect last year, structural reform is perhaps most advanced in the financial sector among the Japanese economy’s nonmanufacturing sectors. But reforms so far have left untouched the largest entity on the scene: the fiscal loan and investment system, funded by the postal savings that account for about 20 percent of private financial holdings.
Now widely discredited, the Japanese model at its best strives to reconcile two values that are often in conflict — social stability and competition for survival. Japan will likely have to plod on, abandoning some of its own features and devices, but keeping others.
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