All kinds of “self-confident” experts make predictions in the mass media about the economy and politics. In Japan, such experts are rarely held accountable if they err in their predictions. In the late 1980s, when the bubble economy peaked, Japanese experts expressed the following opinions that later turned out to be completely mistaken:

* U.S. manufacturing industry was declining because of misguided management techniques. The industry could revive itself only by learning Japanese management strategies. There was no way for the United States to eliminate its huge budget and trade deficits, which caused the value of the U.S. dollar to keep falling.

* The intelligence level of Americans was much lower than that of Japanese because of poor U.S. elementary and middle-school education. The U.S. should promote educational reform for its economic revival, using Japanese education as a model. (In 1987, then Prime Minister Yasuhiro Nakasone caused an uproar when he said the intelligence level of Americans was not high because “they include many Puerto Ricans, Mexicans and blacks.” He suggested that Japan did not have such a problem because it was “racially homogenous.” )

* Japan should not hesitate to say “no” to U.S. demands in bilateral trade talks because it could easily strangle the U.S. economy merely by stopping semiconductor exports, according to a book coauthored by the late Sony Corp. Chairman Akio Morita and then Lower House member Shintaro Ishihara — now the Tokyo governor. In their opinion, Pax Americana in the 1980s was likely to be replaced by Pax Japonica in the 1990s as a result of U.S. economic decline and Japanese economic prosperity.

Overconfident politicians, business executives and economists announced their opinions — which in hindsight seem to border on madness — as if they were supreme truths. These experts, who were among the top Japanese intellectual elite, were affected by what John Galbraith called “euphoria.” Galbraith said “euphoria” hit Americans in the late 1920s and Japanese in the late 1980s; both periods were times of intense market speculation.

In the late 1980s, Japanese companies and consumers were under the false impression that land and stock prices would continue to rise forever. Euphoria spread not only groundless economic optimism, but also baseless overconfidence in the Japanese system.

It is difficult to predict what the world will look like 10 years from now. The last decade of the 20th century saw many unexpected events in the world and in Japan, including:

* The end of the Cold War following the collapse of the Soviet Union in 1991, economic globalization in subsequent years, the information-technology revolution, the emergence of postindustrial societies in the U.S. and elsewhere, the growth of the financial industry, the continued U.S. economic boom, the establishment of center-left governments in Europe, the financial crisis in East Asia, which stemmed from speculation by hedge funds, increased income gaps between individuals and between nations, the increased likelihood of a single competitor dominating all others in free business competition, and growing interest in global environmental issues.

* Economic slowdown in Japan in the 1990s, steep falls in asset prices, the strong yen, infusion of huge amounts of public funds into the ailing banking industry, progress in financial liberalization, the end of 38 years of single-party rule by the Liberal Democratic Party, sharp criticism of the Japanese system following the praise of the 1980s, exposure of many defects inherent in the Japanese economy and the decline of the intelligence of Japanese youth.

Some of the changes are related. For example, economic globalization, the IT revolution and the postindustrial society have brought about the continued U.S. economic boom and the expansion of the financial industry, which led to the East Asian economic crisis. Market-economy reforms, meanwhile, have caused income gaps to widen between individuals and between nations. Ill-conceived privatization has ruined public education and medical care in Europe, leading to the advent of center-left governments in Europe. Progress in economic globalization and Japan’s long economic slowdown have caused reappraisal of the Japanese system and forced its reform.

We now have to adapt to the changes that occurred in the 1990s. Japanese economic experts are saying that market-economy-based reform is the only way for Japan to adapt. But we should not forget that market reform is only a transitional phase. European countries, which implemented such reforms in the 1980s, eventually turned to the “Third Way.”

The “Third Way” can be considered a revolutionary regime that results from incorporating the good elements of market economies and interventionist regimes. In other words, European countries passed through the transition phase (market-based reforms) in the early 1990s and have reached a new economic paradigm that is the Third Way.

Standing at the threshold of the 21st century, Japan should also be starting to grope for its Third Way. It can start by ridding itself of the handcuffs imposed on it by the “market-economy” mantra.

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