Japan, Capitalism, and the Perpetuation of American Hegemony 義士？日本、資本主義、米国覇権の永続化

A Loyal Retainer? Japan, capitalism, and the perpetuation of American hegemony 義士？日本、資本主義、米国覇権の永続化

R Taggart Murphy

A Loyal Retainer? Japan, capitalism, capital at bay with one hand, promoting 1 and the perpetuation of American domestic corporations with the other.' In other words, for reasons that go directly to the core hegemony political legitimacy of their power structures, these states have deliberately flouted neo- R. Taggart Murphy liberal development doctrine with its emphasis Sixty five years ago, the United States emerged on the free movement of goods and capital. from the Second World War as the undisputed Had Japan’s power-holders in particular not felt compelled for political and historical reasons to hegemon of world capitalism. But within a eschew 'liberalization' of their economy – had generation, neither the American will nor the they allowed capital markets, for example, to American ability to continue managing the determine corporate control while arranging global capitalist order could be taken for the incentive structure of their system to granted. This essay will argue that the key to enshrine financial return as the pre-eminent understanding the repair and continued re- goal of asset-management – their ability to enforcement of American economic and support US hegemony could have been fatally financial primacy since the system-shaking compromised. Today’s global economic system tremors of the 1970s can be found in the would be a very different animal. postwar experience of Japan and its neighbors. Within that experience lies a paradox: it was The era of American hegemony has added precisely Japan’s deviations from orthodox another contradiction of capitalism to those capitalist methods – the distinctive marks that already identified by Marx such as tendencies characterize its political economy – that help towards overcapacity, overproduction, and a explain the continuation of an American- declining rate of profit as capitalists attempt to centered world capitalist system long after one defend and enlarge market share. Since the might have expected its manifest contradictions emergence of the dollar in the 1940s as to bring it down. capitalism’s dominant currency, we have seen a secular decline in its relative value. Unlike Perry Anderson has recently written: 'In Japan, sterling, which maintained its purchasing Korea and Taiwan, the post-war states were power through most of the 19th century and was creatures of American occupation ordisseminated via British capital exports, the protection, on a front-line of the Cold War. global supply of dollars since the late 1960s has Strategically, they remain to this day wards of stemmed from American current account Washington – planted with US bases or ringed deficits, thus raising the possibility of an by US warships – without real diplomatic or erosion of confidence in the dollar that military autonomy. Lacking politicalultimately could lead to a crisis of confidence in sovereignty, yet needing domestic legitimacy, capitalism itself. This contradiction – first their rulers …compensated with policies of foreseen by the economist Robert Triffin in economic self-development, keeping foreign 1956 (he called it a 'dilemma') – was resolved

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(at least temporarily) by a Japan that had while the methods Japan employed may not adopted an export-led growth model partly to have been fully capitalist, they depended for forestall the full transforming power oftheir success on their embedding within a capitalist relations. Among other things, relying global capitalist order pivoting around the on export proceeds and domestic savings financial hegemony of the United States. And rather than foreign direct investment to finance when Japan's methods began to threaten that development helped ensure that economic and order by devastating the traditional industrial political outcomes were determined bybase of capitalism’s hegemon, Japan would domestic power holders rather than impersonal move to preserve the global financial order market forces. But the perpetuation of the while doing its best – not always successfully – export-led growth model required that Japan to limit capitalist liberalization at home. Here is accumulate dollars that it would not seek to where we find the central paradox: Japan's very exchange either for imports or for other resistance to the full transforming power of currencies. Since Japan in a manner ofcapitalist relations forms a crucial explanation speaking would always be there to serve as the for both Japan's willingness and its ability to dollar’s buyer of last resort, international support the global capitalist order. capitalism could avoid the contradiction inherent in a global reserve currency whose The 1950s Origins of 'The Japanese value continued steadily to decline. This crucial Miracle' role Japan played in supporting the dollar, however, brought with it its own contradictions The thirteen crucial years between 1955 and for the country in the form of a buildup of 1968 would see Japan vault from a poor dollars that were not adequately translated into struggling country just beginning its climb out domestic purchasing power. To resolve this of war's devastation to a position as the world's contradiction, the Japanese authoritiessecond largest economy. Japan seized global deliberately created and fostered assetleadership in a series of industries beginning bubbles. The bubbles, once they imploded in with textiles and moving up the value-added the early 1990s, could not be re-inflated, but chain through shipbuilding, motorcycles, a the attempts to jolt the economy back into range of consumer electronics, and steel. growth with waves of credit creation supplied Dominance of colour television, machine tools, much of the credit that blew bubbles abroad – and automobiles was just around the corner. first in Southeast Asia, and then in the United These were all established industries with States itself. And it has also been this Japanese global markets adequately served by existing credit, joined in the last two decades by China, capacity in the United States and Europe when South Korea and other Asian countries, that Japanese competitors suddenly arrived on the provided the crucial support the dollar needed scene. It is crucial to understanding what to survive the bursting of those bubbles and subsequently happened both in Japan and to maintain its position as the dominant world the global capitalist system that one keeps in currency. mind that Japan targeted existing industries and existing capacity rather than attempting to The very market-thwarting mechanisms that launch new industries. In a nutshell, Japan's the Japanese put in place domestically have strategy for economic recovery from the repeatedly been pressed into service indevastation of war required first booting managing the biggest contradiction of them all: foreign companies out of the domestic market the rescue of a global capitalist order by a in carefully chosen sectors. The domestic country that had attained wealth and power at champions that then emerged from a protected least in part through non-capitalist means. But home base exported torrential surges of goods

2 8 | 41 | 3 APJ | JF to wrest market share abroad from Western ended the Occupation and restored to Tokyo a companies and establish dominant global limited degree of sovereignty would not have positions. For the strategy to work, the exports allowed them to experiment either with had to be of equal or higher quality than those Stalinist autarkic industrialization or the self- available from Western competitors, and sufficient import substitution being offered at lower prices. implemented at the time by such avatars of dependency theory as Jawaharlal Nehru's India In the 1950s, Japan's power-holders stumbled or Juan Peron's Argentina. Instead, Japan's onto a formula for economic growth and capital power-holders reconfigured institutions accumulation that surpassed anything the inherited from the war economy in order to world had seen until that time. Much of their direct scarce capital towards companies that success stemmed from the way they turned to held the promise of becoming internationally their advantage the peculiar parameters of that competitive exporters in order to accumulate decade: a United States unwilling to restore for Japan the key global currency of the day: real sovereignty to Occupied Japan, but also US dollars. These dollars could then be used to ready to buy anything Japan could sell without purchase the capital equipment needed for demanding reciprocal access to Japan's market. investment in the next targeted industry. At the beginning of the decade, the United Success involved careful identification of the States accounted for close to half the right industry for targeting and access to the purchasing power of the planet while Japan had patient financing necessary to seize and hold barely begun to recover from the devastation of global market share. That meant assuring war. So one-way trade with Japan hardly predictable costs for key inputs – labour, land, seemed much of a sacrifice to Washington, money, capital equipment – which in turn particularly when it formed part of a broader required central control over their prices. package that included a string of strategically placed American bases throughout the The priority given to economic reconstruction Japanese archipelago and put Japan firmly in from the ruin of Japan’s bombed-out cities the Western/capitalist 'camp' -- never mind that required no political discussion in itself, since it many of Japan's methods were hardly capitalist was taken as a given by all levels of society at in that they pivoted on state control of and the time. But the Japanese left had both the planning for capital rather than the unfettered capacity and the will to make trouble if the workings of the market. Indeed, Japan's power- interests of working people were not holders had no real blueprint for what they sufficiently attended to. Marginalizing the left were doing, capitalist or otherwise. was thus essential to the predictability required Mainstream economics, whether of the Keynesian or, later, neo-classical variant, did by the economic strategy Japan came to adopt. not constitute much of their mental furniture. Strikes were broken, trade unions largely 3 Trained largely in administrative law,2 their emasculated, and the possibility of a left economic outlook was informed partly by the electoral triumph precluded by a semi-rigged Marxian thought that pervaded the upper electoral system that favored conservative rural reaches of Japan's academic establishment at districts over urban. The 1955 merger (with that time. covert financial support from the CIA) of conservative forces into a single Liberal But the men who led Japan's march to the first Democratic Party virtually assured the LDP of a rank of the world's industrial powers were not parliamentary majority, even if it rarely Marxists as such, and even if they had been, commanded more than a plurality of the the terms on which the United States formally popular vote.

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employment” provided a significant core of the Japanese working class with stable jobs, steadily rising incomes, access to education, and welfare benefits in a society with a relatively egalitarian distribution of income and wealth. But they also provided industry with predictable labour costs by preventing labour markets from taking root. Wages and salaries at all levels from the entry level factory worker through the CEO of a major company were established and coordinated through negotiations among a handful of key company unions and managers acting in consultation with industrial federations and the economic bureaucracy. Annual wage increases could thus Tokyo 1945 be aligned with general economic growth levels. Job-hopping was unheard of among But the social compact that evolved out of the leading companies; a well-established firm labour struggles of the 1950s also helped would not hire someone who had worked for a sideline the left into a ritualistic, emptydirect competitor. sideshow. Under this compact, established companies would see to the economic security Just as there were no labour markets to speak of male heads of households in return for of, there was no real financial market and complete management discretion over work certainly no market in corporate control; assignments and job content. While this so- corporate decision-making rested firmly with called ‘lifetime employment’ extended only to mangement that need not answer to outside core male employees in established companies, shareholders. Companies were not bought and it became a norm to be striven for by all forms sold in open markets under any circumstances, of enterprise, public and private. Companies despite the nominal fiction of shareholder essentially could not fire a permanent employee capitalism. Established Japanese companies (sei-shain) while the bureaucracy ensured that ensured that most of their shares were held by bankruptcies among major companies in other major companies in reciprocal established industries did not occur. Major shareholding arrangements. What actually companies were pressured to keep their traded on Japanese ‘equity’ markets was not suppliers on life support even in difficult times. pro-rata ownership or pro-rata shares in Banks were loathe to cut off credit either to an residual corporate profits, but simply the established, first-tier company or to any of its present value of future dividend streams that recognized principal suppliers. And thebore scant relationship to corporate Ministry of Finance issued what amounted to a profitability. Meanwhile, banks provided the blanket guarantee that no financial institution overwhelming share of financing to industry under its purview would ever be allowed to fail. while their own cost of funds and the rates they charged borrowers were centrally determined. From one perspective, these arrangements There was nothing resembling credit analysis represented a real achievement by theas a Western banker would understand the Japanese left since they did result in the concept. Well-connected companies received fulfillment of a core left demand: near-universal credit in whatever amounts they needed; the economic security. The norms of “lifetime poorly connected need not bother to apply.

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It is difficult to see how these arrangements, when viewed as a totality, can properly be termed 'capitalist' without destroying the term's analytical utility by reducing it to a simple label for any economy that is post-feudal but non-Leninist. Although Japan did in the years between 1955 and 1968 certainly experience 'relentless and systematic development of the productive forces,' to quote from Robert Brenner's definition of capitalism,4 Japan's 'economic units' did not 'depend on the market' for what they needed. The labour and money they required were allocated to them through centrally coordinated US military procurements from Japan hit methods. Meanwhile, the peculiar Japanese $1 billion in 1953 institution of the sogo shosha or general trading companies were responsible for delivery of supplies of commodities in the But ever since the war ended, Japan had run its quantities and at the prices required by monetary policy in a fashion familiar to many industry.5 And, to continue with Brenner’s developing countries: using its holdings of US terms, while 'economic units' did respond in a dollars as the principal variable in establishing fashion to 'demand with respect to supply for its money supply. Countries lacking an goods and services,' the demands that were internationally tradeable currency of their own given priority originated from overseas. – and that would certainly include Japan in the 1950s – must, one way or another, assure The Emergence of Contradictions adequate holdings of reserve currencies such as dollars if they are to be able to pay for In 1968, Japan's economic methods began essential imports. All other macroeconomic visibly to alter both the political and economic variables are, by necessity, subordinated to this global ecology in which they had flourished. An objective. Since the domestic money supply is American presidential election was affected the principal lever that governments can use and possibly determined for the first time in the directly to affect aggregate demand, and since postwar period by trade issues withthe balance of aggregate demand to domestic 6 Japan. Meanwhile, at home, the monetary production in turn dictates whether a country effects of Japan's methods were beginning to runs a deficit or surplus on trade and current pose a policy challenge. account – and thus whether reserve currencies are on balance flowing into or out of the The Korean War had provided Japan with a country – monetary policy must be set by temporary surfeit of dollars, thanks to US relative levels of reserve currencies in military procurements which had helped jump- countries that seek to maintain minimum levels start the postwar economy. of the latter. In the case of Japan during the 1950s and early 1960s, that meant maintaining the domestic money supply at roughly three times the amount of dollar holdings.

In the mid -1960s, however, Japan had begun to run a structural current account surplus,

5 8 | 41 | 3 APJ | JF leading to a relentless rise in Japan's US dollar genius in organizing rural construction holdings. And the yen was on the verge of executives, farmers, and small business owners becoming internationally acceptable as a to extract public works spending and other settlements and reserve currency. But dollars deliberate allocations of credit from the central that are simply held as reserves without any bureaucracy.8 Tanaka believed that building a intention ever to be exchanged or redeemed for doken kokka (“construction state”) would imports begin to have perverse monetary spread prosperity throughout the country, implications once they are no longer needed to especially to poorer locatlities. And while this provide credible backing for domesticwas certainly true – albeit at the price of currency.7 If such an economy is to avoid horrendous environmental damage – the inflation – i.e., if domestic money supply is no construction machine Tanaka helped create longer allowed to grow in tandem withalso provided for a buildup of deposits in increasing reserves – ways must be found to Japan's banking system that served to offset the offset the growing reserves. This challenge is growing dollar horde. being faced today to a greater or lesser degree by all the export-oriented East AsianThe ascendancy of Tanaka seemed to represent economies, most particularly China, South a fundamental power shift. Unlike his Korea, and Taiwan, but Japan has been coping predecessors, he hailed from a regional with this structural by-product of its economic backwater, never went to university, and methods since the late 1960s. presented himself as an earthy populist in contrast to Tokyo's effete elites. But his That was an era when, for the first time ever in administration helped Japan cope with its its history, Japan had begun to enjoy a degree emerging contradictions without fundamentally of prosperity that extended to virtually all its threatening the postwar political order while people. Thus understandably the reaction to leaving the power-holders in Japan's the emergence of contradictions was to seek to bureaucracies, major corporations, and leading strengthen in every way possible the postwar banks with continued control over economic certainties: a stable, undervalued exchange decision-making. rate and unlimited access to the American market. A new prime minister, Tanaka Kakuei, But before the policy makers clustered around came to power in 1972 on the basis of his skill the Tanaka Cabinet could finish the at balancing the demands of textile exporters groundwork for the deliberate creation of asset with the need to mollify an angry Nixon inflation, the Bretton Woods system broke up administration. Nixon believed he had been and OPEC producers seized control of global double-crossed by a Tokyo that had promised a petroleum markets. Japan found itself with reduction in the exports in return forother and far more pressing priorities than restoration of Okinawa to nominal Japanese managing the contradictions of success. Forced sovereignty, but had then failed to deliver. into accepting a rise in the exchange value of After repairing relations with Washington, the yen at the Smithsonian negotiations of Tanaka went on to oversee and re-enforce the December, 1971, Tokyo's economic mandarins political mechanisms necessary for thewere, by late 1973, coping with a currency in economic experiments in coping with the free fall as both foreign and domestic players buildup of dollars – experiments that would assumed Japan was finished. It was not a stupid lead to the deliberate creation of asset bubbles. assessment. Not only was Japan absolutely Tanaka understood that widespread prosperity dependent on imported energy whose price was would bring new pressures from relatively less now soaring, it had flourished within a global well-off parts of the country; he demonstrated monetary, trade, and security regime that

6 8 | 41 | 3 APJ | JF seemed by that year on the verge of collapse. the break-up of Bretton Woods and the oil crisis The Smithsonian negotiations had beenof 1973/74 would see the country emerge as intended to resurrect the Bretton Woods the key supporter for a reconfigured global system with exchange rates reset to reflect monetary order still revolving around the US contemporary economic reality. But thedollar. Japan would play a central and defining agreements floundered on the absence of role in the most important American political political will to enforce the new rates. The realignment since the New Deal: the success of world found itself with a monetary system – if the so-called Reagan Revolution. And Japan one can call it a 'system' – which initially would serve as a tacit model for the rest of East seemed based on nothing but the whims of Asia – most importantly for China in the wake frightened central bankers. Meanwhile, a of the death of Mao Zedong. United States that had served for nearly three decades as the guarantor of Japan's security Japan and the Restoration of Dollar and its market of first and last resort was Hegemony enduring with the Watergate affair a political crisis of unprecedented magnitude while Following the Bretton Woods collapse, Saudi suffering its first ever defeat in war. Arabia and the Gulf Emirates had contemplated billing their customers in a currency other than The pessimists about Japan's future had not the dollar. But their ultimate decision to stick reckoned on the country's formidable residual with the American currency was not driven by strengths, chief among them its institutions of any evidence that Washington had either the control – the same institutions that had brought will or the ability to halt the rapid erosion in about the spectacular rush to growth of the purchasing power of the dollar after 1973. 1955-1968. Again, the economic bureaucracy Rather, they needed American military set about rationing dollars and energy,protection and no other currency circulated in establishing and policing domestic cartels, and the quantities required to replace the dollar as maintaining dogged control of the yen in the a global medium of exchange. The OPEC cartel new floating rate world. The results were, for could compensate for the continued decline in the time, astounding. Japan pushed inflation the dollar's value by periodically boosting down from over 20% (as measured by the prices, but no such option was available for consumer price index) in 1974 to 3% in 1975. anyone else. And as the decade proceeded, While the rest of the world struggled through inflation accelerated and the exchange value of the 1970s with the novel phenomenon of the dollar continued to plummet. 'stagflation' – simultaneous inflation and high unemployment –Japan's recession was over by Events culminated in the summer of 1978 with the end of 1975. In the teeth of the worst global a full-fledged dollar crisis. The incoming Carter slowdown since the 1930s, Japan again grew administration had blamed Japan for America's briskly, racking up not only healthy GDP escalating trade deficits, accusing Tokyo of numbers but also substantial increases in 'dirty floating' -- unannounced interventions to exports thanks in part to deliberate market suppress the exchange value of the yen in order interventions to keep the value of the yen lower to maintain export competitiveness. Under than it otherwise would have been. Indeed, pressure, the Japanese abandoned 'dirty something like half the total increase in global floating.' The yen predictably rose to previously exports in 1976 came from Japan. unimagined heights, nearing the psychologically critical ¥180/$1 barrier. The Japan's triumphant return from the economic Americans had gotten what they asked for, but graveyard to which it had been assigned after instead of the reduction in the bilateral trade

7 8 | 41 | 3 APJ | JF deficit with Japan that they expected would would rise even as rates fell. Savvier follow a clean float, found themselves instead Republicans used this 'voodoo' economics as a staring into the abyss of a dollar collapse. Japan cloak for their true intentions, believing that joined Switzerland, Saudi Arabia and West the prospect of financial disaster in the wake of Germany in a four-country rescue mission for the tax cuts would force the government to the dollar, while Carter's hand was eventually reduce spending. They counted on this indirect forced into engineering the appointment of means of 'starving the beast' to gut the welfare hard money man Paul Volcker as Chairman of state. Meanwhile, Democratic leaders such as the Federal Reserve.9 Owing no political debt to Speaker of the House Tip O'Neill lacked the Carter, Volcker set about halting the slide in political support to withstand the the dollar's purchasing power with steep hikes administration's tax-cut offensive, particularly in interest rates and a concomitant deep after the assassination attempt against Reagan recession that would help doom Carter's re- in April, 1981. They caved to White House election chances. pressure, anticipating that events would force the administration to reveal its unpopular hand It is at this point that Japan stepped out from when it came back to Congress to negotiate being a supporting actor to assuming the spending reductions in order to forestall starring role in the resurrection andfinancial catastrophe.10 restructuring of American hegemony over global finance and the global economy – and These events never occurred: the deficit would thus the survival and recovery of global indeed snowball, but it would be smoothly capitalism from its worst systemic crisis to that financed without a political or market crisis. date since the 1930s. Ronald Reagan won the With the sole exception of economist Robert 1980 American presidential election with what Mundell (who, however, thought it would be amounted to a mandate to destroy what was 'the Saudis' who would finance the deficit11), no left of the liberal Keynesian order that had observer saw that this would happen. The prevailed since the New Deal and the Second public sector deficit soared to levels few had World War; his campaign had succeeded in thought could be sustained over time without blaming this order for the inflation and other ruin. The United States emerged from the economic ills of the 1970s. 'Government is not enactment of a structural Federal deficit with a the solution to our problems. Government is the robust economy that played to the country's problem,' is the way he famously put it. Once in emerging comparative advantage in the design office, Reagan intended to launch direct attacks and packaging of complex bundles of high- on the institutions that provided for the value added manufactures and services. And a economic security of the American working and permanent Federal deficit would greatly lower middle classes. And with the breaking of enhance the power and wealth of the American the 1981 air controllers strike, hisruling class at the direct expense of the administration did succeed in dealing labour a working and lower middle classes. crippling institutional blow from which it has never recovered. It is critical to note here that the structural Federal deficit that forms the most enduring But the administration lacked the political financial legacy of the so-called 'Reagan stamina to roll back directly the social welfare Revolution' was not a Keynesian deficit programs that formed the core of the New Deal intended to plug the gap between capacity and legacy. A handful of 'supply side' gurus had utilization opened up by a temporary cyclical seized the limelight with the notion of tax cuts decline in private demand. For the Reagan purportedly so stimulative that tax revenues deficits were not used to fill otherwise idle

8 8 | 41 | 3 APJ | JF capacity; instead they financed the radical out all yen-equivalent profits from Japanese restructuring of the heavily unionized sectors investments in US Treasury securities. of US manufacturing as well as theJapanese insurance companies, after all, must infrastructure of the emerging globalized settle claims in yen, not dollars; if they paid economy: Wall Street, Silicon Valley, the 240 yen per dollar for a Treasury bond on issue aerospace and defense industries. but got back 200 yen or less when the bond matured, the interest income would be wiped The key enabler was Japan. The Japanese out by the exchange loss. But asset managers economy emerged from a shallow slow-down in the early 1980s calculated they would have brought on by the so-called Second Oil Crisis of to get back fewer than 180 yen on the dollar for 1979 with its high household savings rate these investments to become money-losing intact, but with a permanent reduction in propositions for them. That 180 number was Japanese industry's funding needs for domestic the rate that had served as the firewall during plant and equipment investment. By the simple the depths of the 1978 dollar crisis. Japan's rules of balance of payments accounting, asset managers interpreted the events as proof therefore, much of the country's savings would that the US and Japanese governments necessarily be deployed abroad. A US Treasury together had the capacity to ensure the crisis scouring the world for funds to finance the would not be repeated. Reagan deficits would take the lion's share. The restructuring of the American economy – and Indeed, as the 1980s wore on, fears of another the concomitant realignment of American class dollar crisis seemed remote as global demand power – would be financed with barely a hitch. for dollar securities drove the American currency to post Bretton Woods highs. Enjoying While the Japanese may have stumbled without the advantage of a cheap yen, Japanese deliberate political choice into their role as manufacturers embarked on a kind of second America's enabler, the contradictions –golden age as industry after industry fell to the political, financial, and social – would become Japanese onslaught: automobiles, earth moving increasingly burdensome. Japan's response to equipment, colour film, machine tools, and a events in the decade that followed the collapse whole range of consumer electronics from the of Bretton Woods had been almost entirely recently introduced VCRs through portable reactive.12 There was never any real debate listening devices. Japan would even set its over what the country should do. Even the sights on the hot new industry of financing of the Reagan Revolution had not semiconductors.14 But while Japan's been a thought-through, conscious political manufacturers may have been basking in decision, but simply a reaction to existing unprecedentedly favorable conditions, the financial circumstances. True, 1980 saw the country's politicians found themselves pulled revision of the Foreign Exchange Control Law, into the early stages of the desperate late 20th speeding the ability of Japanese financial century struggle within the American ruling institutions to deploy assets abroad byclass between the avatars of the 'new economy' eliminating the need to obtain clearance from of Wall Street and Silicon Valley and the the Ministry of Finance for each transaction, champions of older industries. The Reagan but this was simply an acknowledgement of Revolution would succeed in destroying the reality – the recycling of the Japan's growing political power of the American white working surpluses needed to be an efficient process. class by its assault on unions and by the economic devastation its deficits would There was one problem. A steep rise in the indirectly wreak on that class's traditional value of the yen against the dollar would wipe employers in the so-called 'rust belt'

9 8 | 41 | 3 APJ | JF manufacturing industries. (Working people of Japan's power holders may have felt like colour had little political power to destroy.) But canoeists caught in the unforeseen torrents of a substantial factions of American capital derived raging river; all they had consciously done, their wealth and power from these industries after all, was buy the Treasury securities on and they reacted with fury to what they saw as offer and export well-made products at low 'unfair' Japanese assault on their industries – prices. But they did start paddling furiously fury that manifested itself in pressure on once they understood the extent of the Washington and waves of hostile sentiment potentially destructive power of the American aimed at Japan. political currents and eddies. Competing factions of Japan's political elite put aside their The ideological constraints within which differences to engineer the removal of a received opinion operated – the fetishization of woefully inadequate Suzuki Zenko as prime 'free trade' and 'free markets,' the deliberate minister and replace him with Tanaka disciple blindness to the power and class struggles that Nakasone Yasujiro. Nakasone worked with key inevitably accompany economic transformation bureaucrats in the Ministry of Finance to signal – meant that the only politically acceptable way Washington that Tokyo would not be amiss to a conceptually to frame the crisis was to ascribe coordinated effort to bring the dollar down a it to currency manipulation. Japan must be bit. And he helped prepare the country for the 'manipulating' its currency in order to grant its adjustments necessary when the yen would exporters an 'unfair' advantage. (If the charges begin to rise again, assuring Japanese industry leveled today at China sound like an echo of that one way or another, their loss of an this line, that is not a coincidence.) Even exchange advantage would be made up to standard neo-classical economics would teach them. that a strong dollar was an inevitable outcome of the success of Volcker and Reagan in halting The realization that Japan would have to do the erosion of the dollar's purchasing power, something to avoid being dashed on the rocks re-affirming the dollar's role at the center of of American hysteria was accompanied by an global finance, and then exploiting that role to awakening on the part of Japan's elite to the run up large, politically painless deficits. But a potential for accidents inherent in the country's direct challenge to free market orthodoxy was growing financial power. On May 10, 1984, a inconceivable in American ruling circles; mistranslated report that surfaced in the instead business leaders such as Caterpillar's Japanese business press about the supposed Vice President Donald Fites hunted about for problems of the Continental Bank of Illinois led evidence that the Japanese were engaged in Japanese fund managers to pull their deposits various supposedly sneaky practices to keep from the bank without notifying the Japanese the yen undervalued. They hoped to give the authorities or, in some cases, their own senior US government an ideologically acceptable executives. The Japanese had become so excuse to intervene in foreign exchange important to Continental's funding that the markets.14 And they believed their own notices: bank had to go to the Federal Reserve for an that the loss of so much of the American emergency bailout the next day. The Japanese manufacturing base to Japanese competition had sparked a full-scale bank run without the was due to currency manipulation and could be slightest intention of doing so.16 The fixed if dollar/yen rates were realigned. 'There Continental Illinois bailout may have been a isn't anything wrong with the US-Japan trade relatively minor incident, but it underscored balance that ¥180/$1 rate wouldn't solve,' was two new realities: that whatever Japan did a widely repeated remark in the Washington of would move markets. And that events could the time.15 very quickly get out of control.

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This became more and more evident in the rate of the dollar, no one in Tokyo or aftermath of the Plaza Accord of September, Washington actually wanted to see the dollar 1985 – the piece of theatre jointly staged by dethroned as the universal settlements and Washington and Tokyo at New York's Plaza reserve currency. And until that happened, the Hotel with a supporting cast from London, United States would continue to run trade Paris, and Bonn to demonstrate their collective deficits that were automatically financed by its disapproval at the dollar's strength. The players trading partners. But in the sudden and intended to induce traders in the foreign seemingly unstoppable rise in the yen, the exchange markets to bid the dollar down. Japanese had to contend not only with an extra Narrowly speaking, the Accord was a great burden on their exporters but what in success: the dollar did fall, farther than anyone retrospect was quite obviously the end of the expected it to, or even wanted it to. The benefits flowing directly to Japanese ¥180/$1 rate that had been seen for close to a households from the export-led growth model. decade as the ceiling beyond which the yen To compensate Japanese industry for their could not possibly rise was breached for good, strong currency burdens and to keep the good never to return. But Japan's trade surplus times rolling at home, the Japanese authorities continued to climb, the US current account took out of the closet the tools that had first deficit to worsen, and the restructuring of the been forged during the break-up of Bretton American economy to pick up steam. In 1986 as Woods in order to blow bubbles in asset the dollar was steadily sinking, Microsoft would markets. go public, the historic Homestead Steel Works in Pittsburgh would close its doors, and “junk Pioneering 'Bubblenomics' bond” house Drexel Burnham Lambert would report net profits of over $500 million, the most It is perhaps appropriate that the Japanese money that a Wall Street firm had ever earned were the pioneers of 'bubblenomics,' to use to that point. Brenner's term, since the Japanese economic strategy had involved the deliberate creation of excess capacity in global industries. The late 1980s Japanese bubble represented an attempt to resolve the contradictions of that strategy that had finally caught up with Japan. Brenner has argued that at this critical juncture the Japanese economic authorities 'pioneered' a 'remedy' for the 'long term weakening of capital accumulation and of aggregate demand (that) has been rooted in a profound system- wide decline and failure to recover of the rate of return on capital, resulting largely – though not only – from a persistent tendency to overcapacity, i.e., oversupply, in global manufacturing industries.' That remedy The 1985 Plaza Accord strengthened the involved 'titanic bouts of borrowing and deficit value of the yen against the dollar spending, made possible by historic increases in ... paper wealth...enabled by record run-ups For despite the impressive campaign mounted in asset prices.'17 Brenner was writing by the world's leading central banks in the specifically of what happened in the United wake of the Plaza Accord to lower the exchange States in the mid 1990s when 'corporations and

11 8 | 41 | 3 APJ | JF households, rather than government' would CEO would hold out profits as an overriding ‘propel the economy forward’ through heavy corporate goal. Even the recovery of fixed borrowing, but he was right to draw attention investment costs was largely a peripheral to the way in which the Japanese had pioneered concern; as long as established Japanese things. manufacturing companies generated enough revenue to cover their variable costs, they were The contradictions stemmed directly from essentially protected from the risk of Japan's economic methods: methods that made bankruptcy and they received the financing it harder and harder for the United States to necessary to make whatever plant and exchange goods of real value for Japanese equipment investments were required to exports. With the loss of so much of the capture and hold market share. Japanese traditional American manufacturing base to management did not face pressure from equity Japanese competition, and the reluctance on markets for return. Financing was almost the part of Japanese companies to import entirely in the form of short-term bank loans anything that could be manufactured at home, (themselves financed by household deposits) the bilateral trade deficit continued steadily to that were regularly rolled over as a matter of widen. 'You Americans just don't makecourse; thus the fixed costs incurred from anything that we Japanese want to buycapital investment were essentially socialized anymore' was a commonly heard refrain in late since Japanese companies faced no existential 1980s Japan. But if that was truly the case, risk from capital investments that did not pay then the only way to keep Japanese sales going for themselves. was to transfer purchasing power to the customer – i.e., the United States – which is Japanese companies could thus survive and what happened. And the ultimate source of that even thrive at rates of return on invested purchasing power was Japan's domesticcapital ('ROI') and rates of return on equity households. To rephrase things, by accepting ('ROE') that would spell takeover or bankruptcy American IOUs instead of goods of real value as for at least their American counterparts, if not payment for its exports, Japan's aggregate their European ones. But that did not spare the demand was being deliberately sent to the Japanese system as a whole from the United States in order to keep Japanese consequences of anemic returns on its factories running. aggregate invested capital. Japan's postwar economic structure had been, as we have seen, The contradiction here goes to the heart of configured not to generate high rates of return Brenner's contention that the 'persistent but to generate high rates of dollar holdings. tendency to over-capacity in globalSince these dollars over time were increasingly manufacturing industries' is at the root of the used simply as a form of consumer finance for growing severity and frequency of financial Japan's export customers rather than converted crises that have beset the world since the into domestic purchasing power, the economic collapse of Bretton Woods. Individual Japanese contradictions became unavoidable. For a brief companies did not treat profit-making as a period of time – the years between the onset of raison d'être. The economic system in which the Reagan Revolution and the Plaza Accord, they were embedded and the incentivei.e., 1981-1985 – the dollars pouring into the structure of that system rewardedcoffers of Japan's export champions enabled technological progress, gross revenues, cost- them to report unaccustomed levels of reductions on the assembly line, and market profitability, even if those dollars did not fully share. Profits were incidental and could be translate into domestic purchasing power. But shameful if excessive; certainly no Japanese once the dollar flows lessened with the post-

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Plaza run-up in the value of the yen, Japan's than the mistranslated press report that had policy makers were confronted with the reality led Japanese fund managers to start pulling that the strategy of export-led growth was no their money out of Continental Illionois, it was longer sufficient to propel the economythe announcement of the August, 1987 trade forward. numbers that panicked them into dumping their holdings of US Treasury securities. A They understood this. A senior Bank of Japan near-halving of the dollar's value since the ('BOJ') official was quoted anonymously as Plaza Accord had not produced any reduction saying in explaining the bubble: 'We intended in the US-Japan bilateral trade imbalance. With first to boost both the stock and property the dollar buying fewer than 140 yen, Japanese markets. Supported by this safety net – rising investments in US Treasuries made earlier in markets – export-oriented industries were the decade were already well under water. supposed to reshape themselves so they could Fund managers expected renewed pressure on adapt to a domestic-led economy.'18 The MOF the currency and like good traders anywhere, and BOJ had the tools to steer credit directly tried to close out their losing positions before into real estate and stock markets.19 Since they dropped any further. As bond prices fell, Japanese banks lend primarily with theyields went up and investors abroad began collateral of real estate, soaring real estate transferring money out of stock markets into prices were both a result of the waves of bond markets. The Dow Jones plummeted by liquidity pouring into the economy and the nearly 23% in a single day. Fortunately for the means by which that liquidity was transformed dollar and the American markets, however, the into cheap financing. MOF was able to halt the global stock market collapse by orchestrating a recovery in The deliberate asset inflation of the late 1980s Tokyo.20 It followed that by arm-twisting succeeded in postponing a reckoning with the Japanese fund managers to renew their contradiction that lies at the heart of the investments in dollar securities; the BOJ re- export-led growth model: that if it succeeds, a enforced the arm-twisting by yet more credit country must at some point either reconfigure creation at rock-bottom interest rates. Credit its economy or, if it wants to keep the model flowed back into dollar instruments without going, transfer purchasing power to itsputting any damper on the Japanese boom customers. The mechanisms that sparked the which, by the late 1980s, had begun to look like Japanese bubble did compensate for a while for one of the great manias in global financial the systematic transfer of domestic purchasing history. power abroad by showering money on households, albeit unevenly. The bubbleAsset prices continued to skyrocket, reaching deceived corporate treasurers into thinking absurd levels. By 1989, the extrapolated land that capital financing was essentially free; value of Tokyo and its suburbs exceeded that of companies went on a debt and capitalthe entire United States plus the market investment binge that bought for Japan the capitalization of every company listed on the most advanced manufacturing base ever built New York Stock Exchange. Meanwhile, the as well as a lot of fancy headquarters buildings Tokyo Stock Exchange accounted for close to and lavish golf courses. 50% of the market capitalization of the entire world. Even more worrisome to Japan's power- The bubble provided critical support for the holders than these clearly fantastic prices were dollar in the wake of the 1987 stock market the social effects of the bubble. A down crash. Like the collapse of Continental Illinois, payment on a small house within commuting the crash started in Tokyo. This time, rather distance of central Tokyo or Osaka now lay far

13 8 | 41 | 3 APJ | JF beyond the reach of ordinary middle class families whose husbands and fathers had formed the foot soldiers of the economic army that had conquered global markets. But people who had title to plots of dirt anywhere in Japan’s urban areas found themselves rich beyond their wildest dreams. Social control mechanisms began to break down as youngsters started to disdain the traditional decades of uncomplaining hard work that had formerly been the quid-pro-quo for economic security. An entrepreneur rumored to be descended from Japan's pre-modern outcast class deliberately set out to create a labour market and engaged in wholesale, bubble- fueled bribery to purchase political protection for his business. This ensuing 'Recruit' scandal as it was called after the name of his company, reached to the highest levels of the Japanese power structure, bringing down the government of Prime Minister Takeshita Noboru, another important Tanaka disciple. The bursting of the bubble reflected in The authorities were frightened. The bubble Japanese land andstock market values had largely accomplished its purposes. Foreign exchange markets had stabilized, while Nowhere to Turn? Japanese industry had used the waves of financing thrown off by the bubble to equip Despite the increasing stagnation that gripped itself with the most formidable manufacturing the Japanese economy in the wake of the base ever built. So beginning on Christmas day, bubble's collapse, Japan continued to provide 1989 with a steep hike in interest rates, the critical support for the dollar and for American authorities deliberately set out to take the hegemony straight through the 1990s. This was steam out of the bubble. But they lost control of most evident at the time of the Mexican peso events. The authorities had had the tools to crisis of early 1995 when it appeared for a ratchet up real estate prices. Once prices while that the US had lost the will and the began to fall, however, they could not stop ability to bail out a country in its own backyard. them. Waves of investment had saddledThe passage of NAFTA had led to an unsustainable surge in hot money flowing into Japanese companies with debts that they Mexico chasing supposed high returns; when discovered were not 'free' after all. It would these returns proved ephemeral, the money take them years to plug the gaping holes this 21 flowed right back out, bringing on a balance of debt opened in their balance sheets. And the payments crisis. MOF could not, after all, honor its implicit guarantee to all financial institutions under its Bailing Mexico out, however, would require purview. additional funding for the IMF. An unlikely

14 8 | 41 | 3 APJ | JF coalition of left Democrats hostile to the IMF from Japan in further waves of liquidity and Republicans seeing an opportunity to creation. The Clinton administration would also embarrass the Clinton administrationgo on to help provide political cover for the succeeded in blocking passage of legislation to bail-out package needed to avert a full-fledged top up the IMF's coffers. Clinton's new treasury banking crisis in Japan. Bailing out the banks secretary, ex-Goldman Sachs co-chair Robert was as politically unpopular in the Japan of Rubin, found a loophole around the1998 as it would prove in the US of 2008, but Congressional obstruction. In the process he after the failure of several financial institutions halted a global run on the dollar as serious as within weeks of each other in late 1997, there any since 1978. But even when otherwas no choice if a meltdown was to be avoided. currencies stabilized against the dollar, the yen Rubin convinced the President to make a well- continued to soar. By May, it took only 79 yen publicized telephone call to then-Japanese to buy a dollar, a rate far below what most Prime Minister Hashimoto Ryutaro urging him Japanese exporters needed to cover even their to do what was necessary. The Diet passed a marginal costs – i.e., they were losing money on ¥72 trillion bank bailout package, the single each sale they made abroad. largest expenditure ever legislated to that point by a government in peacetime. The resulting panic in Japan saw the MOF go outside the usual order of bureaucraticAs the 1990s drew to a close, it seemed that succession to appoint Sakakibara Eisuke as the United States and Japan had evolved a sort Director General of the International Finance of modus-operandi in which Washington and Bureau, the key official dealing with currency Tokyo would use each other to provide political issues. Sakakibara had a well-deserved cover for arrangements needed to keep the reputation as a maverick and gadfly, but he got global financial order going. There had been a the nod on the basis of his purported brief period in the late 1980s when the relationship with Lawrence Summers, then Japanese elite allowed themselves to be Undersecretary for International Affairs in the seduced by dreams of succeeding the US as the US Treasury (Sakakibara had been a visiting hegemon of the global economy. The events of professor in the Harvard economics the 1990s soon disabused them of this notion, department when Summers taught there). however. It was not simply the loss of control Sakakibara flew to Washington in June and after the imploding of the bubble and the negotiated with Summers and Rubin what inability to restart the engines of growth in its amounted to a quid-pro-quo: American help in wake. But also the realization that dominance bringing down the yen/dollar rate in return for of key upstream components and a tacit agreement that Japan would support the 22 manufacturing technologies did not, after all, market for US Treasury securities. With the Clinton administration at its political nadir in confer the economic leadership that Japan's the wake of the 1994 midterm election losses decision makers had thought was within their and worried about its re-election prospects, the grasp. American companies that had barely last thing it needed was a bond market crisis been heard of twenty years earlier – Microsoft, that would send interest rates skyrocketing. Intel, Apple, Cisco – emerged as the key pace setters in the 'new' economy growing out of the The intervention, staged in August, 1995, technological revolutions in computers and accomplished its goal of taking the yen/dollar telecommunications. For it was no longer so rate back over 100. Rubin masterminded the easy to divide 'manufacturing' from 'services' -- tactics used to shift sentiment in the foreign much of the profits in the new industries came exchange markets, but the fire power came from the bundling and packaging of both.23

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In this new world, trade conflicts between the The bubbles burst. Before the Asian financial US and Japan essentially disappeared. The last crisis would play itself out, Thailand, Indonesia, serious one had occurred in 1994 over auto South Korea, and Russia would see parts; Rubin, worried over the effects on the governments fall in the wake of balance of bond market of a visible trade impasse, had payments impasses. Events would culminate in persuaded the White House to fold its (quite the collapse of the American hedge fund Long strong) hand in its efforts to dismantle barriers Term Capital Management that threatened to to sales of American auto parts in Japan. The take much of Wall Street with it. But the two countries were settling into a rough lessons learned by governments in East and division of economic labor that saw Japan Southeast Asia – both in those countries that continue to dominate the high-value added end had been directly affected and in those of manufacturing while the US pioneered new countries that had escaped the worst – was industries and packaged new products. Boeing never to put themselves in positions again would announce plans for what would become where balance of payments difficulties could the revolutionary 787 Dreamliner withbring on political crisis. That meant redoubling Japanese companies responsible for theefforts to accumulate international reserves – manufacture of the technically sophisticated i.e., dollars – with export competitive wing and wingbox. Apple would design and industries. It was the old Japanese strategy of bring on-stream gorgeous new gadgets with the the 1950s updated to the realities of the new LCD screens and many other high-value added millennium. components manufactured by Japanese suppliers. This was most obvious – and most significant – in China. China would simultaneously and in Bubbles Bubbles Bubbles defiance of all conventional wisdom rack up both current account surpluses and capital But this was not the end of the story. The surpluses as foreign investment poured into the waves of credit creation undertaken by the BOJ country (see graph found here). The inevitable to help bring down the yen in the wake of the result: a growing horde of international Mexican crisis and to stabilize a tottering reserves, mostly consisting of direct and banking sector directly set the stage for the indirect claims on the US government. The wall Asian Financial Crisis of 1997. The Japanese of credit sloshing back into the United States banking system may have been rescued from a from China and its neighbors permitted the complete meltdown, but individual banks, incoming George W. Bush administration to run sensitized now to the possibility of failure, were a repeat of the Reagan Revolution. Thanks to still loathe to lend domestically. The BOJ's Asian appetite for US Treasury securities, the credit creation did not spark a domestic Bush borrowing spree was as politically investment boom; instead the rivers of cash painless as that of twenty years earlier. Again, found their way into the so-called carry trade: cost-free military adventures could be launched yen borrowing by hedge funds and other with impunity while torrents of cash were foreign players with the proceeds swapped into channelled by Wall Street into the pockets of a higher interest currency such as US dollars. the American rich. From there, much of the money went into emerging markets abroad, in particular into the booming economies of southeast Asia where the tidal waves of credit fueled unsustainable bubbles in places such as Bangkok.

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economy along neo-liberal lines.

But while a great deal of neo-liberal talk emanated from Koizumi and the people around him, that portion not whipped up directly for Washington's consumption turned out to be largely a cover for loosening the social compact forged in the 1950s. Companies were essentially given the green light to rely on so- called fureeta – temporary workers who did not receive the implied guarantees of economic security that had customarily come with employment at a Japanese company. Koizumi's most famous 'reform' -- the overhaul of the Japanese post office including the postal Chinese and Japanese components of the savings system – originated within the MOF as US trade deficit an effort to reduce the drain on the Japanese treasury of white elephant spending in rural districts that were losing population. Those Meanwhile, the onset of the new millennium who took Koizumi at his word – both Japanese paradoxically granted Japan a temporary entrepreneurs attempting to introduce genuine reprieve in its attempts to escape the 'policy markets for corporate control and foreign trap' of its inability to move away from the investors launching takeover bids for what they export-led growth model. Although Japan saw as poorly managed Japanese companies – continued to pile up dollars, the boom in China were almost invariably stymied.24 Japanese not only gave Japan a new partner inpower holders continued to display supporting American hegemony but provided a ambivalence about the transforming power of real path out of the debt hole left behind by the capitalist relations; they remained unwilling to imploding bubble economy of ten years earlier, turn over decisions about the direction of the thanks to Chinese orders for Japanese capital economy to markets they could not control and equipment. Cheap Chinese goods smashed did not trust. many of the trade barriers that had long kept foreign goods out of Japanese stores, meaning The Lehman Shock and the End of Japan's that while real incomes remained stagnant for Export-Led Model? Japanese households, the cost of living fell even faster. And Japan's governing class found in Koizumi's retirement in 2006 was followed a Koizumi Junichiro an answer to Ronald Reagan few months later by the onset of the subprime and the UK's Tony Blair: a slick, media-savvy crisis in the United States that would lead to professional whose talk of reform and sunny, the worst financial meltdown since 1931. While can-do demeanor would divert for awhile Koizumi was still in office, it had been possible worries over structural economic pathologies politically for Japan to tolerate a continued and widening social fissures. Koizumi would muddling through. The country would adjust to serve as prime minister from 2001 to 2006 – a no-growth economy, no longer particularly the longest period in office since Nakasone. He vital, but with a panoply of cutting edge would be even more obsequious to Washington manufacturing technologies sufficient to ensure than Blair. Part of that sycophancy involved a it could still pay its way in the world. Japan public commitment to reshape the Japanese seemed resigned to becoming a sluggish Asian

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Switzerland. It would continue its role, joined country’s direction. The people who led the now by China, in supporting US financial Democratic Party of Japan (DPJ) to victory were hegemony, thereby assuring the continuation of quite explicit that they were not simply running a global environment that allowed it to survive, against the LDP but against the entire if not notably happily. governing setup that left significant policy decisions with the bureaucracy – that in the words of long-time Japan observer Karel van But the 'Lehman shock' of September, 2008 Wolferen, they intended to establish a genuine made this 'muddle through' untenable. With 25 government. Alas, they reckoned without the Chinese exports temporarily derailed by the US entrenched power of the interests they sought implosion, Japan's economy went into a tailspin to displace. Even before the DPJ’s victory, its - partly because Chinese orders for Japanese opponents had succeeded in delivering a blow capital equipment plummeted, and partly that foreshadowed a crippling of the party’s because Japan’s much-vaunted manufacturing ability to carry out its program. They had supremacy was being challenged like never forced the resignation of its leader, Ozawa before. Not a single Japanese semi-conductor Ichiro, yet another Tanaka disciple and chip could be found in Apple’s hot new iPhone, arguably the most brilliant of the lot. With his for example, while the display panels were clear grasp of the underlying historical and being made in Korea. The dollars being sent institutional factors that block Japan’s progress back into the US banking system – whether -- very much including its entanglement with directly or indirectly via China – were no longer the United States -- and his call to overhaul the translating into demand for Japanese goods. country’s governing arrangements, Ozawa had been at the vortex of Japanese politics since In retrospect, doomsayers over the end of the 1992 when he led a walkout of scores of Asian model may have been a trifle premature – legislators from the LDP. But on the eve of the China has, in a striking mirror-image of Japan's DPJ’s electoral triumph that was largely his performance in the mid 1970s, managed to put doing, he fell afoul of the usual establishment its economy back on track, stunning much of method of dealing with ambitious politicians the world in the process and providing some who threaten real change: rumblings from the glimmers of hope to Japan as well; Japanese public prosecutor of an investigation that are sales of capital equipment to China began to then amplified by the establishment press. recover, halting the rapid deterioration in Ozawa was forced to give way to the diffident Japan’s trade accounts. But none of this was Hatoyama Yukio as prime minister. evident in time to save the LDP from electoral 26 defeat. Koizumi was succeeded by twoAs I have argued elsewhere, Hatoyama’s colourless LDP hacks, neither of whomdownfall – he had to resign a scant 8 months managed to stay in office for more than a year, after he took office – was a direct consequence and finally by an Aso Taro who projected, like of Washington’s unhappiness with signs the Koizumi, a somewhat kooky persona, but DPJ was contemplating security and foreign without any of Koizumi's savvy or ability to policies that might deviate from American reach the average voter. With Japan'spriorities. We have seen in this essay that Japan governing apparatus seemingly helpless in the played a pivotal role in supporting the face of the economic meltdown, the LDP was hegemony of the US dollar over global finance decisively voted out of power in August, 2009. and thus by extension of American management of global capitalism. But Tokyo The election held out the hope that Japan has also given lip service to every American finally had the leadership needed to change the foreign policy goal since the Korean War. And

18 8 | 41 | 3 APJ | JF the country has provided the American military His successor, Kan Naoto, has political roots in with its key logistical anchor in East Asia, the Japanese left and while he is obviously a notably through its vast military establishment decent man who commands considerable public on Okinawa. affection, he appears to lack the independence of mind needed to stand up either to Okinawa only came under Japanese control in Washington or to entrenched domestic the 17th century and was not incorporated into interests, much less to conceive and steer a Japan proper until 1879; during the waning new course for his country. While serving as months of the Second World War, Okinawa Finance Minister in the Hatoyama cabinet, he suffered horribly; many Okinawans to this day had clearly fallen under the influence of senior believe the Imperial Government treated them MOF bureaucrats obsessed with Japan’s fiscal as dispensible cannon fodder. The American deficits. The moment he became prime Occupation that ended for the Japaneseminister, he began to hint about raising taxes, mainland in 1952 lasted for another twenty talk that probably deprived the DPJ of its years in Okinawa; even today, some four control of the Upper House in the election of decades after the formal return of the island to August 15, 2010. With Washington crowing Japanese rule, it continues to be honeycombed about the success of its “tough love” for Japan with US military installations. The DPJ’s that pushed Hatoyama out of office and the DPJ electoral platform had called for a re-having forfeited its clearest shot at undisputed assessement of the American presence in control of the Japanese Diet, Ozawa made one Okinawa, holding out the possibility oflast desperate gamble to save the edifice he had built, challenging Kan for party leadership. complete removal of US bases. He failed, losing the September 14 party The Obama White House and the Pentagon election. While he should never be reacted with fury to such a display of underestimated, his indifferent health, his independence from a Tokyo that Washington indictment on corruption charges in early had long been accustomed to regard as the October, and high negatives with the wider capital of a servile protectorate. The Americans public probably end any chance he has ever to treated Hatoyama with calculated contempt, be prime minister. And while it is too early to partly at the instigation of the network of say definitively that the window of opportunity Japanese establishment voices on whichto reorder Japan’s political and economic Washington has long relied for its intelligence priorities has closed on the DPJ, literally within on Japan. By assuring Washington that it need hours of Kan’s victory, there were already not deal with the Hatoyama administration as a distressing signs of a return to business as substantive government, these spokesmen for usual. Under Hatoyama, the DPJ had hinted it LDP interests succeeded in their underlying was prepared to cope with the consequences of purpose: painting a picture for the Japanese a strong yen, even using it as a lever in public of an ineffective and amateurish prime restructuring the economy. But on September minister who threatened Japan’s supposedly 15, with Kan’s undoubted approval, the Bank of most important security relationship. When Japan dredged up its tired old recipe for Hatoyama was unable to comply with a propping up Japan’s traditional export deadline purportedly set by bureaucrats in the champions: intervening in the foreign exchange Foreign and Defense ministries to reconcile market to weaken the yen. Meanwhile, a Pentagon demands with the wishes ofJapanese Coast Guard confrontation with a Okinawa’s own residents – an impossible task Chinese fishing boat in disputed waters was for any prime minister -- he resigned. being allowed to escalate into a major

19 8 | 41 | 3 APJ | JF diplomatic imbroglio. It all suggested that shape in the mid-1950s, Japan’s power-holders policy was back firmly in the hands of those have acted, as we have seen, almost on auto- who thought and acted like bureaucrats -- a pilot, at least with respect to overriding political formula both for continued economic national goals. They have coped with decline and for an ever more costly inability to challenges and crises by attempts to recreate cope with the rapidly changing power dynamics inherited certainties. Among other things, that in East Asia, where a new superpower rises just meant deliberate efforts to stymie the growth over Japan’s horizon. of an independent class of entrepreneurs and business leaders who might balk at Passing the Baton? bureaucratic direction. Thus when Tokyo found itself faced with the choice of doing what it China and other Asian countries for their own took to support a global capitalist order reasons adopted key parts of the Japanese revolving around the US dollar or seeing that model, but have found themselves facing many order collapse, it could and did take whatever of the same contradictions – in particular, a measures were necessary, even if that meant need to prop up the dollar's hegemony lest they depriving Japan’s households of any chance to destroy the value of their own holdings and earn real returns on their savings. The wreck the machinery by which their customers bureaucrats did not have to worry about being finance purchase of their exports. Indeed, the undermined by powerful capitalists with their very emergence of China as such an important own agendas. overseas prop for the US dollar encourages Washington to treat Tokyo as little more than a China now faces much the same dilemma that staging ground for the US military now that Japan began to wake up to some 35 years ago: Japan increasingly plays second fiddle to China its economy is now so intertwined with that of in dollar markets. the US and it has such a huge position in dollar markets that it cannot walk away from its But China is a very different country with a very different history. Oddly enough for an support for the existing order without doing ostensibly Marxist-Leninist polity, it often irreparable damage both to that order and to seems less ambivalent in its embrace of its own short- and medium-term economic capitalist relations. This may be due to the prospects. But China’s leaders may be both legitimacy enjoyed by the Chinese government, more conscious of what they are doing than to return to Anderson's point quoted at the were Japan’s and – perhaps – less sure of their beginning of this essay, a legitimacy Tokyo has instruments of control. This may seem lacked for so much of the postwar period paradoxical since China is an authoritarian, because of its obvious subservience toone-party state while Japan is theoretically a Washington. Indeed, Hung Ho-Fung'sdemocracy whose leaders must answer to an contention that Beijing has allowed theelectorate. But the rise of provincial power emergence of a new and influential class of centers that balk at Beijing’s orders, not to entrepreneurs and financiers based in coastal mention the swaggering coastal elite of China with ties to global capital – a class now financiers and entrepreneurs that Hung too powerful to be thwarted – suggests that describes, suggests that the Chinese China may have become, in his words,authorities may be less able to emulate the way 'America's Head Servant.'27 their Japanese counterparts acted during several crises over the past 30 years: halt runs But if so, China will not be the kind of servant on the dollar with a few pointed phone calls. that Japan has been. Since the contours of the Indeed, the very reports that have surfaced in postwar Japanese political economy took final the international press of disputes among

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China’s power holders over currency and various branches of the oligarchy did not monetary policies point to underlying power regard themselves as active regulators but as struggles and raise questions over how and men who were, on the contrary, being whether they can be resolved, particularly regulated by rules created elsewhere.’30 This during periods of crisis.28 fundamental political reality was not in the least affected by the legacy of the Occupation At the same time, the greater awareness by and Japan’s ostensible transformation from an China’s leadership of what it is doing and why oligarchy into a supposedly liberal capitalist it is doing it may ultimately prove the critical democracy. Indeed, the American assumption variable in the perpetuation of American for Japan of those powers by which a state is hegemony. While Hung’s coastal elite may act commonly recognized – the provision of from time to time as a break on Beijing’s security and the conduct of foreign relations – freedom of action, the state-capital nexus that if anything served to exacerbate the denial by has emerged in China over the past three Japan’s policy makers that they had any real decades displays, as Ching Kwan Lee and Mark control over what they were doing. When they 29 Selden point out, a formidable capacity to acted reflexively to support the supremacy of discern threats to its collective control over the dollar and of American hegemony, they China’s political economy and a provenwere acting in the manner expected of them – capacity to neutralize them. Some of those and in the manner they expected of themselves. threats clearly emanate from a Washington that while increasingly dependent on Chinese China’s leaders are under no such illusions. financial support seems at the same time to They are perfectly aware of Marx’s comment to have China in its sights as the only serious long the effect that ‘men make their own history, but term challenger of American primacy in global they do not make it as they please, that they do affairs. not make it under self-selected circumstances, but under circumstances existing already.’ The Japan’s political arrangements grew out of a circumstances under which China’s leaders are millenium-long tradition of powerholders who trying to make their own history, to return their pretended they did not exercise power or were country to the pivotal position in human affairs doing so in the name of entities that were that its very name in Chinese implies ultimately figureheads: emperors, shoguns, (Zhongguo, ‘central country’) means accepting parliaments; that the policy makers’ right to for the time being the financial hegemony of an make decisions that determined how others unpredictable and even dangerous entity, a would live was grounded not in explicit, United States that has from the inception of challengeable authority to adjudicate messy their regime posed at least a latent existential clashes of interest, but part of some ineffable threat. For the time being, they cannot do order beyond the reach of politics. That without the American market. But while they supposed order served to cloak the real loci of may find themselves, like their forerunners in power – and indeed forced denial on the power- Tokyo, forced from time to time to support the holders themselves that they were exercising dollar, even at the cost of foregone purchasing power. As Maruyama Masao wrote in 1946 power and a loss of control over certain about Japan’s pre-Occupation power structure, economic and political outcomes, they do so ‘It was unfortunate enough for the country to with their eyes open. be under oligarchic rule; the misfortune was aggravated by the fact that the rulers were unconscious of actually being oligarchs or despots. The individuals who composed the R. Taggart Murphy is Professor and Vice Chair,

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MBA Program in International Business, maximizing their rates of profit by means of Tsukuba University (Tokyo Campus) and a increasing specialization, accumulating coordinator of The Asia-Pacific Journal. He is surpluses, adopting the lowest cost technique, the author of The Weight of the Yen and, with and moving from line to line in response to Akio Mikuni, of Japan's Policy Trap. changes in demand with respect to supply for goods and services. Second, the economy as a This is a slightly revised and updated version of whole constitutes a field of natural selection by an essay that is being published in The Crisis means of competition on the market which This Time: Socialist Register 2011 edited by weeds out those units that fail to produce at a Leo Panitch, Greg Albo, and Vivek Chibber, sufficient rate of profit.' Robert Brenner, 'The copyright Merlin Press EconomicsLtd. of Global Turbulence',New Left (www.merlinpress.co.uk). Review, 229, May/June 1998, p. 10.

Recommended citation: R. Taggart Murphy, "A 5 Michael L. Gerlach Alliance Capitalism: The Loyal Retainer? Japan, capitalism, and the Social Organization of Japanese Business perpetuation of American hegemony," The Asia- Berkeley and Los Angeles: University of Pacific Journal, 41-3-10, October 11, 2010. California Press, 1992, chapter four.

Notes 6 Textile manufacturers in the Carolinas promised to deliver these two key battleground 1 Perry Anderson 'Two Revolutions: Rough states into the Republican column in return for Notes' New Left Review 61 January-February a pledge by the Richard M. Nixon campaign to 2010, p. 93. reduce imports from Japan. See I. M. Destler,

2 Haruhiro Fukui and Hideo SatoThe Textile See B.C. Koh,Japan's Administrative Wrangle: Conflict in Japanese-American Elite Berkeley and Los Angeles: University of Relations, 1969-1971 Ithaca and London: California Press, 1989, esp. p. 254. Cornell University Press, 1979.

3 Andrew Gordon The Evolution of Labor 7 Akio Mikuni and R. Taggart Murphy Japan's Relations in Japan: Heavy Industry, 1853-1955 Policy Trap: Dollars, Deflation, and the Crisis of Cambridge (Massachusetts) and London: Japanese Finance Washington: The Brookings Harvard University Press, 1985. Institution, 2002, chapter three.

4 Brenner has defined capitalism succinctly as 8 Jacob M. Schlesinger Shadow Shoguns: The follows: 'the capitalist mode of production Rise and Fall of Japan's Postwar Political distinguishes itself from all previous forms by Machine New York: Simon and Schuster, 1997, its tendency to relentless and systematic part one. See also the discussion in Gavan development of the productive forces. This McCormack The Emptiness of Japanese tendency derives from a system of social- Affluence Armonk, New York and London: M.E. property relations in which economic units – Sharpe, 1996, particularly chapter one. unlike those in previous historical epochs – must depend on the market for everything they 9 William Greider Secrets of the Temple: How need and are unable to secure income by the Federal Reserve Runs the Country New means of systems of surplus extraction by York: Simon and Schuster, 1987, chapter one. extra-economic coercion, such as serfdom, slavery, or the tax-office state. The result is 10 The key insider account remains David two-fold. First, individual units, to maintain and Stockman The Triumph of Politics: Why the improve their condition, adopt the strategy of Reagan Revolution Failed New York: Harper

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Collins, 1986. Tomohiko, 'Japan's Banks and the “Bubble Economy” of the late 1980s,' Monograph Series 11 See Robert L. Bartley The Seven Fat Years Number 4 Princeton, New Jersey: Center of and How to Do It Again New York: MacMillan, International Studies, Program on U.S.-Japan 1992, p. 59. Relations, Princeton University, 1993.

12 Robert C. Angel Explaining Economic Policy 19 See the discussion of the mechanics of asset Failure: Japan in the 1969-1971 International inflation in Mikuni and Murphy, Japan's Policy Monetary Crisis New York: ColumbiaTrap, pp. 145-164. University Press, 1991. 20 See the account in Murphy The Weight of the 13 Clyde V. Prestowitz, Jr. Trading Places: How Yen, pp. 226-231. We Allowed Japan to Take the Lead New York: Basic Books, 1988, part 2. 21 Richard C. Koo Balance Sheet Recession: Japan's Struggle with Uncharted Economics 14 Hoping to give the ideologically-rigid and its Global Implications Singapore: John Treasury department of the first Reagan Wiley & Sons (Asia) Pte Ltd, 2003, esp. p. xi. administration an excuse to intervene in currency markets, Fites commissioned a study 22 John Judis 'A Dollar Foolish'The New from Stanford's Professor Ezra Solomon that Republic December 9, 1996. An account from demonstrated Japan's policies were deliberately the Japanese side of the negotiations can be keeping the yen's value down. See R. Taggart found in 'Sakakibara kyokucho madamada Murphy The Weight of the Yen New York: W. tobidasu “Dai-hogen”'Shukan Bunshun W. Norton, 1996 pp. 153-159. November 23, 1995, pp. 42-5.

15 The implication was that in this range, 23 James Fallows 'China Makes, The World bilateral trade problems would largelyTakes' The Atlantic July/August 2007 pp. 68-69 disappear. Although the remark was attributed discusses the high percentage of the revenues to C. Fred Bergsten, his actual words were 'the of a given product in today's economy that stem objective should be a yen-dollar rate offrom its branding, design and retailing as between 180-200 by the end of 1982.' 'What to opposed to its actual manufacture on the do about the U.S.-Japan Economic Conflict' factory floor. Foreign Affairs vol. 60, #5, (Summer, 1982) p. 24 1069. R. Taggart Murphy 'East Asia's Dollars' New Left Review 40 July/August 2006, pp. 54-57. 16 R. Taggart Murphy 'Power without Purpose: discusses the arrest of a Japanese entrepreneur The Crisis of Japan's Global Financialwho took all the neo-liberal talk literally. Dominance' Harvard Business Review 25 March/April 1989, p. 71-83. Karel van Wolferen 'Japan's Stumbling Revolution' The Asia-Pacific Journal 15-2-10, 17 Robert Brenner 'What is Good for Goldman April 12, 2010. This is an English version of an Sachs is Good for America: The Origins of the article that originally appeared in Japanese in Current Crisis' Center for Social Theory and the March, 2010 issue of Chuo Koron. Comparative History, Institute for Social 26 Science Research, UC Los Angeles, October, R. Taggart Murphy ‘With Friends Like Us: 2009, p. 2. How the Obama Administration Helped to Topple the Japanese Prime Minister’ The New 18 Quoted and translated by Taniguchi Republic (website) June 8, 2010.

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27 Ho-Fung Hung 'America's Head Servant? The Pacific Journal, January 21, 2007. PRC's Dilemma in the Global Crisis' New Left 30 Review 60, November-December 2009. Maruyama Masao ‘Theory and Psychology of Ultra-Nationalism’ translated by Ivan Morris in 28 See ‘China Officials Wrestle Publicly over Maruyama Masao Thought and Behavior in Currency’ The New York Times, March 25, Modern Japanese Politics, edited by Ivan 2010. Morris, London: Oxford University Press, 1963. The original appeared in Japanese in the May, 29 ‘China's Durable Inequality: Legacies of 1946 issue of Sekai. Revolution and Pitfalls of Reform’, The Asia-

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