Breaches in Japan's Fortress Economy


By Brian Bremner They bonded, tossed a baseball around for the press, and generally just oozed congeniality. The just-finished, tie-less powwow at Camp David between Japanese Prime Minister Junichiro Koizumi and U.S. President George Bush was a nicely choreographed gathering -- at least from back here in Tokyo. And it was a signal to the rest of the world that all is well between the world's two economic superpowers.

Fact is, it's also pretty close to the truth. Back in the 1980s, Japan looked like an economic predator, whose companies absorbed sanctuary profits from closed domestic markets to go on market-share grabs and buying sprees in critical global markets. U.S. congressmen and Presidents cried foul. The Japanese weren't playing fair, they wailed. By cordoning off key domestic markets and building monster current-account deficits, Japan destabilized the global economy with its mercantilist ways, others argued.

SEA CHANGE. When President George Bush Sr. arrived with a trade mission of auto execs in the early 1990s to argue for better access, Japanese Prime Minister Kiichi Miyazawa smiled and basically ceded nothing. (Though Miyazawa was certainly a gent when Bush, ill with a bug, tossed his sushi at a state dinner.) Then came President Clinton, who also knocked heads with Japanese bureaucrats in 1995 and brought both sides to the brink of a trade war before striking an ineffectual deal on opening up Japan's auto and auto-parts markets.

But during last week's gathering, you didn't hear much talk at all about trade friction -- or cutting down Japan's structural U.S. trade surplus, still running at around $18 billion for the first quarter of 2001 -- which has been an issue for decades. Maybe it's because Team Bush is more interested in beefing up ties with Japan to maintain security in an Asia that has to grapple with an ascendant power like China. Or perhaps the Japanese economy is scarcely the global threat it used to be.

Differences remain. For example, Japan backs the international Kyoto pact on cutting greenhouse emissions, while the U.S. has disavowed the proposed limits. But these disagreements aren't about Japan's aversion to opening itself up to the global economy. In fact, it's getting harder and harder to argue that the Japanese economy is cordoned off to imports and foreign capital. Japan may not be as open as the U.S., but no longer is it the fabled fortress economy of the 1980s. Not by a long shot.

MISSING THE POINT. Trade lobbyists for the steel and auto industry will have you believe it's business as usual in Tokyo. They're pushing Bush to penalize the Japanese for the alleged dumping of steel products and to craft another auto agreement to give Detroit and auto-parts makers better access to Japanese consumers.

Such perennial critics of Japan are missing something fundamental. If you look at key metrics such as trade import flows, foreign direct investment, and the capital needs of Corporate Japan, the economy is becoming more open, not less so.

Take Japan's multibillion-dollar current-account surplus, the broadest measure of trade and investment flows in and out of the country. Some economists in Tokyo and elsewhere think the era of monster current-account surpluses is coming to an end. Asian imports, especially clothing and food products, are making huge inroads. Years of tough times have made Japanese consumers big fans of discounters that import such wares and consumer electronics from elsewhere around the region.

In fact, Goldman Sachs economist Tetsufumi Yamakawa points out that Japan's current-account surplus, relative to the country's gross domestic product, has been trending downward for some time now. Back in the late 80s, it hovered around 3.6% of GDP. During the first quarter of this year, it dropped to 1.9% of output.

INACCURATE MEASURE. As Japan's rapidly aging society starts spending more on the retirement years and Japanese companies tap global markets for capital, the current-account surplus could shrink to 1% later this decade. Other economists think Japan will eventually become such a big importer of goods, sucking in capital from elsewhere, that a current-account deficit isn't out of the question.

What's more, balance-of-payment statistics also don't capture the growing economic linkages between Japan and the rest of the world in this era of globalization. They don't account for, say, IBM Japan's notebooks produced locally or in Taiwan that are snapped up by Japanese consumers. The same goes for Motorola pagers produced in, say, Singapore but peddled in Japan. And the picture is blurred further by all manner of U.S.-Japanese business alliances that benefit both sides. In short, trade figures are becoming less of an accurate gauge of underlying competitive strengths.

And what of foreign direct investment into Japan? Last year, it clocked $30 billion, with U.S. companies leading the way, followed by German and Swiss investment. Over the last two years, some $45 billion has poured into Japan from auto companies, suppliers, financial institutions, and telecoms. Yes, that's a puny number by the standards of cross-border transactions in the U.S. and Europe. But for Japan, this is quite a change. That two-year figure is more than the cumulative FDI from 1950 to 1997.

FOREIGN INROADS. When Bush Sr. was in the White House, the idea that Nissan would be effectively owned and managed by Renault, or Mitsubishi Motors by DaimlerChrysler, was a mind-blower. Back then, Japanese executives would have viewed such a sale as akin to corporate treason.

Today, Japanese companies are desperate for foreign capital and managerial knowhow. That's especially true in finance. GE Capital and others have bought numerous insurance outfits and consumer-credit purveyors. The once-illustrious Long Term Credit Bank of Japan now operates under the name of Shinsei. But it's run by a team of ex-Citibank execs and owned by a consortium of Western players led by Ripplewood Holdings, a New York private equity fund.

Also, roughly 20% of the market capitalization of the Tokyo Stock Exchange is now controlled by foreign money, not Japanese investors. Japan's cross-shareholding networks between banks and Japanese companies are falling apart. That's throwing more free-floating shares up for grabs and making foreign acquisitions more likely.

FINALLY SINKING IN. It's also making Japanese executives far more accountable to foreign shareholders, who tend to get deadly serious about returns, profitability, and corporate governance. At some companies, such as Sony, drugmaker Yamanouchi Pharmaceutical, chipmaker Rohm, and insurer Mitsui Marine & Fire, foreign investors own roughly 40% of outstanding shares.

What does this all mean? For starters, Japan really is beginning to open up to the global economy. Some argue this is just a short-term trend, that the old protectionist practices will come back with a vengeance. I'm not sure I buy that. Japan has a lot more to gain by letting foreign capital, managerial talent, and imports wend their way into the economy. Consumers will get more choices, and coddled Japanese industries will benefit in the long run from stiffer foreign competition and alliances. That reality has finally sunk into Tokyo officialdom.

Yes, some entrenched interests in Tokyo will fight the trend. They already are. But once the genie is out of the bottle, it's hard to put it back in. Trade flaps will crop up from time to time, but Japan's economy isn't walled off the way it was back in the 1980s. The biggest irony of all is that years of hectoring from Washington trade warriors about Japan's fortress economy couldn't pull off what a long domestic economic slump surely has. Bremner, Tokyo bureau chief for BusinessWeek, offers his views every week in Eye on Japan, only for BW Online


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