Xenophobia Must Not Overtake Japan: A Recipe for New Economic Growth

The killing spree that took place in June 2008 in the Akihabara district of Tokyo brings into relief the problems plaguing Japanese society with its widening gap between rich and poor. A research fellow with a 35-year career in the diplomatic service shares his thoughts.

Japan, the United States, and the Widening Wealth Gap

In a fit of violence, yet with eerie coolness, a knife-wielding man went on a rampage in Tokyo's Akihabara district on June 8, 2008, killing seven people. He had been posting numerous messages on the Web from his mobile phone in the hours leading up to the crime 1 .

Grim crimes such as this are on the rise, in an apparent reflection of the increase in people who are unhappy with their current circumstances against the backdrop of an economy showing little signs of improvement.

For years, as the Japanese economy soared in the period following World War II, the Japanese developed an image of themselves as a gentle people who value harmony with others. Then came the 1985 Plaza accord, realigning currency values and significantly dulling Japan's edge in export markets. In the years that ensued Japan also failed in its attempts at domestic structural reform. An economic downturn followed, and bureaucrats, the architects behind Japan as a middle-class society, came under harsh attack, just like the Soviet Communists who used to be praised as founders of a great country but on whom all economic difficulties in late 1980s were blamed. With deepening rifts in its society, Japan has lost its grip on solid governance.

Sluggish economic growth for Japan also means that it is no longer feasible to maintain the Japanese brand of socialism rooted in the education with a disproportionate stress on equality championed by the Japan Teachers' Union. The widening gap between the nation's haves and have-nots is no longer deniable.

Looking at Japan's current predicament, there are those who lament that the nation has been beaten down by American-style approaches to government-damaged deeply by the pro-American politics of Prime Minister Jun'ichiro Koizumi and his economic and fiscal policy minister, Heizo Takenaka 2 .

But before settling on such a conclusion, we need to think again. We must consider what Japan has done to the United States before we begin complaining about the negative impact the United States has had on Japan. Only in this way will we be able to reveal the truth and chart the course that Japan should follow in the years ahead.

The 1960s were the height of cultural and economic affluence for the United States--or, rather, for its white community. The American television dramas that were broadcast on Japanese television in those days made many Japanese dream of joining the (American) middle class. The multitudes of laborers that the mass production of automobiles and consumer electronics gave rise to in the United States formed a powerful middle class, having obtained high wages and political rights. The United States grew into a society where this middle class was dominant, just as Japan would in the 1970s and beyond.

A little later, however, American stores were inundated with Made in Japan products, down to the simplest electric water pot. The Japanese competition was quickly driving American manufacturers of consumer electronics, such as Zenith Electronics, off the shelves.

It is doubtful whether the current generation of Japanese is aware of the pain that American laborers went through at the time. Americans, even as they bought Japanese products, were bemoaning the situation. What they felt must have been similar to the pain now being experienced by the Japanese who are losing their jobs and incomes because of manufacturing operations being moved to China.

The United States, for its part, having lost much of its manufacturing business to Japan and other competitors, sought new opportunities in the financial and information technology sectors and soon came to set global standards in these business areas. This was called the "globalization of the economy," with concealed criticism of the aggressive business style of the American financiers. But we must keep in mind that Japan's success is what has led the United States to force its Anglo-Saxon model on other countries.

Searching for a Solution

Lately there are arguments-perhaps little more than jokes-that flatly dismiss these considerations and seem almost to assert that we should go back to seclusion from the rest of the world, because it is the very existence of other countries that has brought about Japan's current plight.

But is total seclusion even a possibility? Even in the Edo period (1603-1868), when the closed-door policy was in place, Japan was trading with China and the Netherlands, and foreign information was entering the country. What would happen if Japan were to cease all car exports, which total several million vehicles per year? And turning every inch of Japanese soil into pasture, up to the peak of Mt. Fuji, still would not be enough to feed all the livestock if Japan were to stop importing the millions of tons of grain it needs. If people are seriously suggesting that we cut ourselves off from the world, then what, exactly, do they think we need to stop, and how?

The debate is bound to boil down to the conclusion that yes, we do need to continue international trade, but that we wish to be spared of further transfers of manufacturing bases from Japan to China and Southeast Asia, which deprive Japanese workers of their jobs.

Even if the factories returned to Japan, though, what would we do with the products that are made? We would not be able to export them, because they would be more expensive than their Chinese counterparts. Yet it would be impossible to sell all of the manufactured products domestically. In other words, factories brought back to Japan would probably go out of business in a matter of two years or so.

What, then, are we to do? How can we grow the economy and prevent the appearance of indiscriminate killers?

Some have suggested that Japan should improve its domestic financial markets and join the ranks of global financial centers (I understand that the British government gets about 30% of its revenue from the London financial center). But Japan is a country where the documents filed for stock exchange listing approval must be written in Japanese, where rules regarding corporate acquisitions are undeveloped, and where news of foreigners even attempting to buy up a Japanese company draws vicious responses from the media. How can foreigners possibly move big money in a country like this?

Some say that now is the time for Japan to switch from manufacturing to "intellectual property." But Japan is not very good at computer software development, and the iPod and other foreign products have left Japan in the dust in the area of portable audiovisual equipment, formerly a Japanese specialty.

Anime (animated films) and manga (comic books) are recognized for their unique content and held to embody what has been dubbed "Japan Cool." But their creators usually do not possess sufficient managerial skills to promote their products globally. It is likely, moreover, that eventually these markets will be taken over by Korea and China.

In the final analysis, the only realistic choice for Japan to earn foreign currency is through monozukuri (the art of manufacturing), where foreign language is not needed to compete.

If we take a different view of things, however, we could also say that there still is room for economic growth led by domestic demand. Many people disparage the Japan of a decade ago as a "construction state." The expression refers to how public works budgets were liberally used to build unnecessary roads, dams, and embankments, and how the politicians in power garnered votes with the help of construction companies. (Actually, while many construction projects were unneeded, traveling around Japan today I see that the provinces have become surprisingly tidy and accessible. Not all these projects were unnecessary after all.)

I used to completely agree with those who criticized this configuration. But has a new industry emerged that can take the place of public works, of construction? Has privatizing the postal savings system stimulated private investment? Unfortunately, the answer is no.

Meanwhile, in the United States, homes have been built for low-income families through subprime lending. China has been extensively constructing office buildings, apartments, and other infrastructure, even at the cost of diverting funds from elsewhere in its national budget, and thus has achieved significant economic growth. Japan alone has been cutting down on publicly funded construction projects and propping up its economy by maintaining exports through a policy of low interest rates and a cheap yen.

Until recently, I too had been a believer in the glory of Japanese manufacturing skills and had thought it unfair how China and the United States were pumping up their GDP figures by constructing homes and office buildings. But the ultimate purpose of economic activity is, in the end, to make our life more comfortable. I have seen on television that even rural migrants working in Shanghai are buying decent apartments. They, of course, are quite content.

Possibilities for New Economic Activities

I would suggest, therefore, that Japan actively engage as well in economic activities focused on improving the living environment--while keeping clear of trade deficits, that is.

European cities are comely, with buildings of consistent heights and styles and without utility poles lining the streets. But they became like this only from the latter half of the nineteenth century, thanks to the wealth amassed as a result of the Industrial Revolution. Although Japan also had the economic resources to carry out similar changes around the end of the twentieth century, it funneled the money into projects that are easier to accomplish and to spend money on, such as dams, seawalls, and expressways.

A residential area in central Tokyo.

Surely we have enough seawalls by now. I say it is time that we seriously set out to improve our homes and living environments. Those of European countries and the United States are much better than what we have in Japan. Residential neighborhoods would look several times more refined simply by putting the telephone and power cables underground. Perhaps something could be done about the former farm access roads which later turned into streets in residential areas. They are so narrow and winding that even in the center of Tokyo fire engines have difficulty driving on them. Public funds should be used to provide loans and subsidize interest payments for improvements along these lines (with due caution, of course, not to follow the precedents of the subprime loans and their securitization).

A considerable workforce would be needed to build these new homes. This means, however, that a large number of jobs would be generated. It seems as if artisans (I mean carpenters, welders, plumbers, and the like) have disappeared in the decades since World War II and the Japanese have all become corporate employees, but the artisan class has lately been making a comeback. Labor unions, health insurance, and the pension system need to be made more robust for their benefit.

The social disparities that give rise to phantom killers cannot be resolved as long as Japan orients itself toward contraction. Now appears to be a good time to bolster domestic demand by augmenting wages through moderate inflation, at the same time increasing public revenues. But I have no intentions of blindly copying the economic policies set forth by Hidenao Nakagawa 3 . The reforms carried out under Jun'ichiro Koizumi will come to nothing if fiscal spending is simply increased without doing anything about the traditional structure of vested interests.

Finally, we must correct the current system whereby young people find it difficult to marry and see their finances drained through high taxes, pension payments, and health insurance premiums. This must be achieved even if it would force the elders including myself--or, more precisely, those pensioners who have respectable properties and incomes--to relinquish part of the benefits they have already gained.

If, in response to the grim economic and social conditions, Japan were to increase public spending while leaving the age-old patterns of vested interests intact, it would be following in the footsteps of the former Soviet Union, which promoted income redistribution despite lacking a sufficient basis for growth. Japan's economic and social policies should be implemented in such a way as to gradually turn the nation into a dynamic society in which young people can readily take part in the creation of new businesses.

1 The incident attracted considerable attention in the international media, including the following:

Times Online http://www.timesonline.co.uk/tol/news/world/asia/article4089998.ece

Reuters http://www.reuters.com/article/newsOne/idUST27752620080609

BBC http://news.bbc.co.uk/1/hi/world/asia-pacific/7442327.stm

2 Jun'ichiro Koizumi served as prime minister from April 2001 to September 2006; Heizo Takenaka was a member of his cabinet.


3 Hidenao Nakagawa, a member of the House of Representatives, advocated the creation of new wealth through economic growth in his book Ageshio no jidai: GDP 1,000 cho en keikaku (Age of the Rising Tide: A Plan for ¥1 Quadrillion GDP), published in October 2006.

Akio Kawato

  • Research Fellow