Edith Terry, How Asia Got Rich: Japan, China, and the Asian Miracle, M. E. Sharpe, Armonk, NY 2002. Commentary by Peter Myers, January 17, 2003; update February 7, 2004. Within quoted text, my comments are shown {thus}.

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{p. ix} Foreword

{by} Chalmers Johnson

It seems likely that fifty to a hundred years from now, when historians look back on the period we conventionally call the "Cold War," c. 1950 to 1990, and ask what actually happened that was of enduring importance, the answer will be the enrichment of East Asia. At the beginning of that period, groups of Western savants, such as the Council of Rome, argued that Asia's population explosion would soon exhaust the world's food supply and that Asian starvation, illiteracy, and corruption might destabilize the global economy. And yet between 1965 and 1990, seven so-called high-performance Asian economies, joined since the early 1980s by China, achieved the world's highest growth rates and thereby transformed the region's and global balances of power. The leader of this truly unexpected development was Japan, which by 1993 contributed two-thirds of the $6.2 trillion regional economy.

This massive economic growth occurred in a stealthy manner, with the so-called Western nations, particularly the United States, not paying close attention to what was happening and remaining smugly confident that the East Asian achievements merely confirmed the superiority of their own "capitalist" structures. When, during the mid-1980s, they awoke to their hollowed-out industries and discovered that Japan had become the world's leading creditor nation while the United States was the world's bigger debtor, there was nothing for them to do but try to adjust. East Asian growth had become self-sustaining, and Japan's share of it was starting to decline, indicating that East Asian wealth was not just a Japanese phenomenon. By the end of the 1990s, China was the world's fastest growing economy. ...

{the remainder of the book is by Edith Terry}

{p. xiv} The proof of the Asian model lay in the Asian economic miracle. Until Japan made the link, it was largely an issue for academic economists, not policy makers. In Japanese hands, the Asian model gained strategic and diplomatic traction that ultimately fed into the antiglobalization protests of the late 1990s. ...

In the early stages of the campaign, Tokyo looked for ways to deepen its imprint on Asia. As it evolved, Japan's focus shifted to the premier global institutions of economic management - the World Bank, the International Monetary Fund (IMF), and the World Trade Organization (WTO). Faced with massive dislocation in global financial markets in 1997 and 1998, these institutions responded by abandoning convergence theory and accepting a more pluralistic approach to economic policy. The World Bank, in particular, swiftly got on board a new intellectual platform at least partly to disassociate itself from its past mistakes. Thus the Asian model, that is the Japanese version of it, was embraced by the largest and most influential of the Bretton Woods institutions. This unexpected collateral benefit - economists would call it an externality - served Japan's original purposes as well, strengthening its hand in Asia, and giving it a new platform for dealing with China. By the late 1990s, Japan could no longer hope to contain China's quest for superpower status, or its competing diplomacy within Asia. But it could, through its influence in the World Bank as well as through its own substantial aid program, play a role as mentor and senior partner to the emerging Chinese giant.

{p. xv} Its strategy would be to replace Chinese resentment and hostility with a sense of obligation, bridging a new century in which China would almost certainly become Asia's dominant political and economic power.

{p. xxi} Emergency policies taken to prevent the wide-scale collapse of the Asian banking and financial sectors added another wrinkle to the debate. Rather than discrediting the Asian model, the Asian recovery seemed to give it new life. The crisis shrank the boundaries of private ownership in the financial sector and expanded government control. Post-crisis, Asia's governments essentially owned its banks. Malaysia owned 20 percent of the banking assets in its country, Thailand 30 percent, South Korea 58 percent, and Indonesia a staggering 78 percent. Instead of sinking into a decade of recession in 1999 and 2000, the Asian economies quickly regained their footing as exports soared, assisted by soft currencies and a U.S. economy on warp drive. By 2000, Asia (excluding Japan) was expanding at a 6 percent annual clip. Even as global growth slowed in 2001, led by a stock market crash in the United States, Asian economies remained relatively robust.

The economies leading the post-1997 recovery, particularly Korea and Thailand, had used generous amounts of public money and exports to save their necks. These were "traditional" components of the Japanese model. The IMF, which had presented long lists of economic reforms as conditions to its huge balance-of-payments emergency support loans in 1997 and 1998, by 1999 was suffering an internal overhaul after facing withering criticism for its mismanagement of the crisis, particularly in Indonesia. Korea and Thailand paid back their IMF loans early, and despite the continued support of President Kim Dae Jung and Prime Minister Chuan Leekpai, huge chunks of the IMF programs were tied up in political wrangling. With the resumption of growth came a blunt rejection of reforms in more politically sensitive areas, such as privatization. Success also bred a conviction that the critics had been wrong and the Asian model had been vindicated. In its response to the crisis, the World Bank echoed the Japanese in placing new emphasis on gradualism and good governance. The new mantra emphasized the role of government in managing the market. Privatization, market opening, and fi-

{p. xxii} nancial liberalization occupied lesser positions in the World Bank's pantheon. By another name, the Japanese model guided the Asian recovery.

{p. xxv} The 1990s saw Japan wandering in a wilderness of its own making, but also saw unprecedented changes to institutional structures that had been bedrock features of the Japanese economy for almost fifty years.

The changes ranged from new foreign ownership of flagship Japanese auto companies, to elite Japanese graduates flocking to foreign firms, to premier Japanese companies' disregard of the walls between rival keiretsu, the giant business combines that took over after World War Two when the U.S. occupation banned holding companies. Auto companies announced they would put subcontracts out to bid, Sakura Bank merged with Sumitomo Bank, and foreign ownership grew in major Japanese companies such as Sony, Rohm, Hitachi, and Mitsubishi Heavy Industries.

{p. 13} In the mid-1980s, yen appreciation drove Japan's flagship industries offshore, and the bureaucracy followed. In Asia, Japanese business and officialdom hoped to accomplish what they could not do in Europe or North America - reproduce the managed economy existing in Japan, with its strategic collaboration between government and business aimed at economic growth. ...

The emerging markets crisis of 1997 to 1998 caused a general reassessment of globalization. It failed, however, to put an end to the quasi-socialistic, bureaucracy-led model associated with Japanese and East Asian success before the crash. Indeed, one major

{p. 14} result was to strengthen the critics of globalization, and Asians began to organize protectively against the next crisis, formulating a web of new organizations and official meetings that in many cases took their cue from Tokyo. The failed cultural revolt against Anglo-American dominance became a successful platform for building something much more important - a new set of institutions linking the Asian economies. The new institutions would increasingly prove useful on a political level.

Most significant of all, Japan lost its outlier status in the Asian system. It began to fit in, even though it had weathered the emerging markets crisis of 1997-98 without distinction. Asians who hoped that Japan would confront the IMF and the United States directly were disappointed. Yet, in the view of many Asians, Japan had played a far more sympathetic role in the crisis than Washington, and in the aftermath, Tokyo moved more confidently within its new Asian networks. Without any direct confrontation with the international financial institutions, Japan put up roughly 80 percent of the $100 billion bailout of the Thai, Indonesian, and Korean economies, far more than any other natlon. Moreover, Japan offered its funds unconditionally, in contrast to the elaborate reforms demanded by the IMF, with moral support from the U.S. Treasury Department. For once, Asians were happy to have Japan as a champion, and if they might wish that their champion was more outspoken, at least it had been there to help when the need was greatest. ... The new "Asian" Japan was ready to say no to the United States, and did so with increasing regularity.

... Japan's heavy-handed and often unsuccessful attempts at economic engineering via the Greater East Asian Co-Prosperity Sphere became the foundation for more sophisticated ideas associated with the Asia Pacific Economic Cooperation (APEC) grouping and the ministerial and summitry additions to ASEAN in the late l990s. The two strategies were linked by a concept called "flying geese," embodying cultural psychology as well as economics.

{p. 15} The Asian financial crisis threw into turmoil many of the Japanese multinationals based in the crisis countries but also cast a spotlight on the critical importance of Japan's new offshore Asian factories to the domestic economy. Contrary to expectations, Japan's effort to steer Asian growth did not stop with the Asian crisis. Japan's economic interdependence with East Asia and Southeast Asia, in fact, increased. Japan poured billions into shoring up its Asian-based factories and led the bailouts of Thailand, Indonesia, and South Korea. Tokyo's huge rescue effort was aimed in large part at propping up Japanese multinationals in Asia while they sorted out unhedged borrowings in local currencies and coped with the radical contraction of local markets, but it also helped jump-start the economies where its factories were based, by firing up exports and employment. From the perspective of the IMF, the Asian crisis was structural, a result of incomplete liberalization. From the Japanese perspective, it was a liquidity crisis pure and simple, and while it exposed structural problems they were secondary to the issue ot managing violent swings in capital flows in developing economies.

{p. 17} Between 1880 and 1895, Japan gained roughly 10 percent in landmass with the annexation of Taiwan and the Penghu Islands. In 1910, with the addition of Korea, Japan suddenly became 50 percent larger. Korea was followed by an explosion of gains, from the Marianas and Marshall Islands in 1920, to Manchukuo in the Chinese northeast in 1932, to the whole of Southeast Asia and China's major cities by the early 1940s. Formally, Republican China, Manchukuo, and the "liberated" republics of the Philippines, Indonesia, Malaysia, and Burma, together with the Thai monarchy, were not Japanese territory but Japanese allies. In fact, they were under the direct control of the Japanese mllltary government.

Even by the narrow definition of "formal territories only," Japan gained 80 percent in size during the years from 1880 to 1940. All of the new territory was under direct Japanese rule and subject to cultural programs installing emperor worship and establishing Japanese as an official language. Such legacies contained both good and bad. In some corners of Japan's former empire, paradoxically, they provided a lingering sense of comfort. In the late 1980s, for many elderly and even middle-aged Taiwanese, Japanese was their only foreign language. I was startled on a trip to Taiwan when both the mayor of Taipei and senior Taiwan executives insisted on speaking Japanese rather than Mandarin Chinese. During one interview, the president of a large manufacturing company ducked out to take a phone call from one of his Tokyo business associates. The conversation was conducted entirely in Japanese.

... Many Taiwanese look back at Japanese rule with nostalgia because the mainland Chinese who assumed power in 1949 treated them more harshly than had their Japanese overlords.

... In Japanese society at large, young Asians streaming to Japan to take advantage of educational opportunities in the 1990s often left the country seriously disillusioned. Exposed to verbal abuse and discrimination, Asians experienced the underbelly of a tribal culture

{p. 18} that viewed the world as an ethnic hierarchy with other Asians classified as lesser races. ...

In the fifteen years from 1985 to 2000, Japanese capital and manufacturing investment ignited an economic boom in Asia of historic proportions. Right behind the investors were disciplined teams of Japanese bureaucrats ... Within Asia, Southeast Asia would be Japan's stronghold, the base from which to launch a strategy of containment against China. It was not to be. By the end of the 1990s, Japanese capital was flooding out of Asia, China had managed to charm Southeast Asia and intimidate Washington, the Clinton administration was actively promoting Beijing as its partner of choice in the region, and Japanese influence in the region waned, despite an $80 billion rescue package for the Asian economies during their crisis.

{p. 19} After 1985, when the yen rose sharply in value, Japanese export industries were in serious trouble and should have suffered declines in both cash flow and asset values. Instead, asset values expanded rapidly, creating the "bubble" in stock and asset prices of the late 1980s. ... Banks understood that they could lend beyond the deposit base because the Bank ot Japan would make up any shortfall in liquidity. Japanese banks lent money first, asked questions later. ... As long as asset values continued to grow, good loans and bad ones were relatively easy to repay because their value in current terms was constantly declining. Japanese banks funded Japan's foreign investment spree essentially because borrowers could not use all the money on domestic projects. Japanese investors were able to pour funds into dubious projects in Southeast Asia and elsewhere because of the Japanese government's implicit guarantee.

{p. 20} ... "Each important industry started life as a consortium led by MITI, thereby freeing lenders from credit risk," Mikuni explains. When domestic markets were saturated, MITI turned to exports. The post-1985 strategy was a variant of the established pattern. Japan's Asian factories would become a new market for Japanese products, gobbling up high value-added components. At the same time, Asia would become a platform for Japanese exports, taking over production of the commodity end of Japanese consumer manufactures - products such as cameras, videocassette recorders, and air conditioners - that were labor rather than capital intensive. Because of rising production costs, these products had become impractical to make in Japan.

{p. 23} The strong yen amplified but also had the power to vastly complicate Japan's Asian diplomacy. In Asia, the yen could impose havoc by weakening against the dollar, which would increase the competitiveness of Japanese exports into the American market. The weaker yen of 1996-97, coupled with the 1994 devaluation of the Chinese Renminbi, helped spark the Asian crisis. Post-crisis, Asian central banks began weighting their currencies toward the yen in order to prevent a replay of the collapse of regional currencies, which had been pegged to the U.S. dollar before 1997. Toward the end of the decade, Tokyo was squeezed between U.S. policy to relieve pressure on the yen in order to help it out of its bad-debt problem, and Asian regional pressure to keep the yen high in order to keep the recovery rolling.

{p. 27} A decade before the Asian crisis, Japan was perhaps the first major late industrializing economy to experience the dark side of the globalization of capital. In 1985, when finance ministers of the major industrial economies cobbled together a deal on exchange-rate coordination, under pressure from the United States, it put enormous stress on Japan's export-led growth paradigm. It was intended to destroy it. Washington imagined that its trade deficit with Japan would shrink if a higher yen eroded the competitiveness of Japanese exports. The Plaza Accord of September 1985, coming after months of pressure by the U.S. Treasury Department, saw the yen double in value over a three-year period. The realignment of exchange rates unleashed a historic movement of capital out of Japan. In February 1985, the yen was at its weakest since 1977, briefly hitting a low of Yen 260.24 to the U.S. dollar. By January 1988, there were Yen 127.56 to the dollar, a rise of 104 percent. ...

{p. 28} Japanese manufacturers panicked, metaphorically rushing for the door.

Most headed for Europe and North America, where they anticipated governments would soon erect protectionist barriers to Japanese exports, and thelr strategy was simply to ensure continued access to markets. But Japanese investors also headed for Asia, with an entirely different approach in mind. In the mid-1980s, the Asian regional market held few attractions and Japanese manufacturers looked instead to their Asian factories to replace export products that could no longer be made economically at home. This strategy implied seeking out economies with infrastructure and human resources as similar as possible to Japan's, and the first surge in Japanese investment to Asia went exclusively to the economies of Northeast Asia - Hong Kong, South Korea, and Taiwan. ...

By 1987, however, Japanese investment in the southern tier began to catch up. By 1991, Japan was investing 40 percent more annually in the Southeast Asian tigers than the Northeast Asian economies. This was partly because rapid growth in the latter resulted in wage and price inflation ... partly because the Southeast Asian economies were cheaper and rapidly putting in the kind of infrastructure that the Japanese needed. Perhaps more than anything else, however, the influx was due to a serendipitous conversion on the part of the governments of Thailand and Malaysia to more open investment regimes. Indonesia and the Philippines proceeded more cautiously but also began to experiment with financial and investment llberalization. ...

The parallel between Japan and the globalization "victims" of 1997-98 is far from exact, of course. The crisis that struck Asian economies in Summer and Fall of 1997 hit currency markets first, then spread into the hair-trigger markets for corporate debt and equity.

{p. 39} ... Japan first discovered the miracle of China by way of the Sinified kingdoms of Korea. Japan's Yamato court had been a loose tribal federation of uji, or clans, marrying inside the clan and worshipping their own deities. The language, culture, and theories of governance of the 'people of Tang" transformed the primitive village society, transmitting to it a civil bureaucracy and the concept of hierarchy. ... China provided Japan with the constructs for most of its formal institutions.

{p. 40} Many Japanese are surprised and disbelieving to learn that Korean artisans designed Japan's first Chinese-styled capital city at Nara. One of Japan's most beautiful and treasured medieval sculptures is clearly Korean in style: the seventh-century Miroku Bosatsu, kept in the ancient Koryuji Temple in Kyoto, was probably carved in Silla, the southeastern part of the Korean Peninsula.

{p. 52} The metaphor of flying geese was central to Japan's campaign ...

{p. 53} The manner in which this snatch of poetry came to symbolize the Japanese economic miracle and the strategy behind it is almost as extraordinary as the miracle itself. ... It took wing from the eclectic intellectual melange of the Meiji (1868-1912) and Taisho (1912-1926) eras, as an attempt to explain the dynamics of late industrialization in Japanese terms. In the 1930s, the flock was commandeered by militarists who saw it as a neat emblem of Japanese ethnic superiority. In the post-war period, the image of flying geese was revived first as a metaphor for industrial policy, then as a symbol of the Japanese model itself. Along the way, its various uses were never far from propaganda. Yet several generations of Japanese economists and policy makers also believed that the image reflected a genuine Asian reality.

By far the most important Western influence on the concept came from the writings of Friedrich List, an early nineteenth-century German economist who played a large role in shaping the economic theories of National Socialism. Like the German romantic poets and philosophers of the same era, List believed in triumph of human willpower over mere matter. He took particular umbrage at the cool classicism of the Anglo-Saxon school, with its basis in Enlightenment philosophy and claim of universal values. Where the British argued that all economies followed universal principles, List argued that social and political factors affected economic performance as well as resources or the skills set of economic participants.

{p. 54} When Japan's Meiji statesmen decided to catch up with Britain and the United States, the superpowers of the late nineteenth century, they created a national economy to wage war on modern terms. The urgency of the task - they saw foreign imperialists trampling down their doors - meant reversing the pattern of industrialization established by the Western economies, which had developed light industries first, then learned how to use machines to build ships, locomotives, and guns. The Japanese state poured its resources into heavy industries, providing subsidies for strategic products, from iron ships to artillery, which would become the backbone of its conquest of Asia. In doing so, Japan managed to compress a century of European and North American industrialization into a single generation, an achievement that still stuns with its complexity and ambition. The flying-geese theory, and the Japanese model that became synonymous with it, were based on the phenomenal success of Japanese modernization. It sought to explain how government might harness the market to achieve national goals and how, in fact, one particular government managed to do so with brilliant success.

{p. 55} ... the hierarchical and bureaucratic values implicit in flying geese are among the legacies of a millennium of Confucian influence on Japan. The flying-geese economic theory implicitly assumes a pyramidal structure, with leaders and followers, similar to the Confucian world order. Confucianism placed the emperor on the central axis between heaven and earth and China at the apex of a gaggle of lesser states. Scholar-bureaucrats were at the height of the social order, just below the emperor. In Tokugawa Japan, under Confucian influence, the samurai played a similar role, as aministrators but also as conservators of Japanese high culture. In bushido, the warrior code, they shared a common idea.

{p. 75} Only when the Asian economies began moving into hyperdrive in the late 1980s and early 1990s did the concept of an Asian economic union, with Japan at its center, begin to command broader attention. By that time, identification with Asia was so widespread among Japanese elite agencies, the business community, and politicians that the vision was no longer a lonely one.

The culmination of these etforts was the establishment of the Asia Pacific Economic Cooperation grouping, or APEC. Historically, APEC was unquestionably Japan's brainchild - the United States was initially a suspicious and reluctant partner. Although the formal proposal came from Australian prime minister Robert Hawke in January 1989, Japan's MITI had long supported the idea of an Asian trade pact and encouraged the prime minister to be Japan's front man.

{on Japan's colonization of Australia at that time, see mfp-saga.html}

In 1967, then Foreign Minister Miki Takeo proposed an "Asian Pacific policy" based on an "awareness of common principles," cooperation among the advanced nations in the Pacific area - meaning the United States, Canada, Australia, and New Zealand - and increased levels of Japanese bilateral aid to the region. Kojima wrote the formal paper on which the Miki policy was based, and it was the first draft of ideas that would become the basis for APEC and for Japan's strategy within the organization. No formal proposals issued directly from Miki's proclamation. Instead, Tokyo turned to Okita, who launched a conference series, with Japanese Foreign Ministry support, to examine the idea of regional economic cooperation in Asia.

The series became known as the PAFTAD, the Pacific Trade and Development Conferences. Okita recruited Australian support. The Australian National University and the Japan Economic Research Center, associated with MITI, began publishing research studies on the economies of Australia, Japan, and Western Pacific nations. The first PAFTAD convened in 1968. Participants were academics, mainly economists, senior government advlsors, and government officials "in their private capacity." Gradually, Okita upped the ante. In 1976, Okita and Sir John Crawford wrote a report to the governments of Japan and Australia recommending the establishment of an "Organization for Pacific Trade and Development" (OPTAD), modeled after the OECD. In 1978 Prime Minister Ohira Masayoshi put Okita in charge of a special task force to explore the idea of a "Pan Pacific association." In 1980, Okita and Kojima helped to launch the Pacific Economic Cooperation Conterence (PECC).

{p. 83} From a public relations standpoint, Japan's APEC was a failure. Publicly, Tokyo proclaimed that it had delivered a bold and progressive "Action Agenda." But what came out of Osaka was, in fact, an ambiguous document. While it preserved a formal commitment to the free market, the declaration's language fundamentally undermined the concept. In addition to "flexibility," the Osaka APEC introduced the phrase, "concerted voluntary unilateral liberalization," meaning, apparently, that APEC members could do what they liked but do it together. In November 1994, when Indonesia hosted the event, President Suharto stunned his counterparts by championing a plan to eliminate all trade and investment barriers in the region by the year 2010 for advanced industrial countries and 2020 for the developing ones. But the Osaka Action Agenda, which was meant to set out this plan in detail, instead offered a new escape clause - the principle of "flexibility" - allowing dissatisfied members of APEC to drop out anytime they pleased.

{p. 88} Socially, the Japanese became more conscious of Asians in their midst, as illegal workers from Southeast Asia, China, and Russia followed the high yen to jobs in Japanese service industries, from the "water trades" of prostitution and entertainment to manufacturing and construction. The numbers of Asian students climbed, particularly from China. Proprietors of Japanese language schools slyly acknowledged that many of the "students" spent most of their waking hours at jobs as short-order cooks or construction workers despite the legal prohibition on foreign unskilled labor. Asian food followed illegal Asian workers and semilegal students, and Tokyo suddenly had a coterie of Malaysian, Thai, and Philippine restaurants. Japanese teenagers began listening to Asian pop music, albeit as part of the fashion for "world music." Discount stores displayed products with Korean and Taiwanese brand names such as Samsung and Acer.

{p. 95} Perhaps the most outstanding product of MOF's brain trust was ... Vietnam. Nowhere were Japan's efforts to shape the Asian economy more concentrated, direct, or successful. In the mid 1990s, to the fury of the World Bank and the U.S. Agency for International Development (USAID), Vietnam invited Japan to advise it on its five-year plan for 1996 to 2000. A delicious irony was embedded in this, which Japanese officials fully enjoyed. Vietnam had defeated not only the United States in the Vietnam War, but also driven back China in the 1979 Sino-Vietnamese border clash. Japan's alliance with Vietnam in economic policy thus teased both giants.

Vietnam was also a prime target for Japanese multinationals. It had the lowest labor costs in Asia, an economic system in transition from a command economy to a modified version of the free market, and access to major markets including China.

{p. 121} On the larger map of East Asia, investment by the Asian NIEs was even more frenetic because of a huge bulge of overseas Chinese investment in China in 1992-93, when Beijing accelerated its economic reforms after Deng Xiaoping's famous Southern Tour in Spring 1992. Japan had lagged behind in China, anyway, but by 1993 the Asian NIEs were investing $21.2 billion in China to Japan's $1.3 billion. By 1994, the NIEs were investing $24.9 billion in China to Japan's $2 billion.

{surely this NIE money was overseas Chinese}

{p. 144} Matsushita's internal culture did not sit well with other Asians. Richard Chong, a Taiwanese businessman, described his experience in hiring a Matsushita executive to help run a start-up electronics company. The former executive insisted on wearing his Matsushita uniform to work. He fought endlessly with other managers and employees because they refused to go

{p. 145} along with his ideas about company discipline, based on the Matsushita model - morning exercises, strict obedience to superiors, and long working hours Eventually, he caused so much friction with other managers that Chong fired him.

And yet, as one of the world's largest multinationals and the largest consumer electronics company, Matsushita had incomparable industrial depth and staying power. It brought to Malaysia a global distribution network for air conditioners and color TVs, which became major export products for the nation. It replicated its Japanese network of subcontractors. By 1998 there were 200 of them, some local, most joint ventures with Japanese businesses. These smaller companies created an industrial infrastructure of parts makers capable of selling their products to the world. Matsushita not only gave Malaysia its business, it created an industry. This pattern was repeated many times over, as Japan turned again to Asia in the late 1980s and found that the legacy of World War Two no longer mattered in a region eager for growth.

By 1995, most of the offshore production of Japanese electronics companies, 70 percent, was in Asia. Some $21 billion worth of Japanese electronics, from Sony Walkmans to compact disc players and printed circuit boards were made somewhere in the region. It took just a tew years for Thailand, Malaysia, and Singapore to become the fastest growing sources of Japanese exports outside Japan. U.S. congressmen fumed, while leaders of developing nations rubbed their hands with glee. The congressmen and women might say what they liked. Southeast Asian countries had gone overnight from resource exporters, vulnerable to the slightest shift in global commodities markets, to manufacturing exporters.

{p. 146} Technology transfer, long a sore point among host countries for Japanese investment, gradually became a less-sensitive issue, at least in the electronics industry. Japanese companies shifted product design and ever more complex manufacturing to Asia. Matsushita's first robot-making factory in the world outside Japan, MASTEC, went to Singapore. At the site were regular training courses for engineering students in surface-mounted technology, a technique for constructing printed circuit boards. Sony also began to build and design robots at its Sony Precision Engineering Center in Singapore.

In Southeast Asia, where Japanese investment was concentrated in the early 1990s, its consumer electronics sector was clearly responsible for setting off an unprecedented boom in exports of manufactured goods. Malaysia became the world's biggest producer of semiconductors. Both Thailand and

{p. 147} Malaysia were on their way to becoming world leaders in consumer electronics manufacturing. Singapore seized the lead in providing computer software and product design for Japanese multinationals. Salaries in the city-state were about one-tenth the going rate in Japan for computer engineers, and Japan's top electronics companies began moving training and research facilities to the island.

Shipments between the offshoots of Japan's new electronic conglomerates in Asia generated a secondary trade boom among Asian countries. At MTV in Malaysia, in the early 1990s, 47 percent of components were supplied from within the region of which two-thirds came from other Matsushita factories in Singapore and Malaysia. Another 35 percent of the value of intraregional components came from cathode-ray tubes from a Matsushita factory in South Korea. Other components came from Japan. In short, roughly half the value of television exports that would have come from Japan a few years earlier was now sourced from two other Asian countries.

{p. 157} When Japanese multinationals foresaw a wave of cheap imports buoyed by the strong yen, they determined early on to control it themselves by dominating the market for products imported from Asia, so that the ultimate source of the wares that made up Japan's rising imports from the region would be Japanese factories.

Indeed, Japan made it clear that its grand new adventure was about industrial collaboration, not competition. The deal that Tokyo offered its Asian neighbors was industrial development in exchange for global exports - under Japanese labels. If local companies reached the stage of wanting to develop their own brand names for global export, Japan was unlikely to welcome them into its markets. This was a story that had already played out in the 1980s, when Korea and Taiwan seemed likely to catch up with Japan in the global electronics industry. When they got close, Japan refused to give up its state-of-the-art technology. Meanwhile, both countries had become hooked on supplies of Japanese capital goods and industrial components, running steep deficits in their trade with Japan.

There was, however, a difference between Korea and Taiwan. Korea's large chaebol conglomerates, consciously modeled after the Japanese keiretsu system, succeeded at becoming the world's fifth largest producers of electronic products by the early 1990s. The chaebol were increasingly determined to market products under their own brand names. As far as the Japanese were concerned, the proper role model for Southeast Asia was to be Taiwan. By the 1980s, Taiwan manufactured nearly all Japanese calculators and cameras under "original equipment" manufacturing (OEM) arrangements, assembling parts shipped from Japan. "It's true that elfective technology transfer from Japan has not been realized in Korea," said Yamada Matsuhiko, an advisor to Nikko Research Center, in a 1992 interview.

{quote} The reason for such problems is also very clear. First, according to Japanese engineers in Korea, the absorptive capacity of Koreans is not good because of their educational background, or their willingness to remain with the company. The turnover of Korean workers is higher than in the United States. Such high mobility prevents effective technology transfer.

Second, managers of Korean companies do not honor intellectual property. They want to steal such trade or technological secrets without any charge. They assert that Japan should give everything to Korea for free, as compensation for past injustices. Another unique feature of Koreans is their Confucian ethics, which have also obstructed effective technology trans-

{p. 158} fer. There are people who say that Confucian morality is a factor in the economic progress of East Asia but I don't think so. High tech cannot grow in a feudal political or social system. Confucian mentality disappeared in Japan generations ago, but in Korea such a mentality exists and frustrates the younger generation.

And here's another thing. The competitiveness of Japanese goods is based on quality control in Japanese factories. But it's almost impossible to do much quality control in Korea. Japanese engineers say that Korean workers don't like such activities, which require devotion, effort, or sacrifice of their private life.

Japanese electronics and auto companies are not allowed to produce final goods in Korea, which are monopolized by Korean big business. Japanese are absolutely excluded from the production of final goods. All that Japanese companies can supply are parts and components only, because the chaebol make the finished products. As a result, Japan's role in the export of final goods from Korea has been very small, compared to ASEAN or Taiwan. And Japanese imports from Korea are very low for the same reason, because Japanese customers are very sensitive to brand names as well as to quality. {endquote}

Yamada merely expressed a mainstream Japanese view; when Koreans really began operating according to Akamatsu's principles, the Japanese dld everything they could to block them. When Hyundai launched the first Korean-made car in the North American market in the mid-1980s, Japanese carmakers nearly succeeded in driving the company out of business through a destructlve price war. If such tactics failed, the Japanese would resort to smears, doing their best to foster the image that Korean products were inferior.

A second major problem with Japanese investment, from the host country perspective, was Japan's desire to control the stream of products back to the homeland. Matsushita, for example, long anticipated that the high yen would eventually break down barriers to the Japanese market. Its solution was to dominate the market for imports as it already dominated exports. In 1996, Dlck Greene, a professor at Kwansei Gakuin University's School of Policy Studles and a scholar with close ties to Matsushita, laid out the internal decislon tree at the company.

{quote} The micro-level process works like this. MITI and Matsushita Electric executives in the early 1980s see an inevitable new relation to the United States vis-a-vis trade developing along with development of a WTO [World Trade Orgamzatlon] infrastructure between trading nations. Without formal committees these people, who have been dealing with each other for years, sometimes decades, informally work to envision what a Japan that

{p. 159} could not produce most of its manufacturing goods in Japan would do to maintain current long-term economic goals - first in the world economically at some future date, leverage through positive trade, currency, technology and service balances (i.e., negotiate away parts of the surplus to get concessions on other policy matters of interest to Japan) and so forth.

One conclusion that emerges in dozens of such casual and private conversations is that if Japan ends up importing most of its manufacturing goods, then it would be best if Japan were to import most of those imports from off-shore Japanese firms. This has employment implications that are unavoidably negative, but revenue and technology implications that are positive. Japan's domestic market can be open without foreign firms getting in. So, in the mid-1980s and late 1980s we see MITI and various industry associations training themselves in how to work as expatriates and import from Japanese expatriated facilities. {endquote}

{p. 210} If Japan exported its bubble, it wasn't just banks that were at fault. Trading companies had preceded the Japanese banks in the region by at least two decades and were active in trade finance, loans, and loan guarantees. Each of the trading firms was part of a "linked" keiresu. By a tradition dating back to the Meiji Era, trading companies had an exclusive claim on the foreign business of their partners within the keiretsu. In post-war Japan, they developed expertise in merchant banking and project finance long before the banks ventured beyond the major world financial centers.

It was the trading companies that often served as lead banks in project finance involving their keiretsu, a formula that allowed the members of the syndicate to spread the risk of projects. Trading companies often became equity partners as well. When the Asian financial crisis struck, the difficulty of sorting out Japanese corporate debt was a major factor slowing down

{p. 211} workouts in Indonesia and Thailand. Banks had lent recklessly because they were lending to Japanese entities, or had trading company guarantees. The tangle was so massive it would take years to sort out.

When entering a new market, the trading companies marched as invincibly as army ants. Working through the presidents' clubs of their keiretsu groupings, the trading companies could put together syndicates with the resources of small countries. When Mitsubishi Shoji, the largest of the trading companies, wanted China's attention, for example, its chief executive traveled with an entourage of sixteen of his ranking colleagues from other Mitsubishi Group companies met with Chinese premier Li Peng, and generally conducted himself in a manner and style normally associated with heads of state.

Mitsubishi made its decision to pull out the stops in China shortly after celebrating its tenth anniversary in the market in 1994. By 1995, China was already Japan's second-largest trading partner after the United States. All nine of Japan's general trading companies, the sogo shosha, had caught "China fever" about the same time, according to the Japanese press, but Mitsubishi was considered a laggard despite the volume of its trade with China, $2.21 billion in 1993.

{p. 214} By the mid-1980s, when the great wave of Japanese investment began, the trading companies had established a pattern of business into which new entrants to the expatnate Japanese business fraternity readily fit. They participated in manufacturing and infrastructure projects through both equity and loans - the latter usually larger than the former, and had become deeply involved in manufacturing ventures, usually as minority shareholders with local partners. They had evolved into roles combining the functions of investment banks, intelligence gathering, and communication within the huge keiretsu of which they remained key players. Outside Japan, they were in many respects the most visible faces of the keiretsu, commanding resources several times the GDP of many of the economies in which they operated.

{p. 222} According to the Japan Institute for Overseas Investment (JOI), most of the local funding was from retained earnings, although there was also substantial exposure to local debt markets. JOI's 1997 survey found that Japanese companies based in Northeast Asia were drawing 67.9 percent of funding from local sources. A further breakdown of the local funding showed that 60 percent overall came from retained eamings, with just under 40 percent from local debt markets. In Southeast Asia, 57 percent was from local sources, with 54 percent from local borrowing and 46 percent from retained earnings.

As it turned out, the local borrowings were treacherous. Much of this local financing was in U.S. dollars, and Japanese borrowers did not bother to hedge more than a fraction of it, according to the Japan Export-lmport Bank (JEXIM). In Thailand, for example, 70 percent of Japanese corporate borrowings were in U.S. dollars, and only 10 percent of the dollar-denominated funds were hedged. Japanese banks were also in deep trouble, particularly in Korea, where they were the lead creditor by mid-1997, with $23.7 billion in outstanding loans. The total exposure of Japanese banks at the start of the crisis was $275.2 billion ... A high proportion of Japanese exports to the region were capital goods, ordered by Japanese subsidiaries and affiliates. As Asian markets contracted, the yen appreciated in local currency terms forcing plant closures and layoffs by Japanese companies selling primarily to local markets, such as the auto companies.

Even worse hit than the auto companies and the banks were trading companies, typically involved in large-scale infrastructure projects.

{p. 223} The Asian crash hit the car companies hard; a Mitsubishi Motors executive confessed his company had retrenched "1,500 percent" in Thailand. And yet, many of the car companies closed production lines temporarily, only to reopen a few months later. Toyota, for example, closed its Hilux pickup in Thailand in November, only to reopen in January at one-quarter the capacity, according to Takemoto Motonobu, general manager of Toyota's Asia Division. Takemoto was planning to get the plant back up to at least half-capacity by exporting trucks to Australia and proceed "step by step" to improve production quality to the Japanese level. "We are in a survival mode," Takemoto said. "We are supported by our parent company in Japan. Likewise, we will support our subcontractors in Asia."

In hard-struck Indonesia, Toyota applied a strategy of operating its assembly plant one week out of the month, and cutting assembly line temporary workers and contract workers to save costs. It also applied a favorable internal exchange rate of Rupiah 8,000 to the U.S. dollar, as opposed to the market rate of Rupiah 13,000, to components imported from Japan. But as late as August 1998 the company maintained its no lay-off policy for regular staff and still managed to squeeze 1,000 sales per month of its popular Kijang sport utility van, down from 7,000 before the currency crisis began. Consiering that the Indonesian economy was in a state of double-digit contractlon, such staying power was remarkable.

{p. 226} What was interesting about Japanese emergency funding was not just the scale but also the philosophy behind it. There was nothing secret about what MITI did, but perhaps nobody bothered to read between the lines, look at it in historical perspective, or check back later. The Emergency Measures for the Economic Stabilization of Southeast Asia, a Japanese cabinet decision reached on February 20, 1998, spelled out support for Japanese companies in the lorm of investment finance and two-step loans to Asian governments to support "local export-related companies in Asia." But in practice, such funds would go primarily to Japanese affiliates.

{p. 230} Given the political dynamics, Summers needed to demonstrate to Congress that the United States would get something back for its money, and talking tough to Japan usually went down well on the Hill. At the same time, the administration was doing its best to fend off protectionists who predicted a huge runup in Asian exports to the United States. The last thing anybody needed to hear was that Japanese multinationals might be behind the expected surge in Asian exports.

Perhaps a third factor, in addition to politics and American stereotypes about Japan, was simple ignorance. Americans seemed oblivious of the scale of the Japanese presence in Asia or of the enormous buildup of that presence in the mid-199Os during the second post-Plaza Accord yen spike. By early 1998, Japanese companies had invested a cumulative total of $111 billion in Asia, most of it in a single decade. In 1995, Japanese companies based in Asia represented a market for components alone worth Yen 9.7 trillion, or $120 billion at Yen 79 to the dollar. In 1988, some 38 percent of the foreign subsidiaries and affiliates of Japanese companies were based in Asia, compared to 29 percent in North America, including Canada, and 18 percent in Europe. By 1997, the figures were 60 percent, 20 percent, and 13 percent, respectively.

In Malaysia, for example, in 1988 there were 356 Japanese subsidiaries or affiliates. By 1997, the figure was three times as many. The story was much the same in the rest of Asia, with the most remarkable increase in China, where the population of Japanese companies grew from 159 in 1988 to 2,399 in 1997, a fifteen-fold increase. In Taiwan, the jump was from 633 companies in 1988 to 1,110 by 1997. In Korea, where Japanese companies were hardly welcome, the figure merely doubled, from 372 to 620. In Hong Kong, too, the number of Japanese companies doubled in ten years, from 680 to 1,480. In Singapore, the number went from 579 to 1,384. In Thailand, the

{p. 231} number went from 512 to 1,396. In Indonesia, it went from 222 to 729. In the Philippines the number rose from 142 to 464. The total count for Asia, by 1997. was 10,995 Japanese companies, double the 5,270 Japanese companies registered in the United States. By the mid-199Os, Japanese companies in East and Southeast Asia, excluding India, employed some 1.3 million people.

Americans were also oblivious of the extent to which Japan's Asian multinationals operated as an expanded version of the domestic Japanese economy, lacking nothing but its high costs. Japanese companies, with government cooperation, virtually replicated the familiar keiretsu business structures of the domestic market. The pattern of trade that emerged between 1985 and 1995 was one in which Japanese companies created a vast, largely closed production loop across Asia, with Japanese intracompany trade as its predominant motif. The keiretsu system made the Japanese regional system vlrtually impervious to outside suppliers. According to Nagasaka Toshihisa, an analyst with the JETRO, the basic trade configuration was one in which "an eighty percent share of production by Japan-affiliated corporations is being supplied to Japan-affiliated corporations in East Asia and an eighty percent share of materials is being imported from Japan."

To understand the magnitude of Japanese investment in Asia and how it survived the Asian financial crash, all it really takes is a walk in the park. Industrial park, that is. Consider Canon: The weak yen and strong sales of copiers helped boost group profits by 26.2 percent to Yen 118.8 billion (U.S.$914 million) and sales by 7.9 percent toYen 2.716 trillion ($21.2 billion) in 1997. Then along came the Asian financial crisis. Once the crisis began, in July 1997, Canon decided to expand production by 50 percent in Thailand and 20 percent in Malaysia. Nearly all the output was shipped back to Canon factories in Japan, then abroad. In the first quarter of 1998, Asia's troubles helped boost Canon's foreign sales by 9 percent.

{p. 240} Sakakibara had resigned as vice-minister of finance for international affairs in July 1999 but maintained high visibility in retirement by taking frequent shots at the Americans, whom he blamed for the Asian financial crisis. In keeping with Sakakibara's style were declarations that Japan should use its foreign aid to build up an Asian alliance to compete with the North Amencan Free Trade Agreement (NAFTA) and the European Union (EU). In March 2000, in time for him to preside over the spring Bank/Fund meeting, the IMF settled upon Horst Kohler as its new managing director. Kohler had been head of the European Bank for Reconstruction and Development, and his appointment was in keeping with tradition. Nonetheless, as the New York Times put it, "the world's second-largest economy was clearly laying down a marker that it no longer planned to acquiesce to the old order."

A few weeks earlier, on March 7, 2000, Reuters ran a brief story from its Tokyo bureau that, in its own way, was just as significant a measure of the changed relationship between Japan and the World Bank. Sakakibara and Joseph Stiglitz, the Bank's former chief economist and senior vice-president, were about to embark upon a joint research project into Asian economic growth and IMF reform. Sakakibara invited Stiglitz to join the project in his capacity as newly anointed as head of the new Global Security Research Center at Keio University, Japan's first research institute specializing in crisis management, with a charter covering international conflicts and environmental problems as well as currency and financial meltdowns. In terms of the philosophy of the institutions both men once represented, this was the equivalent of sleeping with the enemy.

To be sure, Stiglitz had left the World Bank in January, harried out of office by World Bank President James Wolfensohn; there were hints that the U.S. Treasury Department may have made Stiglitz's departure a quid pro quo for nominating Wolfensohn for a second term as World Bank president. Nonetheless, such a pairing would have been inconceivable in the World Bank of the 1980s. In the World Bank of the 1990s, it was almost inevitable.

How did Japan and the World Bank manage to land on the same page? The short answer is, by degrees, beginning with a masterful stroke on the part of the Japanese Ministry of Finance (MOF) in providing substantial funding to the World Bank to explore the role of government in East Asian economic growth. The Japanese-financed research project produced the East Asian Miracle report. Japan's goal had been to fend off the international financial institutions' and the U.S. Treasury Department's imposition of freemarket policies in Asia, and it succeeded brilliantly. By the end of the decade, Washington barely winced as Japan unveiled a succession of programs designed to shore up Asian economies without requiring American-style eco-

{p. 241} nomic reforms. Over time, the United States simply opted out of a confrontation with Japan over its role in the Asian crisis and recovery. ...

The Intemational Bank for Reconstruction and Development, otherwise known as the World Bank, is a large organization - one of Washington, D.C.'s biggest employers, with a Washington-based payroll of about 9,000 in the late 1990s. It was founded in 1944 to finance the rebuilding of Europe. Over the five decades since then, the World Bank had become the dominant Institution overseeing policy lending to the world's poor countries. It was certainly the world's largest repository of Ph.D. economists-turned-bureaucrats. Some 2,000 of them dominated the top jobs at the Bank, and a doctorate in economics was de rigueur for most high positions.

In April 2000, as antiglobalization protestors massed in Washington, the Bank and its next-door neighbor, the IMF, were besieged behind a ninety-block perimeter of yellow tape and barbed wire. On a mild and sunny day, demonstrators testively waved "Spank the World Bank" signs and staged mock battles with rubber sharks symbolizing the evils of capitalism. A papier-mache image popular with crowds and photographers alike featured a pig stuffed with the world in its mouth like an apple.

{p. 248} Stiglitz and Wolfensohn ultimately prevailed. Slowly, gracelessly, the IMF changed course. By the fall, it was pushing reflationary policies in the crisis economies as earnestly as it had preached a combination of fiscal and monetary contraction a year earlier. The policy reversal humiliated the IMF as well as the U.S. Treasury Department, which had stood by the IMF during the dispute with the Bank and other critics. The Bank's advocacy of fiscal expanslon very much accorded with Japanese prescriptions, but even more to Japan's advantage was the breakdown in the solid orthodoxy of a few years earher. The world of development finance would never be quite the same. Japan did not have to confront the IMF itself. The World Bank was fighting Japan's battles for it.

Perhaps the strangest meeting of minds was that between Stiglitz - the amiable, bearded, former chief of the Council of Economic Advisors, one of the most creative economists of his generation - and Sakakibara - Japan's combative chief financial bureaucrat, nicknamed "Mr. Yen" because of his reputed ability to affect financial markets with his pronouncements. Sakakibara had long insisted on the "plurality" of capitalisms and for nearly as long had opposed structural adjustment lending by the IMF and World

{p. 249} Bank. He argued that developing countries should try "alternative" paths, following models such as the Japanese "main bank" system, before launching full-scale privatization and deregulation along Western lines.

While serving as director-general of the International Finance Bureau at the Ministry of Finance in the mid-199Os, well before the Asian crisis, Sakakibara had raised the political ante by challenging the so-called Washington Consensus. This was tantamount to challenging U.S. management of the global economic system.

{p. 255} Simultaneously, Tokyo worked to weaken the dominance of the dollar over Asian currencies. The Japanese referred to the latter project as "internationalization of the yen," and it reflected Japan's frustration at the ease with which the United States could manipulate Japanese economic performance through the money markets. In 1998, the yen was by far the weakest of the currencies of major trading currencies. Only 15.7 percent of Japan's exports to the United States were denominated in yen, compared to 62.9 percent of German exports to the U.S. denominated in deutsche marks. Globally, 36 percent of Japanese exports, and 21.8 percent of imports, were yen based. In international financial markets, the yen accounted for a dismal 0.2 percent of loans in 1997, compared to 69.8 percent for the U.S. dollar, 15.6 percent for the British pound, 5.3 percent for the French franc, and 3.3 percent for the deutsche mark. As an official reserve currency, in 1997, central banks held only 4.9 percent in yen, compared to 57.1 percent for the dollar, and 12.8 percent for the deutsche mark. All of these ratios had sunk in the course of the 1990s. Japan's peak as a reserve currency, for instance, was in 1991, when it made up 8.1 percent of global reserve holdings.

{p. 382} Symbols of women's second-class status in Japan were plentiful. Banks decorated the screens of automated teller machines with cartoon figures of bowing women. Most government agencies and companies required all women to wear clerical uniforms, whether they were clerical staff or not. A card game called Ningen no Kuzu (Human Trash), based on buying and selling women, was wildly successful before the license holder, Tahara, finally withdrew it from the shelves. In the game, playing cards showed a woman's photograph, name, blood type, job description, number of sexual experiences, and male come-on lines, such as "Something is missing from my life." Virgins were rated zero, and the object was to clear the player's hand of all other cards through such means as selling them off to Hong Kong flesh brokers. The game was sold in toy stores, along with plastic models of Ultraman, "Kitty" dolls, and Nintendo games.

If women were forced to serve tea, Japanese men were held to superhuman standards of loyalty and self-sacrifice for their companies. Most Japanese women felt they got the better bargain.

{p. 453} The Asia crisis provoked some backpedaling on China's part; Chinese intellectuals began to point out the flaws of the Japanese model, often in the ontext of Beijing's more eclectic approach. Shen Caibin, a Chinese economist associated with the Nomura Research Institute in Tokyo, echoed such Japanese economists as Nakatani Iwao in arguing that the Japanese model vas fine as long as Japan was catching up with the West but was ill-adapted for an economic superpower. "As long as Japan was in the era of catching up [with the West] it was undoubtedly an excellent student. But once Japan achieved its goal, it had no model to follow, and both its economy and political system drifted aimlessly," Shen wrote.

This did not stop the Chinese from continuing to hammer away at projects to transform state owned enterprises into flagship multinationals; one major difference from the classic Japanese industrial policy, however, was China's enthusiasm for capital markets. The mito late 1990s saw a series of huge public listings of Chinese multinationals that raised billions of dollars, despite murky accounting and majority government control of virtually all such entities.

{Might China's espousal of capital markets be because it wants the money of overseas Chinese, nominally "outside" China's economy, whereas Japanese investors are "inside" Japan's economy?}

Within the Japanese business community, Kobayashi Yotaro, chief executive of Fuji-Xerox, took up the theme of economic partnership. Few Japanese, however, believed that a genuine partnership with China was possible, not out of any objective analysis of Chinese strengths and weaknesses but because of profound intimidation.

In the course of the 1990s, a sensibility emerged in Japan that can only be escribed as China phobia. In 1994, it was big news in Japan when the World Bank estimated that the Chinese economy was already 20 percent larger than the Japanese economy, using a method of estimating prices called purhasing power parity (ppp), The method linked the nominal value of currenies to what money would actually buy, in the manner of The Economist's Big Mac index, which is based on PPP modeling.

{p. 474} In an elfort to focus more attention on the victims, Tsuneishi Keiichi, a science historian, led a group to the site of the former Unit 731 complex in the summer of 1991. They were able to locate a few Chinese who had worked as day laborers at the camp, as well as the widow of a prisoner. When the group returned to Japan, they presented letters from four Chinese asking the Japanese Foreign Ministry for clarification on the matter of the bones. Professor Tsuneishi argued that by ignoring the history of Unit 731, Japan glossed over the fact that they had benefited from the accelerated research done in the human-experiment program. Unit 731 formulated a vaccine against typhoid fever, for example.

Even more dangerous than historical amnesia, he said, was that without an airing of the background of Unit 731, Japanese might fail to recognize the cultural traits - obedience and authoritarianism - that led doctors to perform human experiments without experiencing remorse. In the early 1980s, Tsuneishi interviewed surviving doctors who had worked in Unit 731. Most were graduate students at the time of the experiments. "They did not feel guilty because their teachers would get the credit - and the victims were said to have been sentenced to death," Tsuneishi said. "Some doctors even thought the victims would be happy to contribute to the advancement of medical science."

While Tsuneishi and his colleagues focused their efforts on the Foreign Ministry, another citizens' group was involved in a parallel effort to force the Ministry of Education (MOE) to allow mention of Unit 731 in high school textbooks. Ienaga Saburo, one of Japan's foremost Marxist historians, launched his first lawsuit against the Japanese government in 1965 to protest MOE's censorship of virtually all mention of Japanese wartime atrocities. In the hearings on Unit 731 in the late 1980s, the government continued to maintain that there was insufficient evidence to prove that atrocities had taken place.

{p. 479} The policy encouraging Asian students was part of a broader one of fostering better relations with the rest of the region. But many of these students returned home with a far different image than Japanese authorities intended, so disillusioned that, like Chiang, they simply wanted nothing more to do with Japan. "I'd say 95 percent of the Chinese students here hate Japan," Guo Peiyu, a Chinese artist, told a visiting reporter in 1996. Japan's unwelcoming reputation was at least a partial factor in the slump in foreign students in the country after 1995. Excluding Japanese-language students, most of whom were not affiliated with universities, the number of foreign students peaked at 53,847 in 1995, then declined to about 51,000 annually.

{p. 480} If Japanese looked down on Asians generally, many Japanese automatically assumed that any Asian woman in Japan had come to the country as a prostitute. Among the largest categories of legal immigrants in the 1980s and 1990s were Asian women, who entered Japan as "entertainers" or on short-term visas, often without realizing that they would be working in the sex trade. In 1994, for example, 136,000 Asian women in the twenty to twenty-four-year-old age category entered Japan, almost two-and-a-half times the number of Asian men in the same age group, according to the Japanese Ministry of Justice (MOJ). Most of the women were from Taiwan, South Korea, and the Philippines. The prostitutes' stories were often horrific; the flesh traffickers kept the women in small rooms, forcing them to pay off the expenses of their travel and lodging without recourse to legal or any other form of counsel.

{p. 487} The Mizumotos - and tens of thousands of other Latin Americans of Japanese descent - were part of a twentieth-century immigration gold rush focused on Japan. It reached its height in 1990, when the Japanese government introduced three-year work visas for all foreigners of Japanese descent. Afterward, the volume abated with the collapse of Japan's bubble economy in the early 1990s. Also in 1990, the Japanese government introduced harsh new penalties against illegal foreign workers not of Japanese descent and their employers. Under Japanese immigration law, unskilled workers were banned altogether. The only exemption was for unskilled workers of Japanese descent.

... By the end of the 1990s, public concern about the shrinking of the Japanese population had risen to such a point that private groups were researching and recruiting overseas Japanese to come back to fill service jobs. ...

Even if all 2.5 million estimated overseas Japanese returned to Japan, it would not be enough to fill the gap. The Japanese Justice Ministry responded by urging Japanese to "aggressively carry out the smooth acceptance" of foreigners, and formulated new, slightly looser rules governing the categories of jobs that foreigners could hold in Japan. Even so, the head of the Asian Peoples Friendship Society told the New York Times, "Japanese society still has fantasies about our pure blood, and about the ability of Japanese

{p. 488} people to understand each other better than others. Even if the government or the business community accepts more foreigners, without much more effort on our side, these feelings of rejection toward foreigners will remain strong."

{p. 489} What happened in the 1980s was almost purely a function of the sudden apreciation of the Japanese yen after 1985. Although large Japanese manufacturers were able to move production abroad, where they could find cheap labor, thousands of small subcontractors at the bottom of Japan's industrial hierarchy were unable to afford the move, at last initially. The small companieS eagerly hired Asians without checking their visa status.

{p. 492} Officially, the Japanese government decried the influx of illegal foreign workers, estimated at between 200,000 and 300,000 at the height of the inflow, and tried hard to turn them back. Unofficially, according to Watanabe the Christian minister and activist, the government allowed the hiring to con_tinue but kept pressure on foreigners to leave by denying them acces to basic medical and legal services. The result was that Japanese employers were left free to abuse their foreign workers. They were routinely paid less and worked longer hours than Japanese co-workers. Employers denied thejr salaries at will and generally refused sick leave and medical insurance.

{p. 493} As the Japanese economy went into recession in the early 1990s, illegal aliens ceased to cause consternation, both because control was tightened and because the influx slacked off. Japanese immigration authorities began medodically rounding up and deporting the foreigners. By the mid-199Os, the more visible communities of illegal workers - the Iranian men who once flocked to Ueno Park and later Yoyogi Park, the Chinese "students" who once packed the ersatz language schools in Ikebukuro, even the Fihpina and Thai hostesses - largely vanished.

... Much to Okuda's surprise, he also found that with time, the Japanese grew to accept the Asians next door. After an initial coolness, landlords andshopkeepers in the area gradually became more respectful.

{p. 495} "Many Japanese think otherAsians are coming to steal the wealth which Japan worked so hard for," said Inyaku Tomoya, a staff member of the Pacificsia Resources Center in Tokyo. "I think they are afraid of them. In Asia only Japan has become an economic giant. The other nations are still poor."

{p. 497} Although Japan s boom in Asian marriages started in the countryside, where there was a desperate shortage of marriageable women, it gradually khold in the cities as well.

{p. 501} If the actions of their Chinese managers were maddening, the Japanese found the behavior of Chinese workers simply "unfathomable." Unlike the passive and cooperative Japanese factory worker, the Chinese openly flouted company rules and were aggressive in demanding special perks, such as training trips to Japan. They commandeered company property at will and showed no loyalty to the enterprise. The processes of hiring and firing were fraught with pitfalls. Chinese were accustomed to getting jobs through personal relationships, or guanxi, and frustrated the attempts of Japanese managers to introduce objective criteria for promotion. Once the Chinese had advanced ough the ranks, whether by education or on-the-job training, they refused to go back down to the factory floor. To the Japanese, this was the worst form

{p. 502} of snobbery, and created barriers to technical transfer within the enterprise. Wrote Sonoda: "Furthermore, even if the Japanese side gives technical guid ance, there is no system of communication between the engineers and the line workers. The engineers tend to consider the technical expertise they have acquired to be their own 'personal property,' and are loathe to teach it to others. As a result, it is difficult to spread technology throughout the entire factory."

For their part, the Chinese balked at the overbearing manners of the Japanese managers, and at being forced to observe rules that reflected Japanese cultural values and norms. "When one or another trouble surfaces, there are all the ingredients for a conflict of 'Japan versus China' or 'capitalists versus workers,'" Sonoda sighed. A strike at a Canon factory in Zhuhai in Guangzhou Province in Spring 1994 was caused partly by friction over a requirement that workers and managers had to eat in the same dining room, something encouraged in Japan to promote shop-floor harmony. The Chinese also objected to Canon's strict rules for such things as toilet breaks and personal phone calls. In the end, in order to smooth things over, Canon had to agree to a 30 percent wage hike. When Chinese themselves were in charge, such rules got short shrift.

There were ironies to the friction between Chinese and Japanese work styles, since some of the worst problems arose from institutions shared by both economies, such as the seniority-based wage system and lifetime employment. These were alike, yet different, and the nuances could drive the Japanese crazy. The Chinese insisted on employing a wage system modeled after the eight-tiered wage structure of state enterprises, but worker groups, not management, were in charge of evaluation based on "collective assessment." Japanese were amazed that workers could improve their score simply by showing up for work on time; they took attendance for granted.

The Chinese system of lifetime employment also bothered the Japanese despite its resemblance to the much-touted Japanese institution, associated almost exclusively with blue-chip companies. Unlike elsewhere in Asia, in China, firing was virtually impossible, and Japanese and other foreign employers were obliged to find new jobs for dismissed or redundant workers. This could take several years. Maruyama Nobuo, an economist at the Institute of Developing Economies in Tokyo, explained, "Since China has an almost infinite supply of labor, it might be thought both possible and important to select workers strictly on the basis of merit. And yet, since enterprises also serve as quasi-communities for their workers, the contractual relatlionship with the enterprises becomes unclear and it becomes hard to fire or even lay off workers."

{a legacy of Mao, no doubt}

One solution was to work through overseas Chinese entities, continuing long-established Japanese tradition in East Asia.

{p. 503} ... The use of such go-betweens reflected Japanese insecurities. Like other foreigners, they were excluded from the dense web of guanxi ties based on | clan, village. and education. ...

When all was said and done the Japanese were unable to grasp that the Chinese operated along very much the same assumptions of superiority that they did. The Chinese were aggressive, tribal, nationalistic, and would stop at nothing to defend the nation from perceived threats. China had, of course invented many of the basic cultural paradigms within which the Japanese operated. So perhaps it was no surprise that, as the twentieth century ended Japan would be looking over its shoulder not at the United States, or Europe or even Russia, but at China as its most formidable potential foe.

Unable to bridge the gap of understanding between themselves and other sians, Japan forgot one of the most basic tenets of the creed that had guided Ft from early in the century. The reason why Akamatsu's geese had flown together was that they had shared a common dream. If the dreams were different, no amount of money or persuasion could get them to fly again.

{p. 517} Some of the most influential thinkers and policy makers in the West joined the chorus, urging Asian economies to junk the Japanese and Asian models in favor of open markets and liberal trade regimes based on strong legal institutions. Ranging from Alan Greenspan, governor of the Federal Reserve Board, to London Financial Times columnist Martin Wolf, they proclaimed the end of the "Asian miracle" and denounced Asian "crony capitalism." Lawrence Lindsey, later President George W. Bush's economic advisor, repesented an extreme. Dismissing, on the one hand, the cultural explanation ("excesses are human nature"), Lindsey argued that the only way to solve Asia's problem was through a financial markets variant of Harvard econonist Jeffrey Sach's shock therapy" - open global capital markets everywhere.

{p. 519} Decisions made in the mid-1980s to early 1980s to liberalize financial markets in Indonesia, South Korea, and Thailand led directly to crash of 1997, by way of chaotic banking sectors, real estate, and stock markets. In this sense, the crash was not a failure of the Japanese model, but actually vindicated an aspect of it. Japan, and later China, had pioneered policies of liberalizing their economies piecemeal. The lesson Asians could take from 1997 was that they had not been piecemeal enough, liberalizing too much rather than too little.

{p. 563} In May 2001, after a year in which the Nikkei Index had slumped to new lows and the Japanese economy was hopelessly stalled, Japan's Ministry of Economy, Trade and Industry (METI) declared an end to the flying-geese pattern of development. "No paradigm currently exists which is able to replace the market economy system," a METI white paper noted, going on to bemoan the rigidity that had crept over Japan's post-war institutions, undermining its ability to transform itself anew in an era of globalization.

The dry language of the official publication did little to dramatize METI's change of heart, but the numbers spoke loudly. In the 1990s, China had set the pace and changed the rules by demonstrating that a still-developing economy could compete with the giants, right up and down the technology scale based on a more open economy and through entrepreneurial effort. Deng Xiaoping had said, "To get rich is glorious." Where Japan had made a religion of "self-help" and abjured foreign capital, China had successfully pressured foreign money into the service of national goals {but was it largely overseas Chinese money?}. Using foreign direct investment to drive growth, China quadrupled its exports over the decade. Foreign companies accounted for 46 percent of Chinese exports and 52 percent of imports. Moreover, competition for China's market had done more to drive Asian regional growth than Japan's billions of dollars in manufacturing investments in the region. In the 1990s, China had contributed 40 percent of Asian growth, according to METI's own calculation. Despite all of Japan's planning and stratagems, the decade had gone to China, and the new century, METI said, would foster a "fiercely competi-

{p. 564} tive environment" in contrast to the organically soft collaborative strategies exercised by Japan.

Thus METI, the architect of Japan's postwar miracle, conceded defeat to China, the last of the Asian tigers, whose protean ability to manage and ride the even bigger tiger of the global economy outshone Japan's in the shaky years after the Cold War ended.

{p. 566} There was little difference between the thinking of the Chinese and Japanese govemments, Xie added. Both economies were centrally managed. "The difference between China and Japan is that China can grow while Japan cannot. In Japan, you have Sony and Honda who are capitalists, and the rest of the economy is socialist. The export economy is 15 percent of GDP. In China, 40 per cent is socialist and 60 per cent is capitalist. They are closer to each other than to anybody else." Within ten years the Chinese and Japanese economies would be so closely integrated that they would have to deal with political and security issues in new ways, he thought.

{p. 567} A gap between symbolism and substance remained, and China's economy, at $1.1 trillion, was still far smaller than Japan's $4.6 trillion economy, however much one might seem to be tethered to the other. China might run into serious problems if it failed to carry through with restructuring of the state firms.

{China's economy is still socialist: its big four banks are state-owned, its construction development is state-planned, it has a two-tier currency, its capital account is closed. Edith Terry overlooks these factors in China's economic survival; Wall Street is pressuring China to get rid of them}

{p. 569} The relocation of Japanese companies to China had become so pervasive that it had become a factor in the continuing decline of Japanese real estate prices, which had fallen for eleven straight years. With prices for factory sites one-tenth the cost in Japan, it was not only METI that had given up on the flying geese strategy. Japanese companies as well had abandoned the priorities of the 1980s and 1990s, when they took care to keep jobs in Japan by leaving higher value-added manufacturing in the home islands. After Minolta has completed its move to China in 2006, it will have left in Japan manufacturing equivalent to just five percent of sales.

Such economics were driving Japanese banks to China, as well. "We can no longer survive on the domestic market alone," said Takeuchi, who became Mizuho's chief man in Asia after three decades with Fuji Bank, one of the three merged banks. Mizuho, with $1.4 trillion in assets through September 30, 2001, obtained 30 percent of its international profits from Asian business compared to 50 percent from the U.S. and 20 percent from Europe. Unlike Mizuho's business in Europe and North America, where a large part of its portfolio was non-Japanese, just over 50 percent of its business in Asia came from Japanese companies. This was down from 80 percent at the beginning of the 1990s, Takeuchi said, yet still "quite different from our portfolio in the U.S. or Europe."

{p. 570} But with loans in Japan falling and deposits continuing to grow, Japanese banks were hungry for investment opportunities abroad. ...

And so the cycle began again, but with a new objective and a new trajectory, this time to link Japan's economy with that of its larger neighbor. The old paradigm had failed, and the seeds of failure lay incontrovertibly in Japan. As Chalmers Johnson observed, Japan's problem in the 1990s was not that crony capitalism prevailed but that the discipline and autonomy of bureaucratic rule had broken down. Without either that discipline or effective political leadership, Japanese multinationals in Asia were subject to the ordinary pressures of the market. The deep pockets and convoy system of the keiretsu would no longer sufflce. The keiretsu depended for survival on lending ultimately directed by the Japanese government, and with that government in disarray, it had no longevity.

{This is not quite right. With the end of the Cold War, US military power became more important than Japanese economic power: US hegemony restrained Japanese expansionism. Also, Anglo-American bankers had fought back against Japan's encroachment, with the Basle Accord of 1988: basle.html}

So the long enterprise, to harness Asia's energy to a Japanese design, had failed. Failure and extinction are two different things, however. The splinters of an idea can be as influential as the core.

{p. 571} Not long ago, at another dinner party in Hong Kong, Edith Kuruneru, a Sri Lankan-Chinese-Peruvian friend, voiced an old complaint: Japanese are considered whites when traveling abroad, unlike Chinese, she said. It was so unfair. The ethnic indeterminateness of the Japanese was a result both of Japan's economic success, and its determined avocation of Western institutions and ideas. Fukuzawa's exhortation to embrace the West had succeeded in making Japanese seem different from other Asians in the eyes of Western-

{p. 572} ers. But Japanese themselves frequently express unease in being surrounded by Caucasians.

{Edith Terry concludes with a plea for Globalization:}

{p. 573} Japan was at its apogee when it was at its most global, as it transformed itself in the late nineteenth and mid-twentieth centuries. Autarky is weakness. Why then, do we continue to long for antidotes to the homogenization of global culture, for diversity rather than convergence? The question may be unanswerable. In an average world, convergence is the order of the day.

{end of quotes}

Edith Terry bases Japan's economy on the philosophy of List:

"the image of flying geese was ... a symbol of the Japanese model ... By far the most important Western influence on the concept came from the writings of Friedrich List, an early nineteenth-century German economist who played a large role in shaping the economic theories of National Socialism." (p. 53).

When the Cold War ended, Chalmers Johnson declared that Japan had won it; and so, variants of National Socialism still contest the world stage, variously called "socialism in One Country", "socialism with Chinese Characteristics", etc.

Israel also has a National Socialist economy: nat-soc-isr.html.

Australia had an econmomy of this type in the 1950s and 60s, which I fondly remember on account of its benefits. In so far as such socialism is defensive of the populace, it is laudable. Yet it must be admitted that, however beneficial internally to those perceived as the in-group - the we-group as Anthropologist Peter Lawrence used to call it - such an economy can be devastating to outsiders, whether foreign countries or outcaste groups within the society. As with many religious groups, close internal ties come at the expense of external aloofness and colonization.

One sees this the more clearly when those pursuing such policies are not in one's own camp: when we are the recipients, those being colonized. So the world still needs some sort of "internationalism", to protect us from the strong economic forces, whether of the Capitalist or National Socialist variety.

List saw the developmental economy of the United States in the nineteenth century as exemplifying his principles; but the decimation of the native peoples illustrates the downside, as does Japan's selfish consumption of the world's resources today.

To buy Edith Terry's book How Asia Got Rich: http://www.anybook4less.com/detail/076560356X.html.

Chalmers Johnson on Japan's economic juggernaut, and on how America's Elite Caused the Asia Crisis: johnson.html.

Back to the Asia Index: asia.html.

Write to me at contact.html.