During the 1980s and early '90s, the Japanese seemed to be unbeatable in the international marketplace for products that they had chosen to export. American concern about loss of U.S. leadership in high technology products like electronics and automobiles was compounded by growing Japanese skills in creating new products through its expanding R&D enterprise. But now, as David Sanger wrote in August 1996, "The fear that Japan was about to control a set of technologies that America could not afford to lose has been replaced with a confidence within American industry that at times almost borders on complacency" (Sanger 1996). To read much of the American press, it seems that the Japanese economic miracle is history. A spate of articles concludes that the persistent recession there proves that Japanese policies have failed and need to be "reformed," i.e. to look more like American ones.

Conservative economists have attempted to explain for decades how Japan's state-guided capitalism could possibly have achieved higher growth rates than the freer economies of Western countries; now that growth has slowed they are happy to say, "I told you so." A dose of deregulation is prescribed; less government involvement in the economy will pull Japan out of the recession.

For example Robert Samuelson argues that Japan's earlier rapid growth was a result of bureaucratic protection of large exporters including regulations requiring Japanese consumers to subsidize them. His conventional economic view of the denouement was that the huge trade surpluses inevitably led to upward valuation of the yen, stopping export-driven growth dead in its tracks. But now the residue of regulation prevents generation of enough domestic demand for a growing economy. He views efforts to revive exports with disdain, but hails Japan's deregulation:

What Japan needs is freer markets. Even the Japanese admit that something is wrong. Their latest economic enthusiasm is "deregulation." But do they really understand why it's important? (Samuelson 1997)

But as Eamonn Fingleton says, "The West always seems to underestimate Japan. Some systematic flaw of Western psychology leads Westerners, and particularly Americans, to exaggerate Japan's weaknesses and belittle its strengths" (Fingleton 1995).

A recent Washington Post editorial agrees, "The comic book version of an ascendant American and a Japan in decline is just a bit too simple." A comment by Prime Minister Hashimoto on June 23, "We hope the U.S. will engage in efforts to maintain foreign exchange stability so we don't have to succumb to the temptation to sell off U.S. Treasury Bills," precipitated the second worst point loss in the Dow Jones Average in stock exchange history -- showing the clout of Japanese investments resulting from their long standing trade surpluses with the United States.

Indeed those surpluses threaten to resume their upward spiral. After the trade balance with Japan spiked this January, Treasury Secretary Robert Rubin urged Japan to not expand exports to resume its growth. In early June when Charlene Barshefsky, U.S. Trade Representative, also warned Japan to not export its way out of recession, Finance Minister Hiroshi Mitsuzuka said Japan's surging trade surplus is just "a passing phenomenon." Soon thereafter, Japan's current account surplus soared to $9.8 billion, nearly double the year earlier figure.

Fig. 1. Merchandise trade balance of the United States (Department of Commerce 1997).

The data presented in Fig. 1 show that while Japan's direct trade surplus with the U.S. seems to have abated, actually it has been augmented with surpluses from other Pacific Rim nations that are emulating Japan's export-driven growth model. In fact a significant share of those exports is from offshore Japanese factories. Financial analyst Alexander Kinmont has estimated that in the 1980s Japan added production capacity equal to that of France, and has already built an equivalent amount abroad in this decade (Einhorn 1997). In the mid-1990s almost all of the U.S. trade deficit could be accounted for by Japan and other Pacific Rim countries, while a small surplus with the rest of the world was some consolation for Americans. This surplus has recently vanished, partially because of the expansion of offshore assembly plants in Mexico by Asian companies (and American ones) to take advantage of the 1993 North American Free Trade Agreement (NAFTA) -- a continuation of the same trend.

As a recent Business Week cover article put it, economically there are really two Japans (Bremmer 1997). Top companies like Sony, Toyota, Toshiba, and NEC are doing quite well, and are expanding globally to take advantage of the efficiencies of offshore manufacturing. The implication of an industrial policy that focuses capital investment in export oriented industries has always been that the unfavored domestic service industries stagnate by remaining inefficient -- a situation that is highlighted by recession.

Thus the current lack of serious attention in the United States to Japan's continuing economic and technological challenge may be a bit naive. The story is now much more complex, because of the growing use of final (assembly) manufacturing and export in third countries; one key to understanding the underlying forces is to trace the research and development for the basic technologies on which that manufacturing is based.

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Presented: July 1997; HTML: 9 August 1997; WTEC Hyper-Librarian