theory, to have sold for half their former price (provided that demand elasticities were close to unity). This did not happen. At the very least, the curious sight of Japanese bringing back armloads of European goods that they had bought in the United States ought to have disappeared, but the crowds of Japanese shoppers in airport duty-free shops did not diminish at all. In other words, the benefits from the yen’s sharp rise against the dollar were not adequately passed on to Japanese consumers. Nor did prices for Japanese goods rise sharply in the United States. Since the value of the dollar was half what it used to be, the prices of Japanese goods ought to have been double what they once were, but that was not the case.
In fact, between 1985 and 1989 the prices of Japanese exports to the United States rose only about 8 to 10 percent despite the fact that the yen had doubled in value. How was that possible? There are two lines of thought on this matter. The first view is that Japanese businesses did not take much of a profit on their exports, that they made their money by setting a high price domestically and holding down export prices to a level where they at least did not sustain a loss. The other view is that, to ride out the strong yen, Japan focused its efforts on restructuring and technological innovation. As a result, costs came down so substantially that there was no need to raise prices.
Although the cheap dollar seemed to offer the United States the perfect opportunity to expand its exports to Japan, it was unable to do so. Why? There are two lines of thought on this question as well. One is that America’s export effort was inadequate; the other is that the Japanese market has so many barriers that no matter how hard America tries it cannot get in.
All of these views are probably true. The price of Japanese goods certainly did not double. That is because Japanese business took the loss, and also because they steadily reduced costs and thereby increased their ability to resist the effects of a strong yen. The fact that American exports to Japan did not noticeably increase is due both to the failings of America’s own export efforts and to Japan’s reluctance to open its market. These overlapping factors formed the background to the Japan-U.S. Structural Impediments Initiative talks.
Yet, while everyone complained that the price of American exports to Japan did not go down in proportion to the yen-dollar exchange rate, even though this proved disadvantageous to the Japanese consumer, everyone blithely accepted the fact that prices for Japanese exports to the United States did not rise much. Properly speaking, the amount of increase or decrease should be symmetrical, and it seems unfair that there was so much hostility to the one and no acknowledgment of the other. After all, if the price of Japanese goods ought to have risen by 100 percent, but Japanese companies kept the increase down to only 8 to 10 percent, they ought to be thanked for their contribution to holding down inflation in the United States. But instead of being grateful, Americans blamed Japan for the fact that U.S. products did not sell for half price in Japan. This is what economics calls asymmetry.
Physical phenomena usually occur symmetrically. If 70 degrees Fahrenheit is the ideal temperature for human beings, then anything higher than 70 degrees is considered hot, anything lower is cold, and discomfort is felt proportionally at the higher or lower temperatures. Although the same ought to hold true for economic phenomena, one extreme was welcomed, the other was decried. That is what makes economics so difficult. It is human nature, of course, to keep silent about something advantageous to one’s own pocket-book. The Japanese, however, should have drawn attention to this situation and stated their case firmly, but they remained strangely inarticulate. If Japanese officials and the mass media had made Japan’s position better known to the American public, the attitude of ordinary Americans might be considerably different. It would certainly be more beneficial to both countries if the Japanese media concentrated their talents and efforts on giving a clear account of Japan’s position rather than producing sensationalist programs like the one mentioned earlier on American racism.
The appreciation of the yen and the devaluation of the dollar after the 1985 Plaza Accord did not have the expected results. The participants now concede that all their tinkering with the exchange rates had almost no effect on imports and exports. Take, for example, the videocassette recorder (VCR). In the beginning neither the Japanese nor the Americans anticipated the size of the market for VCRs. The machines did not sell well at all in the 1970s, but in the early eighties they suddenly became popular, and by 1985 nearly a third of all American households had VCRs, almost all of which were made in Japan. After the Plaza Accord the yen suddenly shot up and the dollar dropped, until ultimately the yen was worth nearly twice what it had been. Logic dictates that the price of Japanese VCRs should have doubled during that period and sales should have dried up. In fact, after 1985 sales of VCRs rose by leaps and bounds, first, because the price did not go up and, second, because American incomes increased greatly after 1985. As a result, Japanese exports of VCRs grew seventeenfold between 1985 and 1990, and by 1989, 75 percent of all American households had a VCR.
One other factor needs to be taken into consideration to account for the failure of the currency realignment to affect sales of VCRs: Japan’s virtual monopoly of the VCR market. A monopoly renders the exchange rate mechanism ineffective because the exchange rate can adjust for surpluses and deficits only when substitute products are available from other countries. At present, export figures for VCRs are declining, an indication that the market is mature and that most purchases now are to replace older models. But a situation quite similar to the one for VCRs in the 1980s is evolving in the market for facsimile machines. As in the case of VCRs, Japanese companies have a virtual monopoly on fax machines.
Although, all things being equal, the currency re-evaluations should theoretically have caused the Japanese share of the VCR market to fall from 33 percent to 15 or 16 percent, just the opposite occurred. As American prosperity led to increased absorbability, economies of scale were brought into play and unit costs came down. Meanwhile, to counter the strong yen, Japanese businesses restructured and put greater emphasis on technological innovation and automation that led to wholesale cost reductions. In short, economies of scale and technological innovation made possible low-cost mass production so that Japanese VCR manufacturers were able to achieve a seventeenfold increase in sales despite the adverse climate resulting from the strong yen.
As a result, the Japanese consumer electronics industry achieved an unrivaled position, nearly a monopoly, flooding world markets with goods labeled “made in Japan.” Japanese goods earned such enormous profits that the question of who was more at fault for this flood tide—those who import or those who export—ceased to have any relevance. Nothing seemed to be able to check the Japanese export juggernaut. Under the circumstances, what other course was open for America except, as Fallows suggests, to consider the new ploy of containment?
TWO
CONFLICTING VIEWS OF THE ROLE OF GOVERNMENT
Economic Strength as a National Security Issue
Japanese Hypercorporatism. One crucial difference between the United States and Japan is that Japan is a country that holds government in high esteem, whereas the American public has a fundamental distrust of government. This difference is significant because, as many have pointed out, postwar Japan has become an economic superpower under the “administrative guidance” of the Ministry of International Trade and Industry (MITI), the government department whose function is to formulate and implement Japanese commercial and industrial policies. In order to rebuild a country that had been reduced to rubble during World War II, the Japanese government adopted policies that favored production and provided indirect support to help producers maximize their market share. In contrast, a mature capitalist society like the United States tends to regard government intervention in the activities of producers as undesirable and favors policies that improve the well-being of the consumer. In an article in the Nihon Keizai Shimbun of September 17, 1990, I called this sort of Japanese capitalism “hy-percorporatism” and the mature capitalism of North America and Europe “hyperconsumerism.” To adopt the terminology of Alfred Chandler in Scale and Scope: The Dynamics of Industrial Capitalism, if the United States is a system of competitive managerial capitalism and Germany is a system of corporate managerial capitalism, then perhaps we might call Japan a state managerial capitalist system.
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