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Japanese Prime Minister Shinzo Abe’s Liberal Democratic Party won what appeared to be a resounding victory in Lower House elections for the second time in two years. But a closer look reveals that these ‘victories’ were rather odd. The ldp could not secure even 20 per cent of the votes of Japan’s total electorate in either contest. The party had actually commanded a higher share back in 2009, when it lost control of the Lower House and was obliged to turn over the reins of government to the opposition Democratic Party of Japan. That was the only time voters had ever interrupted Japan’s so-called one-party democracy, known locally as the 1955 system for the year in which the ldp was founded. (The ldp had also briefly been forced into opposition in 1993 because of defections from the ranks of its own legislators.) The ldp’s return to power in 2012, with a lower share of the electorate than that which got it kicked out in the first place, is generally ascribed in Tokyo to a boycott by the dpj’s erstwhile supporters, an abstention repeated last December. The dpj had been swept into government in 2009 on the hopes of millions of Japanese voters for real political change. But the demise of the first dpj cabinet under Prime Minister Yukio Hatoyama in 2010 demonstrated that those hopes had been misplaced. Hatoyama was sabotaged by parts of the bureaucracy and by a concerted campaign in the serious newspapers. Such attacks dog all ambitious reformist politicians in Japan, appearing with the predictability of flies buzzing around farm animals on hot days. But in Hatoyama’s case, the bureaucrats and pundits who brought him down were able to enlist the crucial help of the American foreign-policy establishment, dismayed by the dpj’s promise to overhaul Japan’s security set-up and foreign relations. Since the end of the us Occupation in 1951, Japan has functioned effectively as an American protectorate rather than an ally. The 1951 us–Japan Security Treaty, amended in 1960, is effectively a base-leasing agreement, allowing the Pentagon to maintain a large network of military bases throughout Japan, with much of the cost borne by the Japanese taxpayer. For practical purposes, Washington has enjoyed veto power over Japan’s foreign and defence policies. The dpj leaders had talked of reducing the American military presence and negotiating improved relations with Beijing. Japan’s spokesmen in the United States—ldp partisans almost to a man—used such talk to convince Washington that the dpj was anti-American and threatened the status quo in the region. Officials in charge of Japan at Hillary Clinton’s State Department, mostly Pentagon alumni, fretted over the effects on the much-heralded ‘pivot’ towards Asia and the White House aligned itself with the ldp opposition. The Obama Administration proceeded to deal with Hatoyama in a manner so insulting that, had it been directed at the leader of almost any other country, millions would have poured into the streets demonstrating against the United States. In Japan, by contrast, this contemptuous treatment of a sitting government gave the ldp and its mouthpieces in the Tokyo media the ammunition they needed to demonstrate that the dpj was damaging Japan’s most important foreign relationship.footnote1 Hatoyama’s two dpj successors, fearful of a similar fate, steered clear of controversial foreign-policy initiatives, and a rift developed in the reformist party that became its undoing. Its last Prime Minister, the technocrat Yoshihiko Noda, betrayed his party with a call for an early election in 2012 to secure the Ministry of Finance dream of higher taxes. Bereft of all credibility, the dpj was punished by the boycott of millions of its former supporters. Together with the disproportionate weight of more conservative and rural constituencies in Japan’s electoral set-up, plus the country’s unique system of candidate-based first-past-the-post balloting and party-based proportional voting, the boycott has allowed the ldp to translate its base of less than 20 per cent of Japan’s electorate into commanding Lower House majorities. Its leader, Abe, had served once before as Prime Minister, having taken over in 2006 from the show-bizzy Junichiro Koizumi. Abe thought that enough had been done in liberalizing the Japanese economy during the Koizumi years to allow him to turn to what was really important to him: the long-cherished right-wing agenda of tearing up Japan’s postwar arrangements, with their supposedly alien notions of democracy and constitutional government. The public greeted these earlier efforts with a long yawn. Beset by a series of scandals and pilloried in the press as tone deaf—kuuki yomenai, or ‘can’t read the air’, is the Japanese term—Abe resigned after less than a year in office. Six years later, in the aftermath of the financial crisis and the Fukushima disaster, Abe appeared to have learned the lesson that if a government appears unresponsive to people’s economic fears and aspirations, little else can be accomplished. On taking office for the second time in December 2012, he announced ‘three arrows’ to transform the Japanese economy. He put a new man in charge of the Bank of Japan to shoot the first arrow, a round of quantitative monetary easing to rival Ben Bernanke’s: some ¥65 trillion ($350bn) in 2013, rising to ¥80 trillion ($450bn) in 2014. A ¥10.3 trillion ($116bn) binge of spending constituted the second arrow; Abe could rely on a legislature that would do what it was told in matters of fiscal stimulus. The third arrow was an ill-defined package of ‘structural reforms’. But the lack of concrete detail really didn’t matter since the first two arrows accomplished what Abe wanted: goosing the stock market and trashing the yen. Corporate Japan was ecstatic as its profits and export receipts surged in the wake of the sharp currency weakening, although the quantities of exports barely increased. The economic sugar-high lasted long enough for the ldp to win Upper House elections in July 2013. That gave Abe the freedom to do what he and the people around him really wanted: set about restoring the openly authoritarian government of the inter-war years. The ldp didn’t have quite the super-majority it needed to tear up the 1947 Constitution, which much of the party had long pegged as an alien document imposed on Japan.footnote2 So Abe acted as if it were nothing but a piece of scrap paper, ramming a blatantly unconstitutional act governing the treatment of confidential information through the Diet late in 2013 that gave the government the power to label anything it wanted ‘classified’ and to prosecute anyone who attempted, even unwittingly, to find out what might actually be going on. Then on 1 July 2014 the Cabinet announced, at Washington’s urging—and without legislative approval—that Japan would henceforth engage in ‘collective self-defence’—meaning that Tokyo could dispatch troops to take part in conflicts that did not threaten Japan itself. Since Article 9 of the Constitution ‘renounces war as a sovereign right of the nation’, specifies that ‘land, sea and air forces will never be maintained’ and states that ‘the right of belligerency’ will ‘not be recognized’, the Cabinet’s announcement was tantamount to a declaration that Japan had become a lawless state, governed by executive decree. Meanwhile, Abe had also stacked the management of nhk, the state-run television network, with far-right appointees, led by the conservative businessman Katsuto Momii, and began worshipping at Tokyo’s Yasukuni Shrine. This former spiritual centre of Japan’s wartime nationalist cult not only memorializes the souls of millions of Japan’s war dead, but also those of convicted war criminals who were enshrined there in 1979 by rightist priests—the reason why official visits to Yasukuni have, since then, provoked fury in China and South Korea, and why Japan’s emperors stopped going to the shrine. Washington’s perceptions Abe’s attacks on institutions that stand in the way of his rightist agenda need to be seen in the context of assaults on the rule of law in the us and the ongoing collapse of political oversight of the organs of the American national security state. An America in which the fourth, sixth, and eighth amendments to the Constitution have effectively become dead letters is hardly in a position to upbraid another country for ignoring its own Basic Law. Nor does a Washington that permits a lawless cia to thumb its nose at its nominal legislative overseers have any grounds for remonstrating with a Tokyo that contemplates the establishment of unaccountable secret panels to determine who might or might not have compromised confidentiality. It is in President Obama’s country, not Prime Minister Abe’s, that whistleblowers in the National Security Agency have faced draconian and vindictive prison sentences for exposing crime and corruption in the government for which they worked.footnote3 This very drift of the us away from its political moorings in democratically accountable institutions has helped soothe the inherent tension that besets rightist elements in the ldp, long forced to square their championing of the us–Japan ‘alliance’ with their loathing for the legacy of the American Occupation—above all, its regrettable legitimation of the notion of the accountability of the governing to the governed. Official Washington rejoiced in the ldp’s return to power in 2012, not just because the ldp is partly a cia creation—the Agency had channelled funds to Tokyo in 1955, financing a merger of conservative parties to forestall a leftist electoral victory—or because its ties with the American defence and foreign-policy establishments are so deep and long-standing. The Pentagon wants a beefed-up Japanese war machine along with so-called ‘inter-operability’ in East Asia, meaning that the two militaries there would essentially function under one command. Abe held out the promise of overcoming the largest obstacles to this ‘inter-operability’: the Japanese Constitution and the festering opposition on the small island of Okinawa, where much of the American military presence in Japan is concentrated. Abe’s government threw so much money at Okinawa that its governor flipped his stance and announced his support for a new us Marine base that had been agreed between Tokyo and Washington but is bitterly opposed by most of the local population. Legislation has been passed to prohibit protests against the new base and, as of this writing, preliminary construction work has begun.footnote4 Washington’s jubilation was not only premature, but demonstrated how little the real dynamics of power in Japan are understood there. The rightist politicians and intellectuals who cluster around Abe blame the Americans and their occupation of Japan for the supposed softening of their country, which has sapped the moral fibre they deem essential in any future confrontation with the belligerent new superpower on the Asian mainland. While they may have precious little real affection for the United States, neither can they conceive of any ready alternative to the us ‘alliance’ other than submission to a Beijing intent on recapturing the regional hegemony China enjoyed during dynastic times. Since Washington also manifestly sees a genuinely democratic political order in Japan as a problem for the American imperium, Japanese rightists for the time being put up with and even welcome their country’s subordination to America’s national security state. The subordination is palatable to the Japanese right since it has learned through long experience that it can enlist Washington’s help in dealing with any challenge it faces by dressing up the problem as a threat to the Pentagon’s plans for East Asia—most recently demonstrated in its ability to pin the ‘anti-American’ label on the dpj. But the agendas of official Washington and the Japanese right are not the same. The American national security state sees Japan as simply another vassal—albeit an important one—expected to do what it is told and not make trouble. The Pentagon and the Japanese right may hold similar views on the need to ‘contain’ China and on the inevitability of an ultimate confrontation, peaceful or otherwise, but Washington is not about to allow Tokyo to choose the timing and nature of that confrontation. What’s more, Washington wants Tokyo to have good relations with Seoul, so that both can play the respective roles the Pentagon has mapped out for them in coping with an unpredictable North Korea while ‘balancing’ and containing the rise of China. Other things being equal, the Japanese right would also prefer to get along with Seoul—but not at the price of giving up its long-cherished goal of rewriting the history of the 1930s and ridding Japan of the ‘alien’ institutions and ideas ‘forced’ on their country by the Occupation. History’s shadows Perhaps nothing mystifies Washington so much as the continued obsession in Tokyo, Seoul and Beijing with events that happened so long ago that scarcely anyone now alive remembers them. But the domestic political legitimacy of all three governments grows directly out of their respective interpretations of those events—and those interpretations cannot be squared under any conceivable scenario. In Beijing, the morphing of a self-proclaimed revolutionary workers’ and peasants’ regime into a Confucianesque bureaucratic mandarinate has entailed the construction of legitimizing foundations beyond Marxist-Leninist theory. The Chinese Communist Party has effectively replaced the latter with Confucian ideals of a benevolent mandarinate at the hub of a properly ordered society. Thus, accounts of class struggle, the Long March and the war against Chiang Kai-shek’s Kuomintang have largely been replaced in the ccp’s founding myths with preening over the party’s ability to deliver economic growth and its supposedly central historic achievement in throwing the Japanese out of China. (In fact, the Kuomintang bore the brunt of the fight against the Japanese.) Among other things, the ccp hopes that by stressing the role of all patriotic Chinese in anti-Japanese struggles, rather than harping on the Chinese civil war, an eventual formal accommodation between Taiwan and the mainland will become more palatable to the Kuomintang—still the ruling party on the island—if not to the broader population there. But all this anti-Japanese posturing makes it difficult for Beijing to do business directly with Tokyo, particularly when the latter is now under the control of the direct descendants—genetically and otherwise—of those who raped and pillaged their way through China. Meanwhile, though South Korea may be one of the world’s great economic success stories, problems of legitimacy have plagued the regime since its inception. Whatever one may think of the dprk’s sorry record of oppression and brutality, the credentials of its founder, Kim Il Sung, as a guerrilla soldier against the Japanese occupation of Korea are not in doubt. By contrast, Syngman Rhee, the first President of South Korea, was placed in office by Washington and forced into exile in 1960 by a student uprising. Less than two years later, Park Chung-hee, the father of the current President, took power in a military coup. More than any other single person he can be credited with Korea’s economic miracle, but his socialization and thinking about issues of power and development were almost entirely Japanese. He was educated in colonial Manchuria, studied at Japan’s top military academy, served in the Japanese army, adopted a Japanese name and, when he seized power, drove forward the industrialization of his country with a rule book that could have been written by Japan’s kakushin kanryō, or reform bureaucrats—the men who put the Japanese economy on a war footing in the 1930s, administered Manchuria as a showcase colony and would, in the postwar world, form the nucleus of the legendary miti, the Ministry of International Trade and Industry. This history restricts the political space available to Park’s daughter for any accommodation with a Japanese government intent on rewriting accounts of the 1930s and 40s. Any narrative that portrays the Koreans as other than pure and righteous victims of brutal Japanese imperialism is intolerable to the present government in Seoul. No room exists in official circles for any nuanced discussion of Korean collaboration with their occupiers, or any genuinely comprehensive account of what led to the ‘comfort women’—the euphemism for the thousands of young Korean women herded by the Japanese military into sexual servitude. The Japanese may have taken the systematization of sexual slavery in Korea and elsewhere to unprecedented levels, but the full story of the institutionalized exploitation of poorer young women throughout East Asia, which long predated Japanese colonization and would long outlive it, interferes with the myth of evil Japanese and virtuous, victimized Koreans. Perhaps the ugliest aspect of colonialism—and the hardest to face up to later—is the moral collapse it engenders in the colonized: the countless small (and not-so-small) betrayals of one’s friends, neighbours, family, and ultimately one’s own self-respect, in order to survive. Most people trapped by foreign oppression understandably like to conceive themselves as Danes pinning yellow stars to their chests out of solidarity with their Jewish compatriots; the sordid record of Vichy France is closer to what usually happens. But that leaves the child of a collaborationist with an Achilles’ heel. Violating tatemae Meanwhile, what of Abe and the people around him? Where does this obsession with rewriting the past come from? Any attempt to airbrush out of history the Rape of Nanjing, the systematic enslavement of Korean, and other non-Japanese, women, the terror-bombing of Chongjing, the deliberate murder of some 70,000 ethnic Chinese after the fall of Singapore, or the medical ‘experiments’ carried out on human subjects by the infamous Unit 731—to list only the most notorious of the atrocities committed by the Japanese Imperial Army—is a fool’s game by any standard of evidence or objective truth. A Japanese leader who took an unsentimentally realist attitude towards his country’s national interests would instantly grasp the problems of legitimation facing his counterparts in Seoul and Beijing; he would recognize that attempts to rewrite history threaten to block the two obvious strategic paths available to Japan: either a restructured relationship with China, or a tacit balancing against Chinese power via alliances with South Korea and the United States. Most Japanese do not share the rightist dreams that appear to motivate Abe and his advisers. They are barely aware—if at all—of what actually happened in the 1930s. Schools skip over it, while a veritable tsunami of novels, films and television programmes portrays the Japanese of the time—including soldiers, political leaders and generals—as decent people caught up in horrific events through no fault of their own. Even the most liberal and well-meaning Japanese find it almost intolerable to face up directly to the scale of what took place. If forced to do so, they fall back on a vague sense that this is what war inevitably brings in its wake—one reason why pacifism is so deeply entrenched in Japan. What particularly irks ordinary Japanese is the sense that the past is being used selectively as a bludgeon with which to beat them. They view the nuclear weapons dropped on Hiroshima and Nagasaki, or the fire-bombing of Tokyo by Curtis LeMay’s us Army Air Force, as atrocities on the scale of anything committed by the Japanese Imperial Army—and justifiably so. But Washington, for all its arrogance and condescension towards Tokyo, usually manages to avoid rubbing Japan’s face in the events of the time. Not so Seoul and Beijing. A ccp that presided over mass starvation and a vast system of ‘black’ jails, that appears intent on subjecting Tibet and the Uighur lands of China’s northwest to what amounts to cultural devastation has, in the view of most Japanese, little moral standing to say anything about Japan’s war-time behaviour. Meanwhile, what appears to many in Tokyo to be Seoul’s endless harping on the ‘comfort women’ sticks in the Japanese craw. For every Japanese male of a certain age knows what a kisaeng house is; in the early postwar decades, South Korea was practically a byword among Japanese men as a paradise for sex tourism. The infrastructure of that tourism was not run by Japanese. To many Japanese, it all seems a kind of free-floating malevolence against which they feel defenceless. Much of this sentiment stems from unthinking extrapolation of what goes on in Japanese society to the level of international relations. Two parties in Japan—companies, individuals, government bureaus—that have to get along with each other will tacitly agree to a kind of fictional construct to describe their relationship, for which the Japanese word is tatemae. Violating tatemae—blurting out the truth, as it were—is thus usually interpreted as an intentionally aggressive act, and that is the way most Japanese reflexively see Beijing’s repeated references to the Rape of Nanjing or Seoul’s constant bringing up of the ‘comfort women’. If these governments had genuinely good intentions towards Tokyo, they would be content to wrap all discussion of the past in clouds of euphemisms about unfortunate history and building peaceable frameworks to prevent any repeat. But neither Seoul nor Beijing are prepared to engage in any such dance, and certainly not with a government in Tokyo that appears to be such a direct descendant of the regime that made war upon their countries and inflicted untold suffering on their ancestors. That the ccp could never have seized power had the Imperial Japanese Army not first crippled Chiang Kai-shek’s military; that the South Korean regime, dogged from its inception by the shadow of collaboration, has had to wage a sixty-year struggle with fellow Koreans in Pyongyang, advertising themselves as the true Korean patriots, makes it even harder for either Seoul or Beijing to ignore what Abe and the people around him are intent on doing. Guardians of kokutai Unlike the great majority of Japanese, Abe and his advisers have an acute, if blinkered, understanding of the past that amounts to an obsession. That obsession goes back to the roots of the modern Japanese state in the so-called Meiji Restoration of 1868—in reality, a coup d’état staged by low-ranking provincial samurai from western Japan. Distraught at the erosion of samurai privilege and the disarray and weakness of a visibly declining Tokugawa shogunate in the face of peremptory demands from Western imperialists, they cloaked their seizure of power with two mutually contradictory sets of legitimizing notions: direct rule by the emperor, on the one hand, and notions of constitutional government floating in from the West on the other. They proceeded to force-march their country into the ranks of the industrial powers so effectively that, in the Russo-Japanese War of 1905, they defeated a European state and, from that point on, could compel Westerners to treat them as something close to equals. Their success naturally buttressed their legitimacy. But a gap remained between the fiction of Imperial rule and the reality of government by self-appointed oligarchs, and that gap set the stage for a century of power struggles. The bureaucratized oligarchy that inherited power from the Meiji leaders after the latter began dying off in the early decades of the 20th century had no formal means of adjudicating disputes, since it theoretically governed in the name of an emperor who almost never actually made decisions. The result was colossal political irresponsibility that would culminate in the prosecution of a land war in Asia that lacked any plausible scenario for victory, and in a direct attack on an overseas power with an industrial base ten times larger than Japan’s. The United States began the Occupation of Japan intent on purging the power structure of those who, in the American view, were responsible for the war. Scores of insiders were arrested and hauled before the Tokyo War Crimes tribunals, which soon degenerated into something close to a farce, since the Americans made any discussion of the involvement and culpability of the Emperor off-limits. (Douglas MacArthur, Supreme Commander of the Occupation and obsessed with burnishing his reputation as a benevolent viceroy, had convinced himself that the Emperor had to be shielded from any demand for accountability; that the alternative would be widespread disorder.) Faced with a resurgent Japanese left, an increasing drain on the us Treasury and the startling ‘loss’ of China, where Mao Zedong’s guerrillas were on the verge of power, Washington reversed course, in the jargon of the time, and effectively handed the keys of power back to those elements of the Japanese elite that had survived the immediate postwar purges. This elite’s return to power had to be rationalized with an update of the contradictory political fictions constructed during the Meiji period: the fiction of parliamentary government, the fiction of direct Imperial rule, and the reality of control by the low-ranking provincial samurai who had seized power in the 1860s. The American-imposed Constitution of the postwar era transposed these constructs into keys that were, to be sure, less audibly jarring. Among other things, much of the postwar Japanese population wanted their country to be what it claimed to be: a democracy with sovereignty vested in the Japanese people. But while most of Japan’s power holders were content to use this construct to render their government legitimate in the eyes of the world—the Occupation, and the terms on which it ended, really gave them no choice—they have never fully accepted the constitutional-democratic basis of their right to rule. They continue, without being explicit in the matter, to fall back on notions of Japan as a unique, holy land centred on the Imperial House as the ultimate source legitimizing their political power; kokutai, or national essence, was the prewar term. This is particularly true of elements in the elite that were the direct beneficiaries of the ‘reverse course’ of the late 1940s and who, with cia help, brought the ldp into being in 1955 to help secure their hold on the key pillars of the Japanese power structure: the great bureaucracies and the interlocking corporations and banks. They may not use the word much any more, but the mystical nature of kokutai and the notion that its preservation is the fundamental task of Japan’s rulers underscores their belief in their right to rule. Since their legitimacy in the prewar set-up stemmed directly from their self-appointed roles as guardians of kokutai, a dispassionate examination of what had led Japan to disaster became impossible, for it would undermine their need in the postwar world to set their claims to power beyond challenge. Heirs and challengers More than any other single figure in Japan, Abe embodies the continuity of Japan’s modern power elite since it coalesced in the late 19th century. He grew up at the knee of his grandfather Nobusuke Kishi, who had not only been one of the most important leaders during the fascist years— economic czar of Japan’s showcase colony of Manchuria and Minister of Munitions in the Tojo cabinet—but emerged as the key architect of the postwar political order in Japan: both the ldp and the us–Japan ‘alliance’. Since boyhood, Abe has been obsessed with bringing about an interpretation of the events of the 20th century that would clear his grandfather’s name and cement the notion that the war was forced on Japan—that its leaders had had no choice. Abe’s triumph amounts to more than the electoral humiliation of Japan’s organized opposition. It represents the return of his grandfather’s original idea of an ldp that would serve to pre-empt the possibility of future challenge to the control Japan’s bureaucratized oligarchy had just reasserted over its core political and economic institutions, after the hiatus of the Occupation. The political infrastructure built by Kishi and his allies did succeed in blocking any leftist takeover of Japan’s parliamentary machinery, something that looked highly probable in the immediate postwar decade. But the ldp’s architects failed to take comparable measures against an insurrection within the ldp itself. Until 1971, ldp prime ministers—including Kishi himself—were mostly mandarins who had risen from within Japan’s great bureaucracies. But the machinery of electoral politics allowed for the possibility of capture by a populist from within the ranks of the ldp who could master the intricacies of its power balances, and that is what happened in 1971 when Kakuei Tanaka became Prime Minister. A political genius who hailed from—and spoke for—Japan’s rural hinterlands, Tanaka had little interest in rightist fantasizing about Japan’s ‘national essence’. He sought to cut deals—and he was very good at it. Among other things, he negotiated the establishment of diplomatic relations between Tokyo and Beijing with Zhou En-Lai. The bureaucracy made its peace with Tanaka, since he never really challenged the basis of oligarchical rule; what he wanted—and got—was ‘more’ for the millions of farmers and small businessmen throughout Japan who formed his political base. The situation was tolerable to Japan’s traditional power elite as long as the economy was growing. But the slowdown after the implosion of the so-called ‘bubble economy’ of the late 1980s exposed a rift in the ldp between the bulwarks of oligarchical rule and the disciples Tanaka had left behind him. The most able of these disciples, Ichiro Ozawa, announced in a bestselling book his intention to use Tanaka’s methods to transform elected politicians from servants of the bureaucratized elite into its masters, in the process turning Japan into what he called a ‘normal country’. He led the 1993 walk-out from the ldp that briefly forced the party into opposition. After this first failure to construct an alternative to rule by the ldp–bureaucrat nexus that had run Japan since 1955, Ozawa went on to ally himself with the founders of the dpj. His brilliance as a political tactician led directly to the dpj’s victory in 2009. That election frightened Japan’s traditional power elite. It wasn’t just the ldp’s defeat. For implicit in Ozawa’s notions of political competition and rule by those answerable to voters was the democratic bridling of the formal and informal bureaucracies that have ruled Japan since the Meiji leaders began dying off. This alone explains the determination of Japan’s power elite to ensure nothing similar to 2009 can ever happen again. That means more than just neutering the existing opposition. The example of Tanaka and Ozawa shows that as long as the infrastructure of electoral politics offers the possibility of ambitious politicians actually seizing the reins of power, it constitutes a threat to continued control by Japan’s bureaucratic oligarchs. The basis of their legitimacy thus cannot be allowed to reside in votes and elections but rather in the right to rule of a wise, self-perpetuating mandarinate. It is here that we can pinpoint the compulsion to rewrite history: in the need to put the right to rule beyond challenge. Beijing and Tokyo thus end up converging on the same historical Confucian definition of a just political order: rule by a benevolent elite whose claims to power rest on their superior education, insight, and morals. After flirting with models of legitimacy imported from the West—respectively the leading role of properly socialized Marxists, and the victors of free and fair elections—both are reverting to historical type. But that does not make an accommodation any easier since, as we have seen, the founding myths of the two mandarinates cannot be squared. Myth and miscalculation So where does that leave us? China does not view Japan as an independent polity but as a proxy for Washington and American intentions to prevent the restoration of what Beijing sees as the proper state of things: a benevolent, China-centred order in East Asia. Neither Washington nor Tokyo have done anything to allay Beijing’s suspicions of who it is they are actually talking to when they negotiate with Tokyo. Beijing’s sudden pushing of claims to a small group of islets in the waters between the two countries is usually depicted as part of a wider thrust to restore China’s historic hegemony in East and Southeast Asia. But it bears remembering that the Chinese provocations began only in the wake of the destruction of the first dpj government, in which Washington played such a crucial role. That government had dispatched some 600 top business and cultural figures to China, led by Ozawa, with the announced intention of renegotiating the basis of the relationship between the two countries. The contrast between the warmth accorded this delegation and Washington’s insulting and contemptuous treatment of Hatoyama gave rise to widespread media speculation in Tokyo of a fundamental realignment in Japan’s foreign relations, as well as spasms of hysteria in the us foreign-policy establishment. Hatoyama’s downfall happened soon thereafter, followed by the beginnings of the dispute over the islets. Many Japanese, right-leaning or otherwise, fear Beijing’s intentions. The majority do not support Abe’s right-wing agenda, but the drastic deterioration in relations with Beijing since Hatoyama’s resignation has played directly into the hands of those who argue that there is no alternative to Abe’s plans, if Japan is not to be swallowed up by a resurgent China—which is why most either voted without enthusiasm for the ldp or stayed home. Certainly there is today no credible opposition around which they could coalesce. Among other things, only the existing power structure in Tokyo is seen as capable of ensuring the continuation of the American support that most Japanese regard as their only hope for counterbalancing China. But the situation has the makings of a tragedy, for it leaves the American national security state and the Japanese right hostage to each other. Elements of the Japanese right that openly crave some sort of showdown with China helped fan the flames of the islet dispute. Those voices may have been stilled for the time being, but the impossibility of squaring the right’s foundation myths with the necessary preconditions for peaceable relations with China increases the potential for miscalculation. Beijing, for its part, might conceivably seek to provoke a crisis that would be severe enough to humiliate and embarrass Tokyo, but remain just this side of bringing the us military into the picture, thereby demonstrating to Japan that the us security guarantee is ultimately unreliable and forcing a restructuring of Japan–China relations on Beijing’s terms.footnote5 The alternative is a Japanese government enjoying the full legitimacy that stems from majority popular support, a government that could negotiate with both Washington and Beijing as a sovereign, independent entity. Only when it has this will China take Japan seriously. Even for the United States, an ally that takes responsibility for its own security and foreign relations, rather than a sullen protectorate governed by backward-looking revanchists, is far less likely to blunder into the sort of confrontation that would force the us to act or be seen as the proverbial paper tiger. For the time being, no such ally is anywhere in sight, since no credible scenario leading to the precondition—a fully legitimate Japanese government enjoying wide popular support—is imaginable. One can only hope for Japan’s sake, and for the sake of the wider world, that the next time the possibility emerges it will be encouraged rather than squelched. That the world’s second largest economy and leading net creditor should remain mired in seemingly endless stagnation/recession confounds policy makers and observers around the globe. And their fears over the consequences have deepened since the onset of the developing world crisis in July 1997. It is evident that the United States alone cannot generate sufficient demand to pull the developing world out of the doldrums—that it requires the assistance of other leading economic powers. With a Europe preoccupied for the time being with its new currency, the only sizeable power left to help the United States propel the world forward is Japan. Yet far from being part of the solution, Japan appears to be a big part of the problem. Complaints about Japan have become numbingly familiar. According to widely accepted conventional wisdom, Tokyo’s inability or unwillingness to come up with a growth-restoring policy-mix blocks recovery in Asia. Japan’s consumers do not spend on imports; its companies, facing weak demand at home and insulated from the pressure of financial markets to exit unprofitable lines of business, dump production abroad, squeezing out developing world competitors. The country’s imploding banking system has become a kind of black hole of global finance, sucking in liquidity that ought to be going to poorer countries to fuel growth. Meanwhile, concerns that a sudden stock market reversal in the United States could bring the American expansion to a halt exacerbate worries about Japan. For without a Japan to pick up some of the slack, as it were, we would truly be staring global recession in the face.footnote1 What particularly frustrates so many non-Japanese is the sense that Japan’s policy challenges, while severe, are neither novel nor mysterious. The policy recipe urged on Tokyo is pretty straightforward: fiscal stimulus and monetary expansion; the closing down of sick financial institutions combined with recapitalization of the rest; dismantling of anti-competitive regulations and cartels; reforms of corporate governance and financial markets that force companies to become more profitable or face bankruptcy or takeover. Most observers acknowledge that this policy mix could cause political difficulties for any government that tried to carry it out. At the same time, it appears no more onerous than the restructuring of the American economy in the 1980s or the measures implemented in a number of European countries in order to qualify for membership in the euro bloc. Japan’s failure to act seems to boil down to a simple lack of political courage. The result has been increasingly testy foreign pressure on Japan—much of it, although by no means all, emanating from Washington. It is common knowledge that the Japanese elite often relies on so-called gaiatsu (foreign pressure) to provide political cover for unpopular but necessary change. Indeed, the June 1998 meetings in Tokyo of central bankers and deputy finance ministers from eighteen countries are a case in point. Japan found itself totally isolated, pressed on all sides to take the necessary measures to stimulate its economy and heal its banking system. The meetings may have even contributed to the ruling Liberal Democratic Party’s (LDP) losses in the next month’s elections for the Upper House, and the subsequent replacement of the Hashimoto cabinet with a cabinet under Prime Minister Keizo Obuchi that gave the initial impression of being prepared to do what it took. Certainly, much of the impetus behind the sixty trillion yen bank bailout package, the seventeen trillion yen stimulus package, and the de facto nationalization of several important banks can be traced to these meetings. Yet they were actually arranged by Japan’s Ministry of Finance (MOF), leading to accusations in the Japanese media that they had been deliberately staged to produce a loud chorus of foreign pressure on Japan, thereby providing political cover for an about-face by Japan’s policy elite.footnote2 More, however, lurks behind the exasperation with Japan—at least in Washington—than simple resentment at having to play the perennial heavy in an unending political drama that a supposedly mature industrial democracy should no longer need to stage. Indeed, if gaiatsu were all it took to elicit the changes Washington wants to see, Larry Summers and Bill Clinton would no doubt be happy to endure the painless—for them—slings and arrows of the Japanese mass media in applying whatever pressure is required. Japan’s is not the first government—nor will it be the last—to find foreign pressure a convenient cover for implementing much-needed domestic change: witness the deft ends to which the Italians have employed the Maastricht Treaty obligations, or South Korean President Kim Dae Jung’s handling of the IMF requirements imposed on his country. Rather, what seems to produce widespread indignation with Japan—and this indignation is certainly not confined to Washington—is the sense that the Japanese elite does not realize how bad things are, that it is kidding itself. How else to explain the incredulity with which the consumption tax increase of April 1997 was greeted in policy circles—what are these people doing raising taxes? Don’t they know their economy is flat on its back? Or the increasing shrillness with which well-known economists such as Paul Krugman and Andrew Smithers berate Japan’s monetary authorities from the pages of the Financial Times?footnote3 Response of Japanese officialdom Maybe we ought to stop for a moment, therefore, and ask ourselves why Japanese elite officials act as if they believe that Japan’s economic plight is not so bad after all. Could it be that they are right; that Japan’s economic situation is not so terrible? This seems like a stupid question. The numbers coming out of Tokyo do not lie. Unemployment and bankruptcies are at their post-1940s peaks. GNP shrank in 1998, and the poor third-quarter numbers for 1999 suggest that the high growth rates recorded in the first half of the year were indeed, as many had feared, simply the one-off products of huge dollops of public spending rather than signals of any fundamental turnaround. Repeated attempts to jumpstart the Japanese economy with such spending have saddled the country with a government deficit which, as a percentage of GNP, is among the highest in the OECD. The Tokyo Stock Exchange languished for nearly a decade in the grip of one of the most vicious and protracted bear markets of the century; even the recovery that set in early in 1999 is simply taking it back to levels that a few years ago would have been regarded as disastrously low. Real estate prices have fallen more than 60 per cent from their late 1980s peak, with no floor in sight; most of the nation’s banks would be insolvent if Japan followed Western accounting standards. And to top it off, we have seen over the past year spikes in both interest rates and the yen. While interest rates have come back down, the forces that led to the spikes are still there; if higher interest rates return or the yen does not soon weaken again, a range of Japanese manufacturers that have been kept alive since the mid nineties on the life support of a weak currency and extremely low interest rates will not survive. Yet the sense remains that, irrespective of whatever political difficulties may stand in the way of getting the country moving again, Japan’s policy elite doesn’t really think things are that bad. How could this be? Let’s dismiss the notion right away that these people are stupid. Stupidity might serve to explain why they are not doing what Paul Krugman thinks they should do, but it doesn’t square with the facts. This is the same policy elite with the same educational and social backgrounds that guided the country from complete devastation to the front rank of the world’s industrial powers in less than three decades. In any intelligence test one cared to use, the bureaucrats who staff the Ministry of Finance (MOF), the Ministry of International Trade and Industry (MITI), the Bank of Japan (BOJ), and the Economic Planning Agency, together with the upper management ranks of Japan’s corporate and banking hierarchies, could hold their own against their counterparts anywhere. Nor is their information faulty; public accounting standards in Japan may leave something to be desired and outside investors certainly fret at their inability to grasp the real financial situation of Japan’s banks and corporations, but MOF bureaucrats know exactly what is going on inside the country’s financial institutions. For the MOF controls bank funding powers, the opening of branches, the hiring of personnel, and approvals for all financial products. It has engineered every single bank merger since the 1930s. Japanese bankers do very little without MOF blessing; indeed Japanese banks can be regarded essentially as institutions charged with the execution of MOF policies.footnote4 So stupidity or faulty information doesn’t help us explain why the Japanese elite acts as if it weren’t really sure it faced a crisis. Maybe they privately know how bad things are, but don’t want to give the impression of panic. On the surface, this seems like a reasonable hypothesis. If ordinary Japanese households sensed panic in their leaders, if the currency and equity markets saw a policy elite sick with worry, it could only make things worse. Central bankers and financial regulators are expected everywhere to project serene, unflappable confidence; market participants monitor their every twitch for signs of anything else. But this theory falls apart the moment one actually looks at the measures taken by Tokyo’s policy elite. Far from giving the impression of attempting to project masterful control, these people act openly as if they don’t quite know what to do about problems that they are not convinced are all that urgent. Everyone points fingers, yells at them to do something; since this finger pointing comes from their most important allies and foreign customers—and now from sizeable domestic constituencies, with the capacity to make trouble—they know they must respond. Yet because these problems seem to them fundamentally unreal—or at least beside the point—their policy response lacks coherence. How else to explain such seemingly monumental policy errors as the consumption tax hike of April 1997? The dithering on the bad debt problems, when the dimensions have been clear to everyone since 1992 at the latest? The mule-like obstinacy of the BOJ in refusing to spring the liquidity jaws that seem to have trapped Japan, notwithstanding a domestic and international chorus of economists and policy makers urging the deliberate creation of inflationary expectations? The about-face on government purchases of the bonds being issued to finance the latest bank bailout and stimulus packages? First the MOF says its Trust Fund Bureau won’t be buying the new bonds, creating a bond-market panic and driving long-term interest rates up; a few weeks later, it reverses course and says that after all it will mop the excess debt. Taken together, Tokyo’s policy moves paint a portrait of befuddlement, uncertainty and serious internal rifts. Banking crises are the financial equivalent of fires; one expects alarm, panic, firemen rushing to the scene; what one doesn’t expect are groups of obviously capable firemen standing around debating whether there really is or isn’t a fire; if there is, should we use water to put it out, or might we run out of water, so maybe it would be better to try one of these new chemical extinguishers—except the bill for that would be too high? In the meantime, a whole field of bystanders jumps up and down shouting, ‘Put out the bloody fire before it burns our houses too!’ So the firemen feel they must look busy but don’t really do very much. Viewing the world from Tokyo Maybe Tokyo’s firemen have other things on their minds. Their behaviour may mystify Wall Street and neoclassically trained economists, but Japan’s policy elite is not primarily concerned with the factors that usually preoccupy officials in capitalist countries: market confidence, corporate profits, sound banks, stable prices, rising living standards. Other things being equal, it’s nice to have these things, but even a cursory look at the history of Japan’s policy preoccupations show that other things are more important. Take something as unexceptional as sound banking, for example—seemingly as uncontroversial as motherhood. Sound banking implies prudent lending: lending directed towards solidly profitable borrowers that doesn’t finance overcapacity. It implies proper matching between assets and liabilities—in other words, that banks don’t use short-term funding to finance long-term lending—and concern with adequate capital cushions. Yet Japanese banks not only paid little attention to such matters; at numerous times during the postwar era they had been actively encouraged by the authorities to make funds available to borrowers who showed no signs of profitability, and to finance overcapacity in a host of industries from automobiles to semiconductors. They were encouraged to fund long-term loans to these sectors with a mixture of short-term deposits and borrowing in the so-called call money market (Japan’s short-term interbank market), with shortfalls made up by the BOJ. When, in the early 1980s, the more financially stable Japanese corporates began to reduce their reliance on bank funding, the authorities looked the other way as the banks began to shovel loans at lesser quality developers and stock market speculators—indeed, the authorities deliberately used the banks to push vast amounts of credit into an overheated economy, creating in the late 1980s the greatest financial bubble in history. Regulators in most countries urge—or require—their banks to maintain thick capital cushions; back in the mid-1980s, at the so-called BIS negotiations to determine universal bank capital standards, Japan’s officials argued that their banks did not need such thick cushions.footnote5 Today, these same officials openly connive with the banks to make the cushions look thicker than they actually are. It is tempting to say that after all Japan’s regulators really must be stupid; that they don’t know how to administer a modern financial system. Resisting this temptation has proven too much for an army of commentators—some of whom ought to know better—indulging themselves in a veritable orgy of gloating over Japan’s current difficulties. But all this triumphalism misses the point; ‘sound banking’ as defined in the West has never been a policy objective for Japan’s elite, any more than ‘getting prices right’ or ‘properly’ functioning markets for labour, consumer goods, corporate control and housing. What, then, have their policy objectives been? Answering this question requires doing something quite unfashionable in today’s ahistorical, ageographical, model-fetishizing intellectual world—paying attention to history and to institutions; in this case, Japan’s modern history and the bureaucratic power structures that determine policy there. This is not the place to give Japan’s modern history and institutions the treatment they deserve—such an enterprise would require several lifetimes of scholarly work and occupy many thousands of pages. But at the risk of sounding simplistic and reductionist, two points must be emphasized. First, Japan was what might be called a ‘catch-up’ developer, obsessed with avoiding what had been the fate of most of the non-Western world—colonization. And second, Japan has not experienced what classical Marxists would term a genuine revolution—one class overturning another—since the twelfth century, when a rising class of provincial warriors usurped the prerogatives of a sclerotic centralized aristocracy. (The Meiji Restoration, while hugely important, was, in the last analysis, a struggle between elements of the ruling elite. The feudal character of power relations in the preceding Tokugawa era survived the Restoration essentially intact and indeed continues in some form to this day.) Let’s start with the ‘catch-up’ developer. ‘Catch-up’ developers from Bismark’s Germany to Park Chung Hee’s Korea conceive as the overriding aim of economic policy not living standards and market confidence but the building of the infrastructures of an advanced economy. If a steel industry is a prerequisite for an advanced economy, then policy makers in ‘catch-up’ developers will do what it takes to ensure their country has a steel industry, even if that means bank loans to unprofitable companies at subsidized rates and flagrant violations of Ricardian free-trade norms. Japan, of course, is the paradigmatic example of a ‘catch-up’ developer, but there is even more to it than that. Japan’s frantic and successful attempts to avoid colonization in the late nineteenth century led to forced development of industries essential to warmaking, a process that accelerated with the invasion of China in 1933 and the subsequent war with the United States. Once the war ended, Japan’s economic bureaucracies put the institutions of forced development to work, first in the service of those industries deemed essential to postwar recovery and then to transforming Japan into an industrial power of the first rank. Japan’s economic administrators therefore judge their performance by the criteria of the country’s technological prowess and industrial strength. Anyone who has spent any time in Japan or done business with Japanese companies knows that the Japanese are obsessed with the relative standing on global markets of their manufactured products in terms of cost, quality and technological advancement. The profitability or price-earnings ratios of the manufacturers themselves have been, until very recently, almost irrelevant—even meaningless. But on top of this concern with brute industrial strength—natural in a country whose entire modern history essentially constitutes a desperate quest to avoid domination by capricious foreigners whose motives could never be trusted—has been the unique legacy of a political and social order that has not been overturned in its most fundamental aspects for 800 years. For that legacy brings with it the unspoken fear that an overturning might someday happen. Japan did in fact narrowly escape revolution in the 1870s and again in the late 1940s.footnote6 Thus we see the obsession on the part of Japan’s governing class with the maintenance of social peace, and a nearly pathological aversion to anything that potentially threatens disorder or a loss of control. Indeed, Japan’s 125-year-long drive for technological self-sufficiency and overwhelming industrial might is really part and parcel of the overall efforts to neutralize any threat to the existing order. For ever since the Portuguese appeared in Japanese waters in 1543 with their warships, their guns and their subversive religion, foreigners have represented arguably the biggest single source of such threats. In 1854, a 250-year-old effort to isolate Japan from the world collapsed; and 1945 saw the utter ruin of attempts to use military means in order to force foreigners to deal with the country on its terms. Japan’s administrators have thus been left with the single tool of economic policy in trying to control relations with the outside world. The 1990s—a Japanese perspective Looked at from the perspectives of industrial might and social order, then, the 1990s presents much more of a mixed picture than do the standard measurements of GNP growth, corporate profits and unemployment rates. To be sure, even when seen through the eyes of Tokyo’s policy elite, the picture is not good. Uncertainties once thought resolved have returned with greater force. Demands for change—from both inside and outside Japan—have increased in volume and frequency. After two decades of technological leadership, the country finds itself again a follower in the most widely touted new industries. Formerly reliable policy tools no longer work as they used to. Doubts proliferate about the ability of Japan’s administrators to honour all the promises made to disparate groups in the country that have the capacity to make trouble. At the same time, neither is the picture wholly bleak. In a wide range of manufactured products, Japanese companies can still provide higher quality goods at lower costs than their competitors anywhere. Japanese dominance of key industrial components is so great that it is no more possible these days to run an industrial economy without buying goods from Japan than to do so without buying petroleum. Complex machines—computers, automobiles, aircraft—cannot be built without Japanese components. For all its financial troubles, the country still commands the world’s largest pool of savings and remains the number one net creditor. Indeed, that is why Japan’s difficulties so exercise central bankers and finance ministers around the world—if Japan were a poor country with few savings, who would care? Japan’s administrators are clearly under pressure. But at the same time, stretched as they may be, I think they believe that they still command the resources to cope with threats to the existing order, whether those originate from irate foreign countries or increasingly restive domestic groups. Indeed, one could make a convincing case that both internationally and domestically, those threats have receded somewhat in the last three years. A Clinton administration that came to office determined to force change on Japan and overhaul chronic American payments deficits with Tokyo essentially gave up pushing structural reform in the fall of 1998 with the tacit endorsement of the bank bailout and stimulus packages at the expense of the earlier much-hyped reform efforts. And since early 1999, believing that no other alternative to a disastrous Japanese economic collapse exists, Washington has sent several signals that it is once again prepared to accept a further widening of Japan’s record trade and current account surpluses. Meanwhile, at home, the most far-reaching attempt in fifty years to impose political control over Japan’s governing bureaucracy shows every sign of having run out of steam. The Liberal Democratic Party, which has long traded political cover for the bureaucracy and non-interference in bureaucratic policy making in return for funding to feed its principal power bases—the countryside and the bloated construction sector—has succeeded, at least for the time being, in neutralizing the first significant opposition it had faced since 1960. This is an opposition that had, back in 1993, actually managed to turn the LDP out of office for a few months with a programme of imposing political control over the bureaucracy. But the prospect scared too many influential groups in Japan—the bureaucrats themselves, of course, but also the quality newspapers which fundamentally determine what passes for public opinion in Japan. And the LDP–bureaucracy nexus now appears completely in charge again. Which doesn’t mean they don’t face severe challenges—or that they have any unified notion of how to respond to them; but understanding the likely policy responses to these challenges means making the effort to see them through the eyes of Japan’s policy elite. Loss of technological leadership Reviewing some of the biggest of these challenges, we could start with the loss of technological leadership in such industries as computers and telecommunications. This has had a profoundly demoralizing effect on Japan’s administrative elite—more so, I would suspect on the basis of my conversations in Tokyo, than such widely publicized problems as the banking crisis and the exploding fiscal deficits. For by the late 1980s, Japan’s policy elite believed they had achieved their century-long goal of an advanced industrial structure wholly under Japanese control—thus forcing the outside world to deal with Japan on its terms, rather than the reverse. But the unexpected resurgence of American industry in the 1990s—particularly the growth of industries clustered around software, the internet and the personal computer—meant that, at their moment of triumph, Japanese companies found they did not after all control the direction of markets in the most important new industries. Indeed, Japanese semi-conductor and computer components companies grumble that they have been reduced to the status of price-takers; that Dell, Compaq and Cisco treat them the way they treat their second- and third-tier subcontractors in Japan. Meanwhile, complaints about the American dominance of the internet are ubiquitous, but the complaints tend to be resigned rather than defiant. For Japan’s administrators know full well that the price of taking on the United States head-to-head in internet and software-related industries is the importing of the free-wheeling, entrepreneurial culture of Silicon Valley, complete with maverick young scientists walking out on established university professors, billion-dollar start-ups run by boys in their early twenties, and highly developed venture capital markets immune to bureaucratic interference. Despite periodic attempts to mimic certain aspects of this culture—the Japanese electronics giants that encourage their programmers to wear jeans to work; the attempts by MITI to pass out some $1.5 billion over the past two years to jumpstart software developmentfootnote7—Japan’s bureaucrats will not willingly allow anything so threatening to the established order as a Silicon Valley ethos to take root. Instead, look for a continued Japanese drive to ensure that key hardware components are dominated by Japanese manufacturers—they may not be able to dictate the pace of development, as they once thought they could, but the world will still have to do business with them. Look for continued Japanese leadership in so-called embedded software: the software incorporated into the likes of elevators and automobiles. Banking crisis and ‘credit rights’ A second challenge, of course, is that banking crisis which so exercises policy makers and observers everywhere. But Japan’s administrators, even though they may use the word, do not see it as a banking crisis in the way Western regulators would—if they did, they would long ago have closed down shaky banks, recapitalized the healthier ones and foreclosed on bad debt. Instead, Tokyo’s mandarins view the problem in terms of what Karel van Wolferen has very usefully termed ‘credit rights’.footnote8 In a capitalist society, there is no such thing as a right to credit held by any entity other than perhaps the government itself through its powers to tax and print money. No other public sector institution, private company or individual—even the strongest and richest—enjoys any automatic right to credit. But in Japan, an elaborate, although informal—that is, not codified—system of credit rights is administered by powerful official and unofficial bureaucracies. Credit is thus allocated through criteria that are fundamentally bureaucratic in nature rather than market driven—an institution or person that meets certain criteria receives a right to credit; the quid pro quo for access to credit being support for, or at least acquiescence in, bureaucratic policy goals. Once this notion is understood, then such key elements of Japan’s economic structure as main banks, keiretsu or corporate clusters, the convoy system for the nation’s banks (gososendan), and lifetime employment fall into place. Most companies have ‘main banks’ that are expected to support corporate activities irrespective of profitability. The MOF long administered a so-called convoy system that guaranteed the viability of all the banks. Corporate clusters anchored by cross-shareholdings allow each member unlimited access to group resources while imposing, on the other side of the coin, unlimited obligations to other group members. Companies are expected to provide for the life-long livelihood of core employees (seisha-in). The banking crisis can best be understood as the outward manifestation of the inability of Japan’s administrators to meet all the demands of those with credit rights. The reasons why this crisis developed in the 1990s—after several decades in which no such problems existed—are many and complex, but they boil down to an inability to generate the constant increases in nominal GNP that characterized the Japanese economy from the 1950s through to the late 1980s. Akio Mikuni has suggested that this in turn is rooted in Japan’s emergence as a net creditor nation, leading to secular upward pressure on the yen and a deflationary bias in the economy.footnote9 A net creditor nation is almost surely a mature economy; mature economies do not as a rule grow quickly. At the same time, claims on foreign countries generate deflationary pressures because those claims can be and are exercised through purchases of cheaper foreign goods and assets. This has been particularly obvious in the Japanese case with land. Land prices underpinned the structure of asset values to such an extent that many Japanese economists describe the Japanese system as tochi hon-i-sei, or land-value economy. (Loans of more than one year were typically, for example, secured by land; most Japanese banks paid little attention to corporate cash flow, instead looking at the value of corporate land holdings.)footnote10 Many of Japan’s growing claims on foreign countries have been exercised in such a way as to put tremendous deflationary pressures on Japanese real estate prices, which had reached such stratospheric levels in the late 1980s that the market value of the Imperial Palace Grounds was said to be greater than that of the whole of Canada. Tokyo’s overriding concern in this decade has been to get the country moving without a large-scale revoking of credit rights. Building a floor under the stock market with public funds in the summer of 1992, securing the help of the US Treasury to reverse a soaring yen in the summer of 1995, the extremely low interest rate regime and periodic floods of public works spending, the resolution of the housing loan crisis, the consumption tax hike and the series of MOF-administered bank mergers all make sense in this light.footnote11 By the fall of 1997, however, with the collapse of three major financial institutions and overall growth turning sharply negative, it had become evident not only that efforts to revive the economy were going nowhere but that it was going to be impossible to honour all credit rights. What we have seen since then is a kind of triage, with credit rights being revoked to politically weak sectors—small independent businesses for example, some of the lesser corporate clusters, also-ran manufacturers—not to mention much of the financial sector where the MOF has, since the late 1980s, openly forced ‘shotgun’ mergers (that of the Mitsui and Taiyo Kobe banks to form the Sakura Bank a harbinger of the mega-mergers of the past year), permitted a number of highly visible institutions to fail (Yamaichi Securities, for example, and the Hokkaido Takushoku Bank), and effectively nationalized the Long-Term Credit Bank of Japan and the Nippon Credit Bank. Highly visible tie-ups with foreigners, on the lines of the stake Renault has taken in Nissan, and the success in the last two years by foreign financial institutions in areas heretofore closed to them should not, however, be misinterpreted. This ongoing credit triage is not being decided by market forces free of bureaucratic interference. No sign exists that Japan’s administrators really want to see genuine markets in credit and corporate control take root. Even if they were so inclined, it would take at least a decade to build the institutional infrastructure of a modern capitalist economy: independent ratings agencies, a sizeable accounting profession (in an economy two and a half times as large as Britain’s, Japan has about one eighth the number of chartered accountants), enough lawyers, judges and courts to handle the resolution of economic disputes. But the situation does create significant opportunities for foreigners in a number of industries, from pharmaceuticals to automobiles, where foreign participation is seen as preferable to technological backwardness, or widespread layoffs and plant closings. And there is no question but that Japan’s authorities have decided that Japan’s bankers and brokers simply do not possess the expertise necessary to run highly competitive modern financial institutions. In a pattern that goes back to the early Meiji period, foreigners are being temporarily welcomed in this sector and given the opportunity to make significant money until such time as the Japanese learn what they need to know. While some of the expertise the foreigners are introducing is purely technical in nature—to an extraordinary degree, for example, cash is still used in Japan to settle obligations, cheques are almost unheard of, and even payments done via ATMs are encrusted with high and antiquated fees;footnote12 technology introduced by foreigners will surely shake up the payment and settlement systems—the foreigners will also bring with them market forces that have the potential to destabilize the Japanese system and threaten bureaucratic control over credit allocation. Indeed, this is already happening to some degree—Japanese corporations have been tapping international capital markets for twenty years now and money has been leaking out of the Japanese system for most of this decade as investors seek higher returns offshore. It is a mistake to conclude, however, that simply because the administrators of the Japanese system are, under duress, permitting the introduction of market forces into areas where they were previously suppressed, that they have abandoned their long-held conviction that economic outcomes ought to be determined by a highly trained bureaucratic elite rather than the free play of market forces. It is, of course, conceivable that the foreign financial institutions represent the thin edge of a wedge that will finally undermine bureaucratic control. But aside from the difficulty referred to above in creating the infrastructure of a capitalist economy out of whole cloth, the bureaucracy continues to have formidable powers at its command in forestalling outcomes that it views as undesirable. In particular, tax policy—both the policies themselves and the aggressive use of audits—discourages many Japanese from investing overseas. Institutions which are insufficiently accommodating to bureaucratic wishes can be made the subject of onerous investigations, manufactured ‘scandals’, and the institutional equivalent of show trials.footnote13 Unpredictable outside world A third challenge lies in the growing unpredictability of events outside Japan that impinge on the country’s prosperity. Since 1952, the year that marked the end of the American Occupation, Japan’s principal tool in coping with the outside world has been a sustained, herculean effort to ensure that the United States provided a protective umbrella for Japan—or, really, two umbrellas: firstly, a military/security umbrella that made it unnecessary for Japan to have independent foreign policies and security arrangements. If the United States had not managed for Tokyo those functions by which a state is most easily identified—conducting foreign relations and providing for security—Japan would have been forced to hold some sort of internal debate that carried the potential for terrible domestic disruption in a country that has still not even begun to examine the institutional reasons for the disaster of the Second World War. And secondly, the United States provided an economic umbrella that, among other things, ensured access to world markets for Japanese goods at a competitive—that is to say, undervalued—exchange rate. For the unrestricted ability to dispose of excess production on world markets forms an absolutely essential safety valve in an economic system where investment is unconstrained by the need to compete for credit. Broadly speaking, Japan has employed two sets of tactics in ensuring that the United States maintained these umbrellas. The first set, used until the early 1980s, involved threats that Japan would go socialist or communist unless the United States cooperated in this or that area or trade problem. Such threats have been empty since 1960 at the latest, but to a Washington trapped by its own ideological misconceptions and with inadequate resources devoted to Japan,footnote14 the notion that leftists stood dangerously close to the levers of power in Tokyo retained some credibility well into the 1980s. The second set of tactics that have today almost entirely supplanted the first set (which has now dwindled to the depiction of sentiment on Okinawa vis-à-vis the location of American bases there) stem from the growing financial leverage Japan has accumulated over the United States since the early 1980s. At the time, an incoming Reagan administration enacted a set of policies guaranteeing that the US national debt would explode and that the United States would become the world’s leading net debtor nation. Japan emerged both as principal foreign holder of claims on the US government and as the indispensable financier of America’s current account deficit—directly, through its heavy purchases since the early 1980s of US government debt, and indirectly, through the country’s willingness to denominate the bulk of its claims on the outside world in dollars rather than yen. Japan has used the resulting leverage, particularly in this decade, to blunt American trade offensives (the withdrawal of American threats to impose sanctions on Japan’s automakers in June 1995—sanctions that had across-the-board political support in the United States—was, for example, due solely to fears over disruptions in the bond and currency markets) and to secure essential American cooperation in reducing the value of the yen whenever it threatened to impose an intolerable burden on Japan’s exporters. But while these tactics have been successful—seen most recently in the tacit American acquiescence early in 1999 in yet another widening of the Japanese trade surplus—they carry increasingly unpredictable side effects. Case in point: the August 1995 joint interventions by the Japanese and American authorities to halt a soaring yen/dollar rate. In the weeks before that intervention, it took only 80 yen to buy a dollar. That kind of rate, had it continued for a year or more, would surely have forced a restructuring on Japan—Japanese exporters were not even covering variable costs. But Japanese officials made an extremely plausible case to then US Treasury Secretary Robert Rubin that, if left alone, that rate would end Japan’s ability to prop up the US current account deficit.footnote15 That would finally have pulled the curtain down on the perennial American trade and current account deficits, but at the cost of plunging the US into recession. For the current account plugs the difference between what a country spends and what it produces. In the American economy of the 1990s, high capacity utilization rates preclude any rapid increase in output. Thus the only way in which the current account deficit can fall is through a reduction in spending; to put it in other terms, through a recession. To a politically weakened administration reeling from the disaster of the 1994 Congressional elections and facing a presidential election eighteen months off, the prospect of a recession was far more frightening than that of a widening trade deficit. And when the Japanese offered their help in forestalling such a recession—albeit at the cost of perpetuating the bilateral trade imbalance—the administration’s senior economic policy officer took it. But as both Rubin and the Japanese were to discover, it is no longer a bi-polar world. The yen did indeed drop, pulling Japan back for a while from the precipice. At the same time, the Bank of Japan set about backing up the foreign exchange goals with extremely low interest rates.footnote16 But as Keynes once noted, in an economy where banks won’t lend and people won’t spend, this is no more effective than pushing on a wet noodle. Instead of reviving the domestic economy, the low interest rates attracted the hedge funds, giving rise to the so-called yen carry tradefootnote17 and funding the offshore lending of the Japanese and European banks who made it available to eager borrowers in other Asian countries where it financed unsustainable bubbles in property and other markets. The bubbles all burst, bringing on the worst global economic crisis since the 1930s, and crippling what had become Japan’s most important export market. For not only had the competitiveness of neighbouring Asian countries been hit hard by the weakening of the yen—directly affecting their ability to earn foreign exchange through exports and thus their ability to purchase Japanese goods—but the financial crisis in these countries devastated hundreds of billions of dollars worth of investments which had been directly or indirectly funded via the Japanese banking system, thus delivering yet another blow to a set of institutions already reeling from domestic difficulties. Now Japan must contend with the arrival of a new uncertainty: a euro that already shows signs of complicating efforts to maintain a price advantage for Japanese goods on world markets. The unanticipated current weakness of the euro helped set off the latest surge of yen strength that now threatens to destroy whatever chance of recovery Japan has. Any future surge in the value of the euro is much more likely to reflect an easing dollar than an easing yen. And a European Central Bank has much less reason to help a beleaguered Tokyo reduce upward pressure on the yen than does a US Treasury acutely sensitive to Japan’s key role in sustaining the swollen American current account deficit. Domestic discontent Amidst the challenges from abroad, Japan’s policy elite confronts what is probably an even bigger challenge at home—coping with domestic discontent. In an economy no longer growing, where credit triage is forcing the administrators to revoke many of the indiscriminate promises made to almost any domestic group with the capacity to cause trouble, political and economic life in Japan today is characterized by increasing rancour. In the absence of an infrastructure of market mechanisms and legal institutions sufficient to perform ordering functions, ever more open intimidation and arbitrary exercises of power determine who survives and who doesn’t. The political gridlock reported overseas that delayed a bank bailout package until October 1998 only forms the surface of a tremendous power struggle in Japan over the disposition of the bad debt. Almost every important power group in the country is involved, one way or another, in the struggle and, of course, that very visibly includes organized crime, which has made an orderly process of foreclosure impossible. So far, this struggle does not threaten the essence of the Japanese system; a system that survived the Second World War and the American Occupation essentially intact can cope with a decade of no growth and a trillion dollars in bad debts. But the struggle does have far-reaching economic implications, and has itself now become a cause of the country’s problems, as well as a result. This is most obvious in the behaviour of Japanese households, which have had their confidence shattered in a range of institutions—lifetime employment, the Ministry of Finance, the banking system, the very foundations of postwar growth and prosperity. This collapse in confidence has not coalesced into anything resembling a serious political threat to the existing order—indeed, as noted above, the attempt by some of Japan’s more astute politicians to impose political control over the bureaucracy appears for the time being to have collapsed. But it has fostered a climate of risk-averse malaise that takes concrete financial form, among other ways, in the rapidly expanding withdrawals of household funds from the banking system and the growth of cash in circulation, now running greater than five times that in the United States on a per capita basis.footnote18 The pressure from abroad to monetize Japan’s fiscal deficitsfootnote19 in the hopes of creating inflation—even assuming technically it could be done in a country where banks are not lending and people are not spending—would remove the last remaining prop of consumer confidence: the purchasing power of household savings. Interdependence and the policy conundrum The success or failure of Japan’s policy responses to these challenges forms one of the four great uncertainties looming over the global economy, whose fate in turn is wrapped up in how these challenges are met. For the other three great uncertainties—recovery in the developing world, the success of the euro, and the continuation of the American expansion—are very much connected to what happens in Japan. This is not simply because the global economy badly needs the additional purchasing power that a recovering Japan could provide. While true, this point is overshadowed by something even more important: the American economic expansion depends upon Japan’s ability and willingness to prop up the dollar and finance American current account deficits. Which saddles Tokyo and Washington with an exquisite policy conundrum—a world economic engine dangerously dependent on American household consumption badly needs a revitalized Japanese economy to help fuel a broad global recovery. But the very process of overhauling the Japanese economy threatens American consumer spending. To grasp this, recall that more American household assets today are tied up in mutual funds than in bank deposits. As households watch their net wealth grow, thanks to the booming stock market, they save less and less (another way of saying they spend more and more). Indeed, the household savings rate in the United States today is actually negative. But in an economy operating at full capacity, shrinking the current account deficit can only be done by reducing spending, thereby shutting down the last remaining engine keeping the global economic plane aloft. And the structural overhaul widely prescribed to get the Japanese economy moving and thus rev up another engine carries precisely that risk. Thus the policy conundrum. Japan’s sick banks appear to be at the heart of the country’s problems but they are, in fact, symptoms of a deeper structural crisis. Decades of investment without regard for profitability or return have saddled Japan with horrendous overcapacity, which takes financial shape as bad loans on the books of the nation’s banks. Doing something about this overcapacity means job losses and bankruptcies. It means acknowledging that the deposits that financed most of this capacity via the banking system are not worth anything like what people think they are. But tell Japan’s households, whose savings overwhelmingly take the form of deposits with the bank or the post office, that those deposits may not be safe; tell them that their companies may close and they may lose their jobs, and you have a full-scale depression on your hands as banks collapse and people stop spending. Indeed, this has been happening in slow motion. Ordinary Japanese are not stupid. They know that many, even most, banks are being kept from insolvency only by emergency transfusions; that the business environment is awful. They react like sensible people would anywhere—cutting back all but essential spending and pulling money out of tottering banks. Worsen this palpable unease in Japan by doing what the champions of structural reform have long been advocating—close down the shaky banks; put unprofitable companies out of business while streamlining the rest—and you risk turning a recession into a full-fledged depression. Who will then finance the US current account deficit? The Japanese do not, of course, prop up this deficit all by themselves. Developing countries trying to export their way out of their difficulties and Europeans anxious not to miss out on the American equity boom are also helping to finance the American deficit. But financing from these other sources comes and goes, while the Japanese surplus boasts roughly the same life-span as that which it has long financed—the American deficit. Just as the latter has grown steadily through times of inflation, bear markets, recession, runaway Federal deficits, recovery, bull markets, budget surpluses and today’s boom times, so the former has similarly expanded through the so-called miracle economy years, the oil shocks, the early 1980s industrial superpower years, the late 1980s bubble, and the stagnation, recession, financial crises and deflation of the 1990s. Since the sum of the world’s deficits and surpluses have to balance, any country that runs a current account surplus is, by definition, indirectly supporting the US deficit. But Japan’s current account surpluses have directly supported and financed the countervailing American deficits over the past two decades because of a historical anomaly: while Japan is the world’s leading net creditor nation, its claims on the outside world have been denominated not in its own currency but largely in the currency of the world’s leading debtor nation. Japan’s exporters typically bill their overseas customers in dollars rather than yen. Equally importantly, these businesses have generally refrained from repatriating their dollar export earnings, leaving the dollars on deposit with Japanese banks where they ultimately find their way into the US banking system. Akio Mikuni and I will argue in a forthcoming book that Japan’s monetary authorities have long run what amounts to a currency board, matching the dollar earnings of Japanese companies with yen credit creation, thereby permitting Japanese businesses to meet their yen expenses without repatriating their dollar earnings. Indeed, Japanese banks have traditionally supplemented the dollar deposits of Japanese businesses by raising additional funds in offshore dollar markets. Collectively, these practices by Japan’s exporters and banks, backed up by what amounts to yen monetization of the dollar earnings of Japanese companies, have been essential to maintaining a far stronger dollar (or, in other words, a far weaker yen) than that which Japan’s endless trade and current account surpluses would otherwise seem to dictate. Indeed, this has been the implicit aim of the policies: to forestall a surge in the yen/dollar rate that would impose killingly high cost pressures on Japanese businesses and open the floodgates to waves of cartel-busting imports. Problems of the yen But Japan’s economic troubles have seriously endangered these dollar-support mechanisms. The increasing publicity given to Japan’s banking troubles and the lowering of bank ratings by the international ratings agencies have made it difficult or impossible for Japan’s banks overseas to raise dollar funds from non-Japanese sources. As a result, while Japan’s net creditor position continues to grow, its gross creditor position has been shrinking, weakening a major prop of dollar strength. And even more importantly, the perilous state of the Japanese banking system threatens the means that the Japanese monetary authorities have always relied upon to release credit into the economy.footnote20 So far, these pressures have been contained, although it should be noted that the yen now shows signs of another ruinous surge along the lines of the one that nearly destroyed the economy in the spring of 1995, when it took only 79 yen to buy a dollar. But if Japan were to experience the fabled ‘hard landing’ that many believe is the inevitable price of meaningful structural reform, it is difficult to see how these dollar-support mechanisms could survive. In particular, a sudden collapse of confidence in the entire Japanese banking system—something that has been a real threat now since the fall of 1997, when the Hokkaido Takushoku Bank imploded before the authorities were able to halt the crash—would make it impossible for the BOJ to continue monetizing Japan’s dollar earnings. Japanese companies would be forced to repatriate dollars and exchange them for yen, driving the dollar sharply down. As the dollar fell, a US bond market crash would surely follow, as dollar interest rates rose sharply to attract investors worldwide into dollar instruments. That crash would mark the end of the American expansion. Faced with this nasty prospect, both Washington and reform advocates in Japan seem to have concluded that pumping up the Japanese economy with the steroids of massive spending was preferable to risky root-and-branch reform. The key moment appears to have been the decision in June 1998 by the then US Treasury Secretary, Robert Rubin, to intervene in the foreign exchange markets to help prop up the sagging yen that had become the most concrete manifestation of Japan’s alarming condition.footnote21 On the eve of the intervention, President Clinton spoke to the then Prime Minister Ryutaro Hashimoto in a widely publicized telephone call and extracted a promise from him that Japan would inject public money into the banking system and pump up the economy. The most convincing explanation for at least the timing of these moves was Clinton’s imminent visit to China and the need to avoid a devastating devaluation of the Chinese currency on the eve of the summit. Beijing had made it clear in all kinds of ways that unless something was done to halt the rapid fall of the yen and get Japan growing again, China could not be held to its promise not to devalue. The intervention was only the first sign of the policy shift. At the hastily called Tokyo meetings of deputy finance ministers and central bankers from eighteen countries on 20 June 1998, mentioned above, Japan found itself completely isolated, subject to demands on all sides that it do whatever it took to restore growth. The Obuchi cabinet finally succeeded three months later in pushing massive stimulus and bank bailout packages through the Diet. But the latest numbers suggest that all this spending has delivered only one more still-born recovery, something we have seen repeatedly since 1992. The rationale behind the attempts to jumpstart the economy seems, admittedly, clear enough: a revival of confidence by both domestic consumers and foreign investors such that aggregate demand recovers to the point where it becomes self-sustaining. With demand up, businesses begin investing. Banks start lending again and as the overall economy picks up, the shrinking of the huge debt overhang from the banking crisis can get underway. And a rising economy brings with it rising tax revenues and thus the wherewithal to repay the money borrowed to spark the recovery. Meanwhile, investors, both domestic and foreign, seeing a self-sustaining recovery, start pouring money into the Tokyo stock market, reinforcing the virtuous cycle. This scenario or something close to it is clearly what Japanese officialdom has banked on, and they underlined their policy efforts with an extraordinary public relations campaign designed to convince sceptics both in and outside Japan that the corner had finally been turned. Whatever the policy results, the PR campaign at least worked brilliantly: the Tokyo stock market rose substantially—indeed, for dollar-based investors, the combined effects of a rising yen and rising stock prices made Tokyo the most profitable of the world’s major equity markets in 1999. The foreign press saluted the supposed restructuring of the Japanese economy, while many influential economists at major international banks advised their clients not to miss out on the Japanese turnaround.footnote22 But while the final verdict on the latest recovery efforts is not yet in, the most recent evidence—not simply the third quarter GNP numbers but the fact that profits for the corporate sector as a whole have, for the first time in fifty years, turned negative—suggests that the nay-sayers may have the last word. At the time of all the hype about Japan’s turnaround, Ron Bevacqua, then Senior Economist for Merrill Lynch in Tokyo, warned in a newsletter of the risk that the cyclical rebound would be short-lived. Akio Mikuni maintained that ‘a sustainable recovery is not possible for Japan until excess capacity is eliminated. Far from addressing the problem, the bank bailout package permitted it to continue.’ Mikuni’s fears that the bailout money would be used by banks to prop up borrowers who ought to be allowed to fail, have turned out to be valid. Bluster and cooperation Indeed, on closer examination, even the government’s commitment to reflation was less than total. The MOF announcement in late 1998 that its Trust Fund Bureau, a long-standing parking place for excess government debt, would actually reduce bond purchases, produced both a stronger yen and a sharp rise in longer term interest rates as the bond market gagged on all the new debt—the opposite of what a reflationary government would presumably want. While the MOF soon reversed its decision, and both interest rates and the currency temporarily came partway back down, the underlying forces that drove the MOF’s earlier announcement did not go away. As of this writing, the yen is again threatening to break the 100-yen barrier. Meanwhile, demands on the Postal Savings System—the primary source of funding not only for the Trust Fund Bureau’s bond purchases but a myriad of other MOF-decreed purposes (including purchases of the bad debt of many banks)—may spiral out of control. Exacerbating these concerns are fears that in 2000 and 2001 the Post Office may see a net outflow of deposits as a wave of ten-year fixed deposits, taken down in 1990 and 1991 during a temporary spike in interest rates, mature and are not renewed. The Bank of Japan has made it clear it has no intention of monetizing the new debt to accommodate the extra spending. The strains on the Postal Savings System and the stance of the BOJ led Bevacqua to warn that at some point ‘rising interest rates are likely to choke the economy.’ Even if Japan’s authorities manage to take all the right macroeconomic steps, these do not address the underlying microeconomic, structural reasons that many fear will block a sustainable return by Japan to the brilliant economic performance for which the country was, until recently, so celebrated. For the political forces allied against reform are very great, including as they do not only many of Japan’s frightened households but almost every entrenched domestic power group. One major exception is Japan’s most successful companies—Toyota, Honda, Sony, Matshushita, Kyocera, Canon, Ito-Yokado and the like. Since Japan’s prosperity is ultimately in the hands of companies like these, it is conceivable that if the domestic impasse seriously endangers their ability to compete on world markets, they could force far-reaching reforms. Such reforms could include, for example, the curbing of cartel-like arrangements by which strong companies have traditionally borne the burden of supporting their weaker competitors, suppliers and other corporate cluster members. Or, to translate into the language of finance, the liabilities of such companies might finally become explicit and understandable to outside investors. Indeed, unofficial bureaucracies such as the Keidanren which have always played a critical order-keeping role in the Japanese system have increasingly come under the control of top performers such as Toyota and Kyocera rather than old-line establishment firms such as Nippon Steel, suggesting that a powershift may be occurring. But if it is, it is probably more in the nature of a co-opting than a herald of fundamental change. For predicting that Japan’s ‘champion’ companies will cede control of key management prerogatives to outside investors, or place profitability and the concerns of shareholders over those of the ministries, banks and the other members of corporate clusters and industrial associations into which they are bound by all-encompassing bureaucratic webs, is tantamount to predicting upheaval on the scale of the Meiji Restoration. It could happen, and if Japan’s very survival were at stake, it probably would. But current circumstances, bad as they may be, do not yet begin to threaten such. And of course whatever lip service the United States pays to reform, anything that endangers Japanese support for the dollar and the financing of the American current account deficit will ultimately be resisted by any President or Treasury Secretary who cares about keeping his job. Since the structural reform which Washington has been preaching at Japan for a generation now carries precisely that risk, future administrations are almost certain to continue the pattern set by the Clinton White House—empty bluster about the need for change; quiet cooperation in maintaining the existing order. Thus, some form of ‘muddle through’ is, if not the most likely outcome, certainly the most likely strategy to be followed by Japan’s policy elite—as it was through the 1990s. To be sure, loud and persistent demands for ‘change’ will produce at least the appearance of a response. As stresses intensify, the weaker and less organized segments of Japanese society will be sacrificed to protect the central core—in much the same way that survivors of the Kobe earthquake affiliated with major companies soon found themselves rehoused while small shopkeepers and the like were essentially left to fend for themselves. In trying to predict the future, there is little we can say with any certainty, but we can be confident that the very last thing to ‘change’ will be the essence of the Japanese system—opaque, bureaucratic decision-making and prerogatives without accountability to voters, journalists, outside shareholders, CPAs, politicians or courts. The problem with ‘muddle through’, however, is that it makes insufficient allowance for system-threatening shocks brought on by the law of unintended consequences in action. The damage inflicted by the developing world crisis of 1998 on the Japanese economy and on the central prop of the economic relationship between the United States and Japan—the intertwining of the Japanese current account surplus and the American deficit—exceeded what anyone had dreamed possible before the fact, and while for the time being the damage appears to have been contained, it was a very near thing. And of course the next such shock—and we have no way of knowing where it will come from or what it will be—could easily overwhelm the combined efforts of Tokyo and Washington to cope. Meanwhile, ‘unsustainable’ situations—particularly the rot at the core of Japanese finance, but also endless American external deficits, Japanese surpluses, and currency rates that bear no relation to trade and investment flows—have been ‘sustained’ for so long that many have been lulled into thinking they can continue forever. A rude awakening may be in store. Finally, ‘muddle through’ depends on the ability of powerholders in Washington and Tokyo to strike exaggerated poses of concern over ‘reform’, ‘market opening’ and the construction of ‘level playing fields’, while at the same time doing everything necessary to maintain an order which is neither open, nor level, nor reformed, but which is absolutely essential to existing power alignments and to the political and financial fortunes of ruling elites in both places.