Off the Economic Radar with Eamonn Fingleton

Back to Contents of Issue: November 2001

Author says high-tech manufacturing puts Japan at the top of the world economy, above even the United States.

by Augie Tam

There is no shortage of advice from foreigners on how Japan should fix its "dysfunctional" economy. But author and commentator Eamonn Fingleton believes there is more than a thing or two the West can learn from Japan's distinctive economic model. In his book Blindside: Why Japan Is Still on Track to Overtake the U.S. by the Year 2000 (published in 1995), Fingleton explains how Japan is hardly the basket case it is portrayed as in the media. His more recent book In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (1999) should find an attentive audience especially now that the Internet bubble has burst. In these titles and on his Web site,, Fingleton blasts the sanctity of laissez-faire doctrine and warns that the United States is heading for disaster if it remains complacent about its growing trade deficit. Born and educated in Ireland, Fingleton has served as an editor for The Financial Times, Forbes, and Euromoney, and has worked nine years in London, five in New York, and 15 in Tokyo. Augie Tam spoke with Fingleton at his home in Mita.

The first chapter of your book is entitled "Sayonara, Capitalism." You believe that the information age undermines capitalism, something that Japan has figured out?
I don't think that necessarily it's the information age, but it's the way that the cost and the industry have changed that has made possible a very different approach to economic development from the traditional or the natural approach that was developed in the 18th and early 19th century, the system that we call capitalism. The world economy has changed in ways that have allowed Japan to develop a different approach to economic development. And frankly, the way the Japanese system works is more effective at creating long-term economic success.

So you think Japan is still capitalist, but of a different breed?
Well, I'm not sure that I think Japan is capitalist. I think that this economy is run not for shareholders, not for investors, not for wealthy people, but for the workers. So in a sense, the system is midway between our Western capitalism and communism.

You don't believe in the New Economy?
I wouldn't say that I don't believe in it. What I would say is that all along, in the late 1990s, I felt it was enormously overhyped. We need both a New Economy and an old economy. But the idea that we can get by with just the New Economy, as some people seemed to think back in the late 1990s -- that's absolute nonsense. The old economy is, in many respects, more economically important than the New Economy. To participate successfully at the leading edge in the old economy these days, by which I mean in the most sophisticated forms of manufacturing, particularly electronic manufacturing -- requires an enormous amount of both capital per worker and proprietary know-how, very sophisticated know-how. Anyone with a good brain and some decent fundamental education can create software and Internet pages and so on. But who among us, from a standing start, can create today's quality of semiconductor-grade silicon?

Japan is often seen as behind the US in IT. What do you think?
I think on balance it's probably ahead, but it depends how you define IT. There are many aspects of the use of fresh technology that are more advanced here than in the West. For instance, much of banking in Japan is completely automated in a way that it is not in the West. In the West, we typically write checks for our utility bills. In Japan, it's all deducted automatically by standing order, basically, and direct debit. So, there are many surprising areas of leadership in Japan, even in industries that are considered in some way backward -- in some way not quite as advanced as counterpart industries in the West.

You think the wealth of nations lies in the hard industries?
I think that manufacturing is fundamental, but particularly advanced manufacturing -- all the very sophisticated devices used in the electronic revolution. The electronic revolution is hugely important. And the manufacturing that goes into that is really important. What Japan is doing, in manufacturing laser diodes, for instance, is very capital-intensive, and it involves absolutely secret production processes. On the other hand, in the New Economy, most activities are not capital-intensive and require surprisingly little proprietary know-how. What India does in software uses know-how that is completely in the public domain. And, of course, India has an advantage in its relatively cheap labor, because [software] is a very labor-intensive activity.

You make a distinction between advanced manufacturing and assembly manufacturing?
There are several levels in manufacturing, actually. There is the manufacturing of the machines that make our goods -- production machinery, the machine tools, and so on. That is really important. There is the manufacturing of advanced components, and of the materials that go into the components. Electronic components, and many other important components, are really difficult to make and require enormously sophisticated resources, and, therefore, are industries that are suitable for the world's most advanced, richest nations. If you look at the machinery industry, you'll find that the nation that made the world's machinery has historically been the world's richest, most important nation. That was Britain up to the end of the 19th century. Then it was America. And since the '70s, Japan has been the leading nation, with important contributions coming also from Germany and Switzerland and a few smaller countries. Switzerland is perhaps the ultimate example of the point I'm making -- that manufacturing at the more sophisticated levels is a truly great business that has the potential to make a country much richer than anything that the New Economy alone can offer.

And it's not just watches?
It's not just watches, but watches are a good example of the sort of industry I'm talking about. These days, the world's watches don't come from Switzerland anymore. They come from Japan. The quartz movements are made in Japan. Japan absolutely dominates the electronic watch business. Of course, the watch will come saying "Made in China," "Made in the Philippines," or something. But the key materials and the key components are made in Japan.

The US is always pressing Japan to change. But do you think it's the US that needs to change?
Well, I wouldn't put it quite like that. I think that Japan has not been frank with the United States about its system. And it should have been, because the way that Japan operates is in serious ways incompatible with the American idea of how an economy should be run. This is a basic problem that has created all the friction over the years. This problem remains. It's less obvious now, but only because America has abandoned many of the industries that were previously in contention, many of the industries where trade friction was becoming politically explosive. It's not that Japan has suddenly disappeared or fallen off a cliff or folded its tent. Japan now has established total leadership in these industries. There is a division of labor going on in many of these industries. And now that Japan has securely positioned itself at the leading edge, it is happy for the Americans to come back in less crucial activities within such industries.

So, what I'm saying to America, really, is recognize that the Japanese system is different, and make adjustments for that.

Free trade advocates say that America's trade deficit is actually a sign of its wealth.
I don't accept that at all. It's nonsense. But the reasons for America's trade deficit are rather complicated. Economists say that America imports more than it exports because it is saving so little these days. And there's a sense in which that is true, but the issue is the causality. Why is America saving less? The economists suggest it's because people simply choose to do so. But actually a major part of any nation's savings rate is the reinvested profits of corporations. And to the extent that American corporations and manufacturing, and advanced manufacturing in particular, for many years have suffered from foreign trade barriers, their profits are substantially depressed from where those profits would otherwise have been. Therefore, part of the reason America's savings rate is too low is because of trade barriers elsewhere in the world. So there is a major problem here.

The fact that America has such huge trade deficits is certainly not a sign of economic strength. It's a sign that in many of the industries concerned, America has virtually no production capacity left. You think of virtually any industry now -- where are the production machines made? Where are printing machines, for instance, made these days? They used to be made in the US. Now they're made either in Germany or in Japan. There is no American capacity left to make printing machinery.

Take almost any industry you care to mention -- textiles. The final manufacturing is done in low-wage countries, but the machines that make the materials in the first place are made in some of the richest countries in the world -- specifically, Switzerland and Japan.

In global trade, do you think Japan plays fair?
No. I give that "no" in the sense that Japan has misled the world about the true nature of its system of trade. I think that many industries are relatively open in Japan. And the further we go in time, the more open most of these industries are. So there's less of an obvious issue now than there was 15 years ago and certainly 30 years ago. But I think that Japan has an idea of which industries it wants to be in. As long as it is in those industries, then it is happy to import in the case of products it doesn't particularly want to make for itself.

They've cherry-picked the very best in manufacturing and have established leadership in those areas. There's much less friction now. They're happy with what they've got. But if a company from the United States or Europe came along with new technology that was a qualitative jump ahead of what Japan had, that com-pany would face enormous pressure to come to terms with the Japanese system, to share its technology -- and in time to allow Japan to be-come the dominant player in that new industry.

We have an example from the fairly recent past that makes the point, and that's fiber optics. There's a long history in fiber optics where Japan has been really aggressive in saying, "This is a great new industry and we've got to have a big piece of it." And they have used techniques that run counter to the American idea of how the world economy is supposed to work. Now there's nothing wrong with that in itself, but there's something substantially wrong with misleading people on this point. What Japan has done very often is to mislead the West about the true nature of its economic behavior, particularly its trade policies. And that is wrong.

You also say that a lot of the bad news about Japan's economy is actually a conscious effort by Tokyo's bureaucrats to downplay their economy.
The sense that Japan is doing badly is enormously greater abroad than it is here in Tokyo. We in Japan know we're living in what is obviously one of the richest countries in the world.

Some of the most important measures of all, and some of the most culture-neutral measures of wealth, show that Japan is No. 1 in the world. To wit, life expectancy. The Japanese live five years longer than Americans. They've increased their life expectancy by one year in the last 10 years. And historically, the nation that has the highest life expectancy has been widely regarded as the richest nation in the world.

There are many other statistics about how well the Japanese economy is doing that are being ignored. Look at penetration of mobile phones in Japan, much higher than in the United States. Mobile phones are much, much more sophisticated than in the United States. When I see a mobile phone in the United States, it looks like a brick. Those in Japan are the size of a toffee bar and have more capability than American cellphones. Take a dozen other indicators -- travel abroad. In the first nine years of the 1990s, the number of Japanese citizens traveling abroad on vacation increased by more than 60 percent. Vacation travel overseas is a classic luxury. An improvement of that sort is indicative of a major improvement in economic well-being.

Take unemployment. We keep reading in the papers that Japan has record unemployment. That is absolutely not true. If you go back far enough, you'll find much higher levels of unemployment in Japan than what we see today. But irrespective of whether it's a record -- and of course it's relatively high by Japanese standards -- by Western standards, it is extremely low. I believe that the Japanese leadership, speaking through various surrogates, is emphasizing the negatives.

Why would any nation emphasize its negatives? In Japan's case, I think the research makes it clear. Because Japan is perceived as having economic difficulties, it is getting a free ride on trade. Back in the 1980s when Japan was perceived as a juggernaut, as a great overachiever in economic performance, it was regarded as a threat. And that had enormous negative effects which exacerbated political feeling in the United States. Now it's the opposite. Japan's trade is far stronger now than at the beginning of the 1990s, yet people feel sorry for Japan and therefore do not focus at all on the trade issue. I believe that the authorities here have decided to emphasize the negatives specifically to stay below the radar on trade in the United States.

Do you think deflation is a problem?
Again, this is a classic example of how our perceptions can be really distorted. If you step back 120 to 130 years to the years of America's most dynamic growth, the 1870s, 1880s, 1890s -- America at that time had the same "problems" that Japan has now. Consumer prices were consistently falling. But they were falling for a very good reason: because the value of money was absolutely fixed then. America was on the gold standard. And wages remained pretty level, but because workers were becoming more productive every year, producers could produce goods ever more cheaply, with the result that consumer prices were falling. Well, here we are in Japan today, and we have the same "problem." The falling prices are the symbol of the progress they've made in increasing productivity.

Do you believe Western management practices can help Japanese companies, like Nissan as a recent example?
I think that Western management practices are almost completely irrelevant in Japan. Take layoffs. In the United States, it's considered a good thing when you don't have work for workers to lay them off. You have a couple of weeks of bad sales figures and you just lay people off. That doesn't happen here. Yes, companies in extreme difficulty do make layoffs in Japan, but in general, when a company has a few months of poor sales, it bites the bullet. It keeps its workers on the payroll and looks for different work they can do, new products for them to produce, rather than lay them off.

Do you think hard industry is as good for a personal stock portfolio as for a national economy?
In Japan's case, no. Certainly the Japanese system is not geared to creating profits. When I hear people say Japanese companies are in disastrous shape because they're not making profits, that's exactly the feeling I had when I came here 16 years ago. I thought that equities were vastly overvalued because the dividends were low and hadn't been increased in many years. If you approach this economy with the Western idea that investors drive the whole thing, then this economy looks completely dysfunctional. But the whole secret is that this economy is not run for investors. Our Western emphasis on creating good returns for investors doesn't exist in Japan in the same way.

Your book Blindside was published in 1995, and it doesn't look like Japan overtook the US by 2000. Do you think it's still likely by 2005?
In my view, Japan had overtaken the US by 2000, in the sense that, for instance, its trade is now so strong and America's trade is so weak. America's current account deficit last year was 4.5 percent of GDP. That is a truly shocking figure. It's an indication of an enormously fundamental weakness in the United States. America has to import so much because it cannot make these goods for itself -- particularly capital equipment, key components, and key materials. So, if you look at trade in the way that I look at trade, you see very clearly Japan is No. 1. Look at savings. America's savings have almost disappeared. Japan accounts for probably 20, 25, 30 percent of the world's savings, depending on how you define the term. Each year, America is accounting for a smaller fraction of that. Some years it would appear that America's savings are negative; it doesn't have any positive savings at all. I would emphasize that the yen at current levels is extremely undervalued. Japanese companies would be viable at a yen exchange rate to the dollar twice today's level; in other terms, the value of the yen vis-a-vis the dollar could double.

In recent years, the Japanese government has had a policy of a low yen. The American companies had a policy of a high dollar. So these policies go together very well, but they're completely understating the true strength of Japan relative to the US. @

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