Alphatuosity blog

When the facts change, I change my mind. What do you do, sir?

J. M. Keynes (attributed)

The Myth of Japan’s Failure
The New York Times, January 6, 2012

DESPITE some small signs of optimism about the United States economy, unemployment is still high, and the country seems stalled.

Time and again, Americans are told to look to Japan as a warning of what the country might become if the right path is not followed, although there is intense disagreement about what that path might be. Here, for instance, is how the CNN analyst David Gergen has described Japan: “It’s now a very demoralized country and it has really been set back.”

But that presentation of Japan is a myth. By many measures, the Japanese economy has done very well during the so-called lost decades, which started with a stock market crash in January 1990. By some of the most important measures, it has done a lot better than the United States.

Japan has succeeded in delivering an increasingly affluent lifestyle to its people despite the financial crash. In the fullness of time, it is likely that this era will be viewed as an outstanding success story.

How can the reality and the image be so different? And can the United States learn from Japan’s experience?

It is true that Japanese housing prices have never returned to the ludicrous highs they briefly touched in the wild final stage of the boom. Neither has the Tokyo stock market.

But the strength of Japan’s economy and its people is evident in many ways. There are a number of facts and figures that don’t quite square with Japan’s image as the laughingstock of the business pages:

• Japan’s average life expectancy at birth grew by 4.2 years — to 83 years from 78.8 years — between 1989 and 2009. This means the Japanese now typically live 4.8 years longer than Americans. The progress, moreover, was achieved in spite of, rather than because of, diet. The Japanese people are eating more Western food than ever. The key driver has been better health care.

I only really have one word to say to this: Cuba, which according to the WHO had an average life expectancy at birth of 74 in 1990 and 78 in 2009, despite being an “economic basket-case”. Manifestly, the strength or otherwise of a developed country economy only has the scantiest of bearings on longevity or life expectancy gains. Indeed, hampered by a high initial starting point for life expectancy, Japan’s gain over the last two decades looks distinctly mediocre on an international comparison.

                            1990    2009      Gain

Japan                  79          83            4

Australia             77          82          5

Brazil                   67          73           6

Canada                77          81           4

China                  68          74          6

France                 77          81          4

Germany             75          80          5

Italy                      77         82          5

Korea                   72          80         8

New Zealand      75         81         6

Spain                   77         82          5

UK                       76          80          4

US                       75          79          4

I particularly relish Fingleton’s breezy explanation, unsubstantiated by any evidence (of course), for the cause of the gain in life expectancy over the last two decades, even though isolating the factors at work in changes in life expectancy is widely regarded to be notoriously difficult. The Japanese may well be “eating more Western food than ever”, but they are doing so in moderation; given the startlingly low levels of obesity, which have next to nothing to do with “better health care”, it is surprising that Japan has just a one-year lead in life expectancy over, say, Italy or Spain.

For a bias-free and more disturbing interpretation of the recent Japanese longevity picture, I recommend turning to an expert. Here’s Christopher J. L. Murray, Professor of Global Health at the University of Washington, writing in The Lancet in an article titled Why is Japanese life expectancy so high? 

The third and more troubling phase for Japan begins in the mid to late 1990s. Since that time, the pace of decline in mortality for adult men and, to a lesser extent, adult women (aged 15—59 years) has been slower than other nations. Japan has fallen behind Sweden, Italy, and Australia for men and behind Sweden for women. If recent trends continue, other nations are likely to achieve lower rates of adult mortality than Japan. Given the previous two decades during which Japan remained in the top rank, this recent change is dramatic. Many explanations for this worsening relative performance are offered by Ikeda and colleagues, including high tobacco consumption compared with other high-income countries, a modest rise in body-mass index, and high and rising rates of suicide. Unstated is the hypothesis that although Japan has a universal health-care system, the quality of the care delivered might be low. Treatment coverage for high cholesterol, for example, is much lower than in other high-income countries. Given poor measures on quality of care, further reduction in mortality may require that Japan revamp its health-care system. Economic stagnation and rising income inequality could also be part of the explanation of recent trends. 

• Japan has made remarkable strides in Internet infrastructure. Although as late as the mid-1990s it was ridiculed as lagging, it has now turned the tables. In a recent survey by Akamai Technologies, of the 50 cities in the world with the fastest Internet service, 38 were in Japan, compared to only 3 in the United States. 

You can access Akamai Technologies’ State of the Internet Report by registering here. The most recent one that seems to be freely available is for 2011 Q2. Our first lesson is on the use and abuse of statistics. That the Japanese city with the fastest average Mbps, Shimotsuma, ranked 3^rd in the world, is a small Tokyo dormitory community to which very few Japanese could point on a map, and that one of the Japanese “cities” in the top 50, Marunouchi, is not a city, nor even a ward of Tokyo, but a few blocks of office buildings clustered around Tokyo station, make it readily apparent that if you are a largish country for which Akamai has a lot of data collection points and you have a highish average connection speed, then of course you are going to dominate the city rankings. For a more truthful picture of Internet infrastructure, we need to turn to a country-level analysis.

In 2011 Q2, Japan ranked third for average connection speeds, at 8.9Mbps, behind South Korea at 13.8Mbps and Hong Kong at 10.3Mbps. Impressive, to be sure, but not quite the picture of global leadership that Fingleton insinuates it has. Indeed, the broader the metric becomes, the worse the picture looks for Japan: for high broadband connectivity (above 5Mbps), the Netherlands ranks first at 68% of all connections, Japan ranks 6^th, at 55%, and the US 13^th at 42%, while for good old-fashioned broadband connectivity (above 2Mbps), 10 mostly European countries have penetration rates over 90%, the US ranks 35^th at 80%, and Japan is actually behind the US, coming in 39^th place at 76%. What’s more, Japan’s high broadband connectivity actually fell 8.9% YoY and its broadband connectivity fell 12% YoY, while the rates of almost all other countries surged. Not all that stellar a performance at the broadest end of the spectrum, especially given how suited relatively small, very densely populated Japan is to the build-out of broadband.

This Akamai saga, I should add, is a textbook example of Fingletonian deceitfulness, whereby he cherry-picks a data set that severely distorts the truth and ignores the evidence that is inconvenient to his case. 

• Measured from the end of 1989, the yen has risen 87 percent against the U.S. dollar and 94 percent against the British pound. It has even risen against that traditional icon of monetary rectitude, the Swiss franc. 

The strength of the yen has absolutely no relationship with “the strength of Japan’s economy and its people”. All that yen strength is doing, on the liability side of the ledger, is to hollow out those domestic “hard industry” jobs beloved of Fingleton—an astounding 550,000 manufacturing jobs were lost in just the three months to end-November 2011, according to the latest Labor Force Survey (Japanese only)—while on the positive side of the ledger, yen strength makes agricultural and energy imports cheaper and Mr. and Mrs. Watanabe can take that retirement cruise for which they have been saving for so long a year or two earlier. I challenge Fingleton to explain the mechanisms whereby yen strength works to the sustained net benefit of the Japanese economy.

• The unemployment rate is 4.2 percent, about half of that in the United States.

Japan’s Hidden Jobless Hits 4.69mn, Worse Than After Lehman Shock
Nikkei, November 16, 2011
TOKYO (Nikkei)—The number of Japanese that want to work but are not actively seeking employment has surpassed levels from after the global financial crisis erupted, according to government data released on Tuesday. …
The hidden jobless in Japan jumped by 190,000 from a year earlier to 4.69mn in the July-September quarter, excluding the three prefectures hit hardest by the March 11 disaster, the Internal Affairs Ministry said.
The figure is nearly 70% larger than the number of officially unemployed people. It is also higher than the 4.61mn in the July-September quarter of 2009, when the employment market deteriorated sharply after the financial crisis. 

Adding the 2.80mn officially unemployed and the 4.69mn hidden unemployed together and dividing by the number of employed (62.60mn) yields a “real” unemployment rate of very close to 12%. Of course, all countries have their hidden unemployed, to a greater or lesser extent; my intention here is merely to highlight how the Japanese employment paradise that Fingleton would have his poor readers conjure up from a single statistic is not by any means as rosy as he claims. Japan’s artificially low jobless rate, kept down by a tacit agreement among players in “Japan, Inc.” (for which there is ample indirect evidence), may look attractive from the US, the UK, or any other unemployment blackspot, but paradoxically it gravely weakens the competitiveness of exporters, impedes productivity growth in the service sector in particular and economy as a whole, and serves as a massive barrier to wealth creation.

Even the headline unemployment number, while low, has more than doubled, to 4.5% in the latest Labor Force Survey, from 2.1% in 1990. And Fingleton would rather not let you in on some of the other features of the Japanese labor market in the “outstanding success story” of the last two decades: the rapid growth in the number of poorly paid non-regular workers (now approximately a third of the workforce), the evisceration of the middle class, stagnant or falling real wages, and rising inequality, all extensively, indeed exhaustively, documented in the vernacular press and readily apparent in the data. 

• According to skyscraperpage.com, a Web site that tracks major buildings around the world, 81 high-rise buildings taller than 500 feet have been constructed in Tokyo since the “lost decades” began. That compares with 64 in New York, 48 in Chicago, and 7 in Los Angeles.

Now we enter the realm of the surreal. No one of sound mind would take skyscraper construction as anything other than the loosest conceivable proxy for economic vitality. Take Rome: no skyscrapers at all by the 40-storey/150m/500ft definition, with the tallest building being the 22-storey Palazzo Eni, constructed way back in 1962. Yet who would dispute “il miracolo economico”, Italy’s equivalent of France’s long Les Trente Glorieuses post-war boom. The pace of skyscraper construction is dictated by a myriad of factors, among them cultural predilections, population densities, technical considerations, the already installed skyscraper base, and the availability of land, to name a few, with the state of the economy—as long as it is not in a state of utter collapse—at best a bit part player in the drama.

And of course Japan was busily building skyscrapers in the 1990s and beyond: the Earthquake Nation was very much a latecomer to the skyscraper party. There was no skyscraper by the above definition in Japan until arrival of the Tokyo World Trade Center Building (1970), and it was not until the 1980s that quake-resistance technologies advanced to the extent that Tokyo skyscraper designers pushed past the 150m mark with confidence. Even by 1990, neither Osaka nor Nagoya had a single skyscraper, and Tokyo a mere handful.

Fortunately I have some numbers to hand that gives a more nuanced view of the Tokyo office market than Fingleton cares to concern himself with. They slice the data a different way: here we are dealing with office buildings with gross floor areas of over 10,000 meters squared. As the Bubble inflated, the number of these buildings going up rocketed, and remained in the 40-50 annual new build range between 1989 and 1994, before collapsing to around 15 annually in 1999-2001. There was a spike up to 42 in 2003, which was the consequence of large tracts of former Japan Railways marshalling yards becoming available at Shiodome and Shinagawa in the late 1990s, coupled with the colossal Roppongi Hills complex, but the 1994 Bubble high of 47 buildings (I count 1994 as part of the Bubble era for these purposes because of the three to five years it takes to build a large Tokyo office block) was never regained. Mori Building, a major property developer, expects the supply of office buildings of this size to collapse over the next few years, falling to just five in 2015.

There’s another way of slicing the data, too: total office space in Tokyo’s 23 wards. Let’s compare 1980-1994 (the end of the Bubble for real estate) and 1994-2009. For the former period, office space rose from 33.2mn meters squared to 65.7mn, effectively doubling. For the latter period, it rose from 65.7mn meters squared to 89.6mn, up by just over a third, a marked slowdown in growth indeed, with the annual percentage gain between 1999 and 2009 exceeding 2.0% in only one year, very much what you would expect in an economy with nominal GDP growth closing in on zero.

Skyscraper demand has been driven by the shift to service industries (another belated phenomenon in Japan that helps to explain why the skyscraper boom came late), more office space per worker (a trend that has gone into sharp reversal if my experience is anything to go by), and of course population growth (up by a quarter in Tokyo and its three key surrounding prefectures between 1980 and 2010). But the Tokyo Metropolitan Government, in its Tokyo Worker Projections, expects the number of office workers in Tokyo’s five central wards, which had been rising last decade, to flat-line between 2010 (1.88mn) and 2020 (1.86mn), which does not bode well for asking rents, which are now at a post-1990 low, vacancy rates, which are now at a post-1990 high, nor the future of skyscraper construction, apart from the odd replacement one, in Tokyo. 

• Japan’s current account surplus — the widest measure of its trade — totaled $196 billion in 2010, up more than threefold since 1989. By comparison, America’s current account deficit ballooned to $471 billion from $99 billion in that time. Although in the 1990s the conventional wisdom was that as a result of China’s rise Japan would be a major loser and the United States a major winner, it has not turned out that way. Japan has increased its exports to China more than 14-fold since 1989 and Chinese-Japanese bilateral trade remains in broad balance.

Though some may say current account surpluses and deficits don’t matter, I’m tempted to give Fingleton the benefit of the doubt on this one—the only quarter he will get from me—as the surplus plays a critical role in funding chronic government indebtedness. But those current account surpluses will not be with us forever. 

Current Account Surplus Down 85.5% in Nov
Nikkei, January 12, 2012
TOKYO (Dow Jones)—Japan’s current account surplus contracted for the ninth straight month in November, falling 85.5% from a year earlier, the Ministry of Finance said Thursday.
The surplus in the current account, the broadest measure of Japan’s trade with the rest of the world, stood at Y138.5bn in November before seasonal adjustment, the data showed. 

As longtime Japan watchers like Ivan P. Hall and Clyde V. Prestowitz Jr. point out, the fallacy of the “lost decades” story is apparent to American visitors the moment they set foot in the country. Typically starting their journeys at such potent symbols of American infrastructural decay as Kennedy or Dulles airports, they land at Japanese airports that have been extensively expanded and modernized in recent years.

As these opinions are wholly subjective and not open to analysis, I will only add a couple of subjective comments of my own. A US informant tells me that both Kennedy and Dulles are still perfectly serviceable airports. Not having had the pleasure of their acquaintance—I don’t get out much—I couldn’t say. But I do know that compared to the sterile, deserted concentration camp that is Narita (Tokyo’s principal international airport), with its scant retail pleasures, I much prefer the teeming souk of my own London Heathrow, for all its shabbiness, as a future vision of the world.

William J. Holstein, a prominent Japan watcher since the early 1980s, recently visited the country for the first time in some years. “There’s a dramatic gap between what one reads in the United States and what one sees on the ground in Japan,” he said. “The Japanese are dressed better than Americans. They have the latest cars, including Porsches, Audis, Mercedes-Benzes and all the finest models. I have never seen so many spoiled pets. And the physical infrastructure of the country keeps improving and evolving.”

We should be grateful to Fingleton, really, for so many belly-laughs in a single piece, but in particular perhaps for this gem of a paragraph, which had me RoFL, as I believe young people say these days. William J. Holstein is not, by any measure, “a prominent Japan watcher”—he is a minor-league journalist and business consultant who doesn’t have his own Wikipage, has never written a book about Japan, almost certainly doesn’t speak more than a word or two of the language, and as far as his career profile reveals, has never spent more than a couple of months in the country at most.

But Fingleton needs Holstein, because there are precious few people left on the planet who will subscribe to his bizarre worldview. Fingleton’s sheer desperation for comrades-in-arms is nowhere better revealed than in his willingness to quote this sentence: “They [the Japanese] have the latest cars, including Porsches, Audis, Mercedes-Benzes and all the finest models.” This is a pitch-perfect instance of what I have come to call the Grand Hyatt School of Journalism, or what we might label “Roppongi Class Syndrome”, a severe deep-vein thrombosis of the mind that results from never leaving a cosseted, gilded circle of central Tokyo, where yes—surprise, surprise—there are lots of expensive German cars on the road, as there are indeed in every single world capital of a country with a per capita GDP of over $25,000 (and in many poorer ones, too). Here’s a modest little challenge to Fingleton and Holstein, though: go and stand in summer clothing on a mid-February afternoon on a street-corner in Wakkanai, Hokkaido, about 200km from any German car dealer, even a VW one, and count me out half a dozen Porsches, Audis, or Mercedes-Benzes before you cry uncle for fear of hypothermia. German cars account for a paltry 3%-5% of the total Japanese passenger vehicle market. 

Why, then, is Japan seen as a loser? On the official gross domestic product numbers, the United States has ostensibly outperformed Japan for many years. But even taking America’s official numbers at face value, the difference has been far narrower than people realize. Adjusted to a per-capita basis (which is the proper way to do this) and measured since 1989, America’s G.D.P. grew by an average of just 1.4 percent a year. Japan’s figure meanwhile was even more anemic—just 1 percent—implying that it underperformed the United States by 0.4 percent a year.

A look at the underlying accounting, however, suggests that, far from underperforming, Japan may have outperformed. For a start, in a little noticed change, United States statisticians in the 1980s embarked on an increasingly aggressive use of the so-called hedonic method of adjusting for inflation, an approach that in the view of many experts artificially boosts a nation’s apparent growth rate.

On the calculations of John Williams of Shadowstats.com, a Web site that tracks flaws in United States economic data, America’s growth in recent decades has been overstated by as much as 2 percentage points a year. If he is even close to the truth, this factor alone may put the United States behind Japan in per-capita performance.

 If “he is even close to the truth”, then the US has been in what must have been an almost relentless recession for the last couple of decades (simply deduct 2ppt from 1.4ppt). It must have been a very strange recession, though, for most of that time, what with employers vigorously hiring rather than firing, inflation-adjusted wages rising (slowly, admittedly) rather than falling, and corporate profits and the stock market soaring (the S&P 500 rose from 360 on January 1, 1990, to 1,277 on January 1, 2012).

Perhaps, then—I just suggest this as an alternative interpretation—he is nowhere close to the truth, and neither is Fingleton. I would also suggest that Fingleton knows nothing at all about hedonic regression, hedonic price indices, hedonic quality indices, and the like, and that his “many experts” are nowhere to be found. Attentive readers and those familiar with Fingleton’s oeuvre will by now be beginning to glimpse the two vast and mirror-image conspiracy theories that motivate the Fingletonian world-view: that there has been a long-enduring conspiracy, at the highest levels of the US government, to manipulate the data to present a falsely positive picture of the economy, so as to blind the US people to their growing immiseration, while in Japan, nebulous elites have been furiously massaging the data to present a falsely negative picture of the economy, so as to “blindside” those dull-witted Americans and secretly overtake the US as the world’s preeminent economy. Those nefarious Orientals!

It only takes a moment’s investigation, though, to unearth a 1999 Federal Reserve Board of Chicago working paper, Measurement Errors in Japanese Consumer Price Index, by economist Shigenori Shiratsuka, who is currently Associate Director-General at the Institute for Monetary and Economic Studies of the Bank of Japan and who is an expert on hedonic regression, in which the author tentatively concludes that the Japan CPI has an upward bias of around 0.9%, a very similar level to the 1.1% upward bias to the US CPI found in the Boskin Commission report of 1996, from which Fingleton would presumably be forced to conclude that Japan’s growth has been overstated by a very similar degree to that which US growth has. I challenge Fingleton to explain why the Japanese CPI data must be accurate and the US data not. 

If the Japanese have really been hurting, the most obvious place this would show would be in slow adoption of expensive new high-tech items. Yet the Japanese are consistently among the world’s earliest adopters. If anything, it is Americans who have been lagging. In cellphones, for instance, Japan leapfrogged the United States in the space of a few years in the late 1990s and it has stayed ahead ever since, with consumers moving exceptionally rapidly to ever more advanced devices.

No, no, Fingleton, stop it, please, I implore you! My sides are splitting, the laughter is too painful now! While it is true that for a brief spell in the early years of the last decade, Japan’s mobile internet and its advanced feature phones were at the cutting edge, the world has long moved on and left Japan trailing in its wake. Here’s wired.com in December 2011, courtesy TomiAhonen Consulting, ranking 42 countries by smartphone penetration rates. Japan, whose consumers are “consistently among the world’s earliest adopters”, Fingleton would have you believe, could well be number one, no? No. Top ten, though, surely? No. In fact, Japan is tied for 33^rd place with Romania and Brazil, at 14%, just behind Thailand in 32^nd place. The survey sensibly notes a proviso that both Japan and South Korea have advanced feature phones—but then South Korea’s smartphone penetration rate is already 34%, fully 20ppt ahead of Japan. No doubt Japan will play catch-up rapidly over the next couple of years, but catch-up is not exactly what “leapfrogging” Fingleton has in mind.

There are hosts of other fascinating metrics that show how tentative the Japanese embrace of the Internet has really been: online sales as a percentage of retail sales are far lower in Japan than the developed country average, due to credit-card security concerns (which interestingly are not shared by the South Koreans), online media time consumption is lower than it is in South Korea, China, the US, or the UK, online advertising spending as a percentage of total advertising spending is likewise lower, the money that is spent on advertising is more focused on display than on (more sophisticated) search than elsewhere, usage rates of social networking services such as Facebook are far below those of peer countries, and the Internet is used overwhelmingly for its old-school features—news, search, and e-mail—rather than more up-to-the-minute features such as online music, online gaming, and online banking.

Much of the story is qualitative rather than quantitative. An example is Japan’s eating-out culture. Tokyo, according to the Michelin Guide, boasts 16 of the world’s top-ranked restaurants, versus a mere 10 for the runner-up, Paris. Similarly Japan as a whole beats France in the Michelin ratings. But how do you express this in G.D.P. terms?

I think I will retch if I hear once more the “argument from Michelin” from Japan’s professional boosters—and there are dozens of them, in a Baskin-Robbins array of flavors, out there, however much Fingleton would like the world to think he is a lonely, embattled crusader. We could choose, should we wish, to demolish this comparison on demographic grounds—the Tokyo Michelin guide also includes Yokohama and Kamakura, giving us very roughly one three-starred restaurant per million people, while the city of Paris has only a couple of million folk, and likewise Japan has more twice the population of France—or on pedantic grounds—France has 558 starred restaurants, Japan only 509, but I’d prefer to hone in on the complete and utter irrelevance to the culinary habits of 99% of the population of three-starred Michelin restaurants. All that Tokyo’s 16 three-starred restaurants show is that—surprise, surprise—there is a well-heeled elite in a huge and quite prosperous city that takes its food very seriously indeed. For those of us not privileged to be one of the 1%, our dining-out options are necessarily more limited. For every Michelin-starred restaurant, there are countless thousands of hole-in-the-wall purveyors of affordable eats. The real Japanese food experience, for many a harassed salariman or office lady, is to be found in the cheap solace of a convenience-store bento lunchbox. 

Similar problems arise in measuring improvements in the Japanese health care system. And how does one accurately convey the vast improvement in the general environment in Japan in the last two decades?

How does one begin to know what “the vast improvement in the general environment in Japan in the last two decades” could possibly mean?

 Luckily there is a yardstick that finesses many of these problems: electricity output, which is mainly a measure of consumer affluence and industrial activity. In the 1990s, while Japan was being widely portrayed as an outright “basket case,” its rate of increase in per-capita electricity output was twice that of America, and it continued to outperform into the new century.

Forgive my unparalled ignorance, but I have never encountered anyone other than Fingleton attempting to use electricity output and its rate of change as a(nother) proxy for economic vitality. But let’s have a look at the data, anyway, from the US Energy Information Administration. What follows is electricity consumption in billion kilowatt/hours per million people and the rate of change over the decade, 1990-1999. 

                              1990                    1999                   Pct. chg.

Australia              7.82                     9.08                    16.1%

Canada                15.49                   15.79                   1.9%

France                  5.70                     6.83                    19.8%

Germany             6.14                     6.05                     -1.5%

Japan                  6.25                     7.48                     19.7%

UK                       4.97                     5.57                     12.1%

US                       11.41                   12.38                     8.5%

The first thing to note, obviously, is that the rates of change are all over the place: if we were to apply Fingletonian logic, then France must have been truly flourishing in the 1990s, while consumers and industry in Germany and Canada must have really been suffering. No more than a moment’s reflection is needed to show this up for the arrant nonsense it is. What the high-growth countries—Australia, France, and Japan—have in common is that they are all (mostly) hot in their summers, and I will wager (although for now I lack any hard evidence) that much of the growth in electricity consumption was driven by the—late, compared to the US—spread of air-conditioning. And Japan’s power consumption between 2000 and 2008, years which even Fingleton, I think, could be persuaded to admit were much better for the Japanese economy than the original “lost decade” was, completely stagnated, further undermining his case. 

Part of what is going on here is Western psychology. Anyone who has followed the story long-term cannot help but notice that many Westerners actively seek to belittle Japan. Thus every policy success is automatically discounted. It is a mind-set that is much in evidence even among Tokyo-based Western diplomats and scholars.

Take, for instance, how Western observers have viewed Japan’s demographics. The population is getting older because of a low birthrate, a characteristic Japan shares with many of the world’s richest nations. Yet this is presented not only as a critical problem but as a policy failure. It never seems to occur to Western commentators that the Japanese both individually and collectively have chosen their demographic fate—and have good reasons for doing so.

The story begins in the terrible winter of 1945-6, when, newly bereft of their empire, the Japanese nearly starved to death. With overseas expansion no longer an option, Japanese leaders determined as a top priority to cut the birthrate. Thereafter a culture of small families set in that has continued to the present day.

Japan’s motivation is clear: food security. With only about one-third as much arable land per capita as China, Japan has long been the world’s largest net food importer. While the birth control policy is the primary cause of Japan’s aging demographics, the phenomenon also reflects improved health care and an increase of more than 20 years in life expectancy since 1950.

Fingleton here is referring to the Eugenics Protection Act of 1948, which essentially legalized abortion on demand and felled the post-war baby boom just as it was getting into its stride. But to infer from a single piece of legislation passed at a single point in historical time, now 64 years ago, that—perhaps by some heroic act of the Jungian unconscious unavailable to other, lesser nations—“the Japanese both individually and collectively have chosen their demographic fate” is preposterous. The drafters of that act—politicians and bureaucrats, two species not widely known for their deep foresight—could not possibly have known with any precision what the consequences of their legislation would be five years into the future, let alone a century. They were not by any means burning their midnight candles calculating the ratio of workers to retirees in Japan in 2050.

Two other points, both of them vital: yes, a low birthrate is “a characteristic Japan shares with many of the world’s richest nations”, but this emphatically does not mean it shares a demographic profile with them. Largely as a consequence of the Eugenics Protection Act, Japan is aging far faster than any other developed country and its population will decline far faster. Second, Fingleton insinuates that it is only ignoramus Western commentators who regard Japan’s demographic profile as a “critical problem” (which it is) and a “policy failure” (which it is, and a far too late to rectify one). This does a gross, gross travesty to the depth and breadth of the debate in Japan: presumably Fingleton must believe that the 1.3mn search-engine hits that “shoshika mondai” (roughly, “low-birthrate problem”) generates must be misguided foreigners writing in Japanese in a forlorn attempt to persuade a people that have “chosen their demographic fate” to repent and see the error of their ways. For a real understanding of the Japanese demographic situation, I recommend—as I have done before on these pages—Shrinking-population Economics: Lessons from Japan, by National Graduate Institute for Policy Studies professor Akihiko Matsutani, from which for now I offer the following passage (de-italics mine):

The wrenching demographic change in store for Japan will do worse than slow the pace of economic growth; it will shrink the nation’s economy. Negative economic growth will become the norm in the nation that until recently set the pace for the industrialized world. This is because of the all-too-rapid pace of Japan’s aging and of its population decline. The aging of society at a more moderate pace, as in France, would not push the economy into negative growth. Even Germany, whose demographic profile is more similar to Japan’s, appears likely to enjoy positive economic growth for another 20 years or so.

Technological progress raises labor productivity. Japan’s continuing advances in technology would offset the economic effects of a moderate decline in the workforce and support continuing GDP growth. The problem is that Japan’s working-age population will shrink far too fast for the decline to be offset through technological advances and resultant gains in labor productivity.

The all-too-rapid pace of Japan’s aging is also the villain in the nation’s pension system drama. Everything would be a lot more manageable if the aging of Japanese society was proceeding a little more slowly. As things stand, the number of people who pay into the system will decline rapidly even as the number of people who receive benefits increases rapidly. Something has got to give soon and in a big way. Japan will need to increase premiums, reduce benefits, or devise some combination of the two. The outlook for pension systems is also a concern in the European nations, but the problem there is nowhere near as severe as in Japan. That is because the pace of change in the populations of payers and beneficiaries is far more moderate. 

Back to Fingleton. 

Psychology aside, a major factor in the West’s comprehension problem is that virtually everyone in Tokyo benefits from the doom and gloom story. For foreign sales representatives, for instance, it has been the perfect get-out-of-jail card when they don’t reach their quotas. For Japanese foundations it is the perfect excuse in politely waving away solicitations from American universities and other needy nonprofits. Ditto for the Ministry of Foreign Affairs in tempering expectations of foreign aid recipients. Even American investment bankers have reasons to emphasize bad news. Most notably they profit from the so-called yen-carry trade, an arcane but powerful investment strategy in which the well informed benefit from periodic bouts of weakness in the Japanese yen.

To which I only ask: if the beneficiaries of “the doom and gloom story” are so numerous and the losers so thin on the ground, why does the predominant economic narrative in all countries and at all times not accentuate the negative? (We’ll leave the ludicrous misdescription of the yen carry-trade for another time…)

Economic ideology has also played an unfortunate role. Many economists, particularly right-wing think-tank types, are such staunch advocates of laissez-faire that they reflexively scorn Japan’s very different economic system, with its socialist medicine and ubiquitous government regulation. During the stock market bubble of the late 1980s, this mind-set abated but it came back after the crash.

Japanese trade negotiators noticed an almost magical sweetening in the mood in foreign capitals after the stock market crashed in 1990. Although previously there had been much envy of Japan abroad (and serious talk of protectionist measures), in the new circumstances American and European trade negotiators switched to feeling sorry for the “fallen giant.” Nothing if not fast learners, Japanese trade negotiators have been appealing for sympathy ever since.

The strategy seems to have been particularly effective in Washington. Believing that you shouldn’t kick a man when he is down, chivalrous American officials have largely given up pressing for the opening of Japan’s markets. Yet the great United States trade complaints of the late 1980s—concerning rice, financial services, cars and car components—were never remedied.

The “fallen giant” story has also even been useful to other East Asian nations, particularly in their trade diplomacy with the United States.

A striking instance of how the story has influenced American perceptions appears in “The Next 100 Years,” by the consultant George Friedman. In a chapter headed “China 2020: Paper Tiger,” Mr. Friedman argues that, just as Japan “failed” in the 1990s, China will soon have its comeuppance. Talk of this sort powerfully fosters complacency and confusion in Washington in the face of a United States-China trade relationship that is already arguably the most destructive in world history and certainly the most unbalanced.

I trust that those who came to this unfamiliar with the paranoid machinations of the Fingletonian mind are beginning to see the light. 

Clearly the question of what has really happened to Japan is of first-order geopolitical importance. In a stunning refutation of American conventional wisdom, Japan has not missed a beat in building an ever more sophisticated industrial base. That this is not more obvious is a tribute in part to the fact that Japanese manufacturers have graduated to making so-called producers’ goods. These typically consist of advanced components or materials, or precision production equipment. They may be invisible to the consumer, yet without them the modern world literally would not exist. This sort of manufacturing, which is both highly capital-intensive and highly know-how-intensive, was virtually monopolized by the United States in the 1950s and 1960s and constituted the essence of American economic leadership.

Those sly Orientals! They have only gone and hidden “their ever more sophisticated industrial base” from prying Western eyes! I challenge Fingleton to explain in what way it is a graduation to shift from manufacturing, say, a car to manufacturing components for it. Let’s wholly invert what Fingleton says to give an alternative and more accurate reading of developments over the last few years in particular: having been beaten back by the competition in a slew of end-products from mobile phones to TVs, Japan’s manufacturers find their last redoubts are in capital goods and precision equipment. Good places to be, admittedly, for a nation on the technology frontier—no one is disputing for a nanosecond that there are deep reservoirs of strength in the industrial base—but beats have most assuredly been missed.

Japan’s achievement is all the more impressive for the fact that its major competitors— Germany, South Korea, Taiwan and, of course, China—have hardly been standing still. The world has gone through a rapid industrial revolution in the last two decades thanks to the “targeting” of manufacturing by many East Asian nations. Yet Japan’s trade surpluses have risen.

Unease As Japan Nears 1st Trade Deficit In 31 Years
Nikkei, January 9, 2012
TOKYO (Nikkei)—Japan almost certainly saw its first trade deficit in 31 years in 2011, and experts warn that unless the gap is plugged with interest and dividend income from abroad, Japan will continue to see an outflow of money and have to rely on overseas funds for its fiscal management, such as by issuing government bonds.
Japan booked a deficit of Y2.3trn in its balance of trade—exports minus imports—in the January-November period of 2011, according to government data. The red ink is attributed to a slowdown in exports due to the yen’s record-breaking appreciation and an increase in imports of liquefied natural gas for thermal power generation to make up for the suspended operation of nuclear plants in the wake of the catastrophe last March.
The last time Japan incurred an annual trade deficit was 1980, at Y2.6trn. …
“Japan’s trade deficit will expand unless the world economy achieves a high growth rate, as it did in 2002 to 2007, and the yen continuously weakens,” said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. …

Japan should be held up as a model, not an admonition. If a nation can summon the will to pull together, it can turn even the most unpromising circumstances to advantage. Here Japan’s constant upgrading of its infrastructure is surely an inspiration. It is a strategy that often requires cooperation across a wide political front, but such cooperation has not been beyond the American political system in the past. The Hoover Dam, that iconic project of the Depression, required negotiations among seven states but somehow it was built—and it provided jobs for 16,000 people in the process. Nothing is stopping similar progress now—nothing, except political bickering.

“Japan’s constant upgrading of its infrastructure”—for which read its insistence on wasting money building roads and bridges and trains to nowhere and airports that no one wants to fly to or from—is no inspiration, merely testament to the last gasps of the Construction State in its death throes.

There are many, many more splendid pearls of ignorance on Fingleton’s website, Sandcastle Empire, one of the top drop-down bars of which proclaims, hilariously, “forty years of foresight” and suggests that Fingleton, to paraphrase Churchill on Clement Attlee, is “an immodest man who has little to be immodest about”. So many pearls of ignorance indeed that I may have to pen a follow-up, but for now I’ll lay my blood-soaked quill aside.

It is a disgrace to the Gray Lady that it should have stooped to printing this gibberish. What’s sad is that Fingleton has half a case—there have been a few rays of sunlight amid the pervasive gloom of the last two decades—a case which he proceeds to ruin through truculence and a remorselessly misdirected focus.

Fingleton was a fool when I first encountered him on the Dead Fukuzawa Society message board in the late 1990s and remains an undiluted fool to this day. I can come up with three explanations, plausible and not so plausible, for his behavior: that he is genuinely, unfortunately stupid; that his mentality is such that once cornered, he can cede no nuance of grey in a debate; or that, to cast a Fingletonian conspiracy theory to work on the man himself, he is in the pay of sinister Fulfordian forces, perhaps the “fascist cabal known as the Bilderbergers”. Readers, what do you think?