What The Hell America!

It is not by accident that the plot of the era-defining thriller Die Hard (1988) revolves around a German terrorist taking over a skyscraper in downtown Los Angeles owned by a Japanese conglomerate. This shift in cultural attitudes was accompanied by a shift in American politics. In part, this was a response to the remarkable industrial success of Germany, although Japan was the main object of obsession for policy elites.

Japan’s economic trajectory stands out even among postwar economic miracles, eclipsing Korea, Taiwan, and Germany in the speed with which it converged on and then created anew the frontier of industrial technology. And while Japan was seen as one of the United States’ closest and most compliant allies, the meteoric rise of its developmental state-driven economy strained their relationship.

The manufacturing competitiveness of America’s more productive industrial rivals (in tandem with the strains of the Vietnam War and the subsequent oil shock) drastically altered the balance-of-payments composition of the world economy throughout the 1970s and ’80s. From 1982 onward, the United States had started posting its highest trade deficits with Japan. Finally, in 1985, Japan became America’s largest creditor, which it remains to this day, by a wide margin.

That same year, a leading member of Congress, Rep. William Broomfield, fretted about Japan’s “liberal-sounding policies” that “turn out to be protectionist in practice,” adding that “America is up in arms [. . .] unless this warning is heeded, retaliation and possibly full-blown trade warfare lie just around the comer.” During that same session, Rep. John Dingell intoned that “Japan must start playing by fair rules.” The jitters in congressional politics were mirrored in the business community, which stoked fears of an “economic Pearl Harbor” and “a Japanese takeover” (referring to the epic buying spree of Japanese firms in the United States in 1980s). A certain Donald J. Trump, though his entire business depended on the existence of the US deficits and cheap capital inflows that he so lamented and indeed continues to lament, stood out as one of the loudest proponents of retaliatory trade policies at the time.

Forty years on, American policymakers have picked up this narrative once again to suit the needs of the current brigade of China hawks in both the Biden and Trump administrations. The nature of the threat is not just economic but geopolitical: the specter of “Pax Nipponica” has been replaced with a “Pax Sinica.”

This precedent is informative because it can shed light on the mental framework of some of the leading protagonists in the trade wars of today. A cursory glance reveals glaring differences between contemporary China and 1980s Japan. The nature, scale, intensity, and speed of Chinese industrial development and urbanization — unlike Japan’s, explicitly pursued in the service of nation-building and securing national sovereignty after a “century of humiliation” — resists historical comparison.

Even the industrial revolution seems more like a prelude to China’s effort to create its own modernity. Crucially, while the United States did not succeed in halting its own industrial decline or reverting its trade balance in its favor, it arguably succeeded in upending Japan’s growth model. In response to a rapidly appreciating dollar during the Volcker era, when Paul Volcker, then chairman of the Federal Reserve, dramatically increased interest rates, the United States and its largest allies initiated a reconfiguration of global monetary policies through the Plaza Accord in 1985. That same year Japan became the largest holder of US Treasuries.

As policymakers hoped, the dollar depreciated (giving US exports a new lease on life), whereas the yen appreciated steeply relative to the Greenback. The result was a severe recession in Japan (aptly named Nihon no endakafukyō, meaning “recession caused by the appreciation of Japanese yen”). The Bank of Japan responded with a drastic easing of interest rates; the Louvre Accord, which did not manage to reverse the dollar/yen foreign exchange trends stipulated further easing in 1987.

In response to the recessionary hit to Japanese manufacturing exports and capital investment, the Bank of Japan and Japanese government opted to shift to a finance-led growth model. In concert with very accommodating monetary and fiscal policy stances, speculation was encouraged through ever laxer credit standards and policies that made Japanese assets, especially real estate, more marketable. The result was the mother of all asset bubbles. And, over the course of 1990 to 1992, Japan witnessed what was by some measures the biggest collapse in asset prices in history.

As it happens, after three decades of breakneck urbanization, China is at a similar inflection point in its developmental path. The key question is whether, in the wake of the unraveling of its own growth model, the Chinese state is succeeding in managing the fallout from its enormous asset bubble as effectively as Japan. How do export-driven growth miracles like China or Japan transition from relying primarily on capital investment, high savings rates, and asset price growth to a more stable economy driven primarily by domestic consumption?

If China manages a relatively soft landing after its real estate bubble, it will have been the greatest feat of macroprudential and financial policy in history. But even if China avoids a financial calamity like the one Japan experienced in the early 1990s, it is certain that the rate of growth will be lower than what it has enjoyed over the majority of this century. And it is far from clear how this shift will restructure the incentives and expectations of China’s households, firms, and individuals — and what the political fallout might be.

This raises a general question of how modern industrial economies deal with what might be termed “embedded growth obligations” when their growth model runs out of steam. In this narrow sense, Japan’s experience is germane to China’s near future — and America’s present.

After all, Japan offers a glimpse of one of the more palatable responses to postindustrial stagnation and decline. However, the ingredients that made this response possible are not ones readily available to other nations. First and foremost, one needs the right macropolicy mix. In this case, what prevented Japan from descending into a 1930s-era depression, despite a financial collapse of similar scale, was a “whatever it takes” economic policy. The country’s central bank became the primary fiscal policy actor, financing government deficits and keeping both short- and long-term interest rates (and associated debt-servicing costs) low by buying, or announcing plans to buy, government bonds in an unlimited fashion.

Japanese policymakers, by keeping credit cheap and borrowing and debt-servicing costs low, have been able to rely on a permanent bazooka of exotic policy innovations, such as ultra-low and negative interest rates, “quantitative easing” and “yield-curve control” to coast the country through its “lost decades” of zero growth, persistent deflation, and crippling risk aversion among traumatized firms and households (famously conceptualized by economist Richard Koo as a “balance sheet recession”), while maintaining exceptionally high living standards and political stability.

It doesn’t hurt that, during this period, Japan got its housing policy right (making sure supply kept up with demand) and heavily invested in human capital; Japan has acquitted itself very well in both policy domains. This is not to say that deep-seated economic and social problems don’t persist, chief among them the unfavorable demographic trends and widespread loneliness and alienation. But what Japan demonstrates is that economic decline doesn’t necessarily come in concert with societal collapse.

It is tempting to conclude, then, that by embracing “Japanification” mature economies in North America, Western Europe, Korea, or Taiwan might manage their own social crises in a fashion that is non-self-liquidating and, in the case of the United States, doesn’t risk global military conflagration.

But Japanification exacts a price. That is, the Japanese scenario of managed postindustrial decline has certain preconditions. Chief among them is a technocracy that is not just competent but cohesive. It is not clear that either of these preconditions are met on either side of the North Atlantic.

But it is at least conceivable that both could emerge over time. Less likely, however, is that technocratic elites will become as emboldened as they are in Japan, to the point where the Bank of Japan and the big bureaucracies have been effectively running the show. Even if such a transition were easy to effect, it is likely that a majority of Americans and Europeans would choose a dysfunctional democracy over a rubber-stamp parliament and a polity in which executive power is dispersed among a small clique of party politicians, industrialists, and bureaucrats.

Former Senate majority leader Robert J. Dole had once carped about “the career bureaucrats who run the government in Tokyo” who “just listen politely and ignore the instructions of their political superiors.” In an era of backlash against the administrative state and professional classes, this scenario is implausible in the West.

Lastly, the onerous levels of social rigidity (long misconstrued as “harmony” by Westerners and Japanese conservatives alike) that seem to allow Japanese institutions — from the labor market to firms to families — to function “smoothly” are difficult (and very likely not desirable) to replicate in more liberal and “individualistic” societies. This has led the likes of Paul Krugman, an admirer of Japanese macroeconomic policy, to quip that Europe risks becoming “Japan but without the social cohesion.” The politics of growth and social mobility might prove particularly disadvantageous in the United States, especially in an age where the get-rich-quick zero-sum culture of American capitalism has eroded ordinary “middle-class” aspirations among most Americans.

Japanification as the goal of any democracy should strike progressives in other advanced economies as repugnant. But so, too, should the alternatives to Japan’s semi-successful attempt to “rebalance” its economy: quasi-permanent austerity, and new forms of financial asset excess that leave most people on the curb, or, in the case of China, to a large contraction of GDP and rise in unemployment.

The central fiction is that these alternatives, as they are currently playing out, are more democracy-preserving and more conducive to maintaining growth prospects and individual liberties than technocratic management. This is evidently not the case. The late phase of neoliberalism is shaping up to be decidedly authoritarian and economically corrosive. And while it is tempting to view Japan’s experience as the first grand experiment in post-growth — albeit growth frozen at exceptionally high levels of consumer welfare, human capital,  living standards, and public goods provision — there have been signs of life in the country’s  economy. Inflation and consumer spending have risen persistently in recent years. In fact, it is an open question how quickly this turnaround might have occurred had it not been for the pandemic and the catastrophic tsunami and nuclear meltdown of 2011.

Above all, Japan hasn’t actually undertaken the necessary rebalancing required to transition to consumption-driven growth. Too much of its national income is still held by high-saving entities (i.e., firms), the government, and wealthy households. Though comparisons with China, common in the financial press, are misguided, what does hold is that both need to undertake massive redistribution programs that favor lower income households that spend more of their income.

In this sense, it is too early to tell whether Japanification can be rendered more acceptable. If this transition is successful in altering Japan’s growth trajectory, some of the unpalatable aspects of Japanification might not be politically required. It is therefore worth exploring the possibility of adopting a similar approach, but one that reflects the democratic and individualistic norms that would in theory be obstacles to “Japanifying.”

The stakes of this debate are higher than seem obvious at first glance. Unease over the loss of American grandeur on the world stage has prompted successive US administrations to engage China in economic war, heightening the risk of all-out conflict while upending the global economic order in the process.

Bipartisan belief in American exceptionalism has prevented US elites from accepting the possibility that decline need not be understood in absolute terms. One reason for this might be that the country’s elites have transplanted the zero-sum worldview that characterizes American domestic politics — in which coastal elites benefit at the expense of the heartland — to the international arena.

Reversing the course of American politics and the global trade war requires, at the very least, jettisoning the false promises of national renewal and a direct political confrontation with a malcontent and rapacious elite whose rents depend on the maintenance of hegemonic ambition. The insight most worth internalizing, however, is that for advanced industrial countries, decline is relative. And relative decline needn’t spell death.