XII

The Outlook

“Today Japan is confined once again to her home islands, and the pressure of her population is now far greater than it was prior to World War II. She must import a substantial portion of her food and raw materials, yet she is cut off from many of her former sources of supply. In the long run her situation is unstable in the extreme, and it is highly likely that serious trouble lies ahead. The Japanese now express the desire to live in peace with other nations, but as time goes on and the pressures become still more intense, it is likely that they will attempt again to extend their area to the point where they can attain some measure of self-sufficiency.”

—HARRISON BROWN in “The Challenge of Man’s Future.”¹

THE JAPANESE economy is much like the Japanese language—far too involved and complicated to fit any one set of conclusions, just as some of the categories of the language are too rich in meaning and too varied to be limited to just a simple set of terms.

Any Westerner must be startled when he first learns that the Japanese language has twenty or more words for the English “I” and that native speakers carefully distinguish among all of them. There was a special “I” for the exclusive use of the Emperor. The first person singular is different for men and women. In speaking to friends a man uses boku for “I,” but in the case of very close friends ore, which is more abrupt. In addressing a stranger, formality decrees that the word watakushi is used for “I,” but as a degree of friendliness develops the syllable ku is dropped to make it watashi. There are other words for “I” for special occasions, such as wagahai, sessha, jibun, and shosei.²

There are almost as many ways of looking at Japan’s economy. One can be enthusiastic at the achievements; one can be appalled at the problems; one can marvel that the Japanese have accomplished so much with so little; one can attempt to peer into the future, as does Harrison Brown, with misgivings and forebodings. Or one can reason that if the Japanese were able to emerge with restored economic vigor from the despair of defeat and the overwhelming difficulties of the postwar decade, few future problems seem likely to pose similar challenges. Each shift of the kaleidoscope produces a new and interesting view.

The plus signs in the economy are many. There is the amazing recovery, the fact that industrial output is now more than double the prewar level, that real income and real wages are higher than at any previous time in Japanese history, that the Japanese people, 90 million of them, enjoy a per capita income or standard of living about a fifth higher than the prewar (1934-36) level. Although low compared with Western standards, Japan as the leading industrial country in Asia has the highest living standard of all the countries of the region. With an abundance of skilled labor, talented management, a stable government, a high rate of capital formation, and a thrifty and industrious population, Japan possesses a dynamic national energy and a will to rise and persevere which not even defeat and conquest apparently can extinguish.

As one group of American experts who visited Japan observed:

The Japanese economy is a dynamic growing economy. In the little more than a decade since the end of the war, a phenomenal recovery has been achieved. . . . Japan has an industrial plant that rates her as one of the leading industrial nations of the world. She has industrious and skilled manpower; and of crucial importance in the modern world, Japan has well developed managerial arts and a large class of technicians and leaders skilled in the administration and management of affairs, public and private. The Japanese economy is one of the richly productive economies of the world, and one of great promise for the Japanese people and for the world at large. Output per capita has more than kept pace with the rapid population growth of the postwar years. The continued pace of scientific and technological advance assures a continuation of advancing output per capita.³

Thus on the bright side of the spectrum there appears a modern industrial nation of great vitality with growing output and increasing per capita productivity on the part of an alert and efficient labor force.

On the darker side there is the population-land-resources problem, the employment problem, the agricultural problem, the production cost problem, and, most crucial, the trade problem. As we have seen, Japan has the greatest density of population per arable acre of any country in the world. While the rate of population increase has slowed, the rise in absolute numbers, which is expected to carry the total to 100 million by 1970, stirs grave concerns about employment, food supply, and political stability. Over the coming decade Japan will have to find employment for 7 to 8 million new entrants to the labor force. This is in addition to all those presently underemployed in agriculture or petty trade: those who are working a few hours a week at some uneconomic and unrewarding service activity; the unpaid family workers who would seek paid employment if they thought there was the slightest prospect of securing it. The manufacturing sector of Japanese industry will have to expand sufficiently over the coming decade to absorb the new entrants, since agriculture and commerce and services seem to have reached the point of saturation.

In order to expand industrial production, Japan will have to increase its imports, since it has few natural resources and is heavily dependent on imported raw materials and foodstuffs. To earn the exchange to pay for these imports, Japan will have to expand its exports substantially. Will this be possible in a protectionist world of trade barriers, import quotas, and exchange controls? And even if markets were open in which Japan could sell additional goods, will its prices be competitive or will lower-cost producers like West Germany and the United States undersell Japan in foreign markets? Is Japan a marginal supplier in world markets, as is often alleged, and if so what will be the effect on Japan of any slowdown in the rate of growth of world trade?

While Japanese exports have risen substantially in recent years (1956 showed a 19 percent gain over 1955 and was more than double the 1953 level), they have not regained the prewar level, and furthermore imports have risen even more sharply (1956 showed a 31 percent increase over 1955). Japan’s export volume in 1956 was 86 percent of the prewar (1931-36) average, while import volume surpassed the prewar average by 14 percent. Basically what this means is that taking into account both the large increase in total world trade over the last decade and the considerable rise in Japanese population, Japan is only somewhat beyond the halfway mark in restoring its position in international trade.

The vast postwar growth in the Japanese domestic market, largely the result of improved levels of real income for the working and farm populations, and the extensive rehabilitation of industry have, oddly enough, had an adverse effect on the restoration of Japan’s world trade position.⁴ The expansion of the domestic market in the face of limited natural resources has necessitated a constantly growing volume of imports. On the other hand, the greater attractiveness and profitability of the domestic market has greatly eased the pressure to export. The growth of prosperity in Japan seems inevitably to set in motion forces which tend to widen the trade gap. When, as a result, the payments situation becomes acute, as it did in 1953 and again in 1957, the authorities are forced to step in and take measures to limit the domestic expansion. Temporarily, at least, this limits the industrial growth which is essential if employment opportunities are to be found for a growing labor force. If a domestic boom in Japan causes the rate of increase of imports to run ahead of the rate of increase in industrial production, and this in turn exceeds the rate of increase in exports, as has now happened on two recent occasions, can industrial expansion in Japan be sustained?

Clearly there are, if not minus signs, a significant number of question marks which give pause and concern to one attempting to assess the economic outlook for Japan. Can Japanese skill and ingenuity surmount the obstacles? One recalls prewar stories of Japanese ingenuity—of Japanese selling bottled beer in Germany for less than the German brewers paid for empty bottles and of a thriving Japanese industry, the reproduction of old American antique furniture. There is also the priceless tale about the astonishment of Japanese citizens who purchased boxes of matches originally intended for sale in China and found to their amazement that the words “Down With Japan” were inscribed upon the covers.⁵

The Japanese are, of course, highly adaptable. The ability to weather a storm, to bide one’s time, to accept disappointments, to make the best of past mistakes, to capitalize on every opportunity no matter how small, are arts practiced nowhere more skillfully than in Japan. The ingenuity so often apparent in the past will continue to be applied to Japan’s national advantage. The hostility of occupied and devastated countries is giving way, by skillful reparations agreements, to fruitful investment opportunities. A complex industrial machine is being enlarged and modernized without any loss of national sovereignty or of indigenous corporate control. The needs of underdeveloped countries for technical assistance provide opportunities for increased sales of Japanese capital goods and also for Japanese emigration, and these opportunities are being exploited. Brazil is an example of a country that has welcomed the introduction of Japanese equipment, enterprises, and emigrants. Trade possibilities are being sought out and developed all over the world. Seldom is a chance overlooked. Selling textiles to British colonies and possessions may be like carrying coals to Newcastle but the Japanese have managed to do it. Minor opportunities for investment, overlooked by foreign capital, or not of sufficient interest, have attracted Japanese attention in Central and South America and in South and Southeast Asia.⁶

Apparently the Japanese have learned a good deal from the balance of payments difficulties which they encountered as a result of the domestic consumption boom of 1953 and the domestic investment boom of 1956. In both cases warning signals in the form of rising commodity prices, an increasingly unfavorable trade balance, and declining foreign exchange reserves were ignored for a time, until it became apparent that a domestic expansion, whether in consumption or in investment, which ran ahead of export expansion inevitably brought into play adverse factors which simply could not be overlooked. The links between short-term economic stability and long-term economic growth became clear. The Japanese now seem to recognize and accept the need for a delicate economic balance in order to achieve both objectives at the same time. They now appear to realize how essential it is, in an economy that is so dependent on foreign markets and foreign sources of raw materials, not to let the rate of investment run too far ahead of the rate of savings. And most important, they have shown great courage in applying necessary monetary restraints when domestic expansion leads to a sharp deterioration in the external accounts.

It is reassuring to see that the Japanese now recognize that any failure to link short-term measures to improve their international payments position with their long-range policy for balanced growth will inevitably curtail that growth. Encouraging also are statements such as the following, found in the 1956-57 report of the Economic Planning Agency:

Maintenance of a high rate of investment and a steady economic expansion based thereon are the paramount long-range targets of Japan and people’s aspirations. However, investments must not be allowed to exceed the limit of the nation’s capacity for earning foreign exchange at a given time for domestic balance and international balance are both sides of the shield. Investments made beyond the level of domestic savings are bound to induce large amounts of imports over and above the nation’s international strength. There is no short cut to economic development. An economic expansion carried out beyond the actual economic strength of the nation is bound to cause inflation and deterioration of her international accounts forcing a restraint on the speed of economic growth.⁷

During the fiscal year 1956-57 the rate of export expansion was 20 percent and domestic consumption increased by 8 percent, but investment in equipment rose by 80 percent and investment in inventory by 40 percent. The result was the balance of payments crisis of early 1957 and the reimposition of a policy of restraint, similar to that of late 1953 and early 1954. Thus in two periods when domestic expansion was allowed to run far ahead of export expansion, the resulting vast increase in imports and the sharp decline in foreign exchange reserves necessitated a policy of restraint and curtailment. It is therefore encouraging to read in an official Japanese publication that:

The objective of the over-all restrictive policy lies in reducing import by controlling domestic demand and creating an export pressure for diverting the goods hitherto into the domestic market to the overseas market. Such a restraint on demand will also contribute to the reduction of production cost and commodity prices. A disinflationary policy is unpopular to everybody but it is absolutely necessary for the present economic conditions. If this program is carried out smoothly with a firm determination and with people’s support, Japanese economy will regain a foothold for development. Only on the foundation of a stable balance of international accounts can we expect an expansion of investment, economic growth and improvement of the standard of living.⁸

It is important to remember, however, that Japan’s capacity for independent economic action is circumscribed by the great power struggle of our times. Though it has regained independence, Japan finds itself between the pressures of the Communist bloc, on the one hand, and the free world on the other. The London Economist put it neatly when it declared:

No Japanese Prime Minister, whatever his faction or party, has much room for manoeuver in foreign policy. Whether they like it or not, the Japanese are dependent on the United States for economic and military protection. Most of them dislike it. They resent their indebtedness to the Americans. They are impressed by Russian hints that an American evacuation of Okinawa might induce Russia to give back the Southern Kuriles. Above all, they remember the atom bomb, and they fear that if Japan remains the American forward base in the Pacific it will be an obvious target for a hydrogen bomb. Between the emotion of the electorate on the one hand, and the hard economic facts on the other, only a limited political mobility is possible. Japan can hope to recover its importance in Asia, and ensure its political future, only by the “economic diplomacy” of which so much has been heard lately. Its purpose is to convince both industrialists and diplomats that only through trade relations can the “face” lost in the last war be recovered and Japan established as the leading power in the non-communist East. This is Japan’s natural role, provided it is filled, this time, by peaceful commercial means.⁹

Viewing this relative lack of mobility in very broad economic terms, the likelihood of economic moves by the two leading Japanese power groups—conservatives and socialists—can be postulated.¹⁰ The conservatives must, of necessity, continue the current policy of building upon the present strong economic ties between Japan and the free world. Apart from expanding and increasing these ties by economic diplomacy they have few alternatives. In fact, they may need no alternative because the current policy is their policy and it has worked rather well. If, in an occasional year, economic diplomacy fails to secure balanced trade or balanced payments, they have only to fall back upon the good offices of the leading power in the free world for support and sustenance. That this support must be forthcoming on such occasions is as clear in Tokyo as it is in Washington.

One reason for the lack of any major alternative is that the conservatives are unlikely to want to see, even if it were an economic possibility, a large build-up of trade with the Communist bloc. It would make their regime too vulnerable to an economic buffeting by world Communist manipulation. While they give lip service in Japan to the need for increased trade with Communist China in order to mollify some elements of public opinion, they do not, in fact, look for any large increase. Nor indeed is it necessary. As long as the level of world economic activity continues to improve or even remains stable, and as long as the United States continues to underwrite any gap in Japan’s balance of payments, there is no real need to do more than continue intensive efforts to reduce costs and improve equipment and techniques at home, and to expand exports within the present framework. In due course, a steady expansion of world trade, with Japan securing its appropriate share, should render the Japanese economy viable and release it from any dependence on U.S. support.

The chief threat to continued conservative domination in Japan is mainly external rather than internal. A world recession, leading to declining farm prices in Japan, to a loss of exports and therefore to increased unemployment and persistent balance of payments difficulties, might cause sufficient unrest to unseat the conservatives. In the first phases of such a development, the conservatives are likely to be pushed into adopting some of the welfare measures, such as expanded public works, advocated by the Socialists. Whether this move toward the center by the conservatives would be sufficient to enable them to retain popular support would depend to a large degree on the severity of the world recession. If it were mild, this stealing of Socialist thunder might do the trick. If it were severe, the conservatives might well be driven to the extreme right in an effort to retain power.

The advent of a rightist regime under such circumstances might see the liquidation of many welfare measures, of trade unions, and of much of the trade with the Communist bloc. Seeking financial support from the West, such a regime would probably attempt to reestablish the external economic relations of Japan much as they are today. In its internal policies there would perhaps be a much greater degree of government control of economic activity, as in the case of Spain and Portugal, than is now true of Japan.

Were the Socialists to obtain power, they would be likely to pursue a third-force, neutralist policy in foreign relations¹¹ and in the economic sphere to adopt measures of nationalization and social welfare. In trade matters they could be expected to refuse to adhere to any restrictions on trade with the Communist bloc. After a short while the Socialists might have a very difficult time. The most serious probable economic consequence of Socialist policies would be the effect of various nationalization and social welfare measures upon Japanese costs of production and hence on the price structure. Most union demands for wage increases would probably meet with little opposition. This, and the additional welfare measures, might make Japanese exports overpriced in world markets and thus bring on the familiar train of events attendant upon the decline in the volume of exports—foreign exchange drain, balance of payments crisis, reduction of imports, rising unemployment, small business failures, etc.

On basic policy matters, after an initial honeymoon period, the Socialist left and right wings might soon part company. The sober responsibilities of office might lead right-wing Socialist elements to take a more compromising, centralist position so as not to disrupt unduly business and economic relationships. The insistence of the left, however, on rigid, doctrinaire Socialist programs might bring a parting of the ways.

If, in the resulting crisis, the left Socialists or Communists prevailed, their regime would be likely to undertake a vast reorientation of the whole focus of the Japanese economy in an attempt to link it with Communist China and the Soviet Union. Trade with the West would decline rapidly and the standard of living in Japan would fall. That the populace, despite mounting discontent, could do anything about this trend of affairs is doubtful in the face of experience elsewhere with the ability of Communist dictatorships to hold on once in power. If the Communists ever come into power in Japan it is likely to be only by taking over from a collapsing Socialist regime, or as a result of direct Soviet intervention in Japanese affairs. It is most unlikely that they would ever be voted into power in a free election. They are not at present a significant influence in the Japanese economic or political situation.

The recent polarization of Japanese politics gives the Japanese people a clear economic choice. Either they must continue the present conservative regime and free enterprise capitalism or the only alternative choice is socialism, in either its democratic or its totalitarian variety. Adherence to conservatism has brought them a striking recovery, more than a doubling of production, and a substantial rise in real income and living standards. While the Japanese are not living in opulence or luxury, they are better off than at any time in the past.

That the Socialists could have done as well is doubtful. This view, too, is based on economic considerations. Their social expenditures, their lack of resistance to excessive wage demands (those beyond increases in productivity), and their unwillingness to pursue tight money or austerity programs would probably have produced an inflation substantially in excess of that which actually occurred in postwar Japan. With exports priced out of world markets and foreign exchange reserves depleted, faced with a balance of payments crisis and the need to curtail imports, unwilling to face up to the political consequences of a necessary corrective policy, a Socialist regime would have fallen, or else living standards would have dropped. Or had it been willing, however reluctantly, to undertake a necessary austerity program, it would have been discredited politically, for its measures would initially have hurt its own supporters most and their allegiance would have been lost.

It is the nature of the Japanese economy and its great dependence on external economic factors which creates this dilemma for the Japanese Socialists. Not having been in office for most of the postwar period, however, and not having had to bear the onus of restrictive policies except for one brief, now forgotten episode, they are able to offer vast promises for the future as they edge closer to power. It is perhaps unfortunate for the future of Japanese-American relations that both officially and unofficially we have paid so little attention to the Japanese Socialists. The young people in Japan tend to vote Socialist and in five to ten years this could mean a Socialist regime even in the absence of a recession. Many young Japanese, and especially young Japanese Socialists, are anti-American through a combination of ignorance and propaganda. They badly need wider contacts with the West and observation of Western experience and development. United States programs, formal and informal, should be shaped to this end.

The Japanese conservatives, on the other hand, know the West better. Although they receive credit for economic recovery, they must take the blame for occasional austerity, bear the brunt of anti-Americanism, and carry the burden of acceptance of restrictions on the China trade. They find it difficult to match the Socialist promises for the future since they can realistically offer only the slow gains in real income and real wages which come from increased output and rising productivity. And even this modest hope rests only on a condition—that the level of world trade continues to rise and that world economic prosperity and stability are maintained. For if they are not, then the Japanese economy will be in trouble and so will the Japanese conservative party.

The outlook for the Japanese over the short term, then, depends on trends in the world economy. To the extent that these are determined or influenced by American policies we have a commensurately grave responsibility. The maintenance of a liberal trade policy by the United States, the adoption of any and all measures to ensure the continued growth of world trade, the encouragement of economic development and stable economic growth, sustained world prosperity, and the containment of inflation both at home and abroad, are essential not only to Japan’s economic future but to our own. If the blindness of the protectionists and isolationists should prevail and the achievement of these objectives be thwarted, then we shall perhaps pay a heavy price for our complacency and acquiescence. So great will be the damage, so final the changes abroad, and so complete our own isolation, that it might well lie beyond the power of any future American generation to rectify.