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The Tumultuous Economy of 1990s Japan

The Lost Decade marked a tumultuous time in Japan’s economic history, as corporations and banking systems played fast and loose with the economic interests of the country as a whole. Originally referring to the period from 1991-2000 and now extending to the last decade as well, it started when the asset price bubble was at its peak in Japan, allowing corporations to get lines of credit even though their holdings were overly inflated. At one point, it was calculated that the Imperial Palace land was worth more than the State of California.

Flush with cash, Japanese companies began using real estate as collateral to buy assets and properties abroad at highly inflated prices, such as the Rockefeller Center and the Pebble Beach Golf Course. This house of cards eventually collapsed when the real estate bubble burst and debt began to accumulate. From 1995-2007, GDP fell from $5.33 trillion to $4.36 trillion in nominal terms and real wages fell around 5%.

Another contributing factor was Japan’s “keiretsu,” described by interviewee Richard McCormack as a hybrid economy of Soviet-style Gosplan plus state capitalism, where groups of corporations have interlocking ties with one another, trading stocks and materials, which in turn block out new competitors trying to enter the market. At the same time, the Japanese government was investing enormous amounts of money in Washington to secure lobbyists and consultants by offering large retainers to former U.S. government officials, making them “pipelines” to U.S. decision-makers.

As bilateral trade issues became more heated, legislation such as the Super 301 was passed to amend the Trade Act, aimed at unfair trade practices by certain countries. The two sides then began the SII or Structural Impediments Initiative in 1989, a series of talks designed to deal with domestic structural problems limiting trade on both sides. After several rounds of often contentious talks, agreements were reached in 1990 that promised major changes in such sensitive areas as Japanese retailing practices, land use, and investment in public works, while the U.S. pledged to deal more effectively with its budget deficit and to increase domestic savings. The Clinton Administration ended it in 1993.

Richard McCormack, then Under Secretary of State for Economic Affairs elaborates on the rigidity of the Japanese economy before the bust and how Japan sought to buy influence in Washington. Robin White, Chief Economic Officer for the Department’s Japan Desk, notes how the U.S. sought out allies in Japan to get the government to open up the economy. Joseph Winder, Economic Counselor at Embassy Tokyo, explains the decline of the Japanese market due to their corporate and banking systems as well as the anti-Japanese sentiment that was being felt within the United States. Finally, Assistant Secretary for the East Asia and Pacific Affairs (EAP) Bureau William Clark Jr.  discusses the “Team A and B concept,” where at one time we negotiate, at another we beat them up on trade issues and how that leverage was lost as Asian countries became richer.

Thomas Stern interviewed William Clark Jr. beginning in January 1994. All other interviews were conducted by Charles Stuart Kennedy:  Robin White beginning in June 2005; Joseph A. B. Winder beginning in August 1999; Richard McCormack beginning in January 2002.

Read about the origins of the Greek debt crisis.


“We were in fact dealing with a hybrid economy of Soviet-style Gosplan plus state capitalism”

Richard McCormack

Under Secretary of State for Economic Affairs, 1989-1991

Q: Through the Embassy or on your own observation, you made two main points:  the restrictive nature of the import controls into Japan and the overly close banking loan system with industry and others which eventually meant really bad loans.

McCORMACK: This latter aspect was totally unknown to all of us. The truth of the matter is the American government never really understood in detail the full complexities of how the Japanese economic system operated until we had the Structural Impediment Initiative (SII) in 1989.

We only really fully understood toward the end of my time in the Department just how the keiretsu operated and that we were in fact dealing with a hybrid economy of Soviet-style Gosplan plus state capitalism.

The Japanese economy was, in fact, a combination of Albert Speer’s German wartime economic plan plus elements of the Soviet Gosplan [rigidly planned economy]. They took the best elements from their perspective out of each and built a system of state capitalism with a central planning dimension.

They, of course, organized industrial espionage operations worldwide to get the best technology they could. They built a vast lobbying operation here in Washington. When I left my job as Under Secretary of State, I was by that time certainly one of the two or three top U.S. government experts on Japan’s economy. I went to a think tank at the Woodrow Wilson Center. I hadn’t been there for three weeks when a gentleman from one of the Japanese companies came, introduced himself to me, and said how much they valued my wisdom. They wanted to employ me as a consultant and asked me if a retainer of $300,000 a year would be fine.

I said, “I really didn’t want to do that since I had been working on Japan within the U.S. government all these years. I wasn’t comfortable about going out and working for them.”

Then he said, “$600,000 a year.” I told him I didn’t think it was appropriate.

The point I want to make is that they hired many former American officials who had some working knowledge of Japan. These people became consultants and advisors or what they called “pipelines” into our system. They built quite a remarkable information-gathering network in Washington.

In 1984, a small group of government officials met under the aegis of the Vice President every two weeks to talk about what to do about the Japanese juggernaut. In one of the meetings, one of my colleagues made a joke about a local Japanese diplomat. Half an hour after the meeting was over, the diplomat called the official who made the joke about him to complain. Now think about that. I only mention this to indicate the full degree to which we are penetrated. There were no secrets in the American government having to do with Japan — none.

The Japanese were spending nearly a billion dollars a year to get influence in Washington  

We had a much more open market in the U.S. for imports than was the case of Japan. I was in favor of pressing the Japanese harder to open up than some of the other people in our Department. My view was widely shared on the Hill. A very strong piece of trade legislation called Super 301 [an amendment to the Trade Act, aimed at “unfair” trade practices of any country, but mainly aimed at Japan] was passed.

The second Japan-related problem was of a structural nature. A very strong dollar during the early part of the Reagan period was partly a consequence of very high U.S. interest rates. High rates attracted a lot of foreign money. You had many other countries that wanted to build up their manufacturing base and were perfectly delighted to see the U.S. dollar remain very strong.

That was what the Plaza agreement was meant to address. A strong dollar meant, all other things being equal, that the U.S. manufacturers were going to have difficulty competing. This situation plus import barriers abroad helped cause the Midwest industrial implosion, what was eventually called the Rust Belt. Unemployment soared in parts of the country during the first Reagan administration.

A basic structural flaw in the overall trading system evolved. As tariffs became less important, competitive currency policies increasingly determined the terms of trade. The floating exchange rate system was not allowed by mercantilist countries to operate freely. This certainly worsened after the 1997 Asian banking crisis.

It wasn’t just the State Department that was not totally supportive of being tough on Japanese trade and currency problems. The Japanese admitted to the Treasury in 1988 that they were spending nearly a billion dollars a year wiring Washington:  providing money to think tanks, former senior U.S. officials, people who had political connections and access to the White House, etc. They created a huge and effective lobbying operation.

Thus, you not only had to deal with the political sensitivities that would emerge from the State Department process, but you also had to deal with Japanese lobbying connections to the White House and the press. An enormous effort was made by Japanese officials to shape foreign press coverage of sensitive Japanese economic, trade, and financial issues.

Q: Was there any effort made by the FBI, the State Department, or somebody else, to identify people who were essentially on the payroll?

McCORMACK:  As a matter of fact, after I left government, there was a major review by the FBI of people getting paychecks from the Japanese and other foreign interests but not registering as lobbyists. There was a whole series of proposed indictments that were drawn up by the FBI and sent to the Justice Department, according to media reports in 1992. Many people were taking money but not registering as foreign agents.

When the Clinton people came into office, they noted the many prominent people who were involved in this potential problem, including some of their friends, and decided to quash the whole investigation. According to the media, two senior FBI officials resigned as a consequence of this. I have not verified this beyond what was leaked to the press.

Q: What I am talking about, if nothing else, is that you were dealing in an atmosphere in which you felt that you couldn’t really trust a lot of people.

McCORMACK:  No. I felt I could trust many people. I also felt, however, that there were no secrets as it related to U.S. policy toward Japan on trade issues as I mentioned earlier. When I left government in 1991, I went to the Woodrow Wilson Center for scholars. While I was there I was earning my $40,000 a year stipend and recovering from 10 years in the State Department, ill and bone tired.

I soon received a visitor from a prominent Japanese company who said how much they valued my analytical skills, and offered me a large retainer. I told him that I didn’t really feel I should do this because I had been dealing with Japanese issues for the U.S. government.

“We were dealing with a Japanese economic patient that had cancer”

These are the kinds of little problems that exist in this town. We all know they exist. The point I want to make is that when you are dealing with the Japanese and others on matters of trade policy, there are no secrets. You basically had to operate on the assumption that they knew everything that you were going to do and say.

Therefore, when you moved to deal with them from a substantive point of view, you could not use classical diplomatic techniques. You basically had to prepare a power position that you knew was supported by the President and Congress. If you had that power position, you were able to go forward with your negotiation and possibly get some results. If you were operating without this explicit support, issue by issue, you would be politely heard and ignored. That was the complicated reality.

There used to be a Japanese joke. Where is the most expensive intellectual capital in the world? Answer: Washington, D.C.

In the case of Japan, I decided after I left government to continue to provide my analytical services free to my successors and give them the benefit of everything that I had learned in dealing with Japan. Every year I do a major review of global economic trends, including the Japanese financial system. These reports were read by top people in successive administrations, beginning with Lloyd Bentsen when he was Secretary of the Treasury.

When I was the OAS Ambassador before I became the Under Secretary, [Secretary of State George] Shultz had given me the full portfolio of material generated by our intelligence services that came into the Department every day. I had read enough of the intel to know that we were dealing with a Japanese economic patient that had cancer.

Eventually during the course of the first meeting of the Structural Impediments Initiative that I chaired in June 1989, I said, “I have something I want to raise on a personal level.” I then described my concerns about Japanese finances.

There was complete silence in the room. The only encouragement came from a well-placed friend in Switzerland. Six months later the Japanese financial system began its catastrophic implosion.

“We basically were telling the Japanese to change the way they did things”

Robin White

State Department, Japan desk, Chief Economic Officer, 1990-1991

Q: You know, what you’re talking about is that a U.S. government official is saying to another country that you’ve got to change your internal system. It is like someone coming to the U.S. a few decades again and saying I’m sorry, but you have a racist policy in North Carolina and this is inhibiting our trade with you so get with it and desegregate. It’s almost that.

WHITE:  Oh, yes. We basically were telling the Japanese to change the way they did things domestically because their domestic policies were affecting external markets. We had already negotiated most of the easy things.

Governments are expected to complain about quotas and tariffs, but we were going into the hard-core domestic stuff. People recognized that this was something different and something that could easily cause a lot of negative reaction in Japan. The USG team was sensitive to this concern and one result was that we worked on the Japanese press quite hard to try to convince the Japanese that they were the ones suffering from their government’s restrictive policies.

One of the things done early in the talks was a joint survey of prices by Ministry of Trade (MITI) and Commerce Department officials.

They’d take a certain camera as an example. They’d look at the price in Tokyo and New York and Osaka and Chicago in the same kind of store. They did that for a range of goods and not surprisingly the goods made in the U.S. were more expensive in Japan, but the Japanese goods were also more expensive in Japan.

When the Japanese consumers saw these results they suddenly got the sense that there was something wrong with their system. The very high prices were in large part because of the many layers of the distribution system. So we actually got some sympathetic press. USG officials gave talks to different groups in various parts of the country. In certain areas like distribution we made progress because we had some Japanese allies, entrepreneurs who wanted to open larger stores themselves….

I mentioned in talking about the distribution system, the fact that the mom-and-pop stores had a great deal of power; this group was a very strong supporter of the Liberal Democratic Party (LDP). The other two really strong supporters of the LDP were farmers and the construction industry. So agriculture, construction and distribution are three areas where not surprisingly we’ve had a lot of problems. Contributions from these groups support the LDP and the LDP then gives back to them by subsidies, contracts or protectionist legislation….

Keiretsu issues were another major problem. Keiretsu are large business and corporate groups that have interlocking ties with one another. They held each other’s stock, which kept outsiders out, and they didn’t buy intermediate goods on price grounds but bought from their related companies. That prevented new suppliers from getting in the market.

Anti-trust issues were taken up seriously for the first time and the Justice Department got very much involved in urging the Japanese to strengthen their enforcement of laws that were on the books but pretty much ignored.

What helped on the distribution side was that some domestic interests weren’t happy with the system. We worked with stores like Toys-R-Us that wanted to go into the market in a big way but were blocked by square-foot limitations and other regulations. There were some Japanese supermarkets and others who wanted to expand as well and they were being blocked by the fact that the little stores didn’t want competition.

Enough countervailing pressure was generated on the Japanese side that MITI did end up relaxing the size limits on retail stores. Toys-R-Us eventually opened over 100 stores in Japan.

“You’d realize that the Foreign Ministry and MITI people hadn’t coordinated positions or talked much at all beforehand”

One way that the Japanese government dealt with this domestically was by giving out money to who were considered the losers. In Japanese cities, there were little shopping arcade streets with small shops with fairly limited merchandise. They had their charm, but prices were high and few of the goods were imported. The plan was to give these small stores a big chunk of money and allow them to upgrade. There were also plans to create new malls in the downtown areas with a big anchor store, with the small stores filling in and staying viable. It would also keep people downtown. That was the plan and the money helped smooth the way for changes. The problem they couldn’t address, more apparent now years later, is that young people weren’t attracted to this kind of business so the little stores are disappearing in some cities. People also have cars more and will drive to big stores.

Things have gotten a lot better on the distribution side for big operators and in fact now there are even some discount stores in Japan, which was considered heresy. Many Japanese officials claimed their people would never go for discounts as they valued name brands and quality so much but the economic slowdown proved the theory wrong. Of course the irony is that all the toys that Toys-R-Us brings into Japan are from China, not the U.S., but at least we achieved some market opening.

One interesting thing about the Japanese bureaucracy was that they didn’t really talk to each other very much. You’d get into a negotiation and realize that the Foreign Ministry and MITI people hadn’t coordinated positions or talked much at all beforehand. It sometimes seemed that they were seeing each other for the first time while sitting together across at the table from us. In comparison, as difficult as the bureaucratic infighting could be in Washington, we were a lot better coordinated and a lot more on the same page than the Japanese were in at least a few of our negotiations.

To sum up, the SII [Structural Impediments Initiative] talks went at a pretty full speed for about three years and then it slowed down and eventually became the deregulation talks. Initially we achieved some really good effects.

Ironically, the Japanese took a very hard line against our push for them to improve their business practices, especially to bring more transparency in the keiretsu, the interlocking groups of companies. The subsequent long, damaging economic slowdown had roots in these practices that they wouldn’t change, that is, the closed nature of the businesses allowed a lot of uneconomic business decisions.

For example, it allowed companies to focus on market share instead of profit, not a practice that can be sustained in a transparent system. In areas where they did loosen their tight control, such as retail distribution, the economy as a whole benefited.

“The Time Magazine cover had the Statue of Liberty wearing a kimono”

Q: Were there any warning signs about the Japanese economy and the overinflated bank loans at the time?

WHITE: What we started seeing at that time was the real estate price boom, the bubble that got to ridiculous proportions. That started in the early ’90s because a lot of companies held real estate as collateral. They were able to borrow on it and then it became like a pyramid scheme to the degree that at one point the theory was that the Imperial Palace land was worth more than the state of California.

The high prices allowed companies to borrow against the land that they had in Tokyo or other cities and then use that money for all sorts of speculation.

It became a bilateral problem when the Japanese began investing in a major way in the U.S. On the one hand, states were trying very hard to get Japanese direct investment in their states. Some states had offices in Tokyo and people working to get companies to come with job-producing factories. They offered subsidies and other incentives.

The actual physical plant investment wasn’t a problem, but when the Japanese started buying Rockefeller Center and Pebble Beach Golf Course people noticed. These purchases were so visible that there was a strong negative reaction, e.g. “the Japanese are going to buy up this country.” At one point a Time Magazine cover had the Statue of Liberty wearing a kimono.

The other one that caused a lot of attention was Sony’s purchase of MGM. I was in the Under Secretary’s office at the time, so it was probably 1989. He was one of the people who sat on the investment review committee called CFIUS, Committee on Foreign Investment in the U.S. They were asked to review anything that might involve national security, which usually meant a European company buying up a high-tech manufacturing concern, but in this case somebody asked CFIUS to go over the motion picture purchase, perhaps for fear the Japanese would use films for propaganda purposes.

McCormack’s view was that the case should go through the long process rather than an expedited review so that Congress and other critics could be satisfied that a very careful look had been taken. In the end the purchase was not blocked.

Q: Then there was a joke going around about a new ad campaign: now we bring you the new Toyota, by those wonderful folks who brought you Pearl Harbor.

WHITE: People used the phrase “economic Pearl Harbor” and that indicates the strong negative feelings toward the Japanese. But their economic onslaught turned out to run its course, and they were actually buying land at highly inflated prices that left them holding bad investments.

And not just land. We also saw the Japanese buying van Gogh paintings for huge sums of money and many purchases went downhill. They ended up holding on to vastly overpriced land and buildings, particularly in Hawaii. They’re still recovering from the prices that they paid for buildings and hotels there.

“It is sort of like peeling an onion where you never quite seem to get at the core”

Joseph Winder

Economic Counselor, Embassy Tokyo, 1990-1993

WINDER: We had a number of mechanisms in dealing with the Japanese. In the ‘80s we tended to focus on sectors in particular and engaged in a lot of sectorial negotiations, whether it was construction or automobiles or pharmaceutical equipment. We took problems a sector at a time. In the late ‘80s the administration decided that the talks ought to be much broader. To look at structural impediments, there was something set up called the SII [Structural Impediments Initiative].

A process was established whereby on the Japanese side, the Finance Ministry, Foreign Ministry, and MITI all participated and on the U.S. side there was a broad range of people from State, Commerce, Treasury, USTR [United States Trade Representative], etc. The hope was that it would bring some of the economic ministries in Japan into the process and perhaps put some pressure on them to make some of the necessary changes.

When I arrived the SII was in full swing and we actually made quite a bit of headway, I think, in getting them to make some changes in some of their procedures. Unfortunately, dealing with the Japanese is to change one procedure but not another.

So, it is sort of like peeling an onion where you never quite seem to get at the core, although you make a little headway. At the same time we were doing SII, we were still continuing an emphasis on sectors, a double whammy approach.

“The economic giant that was going to take over the U.S. was now an enormous drag on Asia”

WHITE:  By the late ‘90s the concern was much more that Japan’s economy was floundering. The economic giant that was going to take over the U.S. was now an enormous drag on Asia. Their growth rates were so low they were not providing any stimulus to growth in other countries and that became much more a focus.

The attention shifted in a sense from what USTR could do on specific trade issues to more concern about what Treasury and U.S. businesses could do to urge Japan to get its economic house in order.

The banking system had huge amounts of non-performing loans, but it was very difficult to get them to change because there’s nothing more domestic than monetary and economic policy. The U.S. government’s policy at that time was to promote deregulation of various sectors in hopes that a more free market economy, while painful at first, would give Japan a chance to restructure and use its assets more effectively and efficiently.

Q: Weren’t there too many loans or too much money on real estate?

WINDER:  The real estate bubble burst while I was there. The time I arrived in Japan was interesting. At the time in early 1990s, Japan was king of the hill. Books were out saying that the United States was never able to keep up with Japan and had sort of turned everything over to them. They are eating our lunch everywhere all across the board and it is our entire fault and we shouldn’t let it continue.

By the time I left, the Japanese economy was in the doldrums and nobody was talking anymore about poor American manufacturing and good Japanese manufacturing. The American manufacturing sector had reinvented itself. It had restructured, downsized, focused on core competence and focused on the kinds of things it needed to do and was again very competitive. The Japanese industry was just entering that period and they still haven’t worked their way through it.

So, when I arrived, if anyone had said the Japanese were going to have negative growth, you would have been laughed out of the room. And now, if you think you are going to have positive growth of one percent you are laughed out of the room. It is an amazing turn around.

“The Team A and B concept:  at one time we negotiate, at other we beat on the Japanese”

William Clark Jr.

Assistant Secretary, East Asia and Pacific Affairs Bureau, 1992-1993

CLARK:  Japan was always an issue for the EAP [Bureau of East Asia and Pacific Affairs] Assistant Secretary. It was always the trade problem. By 1992, I had watched Japan trade issues for thirty years. In retrospect, the best I could say is that it could have been worse.

If we hadn’t engaged in trade negotiations and other dialogues, the Japanese would have had even a greater current account surplus. Their markets would have been more closed, although they might have some weaker economic sectors. Our pressure for “market opening” has forced Japan to modernize some of its sectors and become more efficient.

I guess I would have to say that on balance our efforts have had some positive results although it would be hard to prove by just looking at the statistics. You have to remember that [the Department of] State has had one policy; you can argue that the White House and Treasury have followed two policies. State had always supported free trade and market opening in the hopes that would increase our exports to Japan and decrease their imports to us.

The White House and Treasury agree with that thrust, but they also have pushed the strengthening of the yen which hopefully would have had the same results as the market opening efforts. That yen strengthening policy is the one that is always discussed and I think it has been very effective in restraining the trade imbalance. I have already commented about the lack of understanding in Washington about Japanese culture and its decision-making process. By 1992, I think Washington had come a long way in understanding those factors.

That did not ease the burden on the Embassy of not appearing to be Japan’s spokesperson. It is always the burden of an embassy of trying to explain the cultural differences between its host country and the U.S. without appearing to be a defender of its hosts. I think when I was in Tokyo we managed to maintain a balance in our reporting, which has not always been the case.

But even today, even with an increased understanding of the Japanese culture and process there is a lively debate in Washington on how you deal with it. That debate has not changed in the last ten years, although the environment in Japan has changed markedly. We still have the Team A and B concept:  at one time we negotiate, at other we beat on the Japanese.

Arguably, ten years ago, Team B might have had the right approach, but now, with Asia growing in confidence, it won’t work in Japan and in fact creates a backlash from other Asian countries. Those other countries will agree with our goal of market opening, but do not agree that strong arm tactics — such as numerical targets and the “301” approach — are appropriate.

In 1992, EAP was involved in trade issues; I have the sense that today USTR has taken over entirely. Of course, once again, the fact that I had a friend in USTR, Jules Katz helped; we had worked together many years. Jules and I didn’t agree on many issues but we respected each other’s views. It is a fact, I think, that the Japanese “experts” have an entirely different view on how to deal with the Japanese than other Washington bureaucracies.

The Japanese “experts” have to be careful lest they are perceived in the same way as our Embassy in Tokyo was seen from time to time. It is very much a matter of presentation; if you emphasize tactical routes to achieve commonly agreed objectives, then you will have a much better hearing than if you say that the Japanese just won’t do some things. Unfortunately, most “experts” tend to take the second line and that is not the road to success.

By the time I became Assistant Secretary, the famous [George H.W.] Bush trip to Tokyo was history. That was one of the best prepared trips that had ever been developed for a President; it was then cancelled and then reinstated and became one of the worst trips.

The President’s illness didn’t help [when he vomited at a January 8, 1992 banquet hosted by then Prime Minister of Japan, Kiichi Miyazawa], but it was not a well-planned trip to start with, even though we did reach some agreements with the Japanese during his stay in Tokyo. In any case, during my tour as Assistant Secretary, the Japanese trade issue was not a major preoccupation of the administration.