Twenty years ago, though the term did not exist as such, there was a “Tokyo consensus” reflected in a series of Japanese phrases that became part of universal business jargon: gyosei shido (administrative guidance), whereby the all-powerful Ministry of International Trade and Industry picked winners among sectors and companies and, thus, drove Japan to ever higher competitiveness; keiretsu (industrial groups), whereby Japanese companies were joined by various financial and managerial links, thus achieving both horizontal and vertical integration; kanban (just in time), whereby Japanese manufacturers obtained parts directly from suppliers and sub-contractors that were immediately installed on the assembly line, hence abolishing inventory and greatly enhancing productivity; and kaizen (continuous improvement), whereby all members of the “corporate family” participate in multiple improvements, no matter how seemingly small.

During the 1980s, when Japan’s gross domestic product was recording very high growth, a monumental asset inflation was occurring. As the stock market and real estate prices soared, interest rates were kept very low, banks provided ample and easy credit and companies invested continuously, especially in construction, resulting in massive loans and overcapacity. Then the bubble burst. The stock market and real estate prices crashed and the banks were faced with mountains of bad loans. Furthermore, during these years, Japanese industry continued to rely on existing strengths, with very little innovation to meet the new challenges of globalisation, information technology and the services revolution and, thus, to act as growth engines. There are some very strong companies in Japan that weathered the crisis, but they are in traditional sectors such as automotive (Toyota and Honda) or electronic office equipment (Canon) rather than in what might be termed 21st-century leading sectors. Japan remains especially weak in services. Consequently, the state of its economy remains highly dependent on exports.

There is one striking similarity between the Japanese crisis and the current downturn: the hubris that preceded them. The Japanese were convinced the sun would shine, if not forever, at least for a long, long time. And that conviction, in turn, was buttressed by a belief that the superiority of the Japanese system was culturally innate.

Japan’s mistakes

The differences between the US and Japan are too numerous to enumerate here. One important difference in the context of their reciprocal crises lies in consumer behaviour: Americans are the world’s biggest spenders while the Japanese are among the world’s biggest savers. Profligacy, however, featured in the preludes to both crises.

In the course of the second half of the 1980s, corporate Japan went on an investment spree, both domestically and internationally. With interest rates low and the yen having doubled in value against the dollar following the September 1985 Plaza Accord, which resulted in the depreciation of the dollar in relation to the yen, foreign assets seemed especially cheap. Hence, the frenzy in buying mainly US, but also European and Australian, high-prestige real estate (Rockefeller Centre in New York), golf courses (Pebble Beach in California) and companies (Columbia Pictures film studio).

This era of intoxication also saw the extravagant purchase of numerous works of art, notably Vincent van Gogh’s “Vase with Fifteen Sunflowers” by Yasuo Goto, a Japanese insurance magnate, for almost $40m in 1987, a record at the time.

Japanese institutions also invested heavily in the domestic real estate market, with the result that, as pundits were fond of pointing out at the time, the value of the land surrounding the Imperial Palace in Tokyo was greater than that of the entire state of California.

When the bubble burst in 1991, the Japanese financial market was hit by a tsunami of bad loans and many institutions, including some of the most venerable, such as LTCB (Long-Term Credit Bank) and Yamaichi Securities, collapsed.

Unlike the US, in Japan the profligacy was almost entirely institutional. Japan has never had a well-developed consumer culture and the reforms that might have been undertaken at the time to create one did not materialise. The country retained its fundamentally closed form of bureaucracy-controlled corporatist capitalism. When the government sought to combat deflation and re-boot the economy by boosting consumer demand – including by literally dishing out cash – it failed. Japan’s few apparent bouts of recovery were invariably caused by external forces, notably growth in exports to China.

Perhaps Japan’s biggest failing was the long period during which officials and opinion leaders remained in a state of denial. The hubris had been such that the possibilities of fundamental weaknesses in the system were rejected.

Two very different events in 1995 woke Japan from complacency to a state of calamity. On January 17, the Kobe earthquake killed 6,500 people. The shock of the human tragedy was compounded by the government’s floundering incompetence in responding, resulting in far more deaths and destruction than there should have been. The myth of all-knowing Japanese officialdom was instantly destroyed and has never recovered.

The second event was the sarin gas attack on the Tokyo metro on March 20, when Aum-Shinrikyo, a terrorist sect, killed 12 people and injured 5,500. Japan’s self-image as the quintessential land of security and social harmony was punctured.

The financial crisis, the protracted state of denial and the two calamitous events of 1995 shattered the confidence of the Japanese people. That confidence has never been restored and seems unlikely, on the basis of current political, economic, social and demographic trends, to be restored in the foreseeable future.

Lessons for the current downturn

Japan’s socio-economic model differs great from that of other countries but there are lessons to be drawn. Three in particular stand out:

● What goes up must eventually come down. When the sun is shining, prepare for rainy days for they will come. One of the key lessons from Japan’s crisis is that of humility.

● Japan’s experience illustrates the terrible consequences of loss of confidence. At times of crisis, confidence is the most important force to restore.

● The crisis could have been turned into a massive opportunity had “Fortress Japan” opened up. It did not. The one thing that could transform the US financial crisis into a global drama would be if the US were to emulate Japan and become closed.

Jean-Pierre Lehmann is professor of international political economy at IMD, founding director of The Evian Group and co-author, with John Haffner and Tomas Casas i Klett, of ‘Japan’s Open Future: An Agenda for Global Citizenship’.
jean-pierre.lehmann@imd.ch