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Issues of the Nineties

Sony Side Up

Gary R. Saxonhouse
***The Americans who have bought Japanese cars, cameras, calculators, and VCRs have done so voluntarily and have presumably thought they benefitted from them. So, too, have the American manufacturers that have purchased Japanese semiconductors, steel, and machine tools.
FOR all the harsh talk ol trade tensions between the United States and Japan, the world's two largest market economies have grown closer and more Interdependent over the past decade, with extraordinary benefits for the populations of both countries.
The benefits to Japan have received moat of the attention. Though through the years the US has forced Japan to restrict Its exports here of cotton textiles. steel, color television sets, cars, machine tools, and semiconductors, the American market has been more open to Japanese consumer and industrial goods than has any other major market in the world. This access to American customers has been indispensable to Japan's emergence as the world's third largest exporter. (The US and Germany alter nate tn first place).
Through licensing agree Bents, joint ventures, and ■xr forms of economic cooptation. Japan has frequently - occn able to gain access lo the best of American technology — a process it has used tn many Industries lo take technological leadership itself. Meanwhile. despite obstacles that may have limited Imports into Japan over recent decades, Japanese consumers have been able to enjoy the products of IBM. Gillette. Pfizer. Otis Elevator, and many olher American companies with substantial Japanese manufacturing operations.
Closer economic Ues with Japan have also been good for the US. despite the commonly heard claims that Americans have gotten the raw end of the bargain. Indeed, although it has become commonplace recently to denigrate American economic performaiac In the 1980s, by many reasonable criteria Americans fared even better than did the Japancsc during the past decade of close bilateral contact.
Between 1981 and tlx end of 1988, for example, real consumption In the United States increased by 28 per cent, compared with an increase of 27 per cent in Japan. And while US consumption rose in the 1980s at an average annual rate of 3.1 per cent, US Investment grew still more rapidly at 3.4 per cent.
During the 198Os new Jobs were created in the US at almost twice the rale they were created in Japan. Employment In America rose at an average annua! rate of 1.9 per cent, compared with only 1.1 per cent in Japan.
. This rapid growth In cm-pfoyment has by no means undermined American leadership tin productivity. The Orga-nization for Economic Cooperation and Development (OECD) takes great pains to
evaluate national economic performance on an internationally comparable basis. Notwithstanding rapid Increases In productivity for the belter part of a century, and spectacular success In partk u lar Industries, Japan's overall level of productivity remains even today at hillc belter than two-thlrds the American level.
America's economic performance during the I9WK is all the more remarkable because the Ancrican lax paver during this period bore Ihc burden of a belter than 5<> r t cent real Increase 1n national defense spending. Closer economic ties with Japan contributed to America's 1980s boom in four important ways.
First, a massive Inlluw of capital from abroad, and especially from Japan, allowed Americans to finance the 1980s defense buildup without a reduction of cither their capital slock or their standard of living. Second, the availability of low-price, high-quality Japanese imports, besides being a boon to American purchasers of cameras, calculators, VCRs, and countless other products, helped American monetary authorities break the back of inflation In
the early 1980s.
Third, in a reversal of what used to be a one-way street, technology transfer from Japan in the 1980s has helped lo revitalize many American industries. particularly autos and steel. Finally. Ilie emergence of Japan as a major Importer of manufactured goods has pl.ned an important part in America's extraordinary export-led on-ufactoring boom of the past few years. This market Is so inviting that Japanese consumed $374 worth of American imports per capita in 1989, while Americans consumed only 8360 worth of Japanese imports per capita.
The Liberation of
Japanese Capital
From 1980 lo 1989, the US borrowed a ncl total of 8650 billton from the rest of the world. Roughly a fifth of this net capital inflow came from Japan — over 350 billion lak Ing the form of Japanese ncl direct investment in US factories and real estate, and another 380 billion in Japancsc nct purchases of financial instruments.
American demands for a higher standard of living, for a significantly stronger national defense, and for major Increases In capital formalion proved achievable 1n part because they went hand in hand with a dramatic shift after 1980 in the Japanese ability lo hold dollar-denominated assets Until 1980, Japan's Foreign Exchange Control Uiw made ft very difficult for Japanese citizens or private Institutions to hold assets denominated in foreign currency. This law insulated Japanese fi nanelal markets from the rcsl of the world and reserved Japanese savings for the exclusive benefit of Japanese corporations and governmental authorities. When the law was revised at the end of 1980. in part as a result of American diplomatic pressure. Japuncsc corporations. financial institutions. and households for the flrsl time were able to meet long pcnl-up desires to diversify their portfolios and hold dollar-denominated assets.The revision. which also led the way for the liberalization of doincslic financial transactions in Japan, was little noticed (or otherwise discounted) In the United States at the lime II took, place. In retrospect, few events were more Important for shaping the American
political economy of the 198Os.
The opening of the Japanese market lo sales of American financial Instru ments may have lowered US interest rates by as much as four percentage points from the sky-high levels that otherwise would have resulted from the American defense buildup. In consequence, Americans were able to enjoy a substantial increase in military preparedness without It coming at the expense of their standard of living or their capital stock. Indeed the maintenance and continued Improvement of the US standard of living might even have come al Japanese expense, as the massive sale of high-yielding American financial products 1n Japanese capital markets raised Interest rales and curtailed investment there.
End of a Golden Age
Japanese capital outflows were highest from 1986 through 1988 when the Bank of Japan followed a very accommodating monetary policy. But this policy abruptly ended In may 1989 as the Bunk of Japan sought to restrain speculation In both the land market and the Tokyo Slock Exchange and raised the official discount rate for the first lime In nine- years.
In light of this change in Japanese policy, ihc golden age of the Japanese finance of American prosperity may well have ended. A rise In Japanese interest rates of almost five percentage points in little more than two years, the 40 per cent fall of the Tokyo stock market In 1990. a decline in the household savings rate, and the end of the Japanese government's budget surplus all make fl more likely that Japanese Investors will use more of their savings al home during the 1990s. Already Japan's ncl capital exports have fallen from 4.6 per cent of CNF in 1987 to less than 1 per cent of GNP in lale 1990. And while the American
public continues lo be concerned about Japanese ownership of American resources, in fuel, during 1989 and 1990, Japan, by liquidating past in-veslmcnls, has become a ncl capita! importer from the United Stqlcs.
Breaking Inflation's Back
At the macroeconomic level, the opening of Japanese capital markets did more than just provide much needed finance for the American economy. The depreciating yen, which went hand in hand with the opening of capital markets, helped to break the back of US Inflationary expectations in the 1980s. They early 1980s marked the first time in almost 30 years that there was a sustained decline in the price of imported manufactured goods. Between 1981 and the end of 1986, prices of imported goods fell continuously at an average annual rale of 1.1 per cent — which in turn helped lower the prices of all manufactured good. in the United States. Indeed, driven by plummeting prices of Japanese computer chips the price Index of all US producer durables fell 4 per cent from 1982 to 1990 after having risen nearly continuously for the previous 50 years.
Al the microeconomic level, Japanese competitive pressure has forced Improvements in the efficiency of many areas of the American economy. Just as the deregulation of American transportation, communications, energy, and financial services has resulted in vigorous competition in hitherto complacent industries, so has competition from foreign countries destroyed artificial monopolies In US manufacturing. Japanese firms have been at the cutting edge of much of this new competition, creatively taking advantage of the new opportunities opened up by the deregulation of commerce at America's borders.
Indeed competition from Japanese and other foreign firms has proved lo be the most effective form of antitrust policy. Not long ago. intermediate and final goods industries in the US had the power lo inilialc waves of cost-push inflation. laibor and maiuigemcnl engaged In unattractive public battles, which all too often led to lengthy strikes, as part of the process of dividing up monopoly profits earned at consumer expense. These hallmarks of an insufficiently competitive economy arc happily rare today. During the 1980s less that one-tenth of 1 per cent of labor force lime was lost due to work stoppages. Such work losses in the 1970s were three times greater.
Products Americans
Wanted
During tnc 1980s Americans bought no less than 8680 billion In imported goods from Japan. The Americans who have bought Japanese cars, cameras, calculators, and VCRs have done so voluntarily, and have presumably thought they benellttcd from them. So. too. have the American manufacturers that have purchased Japanese semiconductors, steel, and machine tools. Neither the personal computer nor the software business, two of America's hlghcst-growth Industries, would have taken off as rapidly as they did without the availability of low-cost, high-quality microchips from Japan.
The continuing benefits to the American economy from Japanese Imports can best be appreciated by examining the costs of protectionist barriers. The American consumer paid dearly, for Instance, as a result of "voluntary" quotas on auto imports from Japan during the 198Os. According lo widely respected estimates, these import restraints raised the price of Japanese cars in the US by 31.000 and (he prices of US cars by 81,400. Pul another way. auto import restraints In the 1980s annually cost American households one-third of what the SAL bailout will annually cost American households in 11k: 1990s.
Reverse Technology Flow
Japan is now the second largest source of direct tn-vcstmehl in the United Stales, after Great Britain. In the past year, Japanese enthusiasm for California and Manhattan real estate has fallen significantly as the Shuwa Company, a prominent real estate concern, and other Japanese Investors have lost substantial amounts of money on American properties. Even so. the purchase by Japanese of such cultural Icons as Rockefeller Center and Columbia Pictures continues lo fan nationalistic fears' of a Japanese takeover.
But direct investment has enriched Americans who sold properties lo Ihc Japanese, and In many cases has poured capita! into American companies that needed infusions of cash. More than 350,OUO Americans now work in Japanese-owned facilities ranging from Kikkoman's food processing operations In Wisconsin, to Dal Nippon Ink & Chemical's graphic arts group in New Jersey to the Green Cross-owned research and development laboratories in southern California.
Far from hurling the American economy, Japanese firms operating in the United Stales are helping it. Despite years of rising Imports of manufactured goods from Japan. It was only when Japanese firms began lo pro-ducc successfully in the United States that American firms began a dramatic reassessment of their production methods.
Just-in-Time Learning
In the 1980s, General Motors learned from its joint venture with Toyota that spending billions of dollars for high technology docs not necessarily mean high performance. Perhaps the best-known impact of Japanese transplant practice on American manufacturing has been the widespread adoption of Just-in-Unx- methods. Spurred by the successful use of such nx-lhods tn the Toyota-GM joint venture al Fremont, they have been widely adopted within the automobile Industry. Auto parts suppliers report sharp declines of as much as 50 per cent in ihe amount of space required for production and increases in overall productivity of as high as 30 per ccnL In the computer printer Industry, NCR has been able lo turn around Its Ithaca, New York, plant using Just-in llnx- methods first publicized by Japanese transplants. Following the adoption of jusl-ln-tlmc, NCR-lthaca reports a drastic reduction In on-hand inventory from 1 10 days' worth lo Jusl 21 days. Other improvements include an 80 per cent reduction in work In process and a 90 per cent reduction in manufacturing cycle tinx-. Just-in-timc methods do not work for every factory, of course, but they have played a major role In revitalizing American manufacturing.
Turnaround in Steel
No American Industry In recent years has benefitted more from Japanese technology and Japanese capital than the steel industry. Between 1982 and 1985, the American steel Industry, faced with surging imports, excess capacity worldwide, Ineffective diversification, and low productivity. recorded an unprecedented Sil billion in losses. No less than 20 per cent of domestic steel production was operating under Chapter 11 bankruptcy proceedings. Just a few years later, however, and against all expectations, conditions in the American steel industry Improved dramatically. In 1988 and 1989, the Industry revived to the extent of earning record profits. A restructured. if smaller, American steel Industry, now bcneflttlng from the sharp ap prcclallon of the Japanese yen, has once again become Internationally competitive In many important product lines.
While American steelmak ers had been Importing Japanese technology since the 1970s. Il was only tn the mM-198Os with the Importation of Japanese management and capital that decisive changes In the industry's organization and product mix were finally achieved. In 1984, Japan's NKK Corporation acquired 50 per cent of National Steel's equity. This joint venture was soon followed by new partnerships between 1) Nippon Steel and Inland Steel; 2) Kawasaki Steel and Armco Steel; 3) Su ml lo nx> Metals and LTV; 4) Kobe Steel and USX; and 5) Nisshin Steel and Whecllng-Ptltsburgh Steel. These Joint ventures, while pulling the Anx-rican steel industry on a stronger financial footing, accelerated the transfer of Japanese plant automation, computerization, and production control system technology. With the adoption of Japanese processing and surface-coating technology, made possible by these Joint ventures. American producers have been able lo compete at honx and in overseas markets once again on the basis of quality as well as price.
The transfer of Japanese technology and methods through Japanese transplanted firms is not confiiK-d to manufacturing technology, to labor management, lo assembler-supplier relations, or just to the automobile, computer cqulpnx-nt, or steel industries.
Friendly Rivalry
Americans continue lo have many legitimate complaints about Japanese policies. Japan's agricultural protectionism not only raises food and real estate prices for Japanese families, it is wholly Inappropriate for a country that should be bending over backwards to further continued International trade liberalization. Regulatory restrictions on stores In Japan have kept down competition from Japanese and foreign retailers alike.
High-volunx: retailers lend to scour the world for their products; their relative absence in Japan almost surely comes at the expense of the Japanese consunxrr.
These are ihc complaints of friendly rivals, not enemies. In sharp contrast lo US-Sovtet relations during the Cold War, the US and Japan are locked In a mutually beneficial embrace that extends from finance. trade, Invcslnx-nl, and technology lo ihc massive exchange of people and ideas. US-Japanese economic, social, and cultural Integration has benefitted both peoples. These benefits will grow as the world's two most competitive market economics become even closer.