Profile: Japan's Invisible Leviathan

THE MINISTRY OF FINANCE

Perceptive Westerners may be forgiven a touch of cognitive dissonance in looking at the Japanese economy. They read daily that Japan has been badly damaged by a terrible economic slump, yet the evidence tells a different story. What are they to make, for instance, of the yen's conspicuous strength? In the last five years, it has risen nearly 40 percent against the U.S. dollar. Meanwhile, Japan's exports have risen 41 percent, giving Japan a current account surplus of $127 billion in 1994. The export surge is even more remarkable because for more than three years the Jeremiahs of the Western press have been predicting disastrous scenarios on the assumption that a high yen would soon price Japanese exports out of world markets. Yet how can a country be an economic has?been if it boasts one of the strongest currencies in the world while it racks up the largest trade surpluses ever recorded?

The truth is that Japan did not collapse in the early 1990s. Far from it. In the five years to the end of 1994, Japan's total output at current exchange rates shot from 55 percent of U.S. GNP to nearly 70 percent. In other words, while the Western press has talked of collapse, Japan has quietly remained on track toward its reputed goal of surpassing the United States to become the world's biggest economy by 2000.

This is not to say everything has gone smoothly in recent years. In particular, Japan's financial markets have had a bumpy ride. After peaking at the end of 1989, the Tokyo stock market plunged 63 percent over the next two and a half years. In any other advanced nation, such a financial crash probably would have triggered massive damage throughout the economy. Not surprisingly, therefore, when the Tokyo market fell, Western economic commentators gloomily described the Japanese economy as "out of control." But the Japanese economy was never out of control. The Japanese economy does not follow Western logic, whatever Western forecasters say, for the simple reason that it is not a Western free?market economy. The Japanese have discovered that basic changes in the way wealth is created in the twentieth century -- specifically the rise of information as a critical factor of production -- require a radically different approach to economic management. Thus they have invented a type of economics that behaves in ways that confound the predictive powers of Western observers.