The can kicks back (Noah Smith)

In my earlier post, I stated that Japan’s current-account surplus can vanish in one of two ways: either Japan can consume more (which it won’t because of debt and demographics), or it can (over)produce less. That is true. But when the adjustment happens is not set in stone.

A casual observer might think that Nakagawa Shoichi’s speech condemning protectionism might sound a little hypocritical, coming as it does on the same day that he threatened to intervene in currency markets to weaken the yen. But from the perspective of very-short-term Japanese national interests, the policies are complementary: the only way to stave off the day of reckoning I described earlier is to pump up exports. Naturally, that will only make the adjustment more painful when it happens, but given current electoral politics one could understand why the LDP isn’t exactly planning for the long term. Instead of letting Japan take its lumps now and planning for a brighter future, it seems fairly certain that the LDP will fall back on the old “developing-country” export-promotion, and kick the can a few feet down the road.

But kicking the can carries another, little-mentioned risk. So far, American and British economists and executives have been holding the line against a rising protectionist tide, evoking the memory of “Smoot-Hawley” like a mantra. So far the line has held, as America’s Democratic politicians have been too afraid to reach for the bazooka. But the consensus is badly fraying, with Paul Krugman saying he can see the case for “Buy American” provisions in America’s stimulus bill. The monster is straining the bars of its cage. And if America’s ire is ever roused against Japanese currency manipulation, the US will be far quicker to act than it has been against China; after all, US multinationals do not have their factories in Japan.

No one knows how much a modern-day round of “Japan bashing” would hurt Japan’s economic model, but I suspect it would be more severe than nearly anyone can imagine. Japan’s much-discussed “dual economy” relies on a compact in which the bureaucracy distributes the rents from world-beating export industries to a host of less efficient domestic industries and small businesses. In the 70s and 80s those rents came from the superior operational efficiency of Japan’s auto, electronics, and machine-tool champions; in the mid-2000s they came from the costs saved when those champions moved their operations to China. If America closes its doors to Japanese imports, those rents will vanish and the compact will be broken.

So a best-case scenario for the LDP’s kick-the-can strategy is a delayed, more-painful adjustment in maybe three or five years. A worst-case scenario is that American protecionism rises from the dead and smashes Japan’s economic model like the hammer of a vengeful god.

In choosing to run the dreadful risk of delaying Japan’s day of reckoning, the LDP has proven what many of us always knew — that it represents only a subset of the Japanese people, all its claims to the contrary.

– Noah Smith

One thought on “The can kicks back (Noah Smith)

  1. Anonymous

    \”Japan's much-discussed \”dual economy\” relies on a compact in which the bureaucracy distributes the rents from world-beating export industries to a host of less efficient domestic industries and small businesses.\”Could you give specific examples about what you mean by this? Thanks.

    Like

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