Interviews (Arthur J. Alexander)

Arthur J. Alexander
Arthur J. Alexander is the former president of the Japan Economic Institute in Washington D.C. At JEI he conducted research on the Japanese economy, defense economics, technology, and innovation. He has testified several times before the U.S. Congress on these subjects. He is also teaches at Georgetown University in Washington.
Dr. Alexander received his B.S. in engineering and industrial management from Massachusetts Institute of Technology in 1958, a M.Sc. Degree in economics from the London School of Economics in 1966 and a Ph.D. in economics from The Johns Hopkins University in 1968.

Interview: February 26, 2003

Let’s start off by asking why a Sovietologist specializing in weapons acquisition policies, defense decision making and research and development at Rand Corp. (1968-1990) suddenly focused on Japan. Was the “Japan Problem”—to use Karl van Wolferen’s term—the equivalent of the Cold War threat at that point in time?

I went to Rand in 1968 with my economics Ph.D. from Johns Hopkins almost completed. Several research questions attracted my interest there and my first project was on Soviet aviation R&D. At that time, I knew nothing about the Soviet Union or aviation or R&D, although undergraduate study at MIT provided some technical background. One project led to another and after 20 years, I had become a Soviet expert at just about the time of its collapse. I taught the subject at UCLA and at the Rand Graduate Institute (which grants a Ph.D. in policy analysis).

In the early 1980s, several Rand colleagues and I began to find Japan an intriguing issue. Much was being written about its economy, a good deal of which sounded like drivel to my untutored mind. (It turned out to be even worse once I learned something about the subject.) We met irregularly and decided to hunt for some interest in the government for research projects. I attended several meetings in Washington and wrote up a few proposals, which went unfunded.

One such meeting at the CIA around 1982 or 1983 was sponsored by the director, Bill Casey. At a small reception next to his office, I asked him about his interest in Japanese economics. He replied that every cabinet meeting was taken up with economic affairs and that Japan often was at the top of the agenda. He said that there was little knowledge in the government to address these policy questions so he decided to put some of the talent and money of the CIA into what he saw as general support for government decision-making. (Years later, when I repeated this story to Japanese experts in the government, they said that the talent was there, but that the White House did not know how to tap it.)

Shortly after this, we received a typical government end-of-fiscal-year phone call from a CIA analyst; he had money left over from his annual budget and had to commit it quickly before the end of the fiscal year. Could we submit a proposal within a week on the barriers to U.S. business services in Japan? That was my first foray into things Japanese. I was lucky to work with an economist colleague at Rand who knew Japanese and had done graduate work at Keio. Our first reports came out in 1984 on lawyers, banking, finance, insurance, data services, and advertising. That project was a good education in Japanese business practices as we conducted scores of interviews with American and Japanese business people and reviewed the relevant literature.

Again, one thing led to another and gradually I accumulated an armful of studies and a growing knowledge of Japan. At the same time, I continued work on Soviet affairs as well as several other subjects. I ended up teaching Japanese economics at various universities, much as I had for Soviet economics. The interesting thing is that I had never taken a course on the Soviet Union or on Japan.

By the late 1980s, I was looking for other alternatives; I heard that the job of Japan Economic Institute president was open. I had known about JEI from its publications and had visited its Washington offices several times to speak to staff on my research projects. I applied for the job and ended up in Washington in 1990.

Was the switch to Japan studies a sudden break with the collapse in the Soviet Union or was it an outstanding interest in your life?

Looking back on my various choices, it now appears that I was simply a bit of historical flotsam, drifting on the waves and currents and global tides. The Cold War was of primary importance when I left graduate school; it generated intellectually interesting and internationally important questions; moreover, institutions were in place and money was available to study Cold War related questions. Later, the rise of the Japanese economy generated the same kind of intellectual issues and policy concerns.

One benefit of coming to Japanese studies from another regional background is that it provides a source of comparison. One sees a zoo of economic systems, each in its own cage and each as peculiar as the other. By almost any objective measure, the United States is the queerest duck in this zoo, often the greatest outlier from the cluster of other economies. The Soviet Union and Japan are almost as equally strange, although Japan fits more within the pattern of rich country experience than either the USSR or the U.S.

Mention the word “Japan” and one often associates the country’s “system” to socialism—sometimes even communism. Were any of the tools you acquired as a Soviet expert easily transplantable to the world of Japanese economics? Or do you even think in those terms?

It turns out that some aspects of analyzing Japanese decision-making resemble Politburo watching. This was especially true during the heyday of the LDP when the group dynamics of a small number of party leaders decided complex issues. Also, organizational behavior, something that I had studied with respect to Soviet activity, is deeply informative about Japanese policy. Even though one cannot simply transplant the specifics from one setting to another, sensitivity to bureaucratic and organizational issues aid in unraveling behavior. As one example, the control of information can help to determine decisions and their implementation; a monopoly on complex information has given the Finance Ministry inordinate power over the details of policy just as the monopoly over military information gave the Soviet Defense Ministry and its party bosses control in the Soviet Union.

In the Shadow of the Miracle (2002), your latest book, you forward the thesis that “Japan is [just] OK”? What do you mean by okay? Could you quickly summarize your ideas?

My book, In the Shadow of the Miracle, was built on a score of my JEI reports, updated and revised for book form. I had come to the conclusion, after doing the research for many of these papers, that a pattern of rich country experience had relevance to Japan’s future. I had given several lectures on this theme and it coalesced into the slogan, “Japan as OK.” This was a deliberate allusion to “Japan as Number One.” The pattern that I observed is that rich countries have relatively stable economic growth paths, ranging from around 1 to 2 percent annually. The weight of the data suggests that Japan fits in the cluster of nations usually considered to subscribe to Anglo-Saxon capitalist norms. Far from being an outlier or significantly different, Japan comes as close to the behavior patterns and the experience of the United States, Canada, and the United Kingdom as any other country in the sample of observations that I reviewed. Indeed, the data pointed to something deeper. If a country wants to get rich, it should mimic the behavior of affluent economies. Within fairly narrow limits, per capita income seems to be strongly related to these institutional variables.

The institutions of rich countries produce consistent long-term growth. The gains from imitation and catching up have been left behind, and the contributions from rapid rates of investment also largely have been exhausted. What seems to occur is that wealthier nations have developed roughly equivalent institutions to achieve roughly the same results. In other words, countries are rich because they have adopted institutions that work and that are broadly similar. Clearly, Japan is not an outlier in this process. That is why I suggest that Japan will be okay, but as I conclude at the end of my book, it is not a sure thing.

The “revisionist” school of thought, as defined by Business Week magazine in 1989, rejected the thesis that Japan will become a “normal” nation, politically and economically similar to the West. Saying “Japan is [just] OK” seems to be a rejection of this idea. Do you think there is any truth in the “revisionists’” original convictions?

The “revisionist” view of Japan was that it did not share the institutions, values, goals, or behavior patterns of the United States; in particular, Japan was said to not behave according to so-called western economic norms. Such statements can be both true and trivial. No country is the same as another. Considerable research shows the differences between Canada and the United States, not to speak of differences between New Jersey and Montana. Moreover, demand falls as prices rise almost everywhere, even in the most closely controlled economies. The revisionist writings had the misfortune of appearing at the height of Japanese trade disputes with the United States and during the bubble of the late 1980s. They tried to explain something that disappeared within a few years after publication. I think that an analytical failing of the revisionists is that they tried to understand an economy during its fast-growth stage and apply that understanding, such as it was, to a mature economy. A more egregious error is that they often asserted that what worked for Japan or Taiwan or Korea ought to be tried in the United States. The biggest problem with these writings is that they accepted the mercantilist theory that they asserted drove Japanese behavior. More than 200 years after Adam Smith demolished the logic of the proposition, they continued to believe that exports generate value for a country and that imports are damaging, when just the reverse is true. I wrote in my book that we owe a debt to the revisionist authors for bringing certain things to our attention, but I cannot remember now what I had in mind when I wrote it; maybe, I was just trying to be polite.

From: Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations

It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers, whose interest has been so carefully attended to; and among this latter class, our merchants and manufacturers have been by far the principal architects. In the mercantile regulations which have been taken notice of in this chapter, the interest of our manufacturers has been most peculiarly attended to; and the interest, not so much of the consumers, as that of some other sets of producers, has been sacrificed to it.

Such as they were, however, those arguments convinced the people to whom they were addressed. They were addressed by merchants to parliaments and to the councils of princes, to nobles, and to country gentlemen; by those who were supposed to understand trade, to those who were conscious to them selves that they knew nothing about the matter. That foreign trade enriched the country, experience demonstrated to the nobles and country gentlemen, as well as to the merchants; but how, or in what manner, none of them well knew. The merchants knew perfectly in what manner it enriched themselves; it was their business to know it. But to know in what manner it enriched the country, was no part of their business. The subject never came into their consideration, but when they had occasion to apply to their country for some change in the laws relating to foreign trade. It then became necessary to say something about the beneficial effects of foreign trade, and the manner in which those effects were obstructed by the laws as they then stood.

You write about the so-called “Gang of Four” (i.e., Chalmers Johnson, Clyde Prestowitz, James Fallows, and Karl van Wolferen) in your chapter “Revisionism Revisited.” You essentially reject their arguments, but do you sense that they themselves still subscribe to their original thesis?

Several of the writers that I cited in my chapter on revisionism have amended their views. Clyde Prestowitz, in particular, has commented to me, “What did we know then?” He has moved on to other things, but the power of his writing and his vivid imagery convinced a lot of people. Others among the “gang of four” strongly disagree with each other. There was little coherence among their writings other than the basic theme that Japan was different. If there was a common analytical problem it was a tendency to over-generalize from particulars.

Two post-“Bubble” books attempt to keep the “revisionist” leaning alive in this day and age: Eamonn Fingleton’s Blindside (1995), which argued that clever bureaucrats were exaggerating the extent of Japan’s economic plight in order to maintain the current trade surpluses with the West and Ivan Hall’s Bamboozled (2002), which adds to this notion by arguing the “bamboozlement” is also a Western malady (i.e., the Western media is too quick to count Japan out). Is there any truth to these arguments?

I read Fingleton’s article, “Blindside,” in Foreign Affairs but did not read the book. I was going to write to the editors about the article, but there were so many errors of fact and economic logic that I did not know where to begin. As to Ivan Hall’s Bamboozled, I went to a seminar he gave in Washington so my reactions are to that presentation. He seems to see a widespread misrepresentation of Japan among American scholars and policymakers. Japanese government officials actively promote this misrepresentation, although there is a strain of auto-bamboozlement as well. I am unconvinced of both the thesis of misunderstanding and the reasons given for it. For one thing, there is no comparative dimension; are Americans more or less bamboozled by Germany, France, Korea, or China? Second, the notion that the Japanese government is good at coordinating anything, much less a set of abstract images, strikes me as unlikely. Third, one would have to accept Hall’s own views as being correct and accept his characterization of the asserted incorrect views of others to agree with his main premise. From what I heard, I would not accept either.

This would bring us to “America’s Images of Japan.” You write that “facts and logic [do] not always govern the thinking of those held up of exemplars of careful thought.” Do you have anyone specifically in mind and do you believe this phenomena continues in the analyses of Japan today?

One of things that first drew me to Japan was the emotional attitude I saw in the media, among politicians, and even among my friends. I did not understand the source of emotions about events such as trade imbalances that usually did not generate such feelings. These emotions directed at Japan seemed to differ in kind from the attitudes toward other countries. One of the first projects that I tried to pursue at Rand was a study into this subject. Several years later at JEI, I collaborated with an anthropologist in a study for the Japanese foreign ministry into just this subject, American images of Japan. We conducted focus groups around the country and I reviewed the literature on the subject. Among the articles that I came across were two formerly secret CIA studies on the failures of intelligence in the period before the Pearl Harbor attack. One writer noted: “We failed to foresee the Japanese assault largely because we were influenced by a faulty stereotype.” He went on to note, “These stereotypes constitute the intelligence officer’s greatest peril because he cannot escape their influence.” Referring to these studies in intelligence, I commented in my book that “facts and logic do not always govern the thinking of those held up as exemplars of careful thought.” Although the reference was specific, I think that this injsight is more general; in order not to be governend by our unexamined attitudes, we all have to try to bring our preconceived and often unconscious images into conscious awareness, as impossible as that task often is.

You argue that “the catalog of American images of Japan has grown more extensive in the intervening years and shared even more widely among American than they were a half century ago. They still have the power to influence policy, politics, and public discourse, even when they are contrary to observed data and even though a person might consciously reject them.” First, what kind of images are we talking about? And secondly, do you think the imagery has changed in any way since Japan’s so-called “lost decade” of the 1990s?

One of the things I found out in the study on images is that old ones do not disappear, but that they build up in layers in a poorly understood process. Therefore, Pearl Harbor, Hiroshima, trade deficits, technology, Godzilla, movie samurai, and sushi jumble together in peoples’ minds when they think about Japan. Our first round of focus groups was held around 1994, before a generalized sense of Japan’s economic stagnation took hold. In 1998, we conducted several more in the Washington area to see if things had changed. Although there was more awareness of Japan’s economic problems, almost all of the old images continued to have their hold.

Focus group participants consistently talked first about Japan as a business machine. An abbreviated list of first responses describing Japan included cars, electronics, industrious, efficient, productivity, products, products are everywhere, buying up America. The responses indicated how pervasive and invasive Japanese cars and electronics are in American markets, households, and psyches. The injunction, “We must be on guard,” corresponded to a widespread feeling from the focus groups that, because the United States defeated Japan and dropped atomic bombs on two of its cities in World War II, “Japan is out to get back at us.” Self-reference was seen as a powerful motivator of this view. When a young man in Los Angeles in one of the final sessions repeated that “Japan is out to get back at us,” something heard perhaps a dozen times in other cities, the moderator probed more deeply and pushed him about just what was meant. The one word response was “Hiroshima.” When probed again about what that meant, the young man responded, “If they had done that to us, we would be out to get back at them.”

The attributes Americans assign to the Japanese seem to be about Japan as a monolithic culture. Related to the impersonal pronoun “they” is the idea of the faceless Japanese. Few, if any, Japanese politicians, business people, or other personalities are known to Americans. When they are seen on television, they are not recalled.

People from all the groups used Pearl Harbor to create a metaphor between the “sneak attack” and what they perceived as the Japanese economic threat today. The economics-as-war metaphor provided a potent direction to thought that continued to hold sway even after the experience of the past ten years or so.

Talk of Japan’s progress in structural reform is often greeted with curled lips and cynicism. You offer the case of aviation deregulation as a success story in Japan; substantial change was produced by small, but sustained, actions over twenty years. With many Japan watchers arguing that the current economic malaise is purely structural, what does this suggest about the prospects for recovery in the near to medium term? Or do you dismiss the structuralist argument as irrelevant for stimulating Japan’s aggregate demand problem?

The Japanese economy suffers from several different problems, each of which requires different solutions. One of the problems is relatively low efficiency in large parts of the economy. Structural reform, that is more deregulation and greater foreign competition, including foreign direct investment, are the key sources for improving productivity. A key question is whether faster growth requires improving productivity. A different question is whether improving productivity would stimulate growth. There are no clear answers to either of these questions. All countries are less productive than the United States. Their level of productivity and their growth rates appear to be unrelated to each other. Improving productivity would certainly make some people better off because of lower real prices. But, it would probably make some worse off because of lower demand for labor. And, it does not guarantee profitability. Industries and products with fast growing productivity are not necessarily profitable; one need look only at the airline industry in the United States or at semiconductor memory production almost anywhere to see two of the fastest growing examples of productivity with some of the worst profits. The important point here is that companies do not take productivity to the bank; they take their returns.

I think that low rates of return to capital is a more serious impediment to growth than lagging productivity. Structural reform has a role to play in raising returns. But other policies matter as much, such as better rules for corporate governance, greater reliance on capital markets, and a sound banking system without the moral hazard created by government bailouts.

JGBs are on the rise

The chart above is the source of seemingly endless debate among Japan specialists. National expenditures continue to rise year-on-year as the graying of Japanese society sees a concurrent rise in social security costs. Meanwhile, tax revenues have fallen roughly 20% since its absolute peak in 1991 forcing the government to resort to further bond issuances with rising concerns about the stability of the bond market. Two questions: (1) Assuming you had the ear of the Koizumi Administration, what advise would you offer them at this stage in the game? (2) Do you see a “silver bullet” to rectify the situation?

The Japanese government debt situation is not as bad as commonly portrayed. Gross debt is the familiar 140 percent of GDP. Net debt, after subtracting assets, is around 90 percent of GDP. I have looked at the assets and, for the most part, they appear to be sound. The debt held by the public (that is, by nongovernmental organizations) is about 40-50 percent of GDP. Therefore, there is time to continue fiscal stimulus while getting other problems under control. But not decades.

Let’s talk about Japan’s deflation. Nobel Laureate Milton Friedman was famous for his oft-quoted line, “Inflation is always and everywhere a monetary phenomenon.” Morgan Stanley’s chief Japan economist, Robert Alan Feldman, appears to disagree. In his 12 February 2003 report, “Dispersion: New Evidence in the Inflation Debate”, Dr. Feldman argues that “the difference between monetary and structural deflation may be gauged in part by looking at the dispersion of price movements at the lowest level of the CPI. The lower the dispersion of price movements, the more monetary they are. The higher dispersion, the more structural.” His conclusion in Japan’s case: “structural factors have become more important in generating deflation”, therefore stopping deflation will require greater emphasis on structural policies than on monetary policy. Question: someone has to be wrong here. Who is it, Dr. Friedman or Dr. Feldman?

Deflation, meaning the fall of the general, overall, average price level, is a monetary phenomenon, as even Professor Ueda of the BOJ policy board acknowledges. The question is whether the central bank has the tools to actually increase the money supply. Trying to separate the sources of deflation into real (productivity, excess supply) reasons and monetary I think is partly misguided. The way to think about this is that the world presents situations to the central bank that have to be dealt with through monetary policy. Most BOJ board members believe that they cannot affect the money supply with the tools at their disposal in a regime of zero interest rates. Those who push the BOJ to do more recognize the uncertainties, but argue that there is little downside risk to trying an explicit inflation targeting exercise.

Patterns: Several Japan-related programs have been subsidized since the 1960s/1970s. In our interview with Dr. Ann Waswo of Oxford University, she was quite comfortable in letting Japan studies at present “sink or swim” without subsidization. Looking around Tokyo and Washington these past few years, one gets the distinct impression that most “Japan-related” research in English is sinking. For example, the Japan Economic Institute shut its doors in 2000, the Asahi Evening News had to merge with International Herald Tribune to stay afloat, the Japan Quartely—without further subsidies—announced its forced closure and who could forget the fracas over the Brooking Institution decision to pull out of Japan studies? Japan specialists now face a limited pool of resources and hard choices have to be made. What should they be?

One could argue that the heightened interest in Japan that started in the 1980s was a reaction to that country’s startling economic growth and its impact on American business interests, plus the fireworks generated by the asset bubble. Japan today is now a more normal country. I did a recent study on how the American media treats Japan and found that, given its size and trade with the U.S., the media had under-reported Japan stories compared with other countries, but that the gap has been diminishing. The new visibility of China in the news is just what I predicted from the data and equations I estimated.

One always confronts the criticism that the United States ought to be paying more attention to some country or region. Where were the Afghan language experts when we needed them? The interest in and resources devoted to the Soviet Union during the Cold War was natural, but did not outlive the end of the USSR or the Cold War. Are the resources devoted to Japan studies more or less than they “ought” to be? I would be willing to hear an argument one way or the other but have not heard one so far.

With the closing of the Japan Economic Institute, are you going to make another career shift? What are you current projects?

Since closing JEI in 2000, I have been teaching at Georgetown University, completing my book (published by Lexington books in October 2002), lecturing around the country, consulting, and producing a monthly report on the Japanese economy for a select and discerning group of subscribers.

What do you think is required reading on Japan? Do you have any preferences?

My regular reading on Japan includes the Financial Times, the Economist, and the online Nikkei. I continue to follow the economics journals and the studies produced by the World Bank, IMF, and NBER, plus the stuff that people send me via email.

A book that impressed me was Ruth Benedict’s The Chrysanthemum and the Sword. John Dower’s Embracing Defeat should be read by anyone trying to understand contemporary Japan; his earlier War Without Mercy had many insights that we noticed years later on the formation of images. The novel by Toson Shimazaki, Before the Dawn, (Yo-ake Mae), written in the 1920s about the period of the Meiji Restoration gives a richly contextual understanding of that period.

The adjoining question to “required” reading would be: What are the best and worst books ever written on Japan in your view? And more importantly, why?

I do not read bad books; they just waste time and excite unuseful emotions. There are many good ones, but it is impossible for me to select a best. However, see the ones that I mention above; their insights have stayed with me over long periods.

What are you reading right now? What do you generally like to read?

I just read Secrets, by Daniel Ellsberg, a former colleague at Rand and Robert Graves, Goodbye to All That, about his World War I experiences. Graham Green’s Vietnam novel from the early 1950s, The Quiet American, jumped my reading queue after I saw the movie. Charles Dickens’ Our Mutual Friend is now in process.