The Weight of the Yenby R. Taggart Murphy
In eight years from 1980 to 1988, America fell from financial grace, becoming the world's largest debtor. This happened because the United States spent and Japan saved.
"Murphy draws on an impressive array of skills and experience in crafting his narrative of America's troubled economic relationship with its largest trading partner."--Clay Chandler, Washington Post
In eight years from 1980 to 1988, America fell from financial grace, becoming the world's largest debtor. This happened because the United States spent and Japan saved. In the early 1980s, Reagan's Washington discovered that Japan would cheerfully lend their vast savings to the United States by buying U.S. government bonds.
How the Japanese money accumulated, the system that created it, and American fumbling that led to crippling debt service, a loss of much of our manufacturing base, and our economy's diminishing good jobs. The Weight of the Yen explains it all, in an intriguing, jargon-free analysis of the past fifteen years and the problems between America and Japan that are yet to come.
In mercifully jargon-free fashion, Murphy offers a critical interpretation of the events, strategies, miscalculations, and errors that have brought Tokyo as well as Washington ever closer to a day of financial reckoning. First, however, he delivers a clear- eyed overview of how big business works in Japan, where elite finance bureaucrats (who are accountable to neither the electorate nor its representatives) provide administrative guidance that recipients ignore at their peril. The author goes on to review how the credit and industrial policies of these shadowy shoguns made Japan a power in global trade, albeit at no small cost to its populace. He next examines how Japan's ultrainfluential Ministry of Finance allowed indigenous institutions to recycle the vast sums accruing from exports to buy the debt obligations of the US Treasury during the early years of the Reagan administration, when federal budget deficits topped $100 billion. Assessing the consequences of this bailout, Murphy reprises the 1985 Plaza Accord (which laid the value of the dollar far lower than signatories intended) and Wall Street's 1987 crash. Covered as well are the high costs accruing from the collapse of Japan's speculative boom and the unwillingness or inability of American officials to realize that their country's chief lender does not play by the same commercial rules as other nations. By the same token, the author points out, Japan's economic mandarins have yet to appreciate that the Cold War's end has changed a relationship long based on security considerations.
Murphy closes with some uncommonly sensible suggestions on how the two superpowers could forsake the ideological denial that threatens their alliance in favor of a realpolitik calculated to inspire cooperation and trust.
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The West Wing and the MOF
THE WEST WING OF THE WHITE HOUSE is not so much awing as a separate structure, connected to the president'shome by a covered corridor. It is a smallish,vaguely neo-Georgian edifice, whose architect obviouslyhad no greater ambition for it than that it blend quietlyinto the surroundings. Rut it is a pleasant place, set w ell backfrom the bustle of Pennsylvania Avenue, and on a nice springday, banked by flowers and shaded by lovely old elms and oaks,the West Wing can seem quite beautiful.
No visitor, however, will mistake this setting for the Englishcountry retreats after which it was modeled. Aside fromthe permanent banks of television lights and cameras on thelawn, security is exhaustive; the guardhouse will have your SocialSecurity number and birth date well in advance of yourarrival. But the illusion of a civilized manor is nonethelessbravely maintained as you pass through the Grecian porticoand the double doors into the spacious bright yellow receptionroom. You are askedpolitelyyour destination. You are almostcertainly requested to take a seat on one of the comfortablecouches to the receptionist's right and wait a few minutes;people with offices in the West Wing of the White House arebusy. But eventually someone will fetch you and lead youthrough a labyrinth of narrow halls and up a very narrow staircase. You note the carpeted floor, handsome framed pictures onthe walls, and clean white wainscoting. The offices you passbulge with file cabinets and computer terminals, but they arewell lit and open. Youarrive at your destination. The personyou have come to see rises to greet you, apologizes for the delay,offers you a cup of coffee, says something to his or her secretaryabout it, closes the doer, and the meeting begins.
A visit to Japan's Ministry of Financegenerally called theMOFis a different experience. This shabby slate gray affairstands right in the midst of central Tokyo's urban roar, lookingfor all the world like a medium-security prison. You pass alone policeman, walk through a concrete courtyard packed withblack limousines, and peer into a dim entryway. You search invain for the information desk, uniformed pretty receptionists,or large well-lit building directory of most important Tokyooffice buildings; a small board at the side is the only help yonwill get. You walk down wide, gloomy hallways searching forthe appropriate room. Occasionally a pallid young man, tieaskew and sleeves rolled up, will pad by in slippers, carrying astack of documents, or perhaps it will be an older cleaning ladybearing a mop. At the appointed place none of the attractiveyoung women who usually rise to greet the visitor to a Japanesefirm is visible anywhere. Only a small sign above the door confirmsthe location.
Inside, you stand at the edge of a large room crowded withyoungish men working at small gunmetal gray desks. The desksare jammed right next to one another except for a row of slightlyspaced desks on the far side of the room under the windows.The men sitting at these desks are a bit older, and several of theyounger men are running back end forth between these desksand their own. Each desk and the floor space around it are piledhigh with papers. No computer terminals are visible anywhere.The wallssurely unpainted for decadesare decorated solelywith large calendars featuring pinup girls in tiny bikinis. Yousquint against the harsh fluorescent lighting after the gloom ofthe halls. You look around the room trying to spot the rightman. You are almost surely not the only banker lined up againstthe wall, and there may also be two distinguished-looking oldervisitors sitting on the edges of chairs in front of one of the fardesks. They listen intently to a man older than most of hiscolleagues in the room but still a decade or two younger thanthe men he is lecturing.
Your man notices you end motions you to wait a few minuteswhile he takes a telephone call. Finally he waves you overto the one available chair. Any colleague has to stand. Over thedin you try to explain what you have come for. The noise is toomuch even for your host, and he suggests going to a meetingroom. You go back out with him into the hall and spend fiveminutes looking for an unused room. When you finally findone, it has clearly just emptied. The table is covered with half-fullteacups and overflowing ashtrays. Your host clears a spaceon the table and motions you to sit. He is cheerful and pleasant,but when you propose something that he doesn't approve of,he sucks in air through his teeth and suggests your idea is goingto be "difficult" as if that were the end of the matter. Despitehis obvious competence, he occasionally says something thatleads you to realize he has never had to deal with commonbusiness problems, such as finding affordable office space inTokyo's overcrowded commercial real estate market.
The differences between the West Wing of the WhiteHouse and the Japanese Ministry of Finance do not, of course,end with their settings and their procedu-res. The West Wing ofthe White House contains the Office of the President of theUnited States; thus by law and in practice it forms the locus ofpower in the American political system. The Ministry of Finance,by contrast, enjoys no legal status beyond that of agentof Japan's elected legislature, the Diet. In theory the MOF hasno say-so over policy; on paper it exists simply to carry out thewishes of its political superiors.
But the MOF is, in fact, the most powerful entity in Japanand in this one very important respect, if in no other, resemblesthe American presidency. The MOF controls the government'sbudgets. It largely determines Japan's fiscal and monetary policiesand both sets and collects taxes. It not only supervisesbanks, brokers, and insurers but in a very real sense managesthem as well, establishing parameters for credit, asset values,capitalization, and lending. It is ultimately responsible for financingJapanese industry and seeing to the security and use ofthe country's savings. It controls economic information to suchan extent that it need not bother much about informed externalscrutiny from politicians, economists, or journalists. Day to dayit answers to no one for its actionsto no elected representativeor independent judiciary.
Americans find this difficult to grasp. Americans are used todealing with democracies or dictatorships. Most governmentsare either answerable to voters, or they hold power throughrepression and coercive control. In either cease it is clear whereultimate authority lies and where one must direct attempts atinfluencing decisions. But Japan fits neither category.
Its Ministry of Finance is not subject to effective politicaloversight, and thus Americans cannot influence its policies byappealing to Japan's voters to put pressure on their government.Washington has, in fact, tried this tactic, urging on theJapanese media and the Japanese electorate the notion thatchanges the United States wants in the management of Japan'seconomy would benefit ordinary Japanese households. Theseefforts may have contributed something toward the politicalupheavals of 1993 that split the "ruling", Liberal Democraticparty. But they were of no use whatsoever in securing anychange in the policies of the Finance Ministry.
Direct appeals to the MOF have had no greater impact.When American officials dealt with the Soviet Union, they addressedrepresentatives of the Central Committee of the Communistparty, attempting to persuade them with logic,diplomacy, and the threat of force to shift policies. SometimesAmericans were successful; sometimes not. In either case, however,the Americans were talking to people in Moscow who hadthe power and the will to act if they could be convinced to doso. But the MOF is not all-powerful in this manner, nor does itsee itself thus. Its officials regard themselves as an elite mandarinate,charged with protecting the fiscal integrity of the Japanesegovernment from rapacious politicians, a "selfish,"ignorant electorate, and the pleaders for special interests at theother ministries.(*) They believe they are responsible for thefinancial system and treat banks, brokers, and insurance companiesas charges entrusted to their carewayward children who,if left to their own devices, would quickly destroy themselvesand the country. They hold the interests of the MOF and theinterests of Japan to be identical and are thus obsessive aboutmaintaining their instruments of control. Appeals from foreignersthat the MOF reflect on its policies therefore fall largelyon deaf ears; such appeals are weighed solely in terms of thepossible impact on the ministry's reputation and its instrumentsof control and are accordingly effective only if backed by crediblethreats. A MOF can be convinced to permit foreign brokersto trade derivatives in Japan because the U.S. Treasury has thepower to deny Japanese brokers primary dealer status in thehuge and lucrative American government bond market. Butarguments that the MOF use Keynesian stimulus to lift Japanout of a dangerously long recession do not register; foreignershave no power to force such stimulus, and it would result in adiminution of MOF control over the other ministries. Anypossible benefit to Japan of such stimulus is irrelevant.
However difficult or elusive it may be, getting a conceptualgrip on the MOF and on the Japanese institutions it controlsand finances is essential for Americans. It is essential becausethe American presidency now depends on these institutions.How this dependence happened and the price it exacts, both inthe United States and in Japan, are the subjects of this book.
At heart the story is a simple one. In order to maintainhis country's place in the world while avoiding the politicaldiscomfort of hard trade-offs, an American president led theUnited States into an unacknowledged program of borrowingmoney. And in order to maintain its levers of control over Japanesefinance, a Ministry of Finance would see to it that themoney was lent.
The story has its roots well back in the past-in the measurestaken by the Japanese elite in the late nineteenth centuryto "catch up" with the West, in the progressive erosion over thepast seventy years in Washington of the aura of danger and evenimmorality traditionally attached to a government that did notpay its way.
But for our purposes the story begins in 1980 with theelection of Ronald Reagan. What happened initially is so wellknown it seems hardly worth going over except as a reminderof its importance. In its opening months the Reagan administrationpushed one of the greatest tax cuts in history throughCongress. Administration officials also cut back governmentoutlays in a number of areasfederal support for schoollunches being only the most notorious examplebut thesespending reductions amounted to small change when measuredagainst the extent of the tax cuts. Attempts to tackle the greatmiddle-class entitlement programsSocial Security, Medicare,veterans, benefitsthat form the core of nondefense spendingwere abandoned at the first whiff of political trouble, whiledefense allocations soared. The deficit exploded.
Ronald Reagan's critics have argued that the tax cuts wereprofoundly irresponsible, mortgaging the future of the countryto pay for current consumption. Reagan's defenders label theman essential first step in an unfinished revolution aimed at rollingback the welfare state. The supply-siders who constructedthe intellectual foundations for the tax cuts maintain that eventsbore out their contention that lower tax rates would bring inmore revenue; it was just that government spending was togrow even faster than tax receipts.
At the time, however, no onesupply-sider, fire-breathingconservative, white-shoe Republican, "new" or old Democratbelievedthat the United States could sustain fifteen yearsof deficits on the order of$ 150 to $200 billion annually. True,the supply-siders who sincerely thought the tax cuts wouldspark an economic boom sufficient to wipe out the deficit weregreatly outnumbered, even in the Reagan White House, bythose who regarded the idea as "voodoo economics." But Republicanfiscal moderates came to see monstrons deficits as auseful, temporary bogey to scare Congress into finally shrinkingthe government. Meanwhile, House Speaker Thomas P.("Tip",) O'Neill had no intention of saving the administration'sbacon by amicably agreeing to Social Security cutbacks.
It turned out, however, that the bacon was in no danger.The political game of chicken played between the White Houseand the congressional leadership in the wake of the summer1981 tax cuts did not end in any financial crash when neitherside would swerve into being the first to ax popular entitlements.Instead, once the U.S. economy emerged in late 1982from the recessionary wringer Paul Volcker's Federal Reservehad been putting it through, the deficit largely disappeared asan issue.
This is what makes the events of 1981 so important. Afundamental political discipline broke down; the fear of theconsequences of allowing government spending greatly to outstriprevenues melted away. Conventional wisdom had suggestedthat when the financial markets got wind of the witches'stew that the Fed, the White House, the Congress, and thePentagon were preparing, the reaction would be catastrophic.Bond marketsbelieving the United States unable to raise thetaxes necessary to pay off these levels of debtwould surelyjudge this deficit unfinanceable. They would see the only resolutionin a return to inflation, allowing the debt to be paid off incheapening dollars. And any sign of renewed inflation wouldcause investors to demand economy-flattening interest rates lestthe United States follow in the steps of countries such as Braziland Weimar Germany, printing more and more paper moneyto cover debts, leading finally to hyperinflation and a worthlesscurrency.
But none of this occurred. For it did not matter if Americansthemselves were not saving enough to fund the deficit, providedsomeone else was. It did not matter if Americans distrustedtheir government's promises not to inflate its way outof the deficitnot as long as people somewhere were willingfor their own reasons to ignore the disastrous American recordover the previous decade of maintaining its currency as a storeof value.
Grasping what happened requires an understanding of howJapan works and wariness over the labels applied to institutions.A seemingly untroubled concept like the "private sector," forexample, can utterly blur the reality of what actually goes on inJapan. We think we know what the "private sector" means: thearea of economic life ruled by the market where the role ofgovernment is limited to the maintenance of a regulatory frameworkand the enforcement of contracts. We also define it bywhat it is not: the public sectori.e., government and thoseinstitutions it directly funds and controls. Yet in Japan we encountera group of core economic entitiesfinancial institutions,large corporationsthat are obviously not in the "publicsector" as we understand it and are thus unthinkingly assignedto the private. But these institutions are not ruled by the market,and the role of the government in this sector goes far beyondthat of providing a regulatory framework.
I discuss these institutions in the first two chapters. LargeJapanese companies earned dollars with their exports; financialinstitutions lent them back to the Americans. I describe theincentive structure within which they operate, the factors thatdetermine investment and credit decisions. In the subsequenttwo chapters I turn to the financing of the Japanese economicmiracle and the obsessive attention paid to the two variables ofits economic system Japan's administrators could not whollycontrol: exports and the exchange rate. Overall the first fourchapters, Part I of the book, represent an attempt to explain thenear inevitability of the surge of Japanese money into theUnited States once the U.S. Treasury found itself having tofinance annual deficits in excess of $100 billion.
Part IIChapters 5 through 8 provides an account of thefinancing itself: the coming of Japanese money and the rise inthe dollar's value; the Plaza Accord and its all-too-successfulattempts to bring down the dollar; the creation of the "bubbleeconomy" in Japan in response to the soaring of the yen; theNew York stock market crash of 1987 and the successful effortsby the Ministry of Finance to contain the damage. The last twochaptersPart IIItally up the costs: the collapse of Japan's"bubble economy"; the returnmore insistently and moredangerouslyof the contradictions postponed and pasted overby twelve years of borrowing from Japan.
This may seem an economics storya tale of dollars andyen, of banks and brokerages, of finance ministries and treasuries-butit is really a political story. By propping up Americanbuying power for a decade and a half, Japan's administratorsmanaged to sidestep the contradiction at the heart of theirmethods: that they depended upon the security and monetaryarrangements provided by a foreign country whose strengthwas being undermined by Japan's success. As the buying powerof the United States shrinksmeasured by the fourfold increasein the value of the yen since 1971Japan will be forcedinto a fundamental shift in the structure of its economy. Andsuch shifts can be carried out only through the political process.
Similarly, the events of 1981 had, for the United States, thegreatest effect on its political process. Democracy's fatal flawlies in the ease with which the expedient can triumph over thenecessary, the good, or the right. This flaw has troubled politicalphilosophers at least since the time of Plato. It certain y troubledthe founders of the United States, who deliberately createda complex system to check the politically expedient, to ensurethat the political passions of the moment would not be allowedto overwhelm the fundamental legal framework protecting therights of individuals. They saw to it that radical change couldbe effected only through the long and difficult process of constitutionalamendment.
The founders could not, however, have anticipated at thetime of the Constitutional Convention the politicization of economiclife over the following two centuries. They could nothave imagined a world in-which money would be a matter ofgovernment fiat rather than an independent store of value, aworld where the populace would look to government to ensureeconomic livelihood and hold it so accountable, a world wheretaxation and expenditures would become instruments that governmentsused to achieve macroeconomic outcomes that hadnothing to do with paying the governments, bills. The Constitutioncalls for no institution either to guard against the harmful-but-expedientor to ensure the necessary in the area ofeconomic policymaking. The president is supposed to seek theapproval of Congress for a declaration of war, but no legalobstacle stands in the way of a Federal Reserve pursuing anirresponsibly inflationary monetary policy or a Congress thatchooses to legislate enormous deficits.
In the absence of legal sanctions ar obstacles, what has keptthe politically expedient from wholly driving out the necessaryis the threat of economic catastrophecatastrophe that in ademocracy results in electoral defeat. The 1932 election, one ofthe greet watersheds of American political history, saw an angryelectorate hold the Republicans accountable for the Great Depression.The legacy of the depression has kept the Republicansto this day from returning to the full control of the Americangovernment they enjoyed for most of the seventy-five yearsfollowing the Civil War. That election, and the consequencesof allowing deflation and its concomitant unemployment tospin out of control, seared itself into the memory of a generationof politicians.
The experience of the Great Depression and the immenseprestige of a half-understood Keynesian economics loosened akey restraint on political behavior, the idea that governmentexpenditures should not exceed revenues. Until the experienceof the 1930s most assumed that catastrophe would soon ariseif the government spent more than it took in in taxes; indeed,in the 1932 election campaign Franklin Roosevelt and HerbertHoover tried to outdo each other in their commitments toavoid any deficit spending. The political fallout of the GreatDepression, however, removed much of the stigma that hadhistorically attended deficits.
Between 1945 and 1981 the American political establishmentwas nonetheless held in check by the idea that one couldoverdo it. Yes, deficit speeding to a certain degree was acceptableand even welcomejust as "a little inflation" appeared tobe politically tolerablebut until 1981 no one had been willingto test such spending on a vast level outside wartime.
But since that fateful year, when the American politicalestablishment closed its eyes, borrowed vast sums, and waitedfor the crash that never came, it has become impossible to doanything about the deficit. Politicians like Walter Mondale whosuggest raising taxes condemn themselves to crushing defeat.Any attempt to rein in the core entitlement programs is instantlysquashed. A Clinton administration that initially choseto pursue modest deficit reduction instead of meeting its "investin America" campaign promises suffered the worst midtermloss of an incumbent party since 1946. A politician cannot befiscally responsible and expect to remain in office. It is not justa matter of its being politically easier, in effect, to vote fordeficits. It is the only way one can be reelected.
America's electorate and its representatives no longer believein financial catastrophe. Warnings have been made andhave not come to pass. The deficit proved easily financeable atlevels that would have been regarded as economic suicide just afew brief months before Reagan was elected president. Ultimately,however, there is a priceand it is much greater thanthe current interest rates on government bonds.
Meet the Author
R. Taggart Murphy has lived in Japan for the past fifteen years. An investment banker, he has had articles and columns in the Harvard Business Review and the New York Times.
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