Tuesday, June 09, 2009

Is Japan a Client State of the United States? And What of It?

The following is my response to a comment from Matt Dioguardi, with whom I had other enjoyable disagreements in the past, on this post. The blog rejected it as being too long—it only accepts up to 4,096 characters—so I’m posting it here as a separate post.
Matt: Always good to hear from you, although—because?—we hold very different views on many things. I think that the notion that major policy changes will not occur in Japan until something happens to drastically alter the U.S.-Japan relationship is certainly a defensible one, but unless properly defined and qualified, it throws out most of severely limits the notion of “major” on the economic front. Moreover, I don’t read anything that McCormack writes since I made it half way through a talk that he gave on North Korea and concluded that he was nuts; we can agree to disagree here. That said, let’s see if I have anything meaningful to say on the points that you raise.

“Japan exports to America, and reinvests in American Treasury bonds.”

Rephrase it “America borrows from Japan and uses the money to buy things from Japan”, and you begin to wonder which one is really the client. Actually, both statements put a highly simplified, anthropomorphic gloss on what is a complex phenomenon with a very large number of actors driven by many factors from both within and outside of the relationship. Moreover, there are so many policy decisions that must be made that have no direct bearing on the relationship (although many if not all of them are bound to affect our external balance in ways that produces changes in our foreign currency reserves) and yet are so momentous.

Incidentally, defined more precisely, there is a conscious choice that the Japanese government could make that would drastically alter the situation that is described in your statement. Namely, the Japanese government could decide not hold currency reserves and leave everything to market forces. Now, to engage in my own anthropomorphism, “Japan” still could run a trade surplus and “reinvest” the proceeds in American Treasury bonds, but this is one road that few countries running trade surpluses if any will ever take.

“Japan keeps a fairly vague stance (with meaningless rumblings of nationalism), while America does the heavy lifting diplomatically for Japan.”

This is a sweeping statement that could be said of every liberal democracy that does not have a) a nuclear arsenal; b) the capacity to project a serious military force beyond its borders (conduct major landing operations, dispatch multiple aircraft carrier fleets); and c) a permanent seat with veto powers on the UN Security Council. Also note that Japan is a regional power. It has played a meaningful role in Asian (defined as east of Bangladesh) politics that has usually but not always been consonant with the interests and values of the government or the majority of the public of the United States. The Middle East is just not our bailiwick, though events there do seriously affect our economy. But then, do France and the U.K. do any “heavy lifting”? Or to put it another way, do their opinions matter to the governments and increasingly the public of Egypt, Iran, Iraq and Saudi Arabia and other states in the region? The United States is the sole global superpower; as such, “America does the heavy lifting [militarily and almost ipso facto] diplomatically for all of us. There is some change afoot, which does not bode well for the rest of us, but there things stand for the moment. There are paradigms and paradigms; that fact that one cannot—should not?—be changed of our own volition does not render all other meaningless. Or is that not the point of your rhetorical flourish?

Note also that for both statements, you could insert “China” in place of “Jaan” and still end up with coherent, defensible statements. So would McCormack consider China to be a “client state” of the United States? Are we all “client states”? Just askin’.

“There's a speech on-line where Abe praises Japan's new two party system, and indirectly the growing opposition. Strange, if he were really ideologically driven, who cares about how many parties there are? Oh, well, gee, America has a two party system, so that must be good.”

Let’s face it, Abe, is only saying the right thing. Anything else would sound pretty gauche. Of course he is not the only one who is calling for a two-party system. The LDP has had a nice 55-year run, but it has gone stale and many serious problems are piling up that cannot all be blamed on the bureaucracy—I think that the idea is, If the bureaucracy is at fault, then what were you guys in the Diet doing on our munificent payroll?—there’s a widely held public desire for an alternative. It’s more a vote against a mono-party system than a vote for a two-party system. Also, note that the United States is not the only two-party democracy on this planet. In fact, at first glance, nations lacking serious social/cultural/ethnic divides and/or powerful regional rivalries tend to drift towards political systems with one or two dominant parties and a smattering of smaller, special-interest or ideology-driven parties. Even the United States has a socialist Senator. So no, nobody wants it just because America has one. If that were the case, it would happened long ago, when U.S. influence was much stronger here.

“We won't see seismic changes in Japan until the relationship with America seriously stumbles and/or collapses.”

I am unable to address this point unless I know what you mean by “seismic.” I have very limited power to think about economic and political matters in purely metaphorical terms.

”Say if the dollar suddenly dropped to about 40 yen to the dollar. That would make Japanese politics very lively over night.”

Hard to argue with that statement.

“Until something happens, well, not much is gonna happen. Of course, you knew that, didn't you?”

No, I don’t, honestly. I don’t know until it actually doesn’t happen. The political inertia is pretty strong though, that I’ll certainly agree to. Is that somehow a side effect of being a “client state”? I know that there are political commentators and academics who will write reams of stuff from such perspectives. Some are entertaining, a few can even be insightful, but it’s not my cup of tea. I prefer sturdy, fact-based logic.

There you are, Matt

13 comments:

Ross said...

Whether Japan is more a lender or America is more a borrower is in part defined by the currecy used. If the US were really demanding the present bilateral economic relationship, then Japan could get the US to borrow in yen (or China could get the US to borrow in yuan). It does not. It will not. That's why the present situation is more one of Japan, in the past, and China, at present, buying a strong dollar with currency market interventions more than they are lending to the US.

Moreover, while I appreciate your point on anthropomorphizing countries, when it is the government that is responsible for most of the transactions it seem warranted. So, when Japan is sustaining a trade surplus based upon private sector accumulation of foreign assets that does not seem altogether unnatural. But when the government steps in as with Japan in the early part of this decade and China thereafter, the bilateral imbalances are not the result millions of independent economic actors making individually rational decisions. It's the governments/countries that are acting. And it's much less complex than when millions of private actors are generating a similar outcome.

Jun Okumura said...

Ross: Your points are well taken. I did give a lot of thought to the role of government intervention in this case and would have put it front and center if I had been writing an independent post. But this one began life as a refutation of the “Client State” thesis favored by people whose sympathies surely lie with the likes of Raul Prebisch and what I see as the endemic presence of anthropomorphic/conspiracy-theory mindset that lies behind their thinking. To those people, I want to say: Relax, they’re not that committed, organized, or smart.

Yes, I’m making an excuse. But in this case, it’s true.

Oh, and I’m seeing the ICT guy tomorrow.

matt at anarchyjapan said...

Part I --

Jun: Thank you for your nice comments and serious reply to my mini-rant. I am going to have one more go at this. However, I want to start at the end of your comments as opposed to the beginning. You said: "I prefer sturdy, fact-based logic."

I'd just like to note that there is no such animal. Theories are never drawn from facts, implied by the facts, or based on the facts. I regard this as an elementary error. I would encourage you to check out Karl Popper's _The Logic of Scientific Discovery_. Good scientific practice can be judged by an openness to have one's theories questioned and tested.

A theory that tends to lend itself to this practice is like a good rule.

Consider these two rules:
1. You should love all (or maybe "you should love the great leader").
2. You should not drive your car over 88 km/hour.

There's an advantage to rule 2 in that it's clear and the public can largely know what constitutes compliance. Of course, this doesn't mean that rule one is necessarily bad. The point is scientists *should* strive for rules like number 2, even if they can't always have them. That is, a theory that is clear enough so we know what compliance or noncompliance (from nature) would logically entail is more useful than a similar theory that doesn't do the same. (Here when I say useful, I mean useful for ultimately moving us towards the truth of the matter.)

Finally, where do facts fit into all this? Well statements of fact are used to test the theory, to determine if it is, speaking loosely, complying with nature or not. If it's not complying, we judge it for now to be false. So long as we can't find any non-compliance, we judge it for now to be true. Of course, facts themselves are theory-laden, but I'll stop here and go on to the next topic. But again, the idea that one can gather the facts, then use them to project a theory is a myth.

matt at anarchyjapan said...

Part II --
Now my idea of Japan being a client state is very simple.

Japan's relationship with America in an unequal one. We can see this in that Japan constantly runs a trade surplus. Goods are sent to America not in exchange for yen, but for dollars. A large portion of these dollars in turn can't be used to purchase similarly valued goods, but instead must be used to prop up the American financial system. The net benefit is to America. In return from empty promises, Americans have received hard goods. You can poke at this all day long, however you like, but that is the net result.

Next, while Japan does actually possess a fairly significant conventional military, it most obviously doesn't possess the single most important item a country needs in order to protect itself, a nuclear deterrent. Of course, we hear it over and over again, how the *Japanese* people would never accept a nuclear Japan. Yes, yes, I read all the articles and hear it over and over again. It's a mantra. It's also pure balderdash. Japanese obviously want a nuclear deterrent, and they've got one. It's provided for them by a distant foreign power -- but at what cost? First, the financial one given above. Second, the inability to create meaningful dialogs with other Asian countries. (Unless you consider rants over history books meaningful. It's like a child shaking it's fist from under the coattails of his muscle bound father.)

Now how did things get this way? Am I proposing some sort of conspiracy theory? Is McCormack (a leading coordinator at the excellent Japan Focus) proposing a conspiracy theory? Of course not. To a large extent things got this way by a mixture of historical accident and apathy. My emphasis would be on the latter. But the consequences are serious.

One, I think the democratic process in Japan has to a certain extent atrophied. Second, I think the Japanese-American relationship (as well as the Chinese one) to a certain extent played a strong role in bringing on the current financial crisis.

I'll note that I see the idea tooted over and over again that for geopolitical reasons (or because of cultural reasons), Japan can't handle it's own self-defense. This is simply denying reality. The reality is that Japan will have to start defending itself, because America is now facing an unprecedented crisis. If Japan isn't ready, the woe be us all. Personally, I think Japan is up to the task.

LB said...

Although this conversation as a whole interests me not, I could not let this pass uncommented upon:

"(japan) obviously doesn't possess the single most important item a country needs in order to protect itself, a nuclear deterrent."

Bollocks. A nuclear deterrent is only useful to check other countries that also have one. The US vs. Russia and China (and vice versa), China vs. Russia and India (and vice versa), Pakistan vs. India (and vice versa). In this day and age nukes are an anachronism as a military weapon. They were designed back in the day when you needed hundreds of planes carrying several tons of conventional bombs each to effectively take out a major target since a fair number of planes would be destroyed before reaching the target anyway and of those that did get through most were going to do nothing but create collateral damage with their bombs anyway since "accuracy" was measured in hundreds of feet. Even a 2000-lb bomb doesn't do much damage when it lands 100 feet or more from its target.

Today, that same 2000-lb bomb can not only manage to hit the correct building 99% of the time, it can target a room in that building, even an underground one (ask the Chinese at the Belgrade Embassy about that...).

There is no need to take out an entire city, and in fact the military and political ramifications of doing such a thing pretty much make doing it an end-game scenario - you'd do it because you've either lost anyway or are about to.

OperationNorthwoods said...

Jun,

Do you think that Japan was, at one point, a US client state or colony? If so, when did that status end? With the official return of sovereignty? When less than half of Japanese currency reserves were held in dollars? (just kidding)

I think an issue here is terminology, so, for example, is Canada a client state of the US? It would certainly be destroyed economically if the US stopped all trade.

matt at anarchyjapan said...

Jun,

Here's an interesting Peter Schiff video:
http://www.youtube.com/watch?v=KaXoLYciT5s

It seems relevant to this discussion. It seems the bank of Japan is bending over backwards in its support of the dollar, but what's not clear is if that's in Japan's interest. Schiff's analysis is quite fascinating.

Jun Okumura said...

Matt: I’m no Platonist and Karl Popper was one of my intellectual heroes back in the day when I took philosophy more seriously, but I’m sure that they’ll both agree that “logic” and “theory” are different animals. I’m sure they’ll also agree, as I believe, that people should obey some simple rules of logic as well as narrow the distance between fact and opinion. I think that the ability to do so is the defining quality of sanity. In that respect, on the scale between normalcy and full-blown schizophrenia, I put G-Mac somewhere between Gregory Clark and Benjamin Fulford. Having said that, I’m ready to move on, agreeing to disagree, if you are.

“In return from empty promises, Americans have received hard goods. You can poke at this all day long, however you like, but that is the net result.”

The Treasury bills, which comprise most of Japan’s foreign currency reserves, (as well as the accrued interest) will come in handy when the Japanese population ages and feels the need to begin cashing them in. They are not “empty” promises, unless you know more about the likelihood of U.S. hyperinflation.

“…Balderdash. Japanese obviously want a nuclear deterrent, and they've got one.”

What you’re saying in essence is that even if the Japanese public is highly unlikely to support the acquisition of Japanese nuclear weapons, it nevertheless tends to supports the nuclear umbrella. I think few people in Japan disagree with that. The problem is showing that the nuclear umbrella is a significant cause for the decades-long Japanese trade surplus and U.S. trade deficit. Exhibit A: The Japanese external balance in the fifties and sixties. Exhibit B: The Chinese trade surplus that is dwarfing the (rapidly dwindling) Japanese trade surplus. That’s not to say that Japan is not paying a protection fee. That’s what Okinawa, the omoiyari budget for U.S troops in Japan, and the Japanese troops in Iraq to name a few are all about.

“Second, the inability to create meaningful dialogs with other Asian countries.”
What do you mean by “Asian”? What do you mean by “countries”? What do you mean by “meaningful”? And what do you mean by “dialogs”? This is what I’m talking about when I look for “sturdy, fact-based logic.” You’re pushing rhetoric that is dangerously close to G-Mac territory. For the record, I believe that there is plenty of “meaningful dialogs” with “Asian countries,” and the ones that are not moving forward are either of little significance or have little to do with “history issues.”

I'll note that I see the idea tooted over and over again that for geopolitical reasons (or because of cultural reasons), Japan can't handle its own self-defense.

I think such arguments are being made to explain the current state of affairs (there’s some truth to them) but not as a claim for all eternity even if the U.S. decides to abandon the Far East as a sphere of influence.

As for defending Japan, my question is: Defending from what? What are our territorial, regional, and global defense needs, and what should Japan do to meet those needs? These are questions that I’ll be coming back to from time to time.

And a belated thanks for the Peter Schiff link. I’ll try to look at it later.

Jun Okumura said...

LB: Nuclear weapons are a reality, not a concept. It can only be understood in context and individually. (Which is why, say, Israel has nuclear weapons while Belgium doesn’t.) The problem with regard to Japan is that North Korea may may have a very small number of nuclear warheads that would be most effective when scattered among a large number of mobile, mid-range ballistic missiles whose most obvious target is Japan. And there’s the low-probability but still hard to completely ignore threat that, sometime in the future, China might see it profitable to use military threats to have its way with Japan in a sovereignty-related dispute. I think that a nuclear counter-threat, i.e. the threat of massive retaliation, is very effective in such cases. There are huge political downsides to acquire nuclear weapons on one’s own for this purpose, though; which is why I think most states have not sought to do so.

Northwood: …which is why those sweeping labels and unqualified statements mostly only obscure. Which remind be again that G-Mac is a great argument against tenure. He wandered off the reservation into international relations and has made a fool of himself as a consequence.

Matt at Anarchyjapan said...

At this point I risk becoming a nuisance, so I'll try to let go after this ...

1. For Karl Popper there is no difference between fact and opinion. That's his philosophy. Popper regards theorems of logic as themselves theoretical. Nevertheless, Popper believed strongly in the rigorous use of modus tollens. The fact you find some thinkers crazy is limiting, I think. However, you do seem remarkably open minded in keeping this blog and responding to comments. I'm guessing your very accomplished, and it would be easy for you to rest on your own laurels. You don't, and so that's very impressive. For me, I have no pretentious here, I'm nobody nor do I want to be somebody (in this context).

2. "The Treasury bills ... will come in handy ..."

I don't think you've spent much time on this topic. The US monetary base doubled last year. The only reason we don't have rampant inflation is because the M1 Money Multiplier also dropped.

Monetary Base:
http://research.stlouisfed.org/fred2/series/BASE

M1 Money Multiplier:
http://research.stlouisfed.org/fred2/series/MULT?cid=48

The idea is that once the economy begins to recover and the multiplier begins to work its magic, Bernanke will sell off Fed assets in order to reduce the base. But how? A lot of the assets the Fed's been buying are quite dubious, meanwhile American debt is spiraling. At a very minimum the US economy is in for a rough ride. As long as Japan, China and everyone else holds onto their dollars assets, we can probably avoid hyperinflation. But as America will almost surely not default on it's treasury bonds, it's quite obvious that policy makers will have to seriously inflate.

3. As far as foreign policy, I have to admit this is one of my weaker areas, and I am trying to catch up. I spent last week trying to go through a lot of material. I think the term client state is probably over simplistic, certainly America during many prior conflicts (post WWII) has pushed Japan to step up the plate, and Japan has mostly deferred. So one gets the sense that there is a possible strategy here, and perhaps an admirable one. This will require more thought.

4. I was not trying to point to a specific link between trade imbalances and defense issues. I'll retreat to a simpler position that the trade imbalances between Japan and America are not healthy for either nation. It does seem clear to me that China can expect a lot more from it's trade imbalances politically then Japan can, precisely because China defends itself. Obviously it would not be in China's self-interest to start selling their treasury bonds and cause a crash of the dollar, but the remote possibility they might is far more tenable with them than it is with Japan. Moreover, I think China could decouple from America more smoothly than Japan.

5. As far as Japanese relations with Asia, Japan isn't exactly Asia's moral compass, is it? There seems to be a lot of distrust between of Japan in China and South Korea. You find this stuff in both the media and in a lot of books. Am I totally missing something here? Japan and America side together far more than Japan and China. There are a lot of reasons for this, but I am guessing that a slow transition is necessary. Again, this is hard for Japan because of its financial and security interest, at least to me, seems so American centric. I think Japan needs to become more Asian centric.

6. Finally, I like to push the envelope when it comes to taking a side in any argument. Thank you for your tolerance. To return to my original point, I strongly believe in ideals of limited government, and I think these ideals are universal. A lot of political discourse in America and Japan seems to be over thin gruel. Nuances of policy and small shifts here and there regarding government services and taxes. While I would like to be wrong in my expectations that America is in for a hard financial ride, if I am right, I am hopeful that this will encourage debate over things of more substance both in America and in Japan.

Jun Okumura said...

Matt: Then use whatever word you like. I don’t think that Benjamin Fulford’s conspiracy theories are so out of whack with my opinions on the issues that he has taken up in recent years that I don’t think it limits my thinking or that of many others to consider him insane. As for Gavan McCormack, I had no idea who he was when I went to hear him give a talk at a forum that a friend of mine runs, where he claimed that Japan’s lack of remorse for its occupation of the Korean Peninsula was the cause of North Korea’s intransigence. (And I thought Japan was just a client state of the United States…) I wondered where this guy was coming from, looked around, and learned that, among other things, the leftist professor had denied the Khmer Rouge atrocities. Anyone who lets his ideology take the place of critical thinking like that does not have full command of his faculties.

The Japanese monetary base has taken similar leaps in past years while money supply remained stubbornly stable. That said, I have no idea how much of the increase in the monetary base is the result of purchases of poorly performing bank assets some of which the federal banking system will have to write off and how much of it consists merely of loans to banks (“assets”, much of which cash I assume is sitting in the federal banking system as deposits), which I expect will be repaid at some point once liquidity issues fade out. Lacking knowledge of such facts/opinions, I have no way of responding to your second point. You’ll have to turn to a real economist to have a meaningful discussion about the long-term implications if any of future exchange rates and short-term fluctuations in the US monetary base.

It’s not clear to me at all, actually, what China is getting/expecting to get and what Japan is not getting politically from the US. And what do you mean by decoupling?

Of course Japan is not Asia’s moral compass. Which country is? China? The Seychelles (…hey, we could do worse…)? Kazakhstan? Russia? And are you sure you don’t mean Northeast Asia, rather than Asia? Sure, there’s plenty of distrust among the Chinese and South Korean public towards the sovereign state Japan, and there’s a lot of distrust between those two publics as well. Still, we keep merrily buying autos, fashion, entertainment (and businesses) from each other, have a slew of regular, official bilateral contacts, set up and develop bilateral/plurilateral currency swap arrangements…the list goes on. It’s called real life, and we get on with it, get along famously, something that academics and journalists who specialize in conflict issues or have ideological axes to grind tend to forget or ignore. On another point, the Japanese government (like most European governments) tends to side with the US government more often than with the Chinese government, but that’s mainly because Japanese and U.S. interests converge more closely on a whole slew of issues. I don’t understand what you mean by Asia-centric. You’ll have to be more specific than that.

On your final point, limited government isn’t a very operative concept. I am skeptical of the overweening role that the government has taken in consumer finance and real estate rentals, for example. On the other hand, I believe strongly in universal healthcare, government support to the childcare and education systems. I could go on. I do agree, though, that the ongoing political discourse, or rather, the messages that we are getting from our politicians here rather muddled and disappointing. Let’s hope, for your sake too (since you seems to live here), that some political leaders will emerge with the necessary vision, intellect, and energy to address the issues before the fiscal and demographic sh!t hits the fan. Let me sign off on this comment with that hopeful note. Thanks for writing. Matt.

Matt at Anarchyjapan said...

1. "Anyone who lets his ideology take the place of critical thinking like that does not have full command of his faculties."

We all see the world through ideologies, in a sense. But we share the same reality, so we've got to let our ideologies bump up against that reality. My point is we should not criticize the person, but the idea. I think your missing out if you automatically discount ideas via their source.

2. "The Japanese monetary base has taken similar leaps in past years while money supply remained stubbornly stable. ... You’ll have to turn to a real economist to have a meaningful discussion about the long-term implications if any of future exchange rates and short-term fluctuations in the US monetary base."

Don't we have an obligation to try and figure out this stuff for ourselves? How are we suppose to vote if we have to turn to various economists to determine long-range implications?

Just a few more points here,
i.) The increase in the US monetary base dwarves that of Japan's during the BOJ quantitative easing period (especially if you allow for the time factor).
ii.) I've outlined what the Fed is getting for it's newly created cash here:
http://tinyurl.com/l8uudr
I think it very unlikely the Fed will be able to reduce these holdings any time in the near future.
iii.) The BOJ's quantitative easing was made easier by Japan's trade surplus and a high amount of savings within Japan.
iv.) America's will be made all that much harder by the exact opposite, a high level of borrowing and a trade deficit.
v.) Japan's debt is mostly to Japanese savers, America's debt is to a large extent to foreign holders. Of course, the "foreigners" don't want to dump their bonds for obvious reasons, but other than blatant self-interest, there's nothing to stop them from doing this. They've no sense of duty to America.

Having spent more time on this issue over the last week, I will say that at this point, the Fed could still find some way to avoid future inflation. However, I see absolutely no political will to do so. When push comes to shove, my expectation is the Fed will keep on printing. We'll have to wait and see. (I predict very serious inflation in six months to three years.)

You might want to check out the most recent issue of 週刊エコノミスト. They have a good rundown on a lot of the details here. You may think their being a bit sensationalistic, but you can't argue with their numbers.

3. By decoupling I mean I fail to understand why China needs America as much as America needs China. I know I am over simplifying, but it's as if America borrows from China so America can buy Chinese goods. Then when America can't pay back the money it threatens China by saying, hey, if you don't lend us any more money, who'll buy your goods? I just don't get this. Why can't China just make goods for themselves? What is America really adding to this process aside form borrowing and consumption. This just isn't sustainable. You really should check out Peter Schiffs analogy about the island, here:
http://tinyurl.com/lvja3d
(Scroll down past the video of Ron Paul. It's the large quote from Crash Proof.)

4. Thank you for the rest of your comments. I have nothing to add at this time as it would entail too much writing! I think I have to study harder when it comes to explaining my foreign policy positions, thank you. :-)

Jun Okumura said...

Matt: My response here, since it didn’t fit the comment specs.