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Op-ed

Revival of Japan: Golden Efforts Belie Risk-Averse Image

by Edward M. Graham, Peterson Institute for International Economics
and Adam S. Posen, Peterson Institute for International Economics

Op-ed in the Japan Times
August 29, 2004

© Japan Times


A stereotype exists in the United States and elsewhere: Japanese are risk-avoiders while Americans are risk-takers.

To some, this putatively explains why the Japanese economy fell behind the United States during the 1990s. But sometimes a stereotype such as this needs a reality check. And such a check came in the finals of the Olympic Games Men's Team Gymnastics competition.

At the beginning of the final round of this competition, the high bar, both the US and the Japanese teams were slightly behind the Romanian team. The Romanian team went first on the high bar, and, in succession, the three Romanian competitors made major mistakes, costing them any opportunity to win a gold medal.

The Americans came next. To win a gold medal, the Americans needed spectacular performances, as they were now slightly behind the Japanese, and the Japanese were known for their prowess in this event. But the Americans could also "play it safe" with good but less than spectacular performances. To do so would lock in the silver medal but avoid the risk of falling to third or worse, should the effort to be spectacular go bad, as it just had for the Romanians. The Americans chose the risk-averse route: Very good performances that, indeed, did lock in the silver but precluded the gold, unless the Japanese team gave it to them.

The Japanese came next and, at this point, all that they needed to do to win the gold was to do what the Americans had done, turn in good performances that ran little risk of going bad. But instead, in succession, the three Japanese competitors took the risky route of going for the spectacular. And, in succession they dazzled, each performing beautifully and culminating with Japanese national champion Hiroyuki Tomita flying high off the bar and somersaulting twice in midair before reattaching himself. When Tomita clinched the gold by "sticking" a perfect landing, a standing ovation came from the crowd in which even the American team members joined.

Stereotypes exist for a reason, of course, and many Japanese companies, banks, and households went through a prolonged period of seemingly "playing it safe" during the 1990s: rolling over bad loans to old customers, clinging to old industries and jobs, and bottling up savings in low-return bank accounts. Yet this perception was deceptive in two senses.

First, there were always many exceptions to this general trend, some of whom proved enormously successful. Individual entrepreneurs, such as Hiroshi Mikitani, creator of Japan's Rakuten cyber-mall, created new businesses.

Toyota and Honda invested heavily in "hybrid" automotive technology that has enabled them to emerge as leaders in highly fuel-efficient cars, and created the demand for them, leaving American auto manufacturers to license their older technology to catch up.

Sony aggressively gambled on synergies between hardware and software, computing and entertainment. All these now world-leading Japanese firms themselves started out as risky gambles, going up against government-favored firms and global competition.

Second, and more importantly, most of the seemingly risk-averse behavior by Japanese households and businesses was a rational response to incentives.

In an economy where the economy was shrinking, the politicization of lending and public works projects tended to reward poor performance, and deflation was unopposed by the Bank of Japan, there was no reason for the Japanese to take any risks.

This response to incentives was clearest in the financial sector, where partial deregulation without threat of bank closures and the disappearance of banks' capital encouraged Japanese banks to evergreen bad loans rather than pursue new opportunities.

As the major banks in Japan have recapitalized in the past two years—under threat of regulatory discipline or even closure by Financial Services Minister Heizo Takenaka—their lending behavior has responded: Bad loans have been sharply cut and new borrowers are being financed.

Now that the Bank of Japan under Gov. Toshihiko Fukui has committed itself to restoring price stability as well, the incentives have changed throughout the Japanese economy. The current recovery is the result. Japan's great recession was never a question of the stereotypical Japanese "national character."

The Japanese men's gymnastics team, after dominating the sport during the 1960s and 1970s, went through a 20-year slump—which ended spectacularly at this summer's Olympics. Similarly, the Japanese economy has come to the end of its slump, and barring disasters beyond its control in China or oil markets, it will continue to perform well for the foreseeable future.

Just as the Tokyo Olympics of 1964 represented Japan's postwar coming-out party, we expect the men's high bar competition at the 2004 Olympics to represent the recognition of Japan's economic revival (if not the end of the stereotypes).


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