Asia Watch / The Japan That Can Say Maybe
McGurn, William
The Japan That Can Say Maybe by William McGurn Tokyo 0 n this bitter, windswept morning in Japan's capital city, it is hard to tell a revolution is afoot. All along the extensive Tokyo subway...
...Just as in America, this means that ordinary people expend extraordinary amounts of energy looking for ways around taxes...
...In vertically oriented Japan where some 10,000 regulations limit competition on the basis of price and quality—and where anything that is not expressly permitted is forbidden—businessmen are forced to seek relief from regulatory and tax agencies...
...Even folks like Yoshio Terasawa, a liberally oriented businessman-turnedpolitician speaks frankly of the government package as a tax increase...
...On a more legal front, many companies have moved to subsidize their employees' lunches through a monthly Y7,000 ($66) voucher that is tax deductible and accepted at an increasing number of restaurants, including Denny's and 7-Eleven Japan...
...Even Japan's much vaunted system of lower executive pay has as much to do with its progressive tax curve as with any Trappistlike desire to forgo material remuneration...
...Liquor and cosmetics have also been opening up...
...As the Sony speakers blaring outside shout, Aoyama offers the "best prices in Tokyo...
...But today there are discount stores and the price has dropped...
...But it also includes provisions for public financing that will increase government involvement rather than lessen it and contribution caps that will only send contributions underground...
...But the steep dollar price today is in part a function of exchange rates that have offset (and distorted) the real drop in the yen price...
...The Ministry of Finance is against budget deficits but it is not against increased expenditures so long as it can pay for them with taxes," says the University of Tokyo's Kazuo Ueda...
...The same stifling system of regulations applies to most every market here, with predictable results...
...The Japanese side, Hosokawa included, 48 The American Spectator April/May 1994 bitterly opposes targets, arguing rightly (though with not a little chutzpah) that such bilateral deals are inimical to free trade...
...These networks exist throughout Japan's markets, and they are as flexible and competitive as any in Asia...
...H osokawa's shortcomings become painfully clear when the substance of his economic and political programs is held up to scrutiny...
...For one thing, the prime minister lacks a mandate...
...By keeping marginal rates low on the wealthy, Hong Kong manages to make it easier on those at the bottom: 43 percent of the population pays no tax at all...
...It's still not cheap...
...But not the Japanese...
...pressure is strong enough and focused on one company, as they did by agreeing to such targets in the March 12 agreement over Motorola's cellular phones...
...But there is no reason that this could not be done more imaginatively by the private sector—no reason, that is, except that taxes represent the lifeblood of the bureaucracy...
...Those looking for answers, alas, have largely confined themselves to all the wrong places...
...I saw a bottle of Chivas for Y3900...
...Even in the thick of Japan's worst recession in years, Aoyama plans to expand by another hundred stores this year...
...firms doing a healthy mail-order business...
...We both laugh...
...Clearly the future will have fewer elevator girls and more Aoyamas...
...his Japan New Party is only the fifth largest in the Diet...
...The result is one of the most peculiar tax systems in the world...
...Japan simply has to change the way it does business...
...Aoyama is far from alone...
...Well, say you were a farmer with a plot of land...
...Without doubt this is nice for Motorola, but it does little to boost trade or open Japanese markets...
...for going through unauthorized distributors to sell Y's clothing at a cheaper price...
...Without taxes, the bureaucracy would wither, which perhaps explains why an ostensibly conservative Ministry of Finance does not oppose the multibillion dollar efforts to spend their way out of recession...
...That figure, moreover, will rise to an astounding 58 percent with the Hong Kong government's latest budget...
...The problem is looking to Hosokawa for leadership...
...It's not just cyclical," says Mineko Sasaki-Smith, a senior economist at Morgan Stanley Japan...
...Already some disenchantment has set in...
...inside, rows of men's suits and sports jackets crowd the racks...
...In other words, Japan Inc...
...On a nondescript side street just a few hundred feet from where Matsuya's elevator girls work, stands Aoyama Men's Store...
...In the last six months, this shop has expanded twice, once in the same building and then across the street...
...The auto industry, for example, is not just Toyota, Nissan, Honda...
...The American Spectator April/May 1994 83...
...But there is one difference: price...
...This year the MOF wants the consumer to have more, in the hopes that he will spend it on Japanese manufactures and thereby stimulate demand...
...Later this spring, the company will begin carrying JC Penney products...
...and pessimistic works by Americans warning that if we didn't watch these guys, we'd soon be a second-rate subsidiary of Japan, Inc...
...Maverick travel agent Tashio Goto has taken on the Ministry of Transport in a one-man campaign to bring cheaper air fares to Japan...
...Nor is the retail clothing industry the only market to change...
...It's also structural...
...But the fact remains that Hosokawa came out wholeheartedly for jacking up this tax...
...True, it does introduce direct competition between individual politicians, which should give the public here some genuine policy choices...
...is busting up...
...High earners resent the confiscatory levels and exploit the loopholes, while working stiffs resent their inability to use these loopholes...
...which he arrogantly tried to sell as a "national welfare tax...
...The more important questions have to do with the undeniable changes bubbling up from the bottom of modern Japan: whether they are genuine, whether they will be lasting, and whether U.S...
...But we feel sure that a strong Japanese economy will be able to absorb this tax increase in three years...
...is much more believed outside Japan than inside," notes Representative Terasawa...
...It's hard to miss...
...and knows America and Americans much better than we know Japan or the Japanese...
...But if we don't—if we fail to create a society where creativity is rewarded—we will fail with a vengeance...
...The owner of another discount chain, Toshio Miyaji, recently took a group of thirty-eight workers to Europe where he gave them cash and orders to come back with a set number of bargains, which were then sold in the chain for what the company claims was a profit of Y600,000...
...The same goes for the Recruit shares-for-favors scandal and the Lockheed scandal before that...
...Japan is quite dynamic in its way, and not all of that fits the stereotype...
...The problem is not Hosokawa's leadership...
...Japanese politics is notoriously corrupt, and the public dissatisfaction with the status quo understandably led Hosokawa to focus his energies on a political reform bill rather than on recharging the economy...
...Now the Japanese economy is doing very badly...
...His insistence today on set numerical targets for American goods is his way of making sure that any Japanese "yes" henceforth will indeed mean "yes...
...The Y3.5 trillion beer market dominated by five major companies—Kirin, Asahi, Sapporo, Orion and Suntory—will now be challenged by small brewers taking advantage of a relaxation in the Liquor Tax Law that hitherto insisted on a minimum production of 2,000 kiloliters a year...
...Citing his experience as governor of the Kumamoto prefecture, the prime minister declared himself "determined to do away with regulations which increase the cost of business, and cost to the consumers...
...Like any steeply progressive tax code, the Japanese system invites cheating and encourages cynicism...
...And how else to do this but through connections and payoffs...
...it is based on a tremendous network of small and medium-size producers that do everything from seat covers to ash trays...
...B efore the bubble burst two years ago, bookstores were full of triumphant works by Japanese claiming the future for themselves (remember The Japan That Can Say No...
...I do, and it turns out to be a walnut doorstop with the Keidanren logo over the motto "We keep our door open...
...Literally it means 9:6:4, shorthand for a formula whereby salaried people pay tax on 90 percent of income...
...In short, this is not about empowering Japan's beleaguered consumer, but about treating him as a stimulatory lever, to be switched up and down as the MOF sees fit...
...trade strategy might not be completely irrelevant...
...It was the same price everywhere, and it was like giving a 10,000-yen note...
...Outside, bulging bins hold rows of white shirts...
...This was precisely the case with Sagawa Kyubin, the trucking company whose Y2.15 billion payoffs to Japanese politicians between 1988-92 ultimately brought down the LDP...
...They are not used as Christmas presents anymore...
...Years ago Japanese used to give bottles of Johnny Walker Black as Christmas presents, because everyone knew it was worth 10,000 yen...
...A few years back film director Juzo Itami transformed this resentment into a box-office smash with A Taxing Woman and A Taxing Woman II, hilarious send-ups of comedies about tax inspector Ryoko Ikatura's efforts to nail enterprising tax dodgers...
...kuroyon, that sums up the unfairness...
...All along the extensive Tokyo subway network, legions of blue-suited salarymen still crowd the trains as they leave for the office, where they will sit at their desks all day until someone finally screws up the courage to be the first to leave...
...In fact, they favor this kind of expenditure because it increases their power...
...asks Kazuo Nukazawa, managing director of Keidanren, a big-business group...
...I protest, but to no avail...
...Bean and Apple computer are among a number of U.S...
...But the new package—which Hosokawa was forced to water down to get it through—is nowhere near the watershed claimed...
...On late-night TV, hawkers flog British lambswool cardigans, and both L.L...
...In Hong Kong the top rate is an effective 15 percent—less than a third of Japan's—and the corresponding contribution from the top is 73 percent...
...the self-employed on 60 percent and farmers on 40 percent...
...Immaculate, polite, and elegantly indifferent to the chaos around them, the girls embody the maddening contradictions of Japan, Inc.: comforting, reliable, and, ultimately, inefficient...
...More rascals than robbers, Miss Ikatura's foes drive Rolls Royces, own love hotels, hide income in hundreds of false-name bank accounts, keep different sets of books, and even incorporate as religious organizations to avoid taxes...
...But in many ways Hosokawa is a traditional figure," following change rather than initiating it...
...N owhere have the contradictions been more striking than on taxes...
...So no one gives it anymore...
...Allthe talk about the tax cut here is an elaborate tap dance around the real issue, which is that tax evasion here is on par with Italy's," says Salomon Brothers' Ogawa...
...Such protests notwithstanding, the Japanese will inevitably cave when U.S...
...Trading Places, Agents of Influence...
...But just as the Japanese were not quite as strong as they thought back in the late 1980s, they are not quite as weak as they now worry...
...Under Japanese law, it is next to impossible to sell your farmland for commercial use...
...ike most Japanese officials, L Nukazawa has spent time in the U.S...
...Now, revisionists would point out that Nukazawa represents the Japanese establishment, and, like most establishment officials dealing with foreign reporters, he is killing me with kindness...
...Critics who feel let down point out that the prime minister has found it hard to break with old ways—everything from backroom deals and tax increases to recent reports that he too had accepted sweetheart loans from the same Sagawa Kyubin company at the center of the scandal that brought down the LDP...
...The bureaucracies have wide discretionary powers, which means that favorable interpretation of the rules becomes of paramount importance...
...But cracks are appearing all over, reflecting the maddeningly slow but nonetheless inexorable shift of power from producers...
...As we leave his office for dinner, he gives me a small triangular box with a present inside...
...Suits here cost up to 40 percent less than elsewhere, and the Ginza branch is but one of hundreds of Aoyama shops William McGurn is senior editor of the Far Eastern Economic Review...
...Likewise the major newspapers, which despite the lifting of the rice ban continue to debate whether a pot of foreign rice really could ever be as tasty as the Japanese variety...
...In the nightclub area of Roppongi, a colleague takes me to a store called Collezione...
...There is an understandable tendency to personalize the issue, to equate Hosokawa with political reform," says Peter Tasker, author of Restructuring Japan...
...In fairness to Hosokawa, almost everyone in the Japanese establishment, including the press, supports the government line that sometime tomorrow the public will have to "pay" for their tax cuts today...
...The only question, it seems, is how to sneak it past the public...
...That's probably not entirely fair...
...Open it," he says...
...Japan's recession is only the tip of this iceberg...
...Most striking of all, the reform package betrays not the slightest appreciation of the chief reason for Japan's endemic corruption: the close relationship between business and government...
...Today the talk in Japanese newspapers is of "Rising Sam"—America's successful regeneration of its economy...
...But here we do not have such a high opinion of him...
...Sagawa Kyubin started paying off politicians because it needed help getting licenses to expand...
...around the city...
...They do, though it is not as simple and they are not nearly as closed as popular folklore would have it...
...Like so many other things, however, deregulation in Japan has not made it much past the level of fad, frequently invoked but little understood...
...Department stores, once severely limited by the tens of thousands of small shopkeepers, have now been permitted to stay open longer...
...This is a key point...
...Outside Japan people think Hosokawa is very smart," a Japanese businessman tells me...
...The social implications are even more telling, for Japan's high marginal rates punish precisely those whom economies most want to reward: the innovative and risk takers...
...Come to think of it, Americans are still writing such books...
...A profusion of discount stores have cropped up, bypassing the usual supply routes...
...Of course, we should not raise the taxes now," says Terasawa, who spent much of (continued on page 83) The American Spectator April /May 1994 49 WILLIAM McGURN (continued from page 49) his career in the U.S...
...Here the goods are more upscale—plenty of Giorgio Armani labels, for one thing—but the prices are much cheaper than anywhere else...
...The biggest challenge for these smaller and medium-sized companies is not foreign competition but a domestic bureaucracy that keeps them in a sort of indentured servitude to the big boys, denying them access to credit and suchlike...
...As the wife of a small restaurateur whom Miss Ikatura audits screams at her, "You are so polite but you're really just a bloodsucker...
...The bureaucracy may think it is managing this transition, but it is in fact following rather than leading trends...
...On the surface, Hosokawa appears to understand all this...
...False-name bank accounts abound...
...How important...
...Unless this structure changes—especially on the tax and regulatory front—it will not be long before Japan's new leaders resort to old ways...
...Once this is accomplished, the lever will then be switched back up with a hike in the consumption tax...
...You know how you can tell somethinghas become cheap in Japan...
...Part of this reflects a Japanese social decision to keep everyone more or less the same, and doubtless at least some of the reluctance to change it owes itself to the Asian preference for a workable hypocrisy over an inconvenient truth...
...One sign of the success of such groups is the ire of their upscale competitors: the exclusive Y's (which markets clothes designed by its president, Yoji Yamamoto) filed suit against the Osaka-based Outlet Japan Co...
...to consumers...
...The question is not whether the Japanese close their markets...
...There is even a term...
...The collapse of the Liberal Democratic Party after thirty-eight years of unbroken rule did indeed mark a significant evolution in Japanese life, but the ascendancy of Morihiro Hosokawa to the prime ministership was less a cause of this change than a symptom of more fundamental shifts only dimly understood...
...Although the overall tax burden is relatively low compared to that of most developed countries, its marginal rates are steep...
...That much almost everyone here acknowledges...
...And just as the market did almost overnight to IBM what legions of antitrust lawyers had been unable to do for decades, the global economy forced open the symbol of Japanese insularity—the ban on foreign rice...
...And over at the Matsuya Department Store in the heart of the Ginza shopping district, white-gloved elevator girls dressed like stewardesses begin their day ferrying passengers up and down the store's seven flights, stepping out at each floor to announce arrivals and departures...
...The system of lifetime employment has been overtly breached, with more defections to follow...
...For another, expectations are simply too high...
...Farmers and mom-and-pop shops face dual pressures from the competition of the marketplace and the unwillingness of their children to follow in their place...
...But if you could get your land reclassified as commercial, you could make a fortune...
...Again it suggests that those at the top have not quite grasped the ferment bubbling up from the bottom...
...In Japan, where the wealthiest top ten percent are taxed at a marginal rate of 50 percent, they contribute some 51 percent of total income tax revenue...
...They look like any other Japanese suits, mostly dark, all conservative...
...He is cheerful, outspoken, and, as others tell me, completely unrepresentative of most of his Keidanren colleagues...
...But if there is an enemy, it is the heavy hand of government...
...Receipts are not rung up...
...But there is another side to Japan these days, and the fault lines suggest that the people here may not be so immune to world trends after all...
...Most obviously, they have looked to politics...
...Indeed, Bill Clinton told Boris Yeltsin as much during their April 1993 meeting in Vancouver, when he warned the Russian president to be wary of the Japanese "because when they say 'yes' they frequently mean 'no.' " The story caused Clinton much grief when the Japanese press publicized it during the G-7 meeting in Tokyo a few months later...
...Don't confuse this for cooperation, they say...
...Certainly something here has changed when the government feels compelled to offer a tax cut—and backs down, if only for the moment, from an effort to let the Ministry of Finance (MOF) grab it all back the following year through a hefty increase in a consumption tax that was itself a precipitating cause of the LDP's decline...
...The myth of Japan, Inc...
...I think we will make the transition," says the Keidanren's Nuzakawa...
...The ostensible reason for a tax increase is that Japan must take steps to provide for its rapidly aging population...
...Revenue comparisons with Friedmanite Hong Kong highlight the inefficiencies involved...
...Unlike the Reagan tax cuts that focused on individuals by drawing a _sharp distinction between tax rates and tax revenues, Hosokawa's Y5.85 trillion ($55 billion) was part of a larger, Y9.4 trillion Keynesian package of public-works spending, subsidies, and loans...
Vol. 27 • April 1994 • No. 45
