Japan and the Shackles of the Past

Book by R. Taggart Murphy

Review & Article by GlobalMacroForex

I’ve listed on this website now over 8 books on Japan but this one is my favorite.  Not only is Murphy’s writing style truly captivating but the depth of knowledge is amazing.  He has so many insights that other western authors about Japan were leaving out or glazed over that truly change the entire view of the situation.

Murphy’s central premise is that Japan is an incredibly wonderful place whose distinctive culture is misunderstood by Western journalists, politicians, and even its other Asian neighbors.  While Murphy lays bares Japan’s numerous flaws out in the open, he sees optimism.

“loosening history’s shackles and turning tragedy into triumph”

Japanese “Hidden Champion” Businesses

Taggart Murphy in a nuanced way does an excellent job at giving the reader a full understanding of what separates Japanese “Hidden Champion” businesses from the rest.  While acknowledges that many Japanese firms such as Sony, Hitachi, and Fujitsu have lost market share to rivals such as Korean Samsung; He disputes that Japanese businesses are dead.

He points out that Japan’s strength is in upstream manufacturing, where the customer isn’t the end user.  This comes from Japan’s unwillingness to let outside foreigners have high-up positions within firms, which causes an ability to market products that appeal to these foreign markets.  Instead, Japanese firms excel at innovative manufacturing techniques and high-quality attention to detail.  For these types of “Hidden Champion” companies, depreciating the yen doesn’t boost exports.

“Many deal in upstream components or materials that are largely invisible to end-users.  They enjoy technological supremacy and large relative global market shares in their respective industries.  And they have pricing power.”

It really comes down to the quality of the manufacturing.  While he acknowledges “Made in Japan” used to spell cheap and shoddy, the focus switched to attention and detail on every step of production.

Japan joins the European Imperialists

Japan went from being isolated as means of choking off foreign control, to going on the aggressive and trying to join the European imperialists.  Early military victories distinguished this archipelago nation from its other Asian neighbors.  First Japan beat China in 1875 and took control of Korea.

Then Russia started competing for land too, thinking this would be an opportunity to take some of the little islands to Japan’s north.  When the Japanese also beat Russia in 1904 it really marked defining moment,

“For the first time since the fall of Constantinople, a non-Christian, non-Western power defeated the forces of a Christian nation.”

Defeating Russia really marked the West taking Japan seriously as a military imperialist power.  From there, Japan just kept making land grabs until it’s defeat in World War 2, which put Japan back in the Asia category in a military sense.

American Occupation

“Hiroshima at least was an important naval base, but Nagasaki was a gratuitous atrocity”

After World War 2, the United States occupied Japan and put in charge a transitional government.  The American occupation dispersed the Zaibatsu, which were huge multicorporate conglomerates that controlled the country.  Even though most of these wealthy Zaibatsu family business owners were against the war (according to the author, not necessarily my personal opinion).

“Everyday Japanese saw themselves as victims since they hadn’t asked for the war (or supposed it with various degrees of enthusiasm)”

Republican Douglas MacArthur was in charge of the American occupation and many of the decisions he made still effect Japan today even if that was not the original intent.  For example, the occupation failed to achieve the democracy the American officials had hoped for because they left the Japanese bureaucracy and the throne in power.  But democracy wasn’t the real goal of these types of changes.

The American Occupation focused on 2 goals:

1)           Japan’s Military subservience to America to crush Soviet influence

American authorities wanted to stop the rise of communism and the Soviet state at the end of World War 2.  Therefore it was important that the right wing side of Japan won elections even if these were not real elections.  So the CIA manipulated many different right-wing groups within Japan to form the “Liberal Democratic Party’ LDP.  Murphy notes ironically this group was neither liberal nor democratic.  It wasn’t even really right wing either because they promoted government promotion of certain industries and Keynesianism.  In fact, it was mostly cronyism but this party is still in power today (2017).

Keeping a military base and troops stationed in Japan was a huge priority.  Written in Japan’s constitution were new provisions that prevented Japan from having a military or challenging America’s military control of the region.

2)          To establish a client-state relationship with Japan

Japan was to purchase US Treasury bonds and American products.  The intention was never to allow Japan to turn into an export manufacturing powerhouse that displayed American business in the 1980s.

US CIA helped various conservative groups to form the “Liberal Democratic Party’ LDP.  The CIA still has a large role in shaping Japanese politics.

Post-War Miracle Growth

Now in my previous article on How the Asian Growth Model works, I covered the flaws of this style of export-led government central planning.  However, Muphy has some subtlely intricate views on the issues.  He notes how the government essentially socialized risk which enabled firms to export at a loss and capture market share.  Japanese business culture emphasizes market share and growth more than net income and this is especially true of government-backed firms.    As the Japanese government pushed for funds to be diverted to “Strategic industries” and by running these businesses using the World War 2 ‘war-time’ assembly lines, they were able to stomp out the competition in many manufactured goods.  This chart from the Economist magazine presents that Japan has maintained this manufacturing powerhouse into the modern era.

By socializing risk in this way, Japan quickly achieved the manufacturing size to benefit from economies of scale.  (Now, of course, the author doesn’t mention that government central planning misdirects resources and caused the bubble economy within the next few years, but let’s play pretend that this was “miracle” growth.)  Once Reagan & Paul Volcker jacked up the US Dollar via interest rate hikes, it crushed the worldwide cost of oil.  (oil is sold in USD) Since Japan doesn’t have any oil and has to import the bulk of its energy, this lifted the yen in the early 80s. 

Salaryman culture

In China, the culture values the family relationship and honoring your parents.  In western Christian culture, the most important social tie is your spouse/lover.  In Japan, it’s your male coworkers.   They work together for 12+ hours a day, getting the nickname “salaryman” as his entire life revolves around this hierarchical group.  They even go after work, they get laid together at restaurants where the waitress gives oral sex under the table.

These young men are expected to be a salaryman for life.  Literally having “lifetime employment” is the norm for managers at Japanese firms.  Nobody is fired, even when they aren’t good at their job.  They’re given less and fewer responsibilities and asked to take a voluntary severance pay.  As Japan’s bubble popped and transitioned into a lost decade, Japanese firms switched to using more temporary labor that wasn’t promised a full lifetime employment with all the benefits and stability of the salaryman culture.

This creates a socio-generational rift, between the older salarymen and the younger millennial-aged temporary workers who feel left out.  Like the train of achievement took off without them.

“Today, the culture already treats the salaryman in ways that border on open contempt, fashionable young women refer to salaryman as oyaji (“old guy”).  The men who are admired today are not salarymen, but entrepreneurs, designers, and aidoru (“idols”)”

1987 Stock Market Crash

Murphy makes the case that the 1987 American stock market crash was both STARTED and ENDED in Japan.  I do not personally disagree or agree with this, but I’ll state his view because I find it interesting,

“The announcement of August 1987 trade statistics showed that despite a near doubling of the exchange rate of the yen against the dollar since the Plaza Accord of two years earlier, the size of the bilateral US-Japan trade deficit had barely changed.  Americans were beginning to learn that the explanation for Japan’s structural trade surpluses was a lot more complex than currency malalignments that, among other things, nothing could force Japanese companies to give up recently acquired market share just because their profit margins had started dropping.  (As we already noted, profits in the Japanese system were historically of minor importance, what counted was technological leadership and market share)  But with the prospects of another round of dollar weakening, they dumped US government securities.”

So Murphy is arguing that Japanese firms which heavily engage in long USD carry trade, in mass realized the USD might appreciate because the American trade deficit was still huge despite the already weakening USD.  So Japan dumped Treasuries in mass which spiked yields and caused the 1987 stock market crash.

He further argues that it was the Japanese authorities that ended the crash by strongarming their own institutional investors to rebuy USD assets.   I’m extremely skeptical of this whole story, but especially the second part.  It’s very difficult to discern exactly why different groups sold or bought.  In addition, a change in the USD/JPY exchange rate would change the trade balance in a negative direction first, then take two years later for the positive gains to be seen.  We learned this from my article on the textbook the Japanese Economy by David Flath.  So if the institutional investors were acting in this way “immediate response to exchange rate” way, it was fairly irrational.

Mexican Peso “Tequila” Crash 1995

Murphy argues that the bursting of the Japanese bubble in 1990 through all of the 90s, triggered the Mexican peso crash in 1995.  As by the mid-90s, Japan’s markets were getting crushed.  Although I disagree with the author on this view.

Political “Shadow” Puppeteers

Taggart points out that political differences/parties/groups in Japan don’t stem from an actual difference in ideological point of view but are literally just disputes over power from different factions.  No person epitomizes corruption in the Japanese political sphere than Kakuei Tanaka aka the “Shadow Shogun”

America has a system of checks and balances where the president is voted by the people separately with the ability to disagree with Congress.  In Japan, the parliament (called the Diet) gets to vote on the president.  So long after the president Kakuei Tanaka was voted out of office with a corruption scandal involving bribes from Lockheed Martin, Tanaka continued to control which presidents replaced him.  Nobody could take the position without his approval since the Diet was still loyal to him as a result of all his corrupt-favor deal making.  Taggart points out what made Kakuei Tanaka separate from other politicians is he would offer favors to everyone, regardless if the person yet had something to offer back.  This set him up so everyone owed him favors.  Even long out of the presidential post, he still ran things as the “Shadow Shogun”.


I love this book.  I really felt that I gave me the context to understand Japanese history, business, economic shocks, and the intricacies of its culture in a whole new light.  The main thing that sets Murphy’s book apart from the rest is his nuanced attention to the intricate details that provide the missing piece of information to gain the insight on the issue.  With this much ‘hidden value’ added, maybe we can refer to Murphy as one of Japan’s “Hidden Champions”.