One of the myths of the financial world is that the United States is a model of laissez-faire capitalism and Japan is highly, even overly regulated. Nothing could be further from the truth. In the United States, regulations elaborated and enforced by legions of busy lawyers hem in transactions on every side, with rules punishing insider trading and mandating disclosure, liability laws protecting investors, and myriad other devices functioning to make the market more transparent and efficient (and at the same time, of course, enriching the lawyers). It is Japan that is unregulated. Where the Federal Reserve has between 7,000 and 8,000 banking inspectors, the Ministry of Finance had only 400 to 600, and, according to Richard Koo, a senior economist at the Nomura Research Institute, «Of that, only 200 are considered any good.» Lack of financial supervision became such a scandal that the Diet removed this function from the Ministry of Finance in the late 1990s, creating a new Financial Supervisory Agency (to become the Financial Services Agency in January 2001). The new agency, however, has only 310 inspectors, most of whom hail from its inept predecessors. The U.S. Securities and Exchange Commission employs 3,000 inspectors, versus about 200 in Tokyo and Osaka, whose work is mostly perfunctory. In Japan's financial world, gangster payoffs, insider trading, juggled books, defrauding of old people by insurance companies and banks, under-the-table payments to bureaucrats, usurious interest, special accounts for officials and politicians at securities houses – anything goes. It's wild and woolly out there.
In place of regulation, the Ministry of Finance has drawn rigid boundaries around Japan's financial world in an attempt to limit its range. Rather than clean the sharks out of the lagoon, the ministry chose a smaller lagoon. Circling round and round inside their little universe, MOF officials neglected to learn the new techniques of wealth creation that are redefining finance elsewhere in the world.
MOF is dragging its feet in legalizing derivatives, and the red tape for granting stock options to employees of start-up firms is so lengthy that so far only a handful of companies have applied for permits to do so. In any case, it takes an average of thirty years to list on the Tokyo Stock Exchange, so stock options are not much of an incentive. Pension-fund management, at the leading edge of financial sophistication outside Japan, is only in its most primitive stages, and MOF is still in a position to order managers to buy nonproductive stocks and low-yield government bonds. With rules of disclosure nearly nonexistent, investors lack confidence in listed firms and, as a result, the over-the-counter market languished.
To put it simply, Japan failed to develop mature financial markets – and the expertise that goes along with them. This means that money does not make money. Another way of putting it is that Japan has very low productivity of capital. It is one of the oddest paradoxes of modern Japan that in a nation seen worldwide as a paradigm of «capitalism,» the bureaucrats in charge basically distrust money This may result from the fact that in the early postwar years Japan's bureaucrats found keiretsu banks effective (and controllable), and in time the Ministry of Finance became addicted to a system. One might say that MOF's love of the system is far greater than its interest in financial health.
Japan's low capital productivity begs another comparison with ancient Sparta. Plutarch writes that Lycurgus, the founder of Sparta, ordained that Spartans must use iron money. Given that iron was of so little value and yet so heavy, the best people could do was lay up stocks of it in their closets. After a while, they ceased to have much interest in acquiring wealth and instead devoted themselves to military glory. Plutarch points out that «being iron, it was scarcely portable, neither, if they should take the means to export it, would it pass amongst the other Greeks, who ridiculed it... For the rich had no advantage here over the poor, as their wealth and abundance had no road to come abroad by but were shut up at home doing nothing.»
Japan has stored up a huge pile of savings, but the money is iron, shut up at home doing nothing, and the nation is paying the price, with the Tokyo Stock Exchange stagnant for a full decade, a crumbling welfare system, and securities firms that lack the expertise to compete abroad. In this there is a valuable lesson in what really constitutes culture and tradition. Entrenched Asian elites are very fond of appealing to hallowed «Asian values» as a means of clinging to power. MOF's distrust of the free use and flow of money would seem to have all the sanction of Japan's tradition of control by elite officials. On the other hand, it's important to realize that for all its bureaucratic background, Japan also has a freewheeling mercantile history. Distrust of the free flow of money is actually something new, an aspect of Japanese tradition that was relatively minor until after World War II.
When the U.S. Occupation confiscated the zaibatsu assets from their owner families, the bureaucracy as we now know it took control of the government. Salaried officials feared the robber-baron capitalists of prewar times and used every means m their power to rob them of the power of their money. That was how the present system got going. Today, the reason MOF fears the free flow of money boils down to a simple question of control. Money is power, and the ability to decide how money is used and invested is what keeps Japan's bureaucrats firmly in control. That said, the oddest part of the equation is the amazing disdain the bureaucracy shows for money. The figures for debt, bad loans, failed stock markets, and so forth are staggering enough to keep the leaders of most other countries lying awake at night in terror. Yet Japan's government agencies seem curiously unconcerned. Like spoiled society girls who grew up on ample trust funds, Japan's officials have never really had to learn what money is. When they needed it, there was always more from Daddy.
Edo townspeople knew better than to distrust and disdain money. The novelist Saikaku warned:
Year after year the loss and senseless waste pile ever higher one atop the other: the blossoms of a merchant's flowering talents fall, his brocade robes are replaced by ones of paper, and finally, in the same way the seasons turn one to another, he is reduced to a faceless beggar. Consider all this and it should become apparent that for the merchant, in all his varied activities, there is simply no room for lack of heed.
Michael Phillips, an adviser to start-up companies in California, wrote a classic little volume in 1977 entitled The Seven Laws of Money. The Second Law was «Money has its own rules,» which meant that no amount of goodwill or cleverness gets you beyond the simple laws of supply and demand, income and outgo, profit and loss, compound interest, and so forth. He writes: «The rules of money are probably Ben Franklin-type rules, such as never squander, don't be a spendthrift, be very careful, you have to account for what you're doing, you must keep track of it, and you can never ignore what happens to money.» Yet for a while it became fashionable to believe in a mysterious new Japanese system that somehow transcended the Second Law. As Alan Blinder put it, «The amazing Japanese economy poses another challenge-one that has been barely noticed. I refer to Japan's challenge to received economic doctrine. Stated briefly and far too boldly, the Japanese have succeeded by doing everything wrong (according to standard economic theory). That should make economic theorists squirm.»
The question of whether there really are «laws of money» is one of the most hotly debated topics among economists today. Karel van Wolferen warns against taking this view too far. He says:
That [there are laws of money] is what neoclassical economists, in other words, the vast majority of contemporary mainstream economists, are telling themselves and want everyone to believe. Keynes never thought so. And it fits in with American ideology, which is rarely recognized as an ideology. What Alan Blinder is referring to is perfectly accurate: Japan is definitely a challenge to received economic doctrine. Blinder once pointed out to me that the reason why this doctrine has become one, and why it is now rarely challenged, is because it had been made to fit the Anglo-American experience amazingly well. The reason why money does not have its own rules, like physics, is because there is an important political dimension to it. This notion is anathema to mainstream economists, which is why you get so much certainty where none is warranted.