Money and Influence: Japanese Power in the International Monetary and Financial System

'...in the 1980s, Japan supplanted the United States as the dominant creditor nation and financial power. Never before in the history of international finance has such a dramatic shift taken place in such a relatively short time.' R.Gilpin , The Political Emnomy of International Relations (Princeton, NJ: Princeton University Press, 1987), p. 328.

See S. Strange , 'Finance, Information and Power' mimeo, presented at ISAIBISA conference, March 1989.

See S. Strange, States and Markets : An Intraduction to International Political Economy (London : Pinter Publishers, 1988).

S. Wagstyl , 'External Assets at Record Levels', Financial Times . 27 May 1989.

Before 1987. foreign direct investment rarely rose above fifteen per cent of total long-term capital outflows, averaging approximately $6 billion per year. Since 1987, however, foreign direct investment is beginning to take a larger proportion of overall capital exports. See AMEX Bank Review , (Vol.15, No.3, March 24, 1988) p. 6.

See, for example, C. Kindleberger , International Capital Movements (Cambridge: Cambridge University Press, 1987) pp. 33-6.

D. North , 'International Capital Movements in Historical Perspective' in R. Mikesell (ed.), United States Private and Government Investment Abroad (Eugene, OR: University of Oregon Books, 1962) p. 32.

E. Lincoln, Japan : Facing Economic Maturity (Washington, DC: Brookings, 1988), pp. 99-122. Lincoln stresses that this opposition was largely political. The economic case for reduced government spending was not strong in his opinion.

Ibid. p. 76-7

Gilpin, op.cit., p. 330.

William Emmott , The Limits to Japanese Power (AMEX Bank Review Special Papers, No. 16, October 1988) p. 10.

Mattione notes that about $141 billion of Saudi Arabia's total $160 billion assets abroad in 1982 were controlled by Saudi Arabian Monetary Authority. Richard Mattione, OPEC's Investments and the International Financial System (Washington: Brookings, 1985) p, 60.

Ciilpin, op. cit., p. 329 footnote.

A. Spindler , The Politics of International Credit (Washington: Brookings, 1984), p. 175.

'Japan's financial authorities have derived another measure of influence over the banking system from their recognized elite status. Finance Ministry officials, often top graduates of the country's best universities, are perceived as a group to be among the most able of Japan's professional talent.' Ibid, p. 106.

'Tokyo asks its banks to stop currency speculation' Financial Times. 14 May 1987: 'Hedging Helps the Boom' Financial Times, 3 June 1987.

R.T. Murphy , 'Power without Purpose: The Crisis of Japan's Global Financial Dominance Harvard Business Review, March-April, 1989, p. 71-83.

Amex Bank Review. 24 March 1988 (Vol. 15, No.3), p. 3.

R. Gilpin , 'American Policy in the Post-Reagan Era' Daedalus (Vol.116, No.3, Summer 1987 ) p.48-9. Another 'political' account of continued Japanese investment in this period is provided by R.Danielian and Thomsen : 'Japan is eager to minimize the political friction with the US by investing much of its $43.5 bilateral trade surplus in US stocks and bonds'. The Forgotten Deficit: America's Addiction to Foreign Capital (London : Westview, 1987) p. 44.

Akira Ariyoshi , 'Japanese Capital Flows' in Finance and Development (Sept., 1988), pp. 28-30.

Nicholas Brady , now U.S. Treasury Secretary, cited the Japanese pullout as the principal cause: 'The real trigger (of the stock crash) was that the Japanese came in for their own reasons and sold an enormous amount of US Government bonds and drove the 30-year Government (bond) up through 10 percent.' quoted in 'Japanese selling Blamed For Crash' Globe and Mail, 23 April 1988.

See Rich Miller , 'Japan seems set to end U.S. Domination of world monetary system' Financial Times. 2 November 1988.

C. Rapoport , 'Home is best in unstable times' Financial Times. 16 November 1987.

John Plender makes this case. The Japanese authorities, he writes, 'show every sign of understanding the wider politics of the situation and the advantages to Mr. Bush of exchange rate stability. They have gone out of their way to publicize an addition of nearly $60 billion to their budget for foreign exchange intervention, while warning Japanese insurance companies not to depress the dollar by dumping stock at the start of new financial year in April. A Republican victory could no doubt be expected to deliver a more accommodating stance on trade policy after the election, though Japanese officials, predictably enough, deny any such quid pro quo for dollar support.' John Plender , 'No Foreign Capital Please' Financial Times, 16 May 1988.

Ian Rodger , 'Bank of Japan presses US to reduce spending ' Financial Times. 10 November 1988.

E. Lincoln , 'Reassessing US-Japan Relations' Fletcher Forum (Vol. 1 2, No. 1, Winter 1988) p. 68. Even The Economist has taken up this possibility: 'But what about a deliberate investment strike? ...Organized by the government, a collective refusal to finance America's twin deficits might be feasible.' 'Hooked on T-Bonds', 7 February 1988.

L. Pauly , Regulatory Politics in Japan: The Case of Foreign Banking ( Ithaca, NY: Cornell University Press, 1987) p. 6-7.

'Hooked on T-Bonds', The Economist, 7 February 1988.

The Economist concluded : ' Japanese investors should be willing - on strictly commercial grounds-to carrying on lending dollars to America' Ibid.

Y. Funabashi , Managing the Dollar From the Plaza to the Louvre (Washington, DC: Institute for International Economics, 1988) p. 87.

There are, however, also cases in which Japanese state control over the distribution and adminstration of their bilateral aid money has been very small. In Africa, for example, which now receives 1 1 per cent of Japanese ODA, the Japanese have often had to funnel their money through institutions dominated by governments who have greater expertise in the area, such as British Crown Agents who are administering part of Japan's $500 million aid program to Africa. I. Rodger , 'Crown Agents to administer part of Japanese aid' Financial Times, 31 January 1988.

'The Young Pretenders', The Economist, 15 October 1988.

See M. Barnhart , Japan Prepares For Total War: The Search for Economic Security 1919-45 (Ithaca, NY: Cornell University Press, 1987).

See L. Hollerman , 'International Economic Controls in Occupied Japan' Journal of Asian Studies (Vol. 38, No.4, August 1979) pp. 707-719.

Although these two moves signified a liberalizing trend, it is important to see how limited they were. With respect ot the OECD code, Japan diluted its effect by taking out a large number of exemptions. See T.Adams and I.Hoshii , A Financial History of the New Japan (Tokyo: Kodansha , 1972), p.463. In terms of convertability, although it had accepted the IMF's Article 8 obligations only three years later than most European countries, the manner in which it did so was more restrictive than most European countries. All current and capital account transactions still went through special, authorized Foreign Exchange banks, and private citizens were not allowed to retain foreign exchange until 1971. This centralized control gave the government enormous discretionary power.

See, for example, R. Feldman , Japanese Financial Markets: Deficits. Dilemmas. Deregulation (Cambridge, MA: MIT Press, 1986); Y. Shinkai , 'The Internationalization of Finance in Japan' in T. Inoguchi and D. Okimoto , The Political Economy of Japan: Vol.2. The Changing International Context (Stanford, CA: Stanford University Press, 1988 ).

Judging by price indicators, Feldman concludes that 'the Japanese capital market has been fully internationalized since mid-1981'. Feldman, op. cit, p. 186.

See, for example, Calder's discussion of'the reactive character of the Japanese state in foreign economic policy', in K. Calder, 'Japanese Foreign Economic Policy Formation: Explaining the Reactive State ' World Politics (Vol. 40, No. 4, July 1988) p. 537.

See J. Home , Japan's Financial Markets: Conflict and Consensus in Policymaking (London: Allen and Unwin, 1985) p.192. The 1980 and 1984 decisions are seen by some authors as no more than a formal declaration of decisions which the Japanese government had already decided, largely independent of U.S. pressure, to pursue for its own reasons. See, for example, E. Lincoln , 'Infrastructural Deficiencies, Budget Policy, and Capital Flows' in M. Schmiegelow (ed.), Japan's Response to Crisis and Change in the World Economy (London : M.E. Sharpe, 1986) p. 250-2.

For the growing 'internationalism' in the Japanese political scene, see: J.Pempel , 'The Unbundling of "Japan Inc.": Changing Dynamics of Japanese Policy Formation' Journal of Japanese Studies (Vol.13, No.2, Summer 1987); K.Pyle , ' In Pursuit of a Grand Design: Nakasone Betwixt Past and Future' Journal of Japanese Studies (Vo1.13, No.2, Summer 1987).

See J. Home , op. cit, p. 181; and E. Hayden , 'Internationalizing Japan's Financial System' in D.Okimoto (ed.), Japan's Economy: Coping with Economic Change in the International Environment (Boulder, CO: Westview Press. 1982) p.104.

'The Advisory Friends Group, an informal circle of Nakasone's long-time friends, including bankers, businessmen, and former officials, strongly recommended that he pursue the high-yen strategy. Prominent among them was Goro Koyama, senior banker at Mitsui, who provided consistent support for appreciation of the yen and the liberalization of Japanese capital markets' Y.Funabashi , op. cit p. 89.

'as the government deficit surged, the bargaining power of government and banks reversed'. M. Crum and D. Meerschwam , 'From Relationship to Price Banking: The Loss of Regulatory Control' in T. McCraw (ed.), America vs. Japan (Boston, MA: Harvard Business School Press, 19861 p. 289.

R. Dale. The Regulation of International Banking (Cambridge, MA : Woodhead-Faulkner, 1984) p. 44.

J. Home , 'Politics and the Japanese Financial System' in J.Stockwin et. al. (eds). Dynamic and Immobilist Politics in Japan (London: Macmillan, 1988) p.176-7.

Alison Maitland , 'Economic News Gives US a Starring Role', Financial Times, 25 April 1989. p. 45. Clive Wolman 'Investing in the Power of Zen' Financial Times. 9 June 1989, however, points out that Japan's weighting drops to about thirty per cent while that of the US increases to about 35 per cent if one accounts for the fact that extensive cross-holdings in the Japanese stock market exaggerate the overall size of the market.

Far Eastern Economic Review, 15 5 December 1983, p. 79.

The latest figures, measured in April 1989, show daily turnover in foreign exchange trading in Tokyo worth $115 billion, compared with $129 billion in New York and $187 billion in London. 'London Still Top Exchange Centre', Financial Times, 14 September, 1989.

Bank for International Settlements, Annual Reports,

Euromoney, February 1978, p. 6.

R. Taggart Murphy , op.cit p. 72.

Rodger , ' Still a Long way to Go', Financial Times. 13 March 1989,

'Opening the door to Japan's short-term money markets', The Economist. I April 1989.

S. Strange , 989. op.cit pp. 166 and 1.

R. Taggart Murphy , op.cit, p. 74.

With respect to ideological leadcrsip, it is interesting to remember Woodrow Wilson's comment in 1916 as the age of US financial dominance was beginning: 'those who finance the world must understand it and rule it with their spirits and with their minds.' Quoted in J.Frieden , 'Sectoral Conflict and U.S. Foreign Economic Policy: 1914-40' International Organization (Vol.42, No. 1, Winter 1988), p.71.

If nothing else, it is interesting to note, as Ruggie has, that in common with today Dutch hegemony 'co-existed with mercantilist behavior'. J.Ruggie. 'International Regimes. Transactions and Change: Embedded Liberalism in the Postwar Economic Order' International Organization (Vol.36, Spring 1982), p. 382.