Japan’s Three Existential Crises

Only one event in our country’s 222-year history – the Civil War – threatened to tear the United States apart, or to change it beyond recognition. Japan now faces its third existential crisis in the space of 160 years.

A society that has long defended its ethnic homogeneity and political independence could soon confront a stark choice: Accept outside manpower, money and influence to a far greater degree than ever before, or slide into global irrelevance.

Commodore Matthew Perry sailed a fleet of American warships into Tokyo Bay in 1852 to force the Tokugawa shogun to permit trade with Western powers. Within two decades the feudal castes of lords and samurai that had governed Japan since 1600 were gone, replaced by a strong central government under the Emperor Meiji. Meiji promptly set Japan upon a course of rapid modernization to prevent his nation from being colonized like many others in Asia. It would, in fact, turn Japan into one of the colonizers.

Victory in the 1904-05 war with Russia, and the 1910 conquest of Korea, heralded Japan’s emergence as a major power in East Asia. Meiji’s policy of modernization and military buildup continued full-tilt under his vigorous and well-educated grandson, Emperor Hirohito, and a government dominated by the nation’s military-industrial complex. Japan invaded China in the 1930s while political factions debated between a “Strike North” policy against Soviet Russia and a “Strike South” policy aimed at Southeast Asia. The U.S. Pacific fleet was the biggest obstacle to the southern objectives, so when that faction carried the day, the Japanese saw little choice but to attack Pearl Harbor.

The strategy failed. Japan’s defeat at the hands of America and its allies brought an end to military-dominated government and to Hirohito’s role as the government’s public face. (Hirohito had, for example, marked Japan’s conquest of Singapore by appearing in military uniform astride his white stallion.) The Japanese insisted on preserving the emperor’s title, but he would no longer be portrayed as a living god.

Hirohito’s pre-recorded announcement of the surrender was the first time ordinary Japanese ever heard his voice.

“Despite the best that has been done by everyone – the gallant fighting of our military and naval forces, the diligence and assiduity of our servants of the State and the devoted service of our 100 million people – the war situation has developed not necessarily to Japan’s advantage, while the general trends of the world have all turned against her interest,” the emperor told his stunned subjects. “Moreover, the enemy has begun to employ a new and most cruel bomb, the power of which to do damage is, indeed, incalculable, taking the toll of many innocent lives. Should we continue to fight, it would not only result in an ultimate collapse and obliteration of the Japanese nation, but also it would lead to the total extinction of human civilization.”

Hirohito insisted that Japan’s aims had been defensive, neither aimed at infringing others’ sovereignty nor at “territorial aggrandizement.” He exhorted his people to “suffer the insufferable.”

“Let the entire nation continue as one family from generation to generation, ever firm in its faith of the imperishableness of its divine land, and mindful of its heavy burden of responsibilities, and the long road before it. Unite your total strength to be devoted to the construction for the future. Cultivate the ways of rectitude, nobility of spirit, and work with resolution so that you may enhance the innate glory of the Imperial State and keep pace with the progress of the world.”

Even now, the speech is painful to read from the perspective of a Chinese, a Korean, a Filipino or anyone else who fell under Japan’s famously brutal domination during the war – not to mention Americans, who mustered the will and resources to overcome the Pearl Harbor setback. But these words were a crucial inspiration for the Japanese. Their emperor would be watching from the sidelines of the Imperial Palace as they rebuilt Japan from the rubble of war into Asia’s leading economic power, the world’s second-largest economy and one that, by the 1980s, looked like it might overtake ours. Hirohito remained on the throne until 1989, when Japan’s postwar economic might reached its peak under an American-imposed constitution that replaced militarism with pacifism.

Japan has seen a long and painful decline in its world standing since 1989. Its stagnant economy slipped behind China’s. Its population is slowly shrinking and rapidly aging. Its government now has one of the heaviest debt loads in the world, after spending trillions of dollars on public works projects that gave Japan a first-rate infrastructure without stimulating the lasting economic growth that was the stimulus’ goal.

Most of that debt is owed to Japanese households and institutions. From the shogun era to the present day, one constant of Japanese society has been its insularity. The country welcomes neither people nor, for the most part, capital from beyond its shores.

That may now have to change if Japan is to avoid being marginalized on the global stage. Friday’s massive earthquake and devastating tsunami wiped out vital human and physical capital. The country’s auto industry is reeling from disruptions in manufacturing, shipping and its supply chain. The electronics industry lost important capacity. Unaffected rivals in China, Taiwan, South Korea and even the United States will probably gain strength as they fill the gap.

But it is the crisis in the region’s stricken atomic energy plants that is really the potential game-changer. Nuclear power provided more than one-third of Japan’s electricity before this weekend. Now the only nation ever to suffer an atomic attack in wartime is confronting rolling electricity cuts and a real, immediate risk of a major radiation release.

Japan will survive this week’s disasters and will carry on in some fashion, but it may simply lack the resources to rebuild itself from the rubble as it did after World War II. An insular Japan may become this century’s Argentina, a once-significant player reduced to irrelevance. A Japan that is more open to the outside world probably stands a better chance of remaining a leading force in it.

The Japanese are not worrying right now about the future of their society, nor should they be. They have far more pressing concerns in disaster relief and in managing the crises at the stricken power plants.

The country’s central bank today flooded its financial system with more than $180 billion in fresh money to try to keep commerce moving elsewhere in the country. A nation that has been struggling with deflation for two decades is clearly about to embark on some of the most deliberately inflationary policies any major economy has ever tried.

Commodore Perry and Gen. Douglas MacArthur, the U.S. occupation administrator in the 1940s, both tried to change Japan from the outside. Each time, Japan did change, but it did so from within, in ways that the Americans could not have expected and may not have wanted. Perry’s goal of a subservient trading partner led to war. MacArthur’s goal of an American-style democracy produced economic growth but political stagnation, which led to eventual economic stagnation in time.

Events of the last few days are clearly going to change Japan again. Once they clean up the wreckage, the Japanese are going to have to decide how.

About Larry M. Elkin 534 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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