Global Intelligence Update
Red Alert
July 13, 1998
Japan and Russia Moving Toward a Coalition of Cripples
We are entering an important week. Japan has suddenly, but not
unexpectedly, entered a period of intense internal political crisis as
Prime Minister Hashimoto, having lost many more seats than expected in the upper house of the Japanese parliament on Sunday, prepares to resign. In the meantime, the Russian financial crisis is lurching to some sort of temporary conclusion as Russian negotiations with the IMF close in on an agreement that will buy Russia a short breathing spell. Thus, the world's leading economic cripples have now bought themselves another few weeks or months in which they can excuse themselves from dealing with the profound economic, social and political problems that confront them. However, it is not only paralysis that binds these two countries together. There are
increasing signs of cooperation between Japan and Russian designed to place the United States in a position where it can no longer resist pressures to underwrite a massive bailout of Asia and Russia without the compensatory trade concessions or painful social reforms. We expect this process to proceed not in spite of, but because of, political chaos in Moscow and Tokyo.
Russian Prime Minister Sergei Kirienko is going to arrive in Tokyo on
Monday evening. As this report is being prepared, Kirienko is airborne and there is no evidence that Hashimoto's pending resignation will cause Kirienko to turn around. The Russian visit to Tokyo had been postponed once before when then-Prime Minister Viktor Chernomyrdin lost his job in a shakeup of the Russian cabinet. Kirienko's visit is occurring at an extraordinary moment in which the strains on both the Russian and Japanese political systems are becoming almost unbearable. Intense conversations have been taking place between Moscow and Tokyo over the past few days concerning their mutual economic crisis. During the past weekend, as Russian officials negotiated a loan from the IMF, Yeltsin and Hashimoto held telephone consultations, which resulted in Japan essentially endorsing
the Russian position on the IMF bailout. Japan, usually a hard-liner on IMF bailouts, has suddenly found itself backing the Russian position, perhaps in anticipation of its own coming needs.
In essence, Japan and Russia are agreeing that the United States, through the IMF, should help bail them both out of trouble. Russian Ambassador to Japan, Alexander Panov, said in an interview on Friday that Japan and Russia were moving to what he called "a semi-alliance." Since the only point of such an alliance would be to increase leverage on the U.S. and force support for a massive bailout that would forestall political crises in both Russia and Japan, the coming week could prove extraordinarily important in defining the international system. We expect territorial issues to take a back seat to coordination between the two countries as they unite to try to force the U.S. to solve their problems.
Complicating matters, of course, was Sunday's defeat of the Japanese
Liberal Democratic Party in elections to the Upper House of the Diet. The defeat does not legally compel Prime Minister Hashimoto to resign. He still holds a 13-seat majority in the lower house. However, the elections had become a referendum on the LDP's performance in managing the ongoing economic crisis. LDP leaders, including Hashimoto, had publicly stated if they won less than 61 of the seats being contested, Hashimoto would resign.
It appears at this moment that the LDP has won only 44 seats. This should not come as a surprise to any rational observer, since the LDP's performance has been abysmal. It is amazing to us that anyone in the LDP believed that they would do well in the election. We suspect that the pledge was a subtle way for LDP party bosses to force Hashimoto out of office. By creating a referendum they could not possibly win, they got a chance to reshuffle the cabinet without an election. Thus, the brilliant Machiavellianism for which the LDP is legendary continues to operate, even in the face of disaster. Of course, given Japan's problems, the subtlety of the LDP leadership seems wasted here. As the saying goes, they are rearranging the chairs on the deck of the Titanic.
To be fair, Hashimoto did as well as he could have with the disastrous hand he was dealt. Japan's financial situation is so poor that almost all proposed solutions would have devastating consequences. But it remains easier for the LDP to hold a single personality responsible, since the alternative would be for the LDP to face the bankruptcy. This should be restated more broadly. The fact is that Japan's central problem is that it makes absolutely no difference who is selected to replace Hashimoto as Prime Minister and it doesn't matter very much whether his replacement is selected by the LDP's bosses or in a general election. Anyone who emerges
from the LDP ranks will follow the same paralyzed policy as Hashimoto.
Anyone selected from outside the LDP will face the real permanent
government in Japan, which is the government bureaucracy, the corporate groupings called keiretsu and their umbrella organization, the Keidanren.
Policy is made there or, more precisely, the complex and overlapping
interests represented there render it impossible to make policy. An
insider is a prisoner of the system. An outsider is helpless in the face of the system.
On the surface, Sunday's elections appear a victory for Japan's reform
Democratic Party. But the most interesting figure is the stunning gains of Japan's Communist Party, which apparently won 13 seats (up from 6), compared to 27 won by the Democratic Party and 44 by the LDP. This does not mean that Japan is going to go Communist. That will not happen. But it is a measure of the level of frustration and anger in Japan that the Communists have emerged as a major electoral force. From our point of view, it is the strongest indication yet of the political pressures developing beneath the rigid surface of Japan's political life. The economic crisis won't go away. The pressure will continue to build. Extremist forces will be strengthened. The center will find it extremely difficult to hold. The LDP cannot make policy. Its opposition cannot govern. Frustration will strengthen the margins.
This is the Tokyo that Russian Prime Minister Kirienko flies into on
Monday. He is traveling from Moscow's intractable economic and political crisis into Japan's intractable economic and political crisis. This is an extremely important meeting of the world's two leading economic cripples. The real issue to be discussed, of course, is not the IMF, but the U.S. Japan badly wants the U.S. to provide financial support for Asia in general and Japan in particular. It also wants the U.S. to make this commitment without demanding reciprocity, such as meaningful reforms in the Japanese economy that would permit U.S. companies to enter the Japanese market. It
is using the Russian bailout as precedent for its own looming need for
international help for its banking system and the rest of Asia's.
The U.S. is not likely to provide this help. First, it is not clear that any amount of help can stabilize Asia's economic system. All it can do is postpone the inevitable, wrenching consequences of Asia's generation-long obsession with market share over profitability. Second, it is clear that the amount of help the U.S. would potentially be able to give is completely insufficient to shore up Asia's economies. Third, it is clear that the amount of aid the U.S. is prepared to give is ludicrously less than what is required. Finally, it is not clear that it is in the U.S. interests to
solve Asia's problems.
Asia's only argument for help, which is that Asia's problems will swamp American prosperity, simply doesn't stand up to simple arithmetic. Asia's own protectionism has protected the U.S. from over-dependence on exports to Asia. Even the fabled Japanese withdrawal of funds from the U.S. capital market would not mean anything, even were it to occur. First, where will the Japanese put their money if not in the United States? Japanese businessmen are not about to deposit it in Japanese banks or stocks. If they move the money to Europe, its net effect on the U.S. will be zero, since money is fungible. Moreover, if you are facing bankruptcy in Japan,
you are hardly likely to bring money out of hiding. Japanese businesses with money in the U.S. are not about to squander cash trying to stave off inevitable bankruptcies. They will leave that to governments and the IMF. So the Japanese threat of selling U.S. bonds and securities is as hollow as their banking system.
Now, what goes for Japan goes triply for Russia. The kind of support
needed to stabilize Russia's financial system can only come from the United States via the IMF. Sufficient aid is not forthcoming. The U.S. government will back temporary measures designed to buy time for U.S. investors in Russia to liquidate what they can and reduce their exposure. But the sort of comprehensive resolution of Russia's problems cannot possibly be achieved. The bright young men governing Russia do passably well at meetings at Harvard and with Western bankers. But they are, by definition, incapable of coping with the brutal realities of Russian society. Russia today reminds us increasingly of Iran in the last days of Shah of Iran, as Western bankers conduct negotiations with Westernized technocrats, sublimely oblivious to the volcano building beneath them. A Russian default is now, we believe, a given. The timing depends entirely on the IMF, and timing, to be sure, is the only option left open.
Thus, two crippled giants are desperately trying to convince the U.S. that it cannot afford to let them go under. This misses the point, of course. Russia and Asia have gone under. The U.S. is doing just fine. The issue now is this: What will the post-crisis international system look like? The new is born out of the old. The old, which is still playing out its last hand, consists of the coalition of cripples trying to use their skills and waning strength to convince the U.S. that it has no choice and must save them. This will fail. What will be left, however, is the coalition. Once Japan and Russia pass through the purgatory of default, they will emerge on the other side as two very changed but very important nations, bound together by common interest and a shared ideology, which holds the U.S.
responsible for all of their troubles. That will begin the true post-Cold War world, with the past decade being remembered as an historical
interregnum.
There are some interesting straws in the wind. Japan's Yomiuri Shinbun last week reported a shift of personnel involved in Russian affairs. Kazuhiko Togo was made director of treaty negotiations with the Russians. He replaced Yukio Takeuchi, who took over as director of North American affairs. The current director of North American affairs, Norimoto Takano, was shifted to direct training for the Ministry. The article noted that officials in both the Foreign Ministry and Defense Agency were "shocked" at the news, since Takeuchi was deeply involved in Japan-U.S. cooperation.
Now, this appears complicated but it really isn't. The person heading up U.S. affairs has been moved aside. The person who had handled the Russian treaty negotiation is now dealing with the United States. There are factions inside the Japanese Foreign Ministry just as there are in other countries. It looks to us like the Russian faction just won a bureaucratic battle with the North American division. Policies are sometimes defined in small bureaucratic fights. This personnel shift is not likely to make the U.S. happy.
On the same day as the shakeup was revealed, Japan announced that Japanese and Russian warships would conduct joint exercises in late July. Five Russian and five Japanese ships will develop joint procedures for rescuing shipwrecked sailors. That pretty much sums up the foundations of the coalition of cripples. But before the U.S. dismisses this coalition, it should remember that Russia and Japan, taken together, would inevitably constitute a powerful challenge to American global power. If they do manage to get through the inevitable shipwreck and they both blame the U.S. for the carnage, the new world order will become a much more dangerous place for the U.S..
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