For more than two years, Americans have heard distant rumors of unthinkable land price escalation going on in Japan. News reports indicate that in 1988, Japan’s theoretical land value surpassed by four times that of all land in the United States, a country nearly 25 times larger than Japan. Another real estate bulletin: the calculated cash value of a single ward in downtown Tokyo—Chiyoda-ku—could purchase all of Canada. And another: land in Tokyo’s Ginza shopping district is selling for $250,000 a square meter. Closer to home, the commercial real estate industry in the United States has felt some of the impact of these tremors in the rapid acquisition of “showpiece” purchases and properties in cities across the country by Japanese investors and corporations. The Rockefeller Center purchase captured the public’s imagination but was actually a relatively small transaction in view of the estimated $53 billion in United States real estate acquisitions made by Japanese investors. Nearly all of these purchases have been made since 1985; the total has been projected to reach $100 billion in 1992.

But the consequences of Japan’s endless real estate boom extend far beyond these considerations. The Tokyo land rush is reshaping not only Japan’s but also the world’s economic future. And in the process, it is setting Japan’s course ever more firmly toward collision with its trading partners and economic neighbors.

What If?

Few Americans today are surprised at the volatility of real estate markets or at their capacity for quixotic exploitation in sudden “booms.” Indeed, growing rich or at least affluent from the capital gain on a home sale has become a legitimate part of the American dream. But few Americans actually experience an appreciation of double or triple their land values in just a matter of months. Those who do are usually considered as lucky as lottery winners.

But what if it weren’t luck? What if such a spectacular, exponential rise in the values of all land in, say Los Angeles, occurred in only 36 months? What if it were known to have happened as the direct result of a calculated release of hundreds of millions of dollars in speculator funds into that city’s real estate market by all of the nation’s largest banks? What if the Federal Reserve had made those funds available through the banks, just for that purpose, and allowed the banks to require no other collateral than the skyrocketing value of the land itself—and to loan the money at the lowest commercial interest rates in the world?

What if local, state, and federal government stood by watching as commercial and residential prices in downtown Los Angeles, West Los Angeles, and even Orange County rose by 200% or 300% or 400% in just three years—with the federal government’s financial, tax, and land use policies virtually guaranteeing that those prices would not fall again by more than fractions?

Now consider: What if you were the owner of a small Los Angeles business? The office building you purchased for $400,000 a decade ago was now appraised at $1.5 million—and banks were calling you, offering to lend you 80% of that new value, $1.2 million, at 6% or less, for you to use in any business or investment you wish, including real estate and stock market speculation. Now suppose that all principal American corporations owned or controlled large or small amounts of land in the same city—and banks were competing to offer them the same borrowing opportunity as you, based on the value of their land holdings but at interest rates even lower than yours?

How much cash or credit would the shopping plaza down on the corner or the one in Beverly Hills be worth to its owners if they wanted to capitalize their assets and play the stock markets in New York, London, and Tokyo? How much would Southern Pacific Railroad Company suddenly have if it wanted to do the same and purchase a major oil company, a British bank, or a worldwide chain of hotels?

And, taken all together, what kind of total R&D expenditures, overseas and domestic acquisitions, capital investments in modernization and capacity expansion, portfolio additions, and world market penetration could that kind of cash finance for U.S. corporations if the federal government were to encourage the use of the money for just such expansion, through tax, interest rate, and other policy measures—while simultaneously protecting corporate cash holders from hostile takeovers by domestic or foreign raiders?

This “what if” scenario may seem fanciful. But such an imaginary exercise not only portrays the nature of Tokyo’s land boom but also dramatizes the third dimension of its reality that has mostly escaped notice amid all the big numbers: the direct, spreading impact of Japan’s land boom on the United States. Observers have cited Japan’s shopping sprees in U.S. real estate, corporate equity markets, and luxury boutiques as evidence of the newly advanced purchasing power of the yen. Commentators also see Japan’s increased overseas investments as a reflection of the same phenomenon, plus long-awaited financial deregulation at home. But what these observations miss is the fact that the capital resources from which the Japanese purchasing power springs have themselves expanded massively in the past four years—right along with the value of Japanese land.

Americans who ask themselves how the Japanese managed to buy up a quarter of California’s banking market in such a short time, how they effortlessly outbid all comers for the Rockefeller Group or any of dozens of other major and minor U.S. corporations, or how they are so rapidly and successfully transferring manufacturing onto an international base after decades of insisting that such a thing was impossible, will find large elements of the answer in Tokyo’s real estate listings. The creation of massive amounts of paper assets, the collateralization of them through huge volumes of low-interest lending against such assets, or the realization of cash based on the same assets through the volcanic upwelling of share prices on the Tokyo stock market, and the export of the resulting capital through conversion of the yen into vastly cheapened dollars is a process that defines both how big and far-reaching this new Japanese “money machine” is. It also shows how simply and efficiently it works.

The Japanese can now afford to buy whatever they want that is for sale in capital, financial, manufacturing, high-technology, knowledge-intensive, distribution, processing, and services industries anywhere in the world. And they can afford to outbid anyone else who might want it. Like a fully realized version of the apocryphal oil sheik of the 1970s, they now have a virtually endless source of cash flowing right out of the ground at their feet—and encounter no risk or any other discomforting accountabilities in spending it.

Most important, an overview of how big a transformation this is engendering in the world economic order, and how quickly the Japanese are accomplishing it, demonstrates how radically Japan’s adaptations of the “capitalist system” differ from the understanding of it most American business leaders share.

Perhaps the greatest surprise of Japan’s money machine, however, and the United States’s greatest vulnerability to it, is the paradox that it is really built on no foundation. Since Japanese land is the nation’s only tradable commodity not subject, directly or indirectly, to the disciplines and interventions of the international market, the land’s value is whatever the Japanese owners and the lenders who finance the trade in it say it is. The higher the prices go, the brighter the economic future for both the owners and their creditors. And the prices are still going up.

Government Bubble Blowing

Land speculating is, of course, as old a practice in Japan as it is in any capitalist country. But a big inflator of the bubbles in Japan has always been the favorable climate of government attitude: little land regulation; less land-use policy; low tax rates and loophole-ridden tax laws on capital gains from land; and strictly regulated interest rates and artificially mandated credit ratings that have allowed major players, such as trading companies, and minor ones, such as real estate agencies, to raise speculative capital easily at low cost, no matter how high the debt-to-equity ratio on any corporation’s books.

But now there is something new: land value inflation has become almost an instrument of administrative policy in Japan. The confluence of three powerful forces led to virtual—although unintentional—government sponsorship of the start of the land value boom: Japan’s lagging public investment in infrastructure, its promise to its trading partners to stimulate domestic demand, and the spectacular rise in the value of the yen following the Plaza Accord of 1985, which threatened Japanese exporters’ price competitiveness in global markets.

In the mid-1980s, under Prime Minister Yasuhiro Nakasone, Japan began to formulate a new master reconstruction plan. Its purpose was to frame a comprehensive vision and a set of goals for national development that would boost domestic demand to towering heights. The government was to unveil this Yonzenso, or fourth national development plan, formally in June 1987, but its most important themes were under public discussion long before that. There was much discussion of the need for decentralization, but one of the most significant aspects of this plan was that, on balance, it unmistakably pointed to Tokyo’s continuing role as Japan’s single center of national government, economic, and industrial policy-making and management—the capital for all three of these spheres. In the context of the United States, Tokyo’s concentration of power and influence exceeds even the colocation of all of Washington, D.C.’s politics and all of New York City’s economics. Very simply, the plan’s final message was that to be involved in Japan, to be a participant in important events, is to be in Tokyo. Thus the Yonzenso sees population in the greater Tokyo area growing by 3 million people—a 10% increase—by the year 2000. This growth would come on top of Tokyo’s existing population density: 30 million people in a 30-mile radius. While Japan is certainly not a planned economy in the Soviet sense, and nothing was mandatory about the Yonzenso’s development targets, the plan did indicate to Japanese industry leaders where government policy, investment, and budgeting pointed for the future: to intensive commercial and infrastructural development. And it came at a pivotal time.

While the plan was still in research and drafting stages in late 1985, the Plaza agreement brought about the precipitate expansion in value of the yen—which, at one stage, almost doubled against the dollar. This development prompted deep concern on the part of both industry and government: if the yen rose high enough to force corporations to raise their prices overseas, it could cut into the nation’s command of export markets. But a look at the background against which the currency realignment took place helps to explain why it too contributed to triggering the Tokyo land boom.

For decades, Japan’s Finance Ministry had been the absolute arbiter of the credit resources with which Japanese industry rebuilt itself after World War II. Large Japanese corporations did not raise capital in equities markets but borrowed it, usually from banks or insurance companies within their own industrial groups, keiretsu. These institutions dispensed the high private savings of the nation more or less at the informal direction of the Ministry of Finance, acting through the Bank of Japan.

That began to change from the late 1970s. With a strong dollar boosting Japanese exports to the United States and high-tech products commanding high margins, corporate profits soared: between 1978 and 1983, for example, annual profits of Matsushita Electric Industrial rose by more than 60%, from ¥116 billion to ¥195 billion; those of Toyota doubled, from ¥202 billion to ¥415 billion; and those of both Fujitsu and Toshiba quintupled—in just five years. These strong earnings, in turn, began to make it unnecessary for many big Japanese companies to rely on heavy borrowings to finance their continued growth. And the Ministry of Finance began to feel a threat to the considerable measure of informal power it had long held over these companies through credit controls.

To reinforce its influence in the industrial sphere, the Ministry of Finance switched to a policy of encouraging continued corporate borrowing, not on the basis of actual capital needs but on the basis of supporting the banks—which then had no other customer base as strong as the major companies, inside or outside Japan. In other words, for reasons of its own, and to boost domestic demand, the Finance Ministry set a policy of “cheap money” lending to corporate borrowers. And it encouraged the banks to spread their liberal lending activities downward and outward through the economy, to medium- and small-size companies, opening up a second tier of liquidity circulation and another arena for land speculations with borrowed cash. In turn, the companies applied much of this cheap money not to operations but to speculation in the capital market, or zaiteku.

In 1986, when the soaring yen began to put immense pressure on Japanese export prices in overseas markets, the specter of market share loss by Japan’s flagship corporations and even domestic recession loomed frighteningly close. Rather than give up market share, the corporations and their suppliers kept price hikes to a minimum and swallowed consequent losses. At the same time, they scrambled to find new ways to lower their production costs and regain some balance through the diminished yen prices of imported raw materials and component parts. The Finance Ministry also responded admirably: first, it conveniently yielded to foreign pressure to lower national interest rates to the lowest in the developed world; second, it pursued deregulation and domestic stimulation in the ways that flooded the national economy with extra cash. In the previous decade, the Bank of Japan had kept growth in the money supply, broadly defined, to around 8% per year. But from May 1987 to April 1989—for two full years—Japan’s money supply showed a growth rate of 10% or higher on an annual basis, in every month.

The government was thereby setting the stage for borrowed money to finance the domestic demand surge, the production cost reduction, and the absorption of out-and-out losses that would help Japanese companies survive the high yen. Once these companies got through the hard year of 1986, when GNP growth slowed to 2.4%, and into 1987, when it sprang back to 4.3%, once they were adjusted to the high yen, they could switch their capital flows into central Tokyo land—60% of which is owned by corporations—with their now-surplus borrowed cash. This, then, is what helped turn a speculators’ bubble into the genuine vortex of land price acceleration in Tokyo: 10.4% in 1986, 57.5% in 1987, 22.6% in 1988. Residential, industrial, commercial: the increases spread all across the real estate landscape. Corporations suddenly found the asset value of the land on their books going up by multiples. The “average” Tokyo square meter that cost ¥1 million in January 1986 had an appraised value of ¥2.13 million at the end of 1988. And that was just the average: in the central three wards of downtown Tokyo, some prices climbed over 400%.

To corporations, the appeal of these quickly inflating asset values was that banks were eager to lend against the land as collateral at 80% or more of “fair market value.” So corporate credit lines, at interest rates then under 5%, rose in multiples right along with them. The 13 most important Japanese city banks and other big lenders such as insurance companies were transformed into fountainheads of corporate credit that grew along with the speculative value of the land—whether sold or unsold.

Mitsubishi Estate, for example, which made such a dramatic appearance in the U.S. media last fall with its $846 million purchase of 51% of the Rockefeller Group Inc., could easily afford that outlay: its unrealized land assets alone have reportedly reached $70 billion. In fact, latent real estate values held by all Japanese corporations are estimated to have grown by more than $2 trillion in the three years between 1985 and 1988. That is an amount equal to half the value of the entire Tokyo Stock Exchange as it stood at the end of 1989.

Leveraging the Land

But even these hidden—and therefore untaxed—profits were not the full value that Japanese corporations derived from the land boom. Banks and insurers will also lend to corporations against the collateral of stock portfolios—at “fair market value.” And Japan’s big corporations have long preferred to have the majority of their shares held by creditors and other corporate members of their keiretsu—industrial families such as Mitsui, Mitsubishi, and Sumitomo, each numbering dozens of corporations among its members, besides those that carry its flagship name. This pattern is known as “stable shareholding” because it guards against takeover attempts: stable shareholders are also creditors, suppliers, partners, or customers—or all four—of the company whose shares they hold. And that company is, in turn, a holder of a large number of their shares. So pervasive is this pattern in Japan that as much as 70% of all major corporate equity is estimated to be in the portfolios of Japan’s big corporations. In other words, companies hold most of each other’s stock: 70% of the staggering ¥580 trillion at which the Tokyo Stock Exchange First Section, which lists the country’s principal corporations, was valued in early 1990.

Because of tight government regulation of the domestic financial industry and because of low prevailing interest rates, funds raised for zaiteku investment during this period had no truly inviting domestic targets other than the Tokyo stock market (or else, overseas financial markets). Fueled by speculative borrowings against the land values held by businesses and private landlords (even home owners), the Tokyo stock market swung into its now famous skyward climb. Shares held by corporations became another asset with rapid rates of growth in value and in value as collateral for borrowings. Although operating profits were quite good for many of the principal Japanese corporations in 1987 and 1988, a look at the price-to-earnings ratios of the Tokyo Stock Exchange indicates that it wasn’t only the basic business performance of listed companies that was bringing in investors. It was “land money”—which created a kind of double leveraging of the land itself: capital value reflected in land prices and in share prices, the latter realized as cash through the liquidity that land speculating had created. And, of course, the more capital acquired by corporations in the stock market, the more available to them for further nonoperating investment—such as more land. The Japanese had created a sort of “never-ending circle.”

To illustrate the effect, in 1987 alone, capital gains of the whole nation, including the unrealized gains from inflation of land and stock prices, reached ¥480 trillion, the equivalent of more than $3.43 trillion at the exchange rate of ¥140 to $1. That figure was 40% more than the total nominal GNP.

And then a third kind of leveraging of the land began. As corporations watched the values of their shares rise, they have increasingly turned to the equities markets for something rather novel in Japan: major capital increases. New share issues became frequent occurrences in Tokyo; in fiscal 1988 and 1989, they were expected to total nearly ¥10 trillion in value. But since Japanese corporations always seek to maintain the patterns of “stable shareholding,” when they issue new shares they make sure that their family members and creditor corporations maintain their high ratio of shareholding. In other words, they expect their lenders and family members to keep the proportions of total corporate shareholding stable by absorbing the appropriate percentage of the new issue. These shareholders do so on the strength of two considerations.

First, as long as share prices are rising, the value of their own portfolios, which serve as a primary collateral for still more borrowing at the bank, grow with each acquisition of shares. Second, they can each in turn ask all the other creditors and family members to buy similar proportions of their new issues when they make them. In effect, these purchases can thus be made close to cost-neutral: what cash a corporation gives to a family member to buy its new shares comes back more or less, sooner or later, when it sells its new shares to the same family member. And, of course, the companies can collateralize the resulting rise in the values of both portfolios for further borrowing. They also use these accelerated share values as collateral in other ways: by issuing large amounts of warrants and convertible bonds, at home and overseas, at very low issuing costs.

If all of this seems dizzying, consider the larger implications. Land is the ultimate security for a vast portion of all of this debt and much of the new capitalization. The exact ratio of total bank debt collateralized directly or indirectly by land is not known but has been estimated at 30% or more. Other creditors active in the real estate and corporate and household lending markets, such as insurance companies, leasing companies, and financial services firms, presumably add heavily to the volume.

If those land prices were to decrease sharply, so also would the abilities of many of the landowners who are not first-rank corporations to service the debts they collateralize—especially those companies in the real estate industry itself. If there were defaults, the business results of the lenders would also decrease sharply. And so too, if paper “fair values” were to drop, would the asset values of the borrowers. The lenders would, in turn, find the value of much, if not all, of their real estate collateral declining drastically—and with it the stability of their vast loan portfolios. And if stock assets had to be liquidated on any large scale to meet loan payment schedules, the stock market would certainly be affected as well.

Japan’s financial bureaucracy, working mainly through the Bank of Japan, has never allowed even the most abysmally managed Japanese bank to fail. Nor has it thus far allowed the Tokyo stock market to become engulfed in any real crisis, such as that surrounding the mini-crash of 1987 in the United States. As the stakes grow each day, should there be a land crash, it is hard to imagine that the government can or will change that policy soon.

Thus the government can allow nothing to be threatened but the most marginal investments in land: the risks of a real burst of the land bubble would spread too far. But this government protection against a Japanese-led global bust raises another, more fundamental question: Is a market that the national government directly and ultimately underwrites against major loss to the point that it is virtually risk-free for its biggest players (almost all of whom are Japanese) really what Americans understand by the term “free market”?

Japan’s Budgetary Demographics

What are the results of this huge ratcheting-up of Japanese credit and capital?

The first is to guarantee the continued upward spiraling of land prices in Japan. In 1988, land prices across the nation rose an average of 8.3%, but regional cities showed much higher increases: Osaka rose by 32.1%, reaching levels nearly two-thirds those of Tokyo; Nagoya land went up by 16.4%. Tokyo’s residential land is still going up as well: over the first nine months of 1989 it rose by 3%. And even though the rate of growth has slowed, loans to real estate companies for land purchases continue to soar: aggregate loans expanded in 1989 by 14.4% over 1988—and 1988 was up by at least 12.8% over 1987. Other cities have been reporting astronomical growth rates. In Narita City, near Tokyo’s soon-to-be-expanded international airport, residential land prices doubled between 1988 and 1989. In Utsunomiya, 100 kilometers from Tokyo, commercial land prices rose 31% over that same time period.

This year’s downturn in the Tokyo stock market, though attributed to other causes, may be in part a reflection of the staggering overvaluation of Japan’s land assets—as well as a corrective to its inflationary impact. The downswing cooled, temporarily, the ardor of many corporations for new securities issues, an expansion of corporate capital so large and rapid that it had begun to push domestic prices up sharply in late 1989. The government, watching pressures mount for large and still further inflationary wage increases in Japan’s annual spring labor negotiations, must have felt strong relief in seeing at least a temporary constriction in the growth of money streaming into the corporate economy. By year-end, its own priorities had refocused strongly on controlling inflation. As of this writing, it remained to be seen whether stock market developments would also influence the upward march of land prices—or lending against securities portfolios.

But the reason for the spreading land price impact is more than just the “bicycle effect” of the land price increases themselves. It is not just a speculative impulse that is at work but a subtle change in Japan’s budgetary demographics. As Japan’s fourth national plan points out, the country is badly in need of a wide range of urban and suburban upgrading. In the past, government funding of public works projects has played the leading role in these investment efforts. A large percentage of funds for public works projects has come, however, not from the regular national budget but from the Fiscal Investment and Loan Program, a fund that is fed mainly by the national postal savings system. In turn, this system has historically been fed by the deposits of enormous numbers of small savers, holding a large percentage of the nation’s storied private savings as long-term deposits because of tax exemptions granted on earned interest.

Now, however, Japan’s partial financial deregulation and the recent removal of this favorable tax treatment has begun to drive small savers away from the Post Office in search of higher returns. Moreover, the progressive aging of the Japanese population—with its heavy demographic skew toward an older base—means that more people will spend their life’s savings and fewer people will accrue them. Both factors mean that Japan must now find new ways to raise capital to rebuild—or build initially—the public works and infrastructure that the country so badly needs.

The only realistic answer the Japanese government can embrace to build public projects while avoiding the abyss of public debt is private-sector investment. Land price inflation has made this conclusion unavoidable: in urban areas, especially Tokyo, as much as 80% of some public works budgets go just to purchase the land. And, of course, the government realizes nothing in the way of speculative benefits from the land it acquires. On the other hand, businesses sometimes can—if the public improvements, such as new roads, convention centers, bay-front reclamation, airports, and so on, also engender commercial development opportunities. The Japanese have found a way to draw in private money for public works through minkatsu, or third-sector corporations that combine national and local government funding with private commercial investment. These joint ventures offer corporate investors the chance—perhaps even the certainty—that land investments will ultimately show the kind of appreciation rates that have become common in Osaka and elsewhere, perhaps even the same as in Tokyo.

More than 500 development projects are now either underway, planned, or under consideration in the greater Osaka-Kyoto-Kobe area alone, including the construction of a new international airport and a “science city” that will eventually become one of Japan’s premier government-industry cooperative research parks. Approximately 75% of the money being invested in projects already underway is from Tokyo institutional sources. In other words, the Tokyo land play is now being transplanted to Kansai. It has produced the average annual appreciation in Osaka urban commercial land of more than 35% over the past two years; next it will likely move to Nagoya, then to other cities such as Hiroshima and Sendai.

It is a paradoxical fact that the land price boom has spurred more development investment, not less. It is because ventures that otherwise would be infeasible economically suddenly sprout promise when the asset value of land appreciates by large percentages each year. Of course, once the projects are completed, the question becomes, where will the real returns come from? The answer is, they will come from higher rents and user fees and higher price markups for the goods and services marketed in the completed developments. Which is another way of saying that the investments are bound to create strong pressure for future regional inflation.

Homes in Tokyo now sell for 15 times the average salaried worker’s annual gross wage. Even small condominium units, 68 meters square, sell for nearly 10 years’ pay. First-time buyers would have to contract 50- to 90-year mortgages to make the payments, even at Japan’s relatively low interest rates; one lender has even begun offering 100-year housing loans. Land prices paid in the Tokyo run-up made returns on some commercial property a matter of a century or more. It is clear that, once leases begin to expire, steady rent increases will have to ameliorate that impossible pressure. The result: inflation and a downward trend in home ownership for first-time buyers are being built into the Japanese economy for decades to come.

Global Financial Power

Japanese corporations, with their huge realized and latent assets, are now as a whole the wealthiest in the world: they account for nearly half of the total market capital value of the world’s top 1,000 corporations, according to one recent survey. The result cannot help but be felt abroad and goes far beyond funding the U.S. Treasury’s debt through bond absorption: Japan’s net overseas assets at the end of 1988 stood at more than a quarter of a trillion dollars, the highest figure of all nations for the fourth consecutive year. The world’s ten biggest banks are all Japanese. And those banks are using their capital-cost advantages to capture ever growing shares of the world banking market—just as Japanese companies have used pricing in the past to capture huge shares of the world consumer electronics, automotive, and memory chip markets. Nearly half of the Japanese overseas assets belong to banks, and Japanese banks have already become the largest lenders in international banking, with a world share greater than 20% for the first half of 1989.

According to one recent report, Japan’s 13 largest banks now have more than five times the combined capitalization of America’s 50 biggest banks and may enjoy an estimated cost-of-funds advantage of at least half a percent. Lower cost, underselling, investment in marketing networks—these are classic Japanese means of achieving domination in foreign markets. Already Japanese banks control 25% of California’s banking, in a state which by itself possesses the world’s sixth largest economy. Some U.S. bankers reportedly feel that the Japanese could capture the same percentage of the entire U.S. commercial loan market by the mid-1990s.

Some U.S. businesspeople outside the banking and financial industries who have watched the trend in U.S. business toward reliance on debt financing may be inclined to welcome these new Japanese creditors. After all, they represent a strong competitive element, one that will help reduce business costs by anchoring the low-interest end of the lending market. But as Japanese businesses absorb dozens of American businesses, large and small, these same observers might well ask themselves how comfortable they would be if a competitor of theirs were acquired by a member company of a Japanese industrial family group, which could then turn to a bank belonging to the same family for preferential loans. In a sharply contested market where even a small difference in interest costs could make all the difference between profits and losses, between those who can afford to compete and those who cannot; or in a recession, when debt management by a cooperative borrower-lender “team” could spell the difference between receivership and survival—in these and other crucial circumstances, preferential credit could make a huge difference in the real terms of competition. Many companies that the Japanese are now acquiring in the United States are in highly competitive technology fields where access to R&D funds is crucial or cyclical retooling costs are very high. What strengths do these competitors gain with access to preferentially termed Japanese loans?

Of course, land prices in Japan have already begun to affect land prices in the United States: the Japanese outbid other contenders for such properties as the Rockefeller Group with its Plaza holdings not only because of their enormous liquidity but also because real estate returns in the United States now average 7% annually, versus 2% annually in the overpriced Japanese market. Japanese land generates capital; foreign land generates income. The world is the real marketplace for Japanese real estate buyers. Japanese life insurers reportedly invested nearly £500 million in the British real estate market from September 1988 to early fall of 1989; observers forecast continued dramatic growth.

At a time when, in the words of one Japanese commentator, “Tokyo has become a bazaar of American assets,” the effects of Japanese merger and acquisition activity in the United States are still not well understood. Americans have often bought a company as much with the idea of breaking it up to realize immediate profits as operating the new acquisition as a going concern. When the Japanese buy a company, they often do so not merely to acquire assets and plant. They also acquire market share—something they previously had to struggle to build through their own costly and time-consuming marketing efforts.

Wall Street gasped when Bridgestone far outbid Pirelli to pay $2.6 billion for a Firestone enterprise that had weak market share and antiquated plant. But the tire industry itself gasped when, less than a year later, Bridgestone announced that it would pour an additional $1.5 billion into Firestone, mainly to modernize and expand production. Recent reports indicate that Firestone is already posing a newly sharpened competitive challenge to Goodyear, the world’s largest tire maker. How many more American companies of lesser rank will be surprised at the reshaping of their domestic market’s competitive landscape by the inflow of capital from Japan?

In 1988, Japan’s private sector outspent the United States itself in capital investment, with a figure totaling nearly half a trillion dollars. For the fiscal year ending March 31, 1989, the Japanese manufacturing sector indicated plans to increase capital outlays again, by some 25% over the preceding year’s levels. The real race in manufacturing industries now, for the Japanese, is to transform their low capital costs into low production costs. And they are doing that, with plant modernization and capacity expansion programs on an enormous scale.

The Value of Money

Some years ago, Peter Drucker said prophetically that the business future belongs to those enterprises with the best access to capital. Japan is proving him correct. What neither he nor anyone else in American business could foresee is that the Japanese would create their capital advantage by realizing a theory that every capitalist nation knows but no others have yet dared to act on for open advantage: money is only paper, with no intrinsic value other than what buyer and seller agree on.

The real Japanese innovation came, as usual, in linking something old and familiar with something new and opportune: manipulation of the domestic land market and the global deregulation of capital markets. By claiming that their land is worth anything the buyers and sellers of credit claim it is, and by realizing that amount as actual cash, through the wide-open, cheap-money lending policies of the Ministry of Finance (and the securities markets, where billions of dollars of that money is pooled), Japanese corporations are making the theory work for them.

How could it be done on such a breathtaking scale, without so far triggering the ruinous inflation that the laws of free market economics would seem to dictate? Part of the answer, certainly, is Japanese domination of entire industries—the manufacturing machine that continues to generate consumer and industrial products that the entire world both needs and wants. The economic and political system that underlies this manufacturing performance has produced a growth machine that is unparalleled in the world; the Japanese now forecast that by the year 2000, they will have a GNP roughly equivalent to that of the United States.

Another part of the answer is the way in which the Japanese have been able to apply that industrial growth system to the larger workings of the whole economy. So pervasive is the ability of the elite bureaucrats, business leaders, and industrial groupings to maintain informal, extralegal control over economic processes, including the workings of the marketplace, that the conventional term “free market capitalist economy” hardly applies at all. Ultimately, no country or enterprise competing within the framework of a genuinely free market can hope to compete with it either in Japan or abroad. Policymakers in the United States will soon be forced to face the fact that the problems in the relationship with Japan are not essentially of an economic nature, but are much more intractable: they are political problems.

This recognition is the most critical feature for American business and political leaders, most of whom remain captive to the terms of their own economic ideology. The economists’ argument continues to hold sway that the import of capital to the United States is entirely beneficial: it bolsters industries, creates jobs, rejuvenates companies, and generates healthy new cash flows as Japan’s businesses are integrated with those of the United States. Moreover, the argument goes, it is ultimately a vote of confidence by the Japanese that the United States, despite temporary economic difficulties, has the stronger, more powerful economy and the greater future. Undeniably these claims are true; doubtless the Japanese investors do see a promising future in the United States.

But the problem remains: Japanese direct investment capital does not really “migrate.” Quite apart from the vital questions of which country the R&D will be done in, or where components will be produced, the crucial fact is that, once the Japanese acquire an American company, management, not just ownership, shifts to Japanese control. That means that management’s functions and perspectives fit a Japanese, not an American, schematic of industrial and economic plans and goals.

This, then, becomes the question: How much actual control of strategic and vital industries shifts to Tokyo with every new acquisition of another American corporation? The answer emerges only in the context of the Japanese system that powerfully joins industrial groupings and government bureaucrats to target global industries and markets, while keeping its own home market inhospitable and its corporate ownership closed to outsiders. Until U.S. business and government leaders are prepared to face this reality and everything it implies, American business will continue to operate blindly in a competition in which winning is not possible while adhering to the rules of free market economies.