Attacking the GLOBAL Financial System? (2001 -
with 2009 additions)

CPDS Home Contact Competing Civilizations (especially An Unrecognised Clash of Financial Systems? Risks in a Clash with Islamist Extremists  Are East Asian Economic Models Sustainable?  Focusing on Japan and the Global Financial Crisis  Which Identity Does Japan want Back? An Exchange of Views
Introduction +


Several scenarios are outlined below under which the  attack on the citizens of 80 countries in America on 11 September 2001 might be linked to (or be a diversion from, an alternative to, or have disrupted) a potentially crippling attack on the US / IMF dominated global financial system for which there (appeared in 2001 to be) a brief window of opportunity.

Whilst an attack on the financial system will probably seem unlikely, it is unfortunately psychologically possible from the viewpoint of a particular group who: find their way of life threatened by that system; have predecessors (and some contemporaries) who suffered ambitions of grandeur; and seemed in 2001 to have their fingers on the trigger of a powerful 'bomb' which could be exploded inside US financial institutions from October 2001.  

A financial attack on America could be viewed as part of a contest for control of the global financial system which has been developing for decades, and as a corollary of the 1997 Asian financial crisis which was seen by many Asian nationalists as a US / Jewish inspired 'attack' on the Asian economic models.

It could (if the Western style global financial system were completely disabled) be believed likely to result in relative economic and political gains by East Asia for reasons outlined below that few Western observers will be aware of (ie the coordination of economic transactions through social networks rather than through financial measures of value). 

The author had long had a vague expectation on the basis of study of the incompatibility of traditional Japanese and Western worldviews that Japan's elites (and perhaps others) could be arranging a quite-legal passive 'attack'  on the US economy (ie one achieved by doing nothing to solve problems in their own financial systems - which would wreak destruction of US asset values because of the latter's dependence on Japanese capital). 

The terrorist attack on America's financial and military HQ's just 3 weeks prior to what seemed in 2001 to be a critical date stretched the bounds of coincidence in the author's mind, and raised the possibility (if Reserve Banks were crippled by terrorist attack) that a more ambitious goal than damaging the US economy might be feasible.

In a banking crisis Reserve Banks (especially the US Federal Reserve) provide the liquidity to prevent short term cash flow problems from escalating into failure of the financial system. If they were crippled by terrorist action, the possibly-soon-to-be-exploded financial 'bomb' could have the effect of destroying (not just asset values that would damage the US economically but) the financial systems that are the nervous system of Western democratic capitalism.

Such a move would be suicidal for those who have built the 'bomb' (which is consistent with a kamikaze tradition) because it requires also destroying their control over Japan's economy, but this would in the process destroy Japan's 'merchant soul'.

The result could be (not only an unprecedented level of human misery) but a huge shift in the balance of global political and economic power.  The latter goal may seem outrageous - but could well be feasible, and would be compatible with the type of thinking which is the basis of ancient East Asian 'Art of War' strategies

Thus a primary (though not necessarily real) scenario is developed below which recognizes that the US financial system tends to be dominated by Jewish influences, whose agenda includes provision of support for Israel, so that there is a plausible basis for cooperation amongst extremist groups in the Middle East and East Asia - and thus for a direct relationship between the September 11 terrorist attack and a potential attack on the US financial system.   

The motivation for attacking the financial system itself could be objection to the massive cultural adjustments required in Japan if it is to succeed economically under the current (US / IMF prescribed) global financial system. East Asian traditions make it feasible  to achieve strength in the 'real' economy, but quite difficult to succeed in the 'paper' economy (especially for Japan) . 

Under the primary scenario, efforts to further increase the security of the Reserve Banking systems against terrorist attack would be highly desirable. 

The primary scenario is unlikely partly because, from a Japanese / East Asian viewpoint, the US is already on a path to losing economic and military power.

However if, as is very likely, the timing of the attacks is a coincidence then the terrorists may go down in history as mounting the most spectacularly unsuccessful attack of all time in terms of achieving their presumed objectives (eg because it may have disrupted what might otherwise have been a more damaging 'passive' attack on the US economy, and have provided major opportunities to the US by uniting world leaders behind it).

In the light of history it appeared in 2009 that , if there were a link between the 911 attacks in America and attempts to disrupt the global financial system, the most likely goal would have been to create a diversion to encourage the US administration to focus militaristically on security challenges and to be dominated by people who did not understand either Asia or financial systems.

As was suggested in late 2009 [1], the US's global role was significantly damaged (and Asia's relative economic and political power was enhanced) by both  the US's militaristic response to the 911 attacks (which alienated many in the Middle East) and by the global financial crisis (which challenged the credibility of democratic capitalism). The latter resulted (in part) from imbalances introduced into the international financial system by the economic model which Japan originated and spread throughout East Asia, and needs to be viewed in the context of Japan's long-term striving to become No1 (see An Unrecognised Clash of Financial Systems?).

By 2009 most US concern in relation to financial imbalances focussed on China rather than Japan (because Japan appeared to be a strong ally, and its economy to be weak) even though Japan's contribution to US financial imbalances remained strong. However it is also worth noting that:

  • according to Eamonn Fingleton (who has studied the Asian situation on the ground for years) Japan had the most significant role in initiating China's modernisation - by convincing China's leaders in 1979 that something like the Japanese economic model (with its large financial imbalances) would work for China (which could have a potentially much larger economic impact than Japan itself). A summary of what Fingleton believes had been involved is included in 'Signs of an Emerging East Asian International Order'
  • Japan's WWII goal of creating an Asian Co-prosperity Sphere significantly depended on engaging China (which Japan at the time described as its 'big brother') in that process;
  • traditional 'Art of War' tactics include  (a) holding up a mirror to opponents so that when they look at you all they see is a reflection of themselves and (b) getting close to enemies - to make it easier to deceive them (noting that deception is the core of 'Art of War' tactics).

Moreover, there are quite different possible relationships between  these phenomena which are mentioned in alternative scenarios. One of the most intriguing is the possibility that the financial 'bomb' might not be intended to be exploded but rather to be one of several tools to influence the behaviour of the US government as a 'new shogun'.

The author's basis for suggesting the primary scenario (and variations which have different implications) involves 30 years of strategic public policy research - with particular emphasis on a systems approach to administrative and economic development which provides a key to understanding the intellectual basis of East Asian economic models. 

Under any of the suggested scenarios there are many options for turning evil into good. There is also potential for further shocks.

25 September 2001 (and progressively modified)

Primary Scenario

1. Primary Scenario - The Asian Financial Crisis Phase 2?

There is a possible scenario under which the terrorist actions on 11 September 2001 might not be the only 'Attack on America' which is to occur. A game might be on to try to achieve a dramatic shift in global economic and political power by seriously damaging the financial system that is the 'nervous system' of Western democratic capitalism - and also perhaps seen as currently a massive threat to the status of traditional Japanese culture and elites, which radical nationalists in Japan have moved heaven and earth to defend against Western values for 150 years. 

Such an attack is feasible because Japan has planted a huge 'suicide-bomb' in the US financial system:

  • Japan has had a long term mercantilist policy goal of creating production capacity far in excess of domestic demand and recycling all foreign exchange earnings and much credit expansion into production capacity - which resulted in large current account surpluses that have been recycled into investments in $US assets (a process which is increasingly difficult to sustain). Features of this clearly deliberate process (see Why Japan cannot deregulate its financial system) include:
    • building production capabilities under bureaucratic supervision without regard to domestic demand or profitability;
    • financing this through the creation of credit by bureaucratically controlled financial institutions;
    • generating large current account surpluses, which the financial system recycles into: further investment in production; acquisition of $US financial assets; and public works - while ensuring that it does not flow through to consumer demand;
    • regulation to protect the financial system from market competition; and  
    • distortion of the Japanese economy in the 1980s and 1990s in order to ensure that the accumulation of $US assets could continue; 
  • Japan is apparently to go officially onto a new international accounting system on 30 September 2001 as part of a package of structural reform of its financial system - which is likely to show that almost all of its financial institutions (and perhaps also some companies) are technically insolvent as a result of accumulated bad debts - because, under Japanese culture, making paper profits was never their goal; and
  • this could prevent future Japanese capital inflow to the US - or lead to large Japanese capital outflow (eg see forecast of $1000bn withdrawal in Cornell A 'Japan braces for painful prescription', Australian Financial Review, 7/5/01).  Because of the US dependence on such capital to support asset values, and on ongoing flows to cover its current account deficit, the effect could be to drive up interest rates substantially (as occurred in 1987) and add a massive new shock to the US share-market and financial system.

Such a shock could wreak economic disaster - a disaster which would be far worse if the US was engaged on a difficult diplomatic and military operation, and if Reserve Banks were damaged by terrorist attacks.  

Reasons that a passive (or worse) 'attack' on the US financial system from Japan was plausible are outlined in Section 2 below, while preliminary (and mixed) reactions which have been obtained from persons with varying degrees of expertise are outlined in Section 3.

The fact that a long-planned passive financial 'attack' on the American economy may have been intended does not prove that this was directly linked with the terrorist attack - or even suggest who may have been responsible if there is such a link (as information about the possible passive financial 'attack' has been available to any Asia-and-finance-literate person for several years).   Moreover the fact that such a passive 'attack' may have been seen as desirable partly  reflects cultural features which have been obvious for decades, yet irresponsibly ignored though they cause substantial difficulties. 

However, because of the coincidence of a terrorist attack just before the passive 'attack' was likely, the primary scenario developed here involves recognizing that a more-than-passive attack might be plausible

Some options for defusing Japan's financial 'bomb' and the risks that this primary scenario portrays are suggested in Section 5 below, together with other scenarios in Section 6 which outlines different possible relationships between a potential passive financial 'attack' and the terrorist attack.  

Caution: It needs to be noted that scenarios such as are developed here are based on limited information - and that there are presumably many relevant factors unknown to this author.


2.  Why a Passive Financial System 'Attack' (or Worse) was Plausible  

A generally-hidden contest for control of economic and financial systems has been emerging for nearly 2 decades between the US-led Western economies and various groups in East Asia.  The cultural background to, and  the historical development of, this financial contest are summarized in Competing Civilizations which also presents a more general historical background.

Features of this contest that were discussed include the following:

  • the US pressure on Japan to revalue its currency in 1985 under the Plaza Accord - as a means to correct its large current account surplus with the US;
  • the withdrawal of capital from US bonds in 1987 - which threatened to a stockmarket collapse;
  • the Asian financial crisis in 1997;
  • Japan-led efforts to establish an alternative to the IMF (an Asian Monetary Fund) which would operate under 'Asian values' (presumably coordination of economic activities by relationships amongst ethnic elites rather than by calculation of expected financial outcomes);
  • the re-emergence of financial difficulties like those at the time of the Asian financial crisis - and the virtual insolvency of Japan's financial institutions which appeared very difficult to resolve (see below).

The author had long expected that Japan's elites could be planning a passive 'attack' on the US economy on the basis of:

  • the contest to be No 1 economically which was clearly Japan's aspiration in the 1980s - and which was frustrated by its subsequent financial problems;
  • the apparent inability of East Asian economic models and methods to permit economic success if this is defined in terms of financial outcomes; 
  • the large scale withdrawal of Japanese capital from US bonds in 1987 - which drove up interest rates and triggered a US share-market crash - which could be seen as an 'attack' on the US financial system that was frustrated by the US Fed's ability to provide liquidity to prevent the failure of financial institutions;
  • if Japan was now 'forced' to withdraw a vastly greater amount of capital from the US, because the adoption of  US-style accounting standards exposed Japan's financial institutions as insolvent, then Japan 's leaders  would be able to claim that this was merely the result of following  others' prescriptions,  and that everyone has known for years what was going to happen. Such an outcome  (which required Japan's leaders to do nothing more than fumble around and fail to take any action to avert the inevitable crisis) could have been an 'Art of War' classic - resulting in major strategic gains to which no one could have expressed any reasonable objection.

Unfortunately, it is possible that an attack could be more than passive.

Firstly there have always been radical nationalist elements in Japan, who might contemplate more than a passive attack and have not been far removed from centres of power.

The Dark Side of Japan
  • Japan's cultural traditions have been radically incompatible with the socially, economically and political liberal Western institutions that Western expansion brought to East Asia (see Competing Civilizations);
  • Japan has always had radical nationalist  elements - who see 'Japan's cultural uniqueness to be unique in all the world' and endorse theories of racial / cultural superiority. These elements sponsored the Meiji restoration in 1868 as a means to boost Japan's economic and military power and were the foundations of the militaristic factions (in Japan's army) that gained power in the 1930s after government was disrupted by the Great Depression. They have remained part of, and been influential over, the Japanese 'establishment' (bureaucracy, LDP, business, yakuza). It was, for example, reported in the 1980s that 30% of the output of Japanese universities concerned Japan's cultural uniqueness and superiority - though this was never presented in English (Dale P, The Myth of Japanese Uniqueness, 1986). The ultimate enemy of these extremists has presumably been the United States because of, for example, (a) the pressure by US Commodore Perry to force Japan to open to Western commerce in the 1850s; (b) deep cultural objections (given a culture based on uniqueness, particularist ethics, social hierarchy, etc - see East Asia in Competing Civilizations) to the West's emphasis on universal values, individualism, truth, law and democracy that the US has championed since WWII; and (c) the refusal in the 1930s of Western powers to acknowledge Japanese culture (which others had no way to understand); and (d) the defeat by the US of Japan's  military in World War II;
  • Establishing Japan's Post-WWII Political and Economic Systems: Japanese organised crime groups (Yakuza) have had ultra nationalistic motives (ie related to belief in Japan's racial / cultural superiority) and appear to have had significant behind the scenes influence in determining the nature of Japan's political and economic systems. The accounts of this by experts who studied Japan that outlined below suggest that:
    • Japan's Meiji Restoration in 1868 was significantly influenced by ronin (ie masterless Samurai), and the latter gained power within the post-restoration Imperial regime - whose main emphasis was placed on building Japan's economic power (as a basis for military build-up). The ronins' associates were given control of Japan's business groups (ie the Zaibatsu);
    • Yakuza gangs started as ronin and played a significant supportive role in the Meiji Restoration;
    • after WWII the ultranationalist Yakuza played a key role promoting the social discipline behind a continued Imperial system - which the US occupation had sought to suppress because Japan's tradition of imperial divinity had been central to it war-time ideologies. There were strong relationships between Yakuza and the political system - and Yakuza bosses rose to prominent political roles (especially within the so-called 'Liberal Democratic' Party). Yakuza gangs also played a very significant economic role - while banks and business groups were controlled by individuals with close links to the financial / economic bureaucracy (eg through the so-called 'descent from heaven' system) - just as had occurred after the Meiji Restoration;
    • US occupation forces had initially sought to encourage the emergence of a liberal democratic environment in Japan - but found it impossible to deal with the entrenched authoritarian social hierarchies (eg those of the Yakuza) and soon started supporting the extreme right groups as these also opposed communism. The fact that key economic agencies were above control by the LDP (which strongly suggested they were acting with a traditional East Asian imperial mandate) did not seem to have been considered. There were ultranationalist (pro-imperial-Japan) sympathisers in Japan's bureaucracy and businesses (because these were originally run by ronin). However they (like they like their counterparts in Japan's military) could not safely have been asked by Emperor Hirohito to engineer Japan's political and economic arrangements - because they would have been closely watched. And who would suspect that organised crime gangs might be charged with doing so?
    • three individuals (so-called 'kuromaku') played a key role in behind-the-scenes organisation of the relationship between business, politics and Yakuza. Of these Ryochi Sasakawa's role seemed significant in relation to organising Japan's economic arrangements.  [The present writer was exposed to Sasakawa's activities in the 1980s as mentioned in The Dark Side of Japan in Australia]. The other two 'kuromaku' (Kodama and Kishi) played lead roles in establishing the so-called Liberal Democratic Party - which presumably (like Japan's post-war economic bureaucracies MITI and the MOF) also operated under an imperial mandate.

Views of the Role and Power of Japan's Yakuza

Outline of Ollman B. 'Why does the Emperor need Yakuza?' (Dialectic Marxism): In 1999 school principals experienced violence because of their resistance to staging imperial and ultranationalist ceremonies (because of their association with Japan's imperialistic and militaristic past) that the Education Ministry required and had started enforcing. A Marxist analysis of the Japanese state can explain this. The Japanese state has never been easy to understand - as nominal rulers seemed always to be others' puppets. Marxist analysis treats Government as the instrument of capitalists - and plays down the role of the bureaucracy. Assuming that only overtly 'political' institutions are part of the state works well for democratic capitalist countries (eg the US) but is grossly inadequate for Japan. Japan's elected governments are weak. The bureaucracy (especially MOF, MITI and State Bank) dominates both the elected government and business. Many top positions in politics and government are held by retired bureaucrats. Many essential political functions are performed by what seem to be non-state bodies. The main legitimation for the state is the Emperor system. There is a 'shadow' (separate) budget 2/3 size of official budget that uses funds from Postal Savings System and public pension assets for projects determined only by MOF. Japan's bureaucracy is in effect the Government. The bureaucracies stranglehold over the political system is replicated in business. Administrative guidance and capital are provided, and any that do not comply are subjected to new laws / taxes etc. There is no parallel elsewhere with Japan's bureaucracy's role as chief strategists and enforcers of their country's economic efforts. This arrangement goes back to Meiji Restoration - after which the lower Samurai who came to power established profitable monopolies and then sold these to families in their own clans. Privatization, not capital accumulation, gave Japan its first Zaibatsu (business empires). This was the reverse of situation in Europe where capitalists came before capitalism. Japan created 'capitalists' in a similar way to the creation of knights and barons in feudal Europe. The Japanese state has since does everything it can to protect its economic offspring. In choosing a CEO many Japanese banks seek a decision from MITI about who to appoint.  Some Japanese prime ministers have sought to reduce bureaucracy's role - but have achieved little. From Marxist viewpoint Japan is problematic because on can't speak of ruling capitalist class if capitalists do not dominate government. The answer is that many top bureaucrats take leading roles in business and politics late in their careers. It also needs to be noted that managers of Japanese companies have much more power than their equivalents in US - because interlocked stock-holdings mean that shareholder influence is limited. And most of Japan's post-war Prime Ministers came through a bureaucratic path. The breakup of the LDP has done little to change this.  Future career options allows Japan's bureaucrats to see themselves as members of a capitalist class. Difficulties in getting into the cram schools that are needed to get into Tokyo University limit these options to very few. Karen Van Wolfen labels top bureaucrats, businessmen and politicians as a single' class of administrators'. All of these qualify as 'capitalists' is that their primary goal is the expansion of their wealth.  Japan remains a Shogunate - where the 'Shogun' is a collective 'capitalist' class. The Samurai who made the Meiji Revolution did not become feudal rulers but instead opted to become a now capitalist ruling class. Achieving this was a massive feat of social engineering. And despite the changes WWII brought Japan continues to operate this way. As Japan's elected government does not actually govern, there is a need to look very broadly at how the functions of the state are performed in Japan. Other institutions that perform 'state' roles in Japan include: (a) major business associations (run by former bureaucrats); (b) US bases; (c) the Emperor system; (d) educational institutions; (e) religious organisations; (f) the main trade union; and (g) organised crime (the Yakuza). Japan's state lacks clear accountability and is in need of legitimization. Political legitimization in the US is based on role of judiciary / elections / president. Though there are ways in which Japan's system can be presented as legitimate - heavy reliance is placed on the Emperor system. Japan is governed by a small group of people who are not accountable to the electorate - and this is presented as just how Japanese people are. Japan's rulers have never been popular. Emperors were more popular - and Shoguns retained them as figureheads to promote unity. After Meiji restoration decisions were issued in Emperor's name. Shinto which ascribed divine status to the Emperor was reinvigorated. In 1873 Kokutai ( National Essence) doctrine was promulgated under which Emperor embodied the will of the nation. criticism of this was illegal. After 1945 this was supposed to have come to an end. US occupiers required Emperor to announce that he was not divine and that war had been a mistake. Allies gave emperor no political role in new constitution - where he was only a symbol of Japanese state and people's unity. However Emperor remains main source of legitimization of Japanese state - especially in relation to the use of its power on behalf of capitalistic class. The Emperor an get people to accept political arrangements with biased outcomes. This confused social and political issues in people's minds. This does not depend on anything Emperor does or says. The Chinee character used for 'state' in Japan means 'family of the country'. The head of state is likened to a father in a family. The Chinese character for bureaucracy originally meant 'to serve emperor or heaven'. After WWII it had been hard for Emperor to resume his earlier role. After end of US occupation, the bureaucracy reintroduced Emperor in any ways possible to promote legitimacy. Any criticism of Imperial tradition was first ignored and then repressed. Yakuza, who have strong ties to far right in Japan, could undertake violent repression without detracting from Emperor's supposed neutrality. The overlap between Yakuza and ultranationalism is strong in Japan. Yakuza are not just like the mafia. In repressing criticism of Emperor and carrying out criminal activities, Yakuza have active Governmental approval. Yakuza political ties go back to 19th century when they did strong arm work for conservative politicians, controlled labour unrest and served as spies and assassins for Government. Both the Yakuza and the new bureaucratic rulers had emerged from lower samurai. In the 20th century victims included communists and radical students. In WWII Yakuza helped the Japanese army organise and rob occupied Manchuria. After WWII Yakuza role was not diminshed.The LDP was founded with funding from Karoku Tsuji (who called himself the 'Al Capone of Japan). Kodama the most important LDP figure til late 1970s also had Yakuza links - as did many other politicians. Yakuza's close ties to government were acknowledged in a speech by Secretary general of LDP. In the US, the 'priestly caste' of lawyers ensure that people respect constitution and supreme court. In Japan this role is played by Yakuza. Yakuza provide legitimization similar to lawyers, and the repression required for ruling class to operate. it thus qualifies as a component of the Japanese state. Japan's ruling class successfully transferred to a new political system after WWII - as there was no purge in Japan except for a few generals. A clss-A war criminal became Prime Minister soon after US occupation ended. The ruling class re-established everything that US occupation had sought to destroy - with Yakuz'a's indispensible help. The Emperor is once again head of state. Japan's 'Self defence Force' is the world's third most powerful army. The democratic process was by-passed leaving power in hands of bureaucracy. The Zaibatsu's name was changed to Kereitsu - and remain as economically dominant as ever. Schools have been forced to adopt more nationalistic outlook. With Japans economic setbacks the need to emphasis Emperor's role has increased - and many are concerned where this is headed. Prime ministers have endorsed Japan and country of Gods with Emperor at core. Visits to the Yakusumi Shrine have been encouraged. Nationalistic outburst attract calls for apologies - but none are given.  To delegitimize Japan's system requires demonstrating that it is run by one class for that class (ie it is a class dictatorship). In Japan radicals have often sought to expose the class bias of the capitalist state and to undermine the Emperor system. However fear of Yakuza retaliation constrains this . Without legitimization through Emperor system japan could come apart quickly. Making clear the Yakuza's role in maintaining the Imperial system should make a difference. Japanese Marxists have debated whether Japan's system is fuedal or capitalist. However Japan is clearly capitalist - with a capitalist state though one that uses pre-capitalist forms.

Outline Extract from Kaplan and Dubro, Yakuza: Japan's Criminal Underworld, 1986

Chapter 2. The Kodama Years  - Occupied Japan: In 1947, Government Section of the US Occupation Forces recognised the existence of underground gangs (but thought that they were a new phenomenon). They could not get official action from the Japanese to deal with them. Simultaneously other forces were aiding Yakuza, eg food rationing which created black markets. SCAP was the American administration centre for Post war Japan. SCAP bureaucracy in which the Government Section's desire to inhibit Japan's war making capacity meant strengthening socialists, liberal, unions. But Intelligence Group (eg G2) pursued reverse policy to promote the ultranationalists. American influence also promoted the role of foreign criminals over Japanese, but Yakuza fought back strongly. Black Market Underworld: New Yakuza gangs, gurental (hoodlums) emerged in post war power vacuum. They were more vicious that previous gangs. Ando was one of the more prominent leaders and was archetypal of postwar Yakuza. Head of a gang, and a construction company, he had extensive infrastructure contracts from the US administration, and influenced the re-establishment of the Emperor system. Another Yakuza achieving postwar prominence was Ozu who virtually took over the Tokyo Chamber of Commerce. Links between Yakuza and politicians were very obvious. Construction companies were traditionally so similar to Yakuza gangs as to be indistinguishable, Both used the same word gumi (gang) to describe their organisations. In 1947, SCAP established a Oyabun-Kobun Committee, nominally to inquire into yakuza, but it actually found itself looking into all of Japan's social relations. It found that of Japan's 14m labour force, 3m were in the Oyabun-Kobun system. Of these 2/3 were in construction gangs. The three major Yakuza oyabun-kobun groups (bakuto, tekiya and gerentai) extend influence into politics, control prices of commodities, control flow of goods and perform local government functions (eg licensing and taxing). The picture was one of organised crime out of control - but US command had no real desire to sort it out. Gangs were strongly anticommunist. Thinking in US was becoming anti-left - and real social change in japan could not be brought about. Labour unions, for example, having been established, were systematically harassed. In complying with US desires to use Japanese rightists as a bullwark against communists, the Japanese rightist frequently aligned with and used Yakuza. Their association continues to the present. Whilst the Labour Division of US administration was establishing unions; counter-intelligence was breaking them up. Japan's famous cooperative company relations may have more to do with anti-union activities of SCAP officials than with loyalty of Japanese workers. By 1947, the purge of ultra-right influences in Japan had become a sham and by 1949 a 'de-purge' policy was implemented. From 1946 to 1948, Kodama was a Class A prisoner in Tokyo's Sugamo Prison (for war criminals). He was to become one of the most powerful men in post-war Japan, and mastermind behind the Yakuza's rise to power. During his imprisonment, he used funds (though intermediary Tsuji) to fund the establishment of the Liberal party. From 1955, when Liberal Party merged with Democratic Party to form the LDP, Kodama was the most powerful individual in LDP. After release from prison, Kodama became principal go between for G2 and Yakuza, which linkage was subsequently maintained by CIA.

3. Nexus on the Right : With US withdrawal, Japanese government feared a communist revolt - but lacked any organised group who would defend them, part from Yakuza. Preparations were made to establish a 200,000 man force. The Justice Minister (Kimura) had created a rightist / gangster nexus, and attempted to form a single cohesive underworld force. Yoshida, the Japanese PM, prevented this. But Kimura was appointed to establish Japan's self-defense force; later established a coalition of rightist organisations and entered the Diet (platform was to establish sovereign emperor; eliminate the democratic MacArthur Constitution, revise text books and strengthen the army). As recovery proceeded, Yakuza shifted from control of black markets for basics into luxuries, eg drugs, prostitution. Amphetamines are a particular emphasis of Yakuza. Gambling was, in part, taken out of hands of Yakuza. Most popular forms were legalized: horse racing; bicycle racing and speed-boat racing. They were convenient sources of money for government. Growing power of Yakuza encouraged many senior politicians / officials to seek alliances with them. The Kuromaku Come of Age: Kuromaku describes a 'fixer' behind the scenes, who bridge the gap between yakuza and legitimate business and politics. Most famous had been Toyama. Postwar dominance was achieved by Kodama, Sasakawa and Kishi. Kodama helped fund and establish the Liberal Party and in 1954 helped engineer the election of Hatoyama as prime minister. Sasakawa has emphasized money rather than politics to achieve power. An outright admirer of Mussolini - 'squarely behind Japan's military policies of aggression and anti-foreignism for more than 20 years'. He has made extensive international connections in business and politics. His postwar wealth was based on establishing the Japan Motor Boat Racing Association - which split income with authorities. In 1980 corporate income was $7.4bn. At the same time he won over yakuza gangs. Employs squads of financial racketeers to push along his investments. Sasakawa has spent 30 years on a program of self aggrandizement - claiming to be a humanitarian. Kishi had links to Ikki Kita in the 1930s. He was de-purged in 1952, became general secretary of the LDP in 1955 and Prime Minister in 1957.


  • Japan attempted in the 1930s to use its military power to gain control of China in order to mobilize China (which was seen as Japan's cultural 'big brother') in establishing an Asian Co-prosperity Sphere. Nationalists in Japan, China and Korea apparently view all these societies as descended from a Great Han Race (see Comparing North Korea with China and Japan).
  • In 1941 Japan joined then-fascist European powers (ie those who also endorsed themes of cultural superiority and autocratic rule by social elites) in their wars against liberal powers; 
  • while Japan's military was defeated in WWII (and surrendered), many of the bureaucratic elites who had exerted behind-the-scenes control of Japan in the 1930s were presumably reinstalled to govern Japan after 1945 by the US Occupation Forces, and they then focused on building Japan's economic strengths. Given the character of government in East Asia, it is virtually impossible to get real change. There is no reliance on a rule of law or general principles. Rather governing involves 'umpteen' particular relationships, and the only people likely to be capable of governing competently are those with decades of experience. In China Mao tried to displace traditional elite influence (through the Cultural Revolution which sought to either educate or liquidate educated elites) but after his death the latter regained effective control (see Communism Versus Confucianism: The Continuing Contest in China );
  • the 'Tale of the 47 Ronin' was reportedly  still  Japan's most popular folk tale - and involves masterless samurai who disarmed suspicion of themselves by pretended dissolute living for decades in order to get an opportunity to complete their dead master's plan to murder his enemy (see Burnstein D. Yen: The Threat of Japan's Financial Empire, 1989);
  • ethics tend to be particularistic (ie involve obligations only to those with whom one has a relationship) rather than universal - and thus do not lead to a concern for outsiders. Thus:
  • deception of outsiders is the first and most important principle of the ancient 'Art of War' concepts of strategy which Japan inherited from China. Strategy traditionally make no distinction between military and economic affairs, seeks to erode an opponent's political and economic systems to advantage oneself, and operates in long term / big system ways which are quite foreign to Western observers. Japan's society and economy are based on profoundly different assumptions about the nature of knowledge; power; governance etc (eg see East Asia). For example, defusing suspicions by 'holding up a mirror' in which others (when they look at you) merely see a reflection of themselves is a traditional 'Art of War' strategy;
  • After WWII Japan pursued a strongly mercantilist economic strategy (ie one concerned with building national power rather than with creating opportunities for citizens as investors and consumers). Economic development was accelerated by 'vision development and administrative guidance' by bureaucratic elites from Japan's Ministry of International Trade and Industry (MITI) with national savings provided through banks linked to the Ministry of Finance with and an emphasis on building market share and little regard to return on, or return of capital. Businesses were in no sense independent of the state as leaders were often from those bureaucracies under a 'descent from heaven' process. These methods (which could not work in a genuinely democratic environment) had been developed by Japan's military in Manchuria in the 1930s (according to Eammon Fingleton) and seemed to be supported by by ultranationalist / Yakuza factions operating under Imperial mandate (see The Dark Side of Japan in Australia). These methods ultimately imploded with the financial crisis Japan experienced in the late 1980s - because credit had been created without real discipline to develop industrial over-capacity and 'buy up the world' at the top of the market. After 1990 Japan invested heavily in apparently unproductive public works to stimulate its stagnant economy - and the resulting infrastructure may well have un-evaluated strategic value. Information about this is on Fingleton's web-site - which suggests that every effort has been made to make the US believe that Japan is much weaker economically than it actually is - especially by highlighting its financial weaknesses (see Fingleton E., 'Is Japan faking it?', FR, 22/11/02). The US has become dependent on Japan for the supply of sophisticated engineering and electronic components for its military hardware.
  • Japan 's leaders  (and  those in  other counties in East Asia) are likely to believe that their economies could operate reasonably successfully in the face of financial chaos (especially if those economies are  coordinated  through obligation and social hierarchy - rather than through financial returns) whereas the US / European economies would not be able to do so. [[This assumption may not be correct (see Are East Asian Economic Models Sustainable?) - but it is a view that is likely to be held by radicals]];

Reverting to the Soul of a Samurai?

  • there have been constant efforts by Japanese extremists to argue that Japan should shift from the 'soul of a merchant' which it adopted at the time of the Meiji restoration - back to  what they would prefer to think was its original 'soul of a samurai'. For those who support such a goal, creating chaos in Japan at the same time that the basis of Western economic strength was eroded would merely be an opportunity to gain power;
  • it appears that Japan's current Prime Minister (in 2001) is:
    • from a mainstream Japanese political background (ie of a conservative family and nationalistic orientation) - despite which he is:
    • behaving in a most un-Japanese way by showing political leadership - a way which corresponds with what the US would like to see in Japan (ie a shift towards real democracy and structural reforms to government and the financial system). Japan, by contrast, likes to think that it reacts 'through its belly' rather than through its head (an assumption which indicates both who is likely to make decisions, and that they are likely to be based on gut instincts, rather than intellectual reasoning); 
    • likely soon to face financial chaos through forcing companies and financial institutions to go bankrupt to deal with bad debts (Walsh M. 'Koizumi and the kamikaze factor', Bulletin, 8/5/01), and appears to be intent on a hard-line austerity policy to respond to prospective failure (Cornell A. 'What recession? What tragedy?', Financial Review, 20/9/01). The absence of any apparent process by which Japan's financial problems can be overcome can also be noted (eg see Walsh M. 'Hell bento', The Bulletin, 17/7/01). Chaos would be blamable on the adoption of US policy prescriptions - and thus perhaps break the popular admiration of the US which was built in the post-war period;
    • promising 'structural reform with no sanctuaries (ie to break down Japan's established bureaucratic and political interests) - though without saying what would be built in its place (Sayle M. 'Japan's New Wave', Bulletin, 17/7/01).  Western observers presumably interpret this intent as moving towards more real democracy and deregulated finance - but, in a crisis, this could involve a reorganization into institutions which give Japan a 'samurai soul';
      • Ozawa (author of A Blueprint for a New Japan, 1994) was Japan's political kingmaker in the 1990s - and had a role in opening up of the rice market. He now sees the present government as being unable to implement reforms - and as falling back onto traditional established interests - bureaucracy, LDP and business. Japan has to move from a consensus approach to a radical leader to make the necessary changes. Japan's main challenge is not economic but the potential for military conflict in north Asia (Pearson B. 'Japan at the Crossroads', Financial Review, 19/3/02). [Note: the rice subsidy (which buys electoral support from rural interests) and the 'establishment' (LDP, business, bureaucracy) are the key elements of Japan's 'merchant soul' which would need to be removed by a radical leader to re-establish a 'samurai' soul - based on advice from an Australian who was taken under the protection of a Yakuza boss in Japan and provided comments on Japanese politics that a Japanese observer (who was opposed to the resurgence of ultranationalism) suggested were exceptionally well informed]
    • believed by observers in China and Korea to be a 'a dangerous populist and nationalist leader using his charisma to steer Japan back towards imperialism and re-militarisation' (Cornell A., 'Koizumi swims in murky waters' , Financial Review, 20/8/01).(see Competing Civilizations)
    • a frequent visitor to the shrine which commemorates Japanese war criminals as heroes [1] - and a close associate of (and likely to be succeeded by) the grandson of a suspected war criminal [1]
  • militarists gained control in Japan in the 1930s when the political and administrative institutions of Japan's 'merchant soul' were discredited in the Great Depression. Merely creating chaos was  apparently  considered a useful strategy by  extremists at that time - because out of such chaos a new order could emerge.  
  • There is uncertainty about whether Japan has broken with its militarist past or, mired in economic stagnation, is slowly reverting to ultra-nationalist ideology stressing national superiority. Japan's PM failed to comment of photos of emaciated POWs in Australia, yet bowed deeply before 'heroic spirits' at Yasukuni Shrine. Japan's previous PM labeled it as the 'country of the gods with the Emperor at its centre' - and exclusivist / racist formulation of Japan's national identity (Victoria B. 'Right face! The return of wartime ghosts',  FR,  9/8/02)
  • Japan is rethinking the purely defensive ideas that underpinned its post-war foreign policy (Pearson B 'Japan yearns for self-defence' FR, 7/4/03)
  • Japan wants right to take pre-emptive military action against nations wishing to attack it (Person B 'Japan wants pre-emptive policy', FR, 22/5/03)
  • there is increasing support for changing the constitution which renounces war [1]
  • Japan is undergoing a military transformation [1];
  • there is an external perception in late 2006 that Japan is sliding into a nationalist style like that in the 1930s [1].
  • In 2012 Japan's neighbours have reportedly concluded that Japan's efforts to quell concerns arising from its history have been cosmetic. Domestically, inward looking conservatives are gaining influence (Sonya Y., 'Japan and China must stem lingering mistrust', Financial Review, 10/4/12)
  • In late 2012 it was noted that nationalist political factions have re-emerged in Japan, which could be troubling for the region. Three years ago the Democratic Party government after years of LDP dominance brought hopes of real two party politics. But this experienced difficulties because of earthquake / tsunami which damaged nuclear power industry  and (b) of character of politics in Japan (which is closed / cliquish which grassroots social movements don't trust). Vacuum is being filled by groups exhibiting alarming nationalism. Tokyo governor (Shintaro Ishihara) proposed purchase of islands in East China Sea, which (a) generated conflict with China, and diverted attention from nuclear industry problems. Ishihara is notorious racist / sexist / homophobic. Japanese people fell the need for strong leadership. Osaka mayor launched Japan Restoration Party (espousing nationalist, neo-liberal economics and political system changes - a single chamber parliament and a directly elected PM). He also endorses the need for dictatorship, and criticises apologies for abuse of 'comfort women'. Hashimoto's policy of phasing out nuclear weapons ended when Ishihara emerged as Restoration Party's leader - advocating acquiring nuclear weapons. Abe has emerged as head of LDP - with similar views on 'comfort women' and nuclear weapons. All these groups endorse expanding Japan's scope for military action - and this would escalate tensions in Northeast Asia. [1]
  • There has been widespread concern about the apparent militaristic / (ultra) nationalistic position of Shinzo Abe, as Japan's prime minister. For example:
    • Shinzo Abe is a study in contradictions. He draws inspiration from his grandfather who was imprisoned after WWII. He is often seen to be an ultranationalist but has sought to improve ties with Korea and China - in ways his less-nationalistic predecessor refused to do.  [1]
    • Japan's prime minister, Shinzo Abe, seems to be both a pragmatic, economics-focused politically successful leader and a self-indulgent nationalist. Abe ignited tensions across the region by reinventing wartime history, and may find himself at war with more than himself. Japan and South Korea were angry at his deputy's visit to Yasukuni war shrine, and his questioning in parliament about whether Japan's colonisation of Korea and partial invasion of China constituted aggression (because things look differently from different positions). Abe had promised to focus on economic issues. And North Korea's belligerence had made it possible to improve relationships with South Korea and China. Gerry Curtis (Columbia University) believes that Abe has a dual personality. He is partly an ideologue committed to a view of history that is shared by no one outside Japan, and few in Japan. If China and South Korea react badly the situation could become dangerous. Abe's remarks worry US administration who does not want to be sucked into conflict with China over Senukak-Dioyu Islands. US also is occupied trying to deal with North Korea's threats.  Abe's grandfather was a member of Tojo's wartime cabinet (who was held as a suspected war criminal), and Abe refuses to believe his relative was not involved in a noble cause. Kiochi Nakano (Sophia University) suggests that it was only a matter of time before Abe's nationalism would rear its head. Abe hopes to increase his political power to change Japan's constitution and upgrade the role of Japan's military  [1]
    • Why did Japan change its economic approach so suddenly  (ie shift from acceptance of deflation to Shinzo Abe's program to reverse 15 years of falling prices. Everyone has been too busy making money to worry about the reasons. The currency has devalued and the stock market is up dramatically. This is starting to affect the real economy. Two contributing causes were the 2011 tsunami (the response to which raised questions about whether industries would leave Japan) and China. Beijing has become increasingly assertive - and this may have given Japan a leader with a sense of purpose. Fears about security and economic weakness have a long history in Japan. Rich country, strong army was the rallying cry of Japan's modernisation after Meiji Restoration. Abe sees a weak economy and reducing Japan's ability to defend itself - and thus stresses both a strong economy and strong national defence. Patriotism has been rising. Abe and others shouted banzai (long live the emperor) at a ceremony to mark the end of US occupation in 1952. The US was told that for Japan and the US to jointly provide security for the region, Japan must be strong. Abe has also committed to participation in Trans-Pacific Trade Pact that would expose Japanese companies to tougher competition. This would mean tearing up the LDP's social contract with farmers. Other long discussed imperatives might also be considered: liberalizing energy / healthcare and getting more women into workforce [1] [Note: abandoning the rice subsidy has apparently been regarded as a the litmus test of Japan's shift from its Meiji era 'merchant soul' back to the 'samurai soul' that nationalists seek - see above]
    • The visit by Japan's Prime Minister (Shinzo Abe) to the Yasukuni Shrine (where WWII war criminals are worshiped) in late 2013 was seen as reflecting Japan's view that its aggression was justified - and has increased regional tensions ('Abe's visit to war shrine reflects a streak of unrepentant militarism', The Australian, 6/1/14);
    • Shinzo Abe seems increasingly oriented to the right wing and ultranationalist organisations. Thus it was not surprising when he approved a political course to revive the idea of militarism and imperialism as exampled by Japan's Great East Asian War. This is to revive the spirit of Japanese nationalism amongst young people. The view is encouraged that when Japan invaded Asian countries it was in the role of liberator rather than aggressor. Japanese nationalist ideas could lead to the revival of fascism. [1]
    • Shinzo Abe has presented as a nationalist and right-wing hawk - but on gaining office he did not put that rhetoric into practice (eg a moderate cabinet was appointed). It may be that his rhetoric was a way of boosting his support from conservative LDP factions [1]
    • Shinzo Abe has been seen as a major threat to Asia's economy - because he will destabilize the region militarily and politically - eg by removing constraints on the use of Japan's military [1];
    •  A report by the US Congressional Research Service expressed concern that Shinzo Abe's view of Japanese history (which denies Japan's wartime aggression) could be damaging in the region. Abe questioned the wording of a statement of remorse and apology for Japan's colonisation of Korea and invasion of China. he also proposes reinterpreting Japan's pacifist constitution and embracing a revisionist view of history which rejects the notion of Japan's imperial aggression and victimization of others in Asia [1]
    • it is wrong to see Shinzo Abe as a member of 'team world' and Asian democracies standing up to China in the name of universal values and to help ensure shared peace and prosperity. However he is a revisionist nationalist. The media needs to manage the dissonance between the comforting myth and the disturbing reality. Abe's visit to the Yasukuni Shrine needs explaining. The latter a revisionist / ultranationalist theme park. The villain at the heart of Japan's historical revisionism is not China but the US. The Japanese empire was seen to have been leading the fight against British colonisation and US imperialism. US aggression against Japan is seen as the real war crime. Abe is not being pushed into an aggressive stance by his right-wing base. He is the base. The risk Abe poses is well understood in China [1];
    •  Shinzo Abe did not like being labeled a 'strong nationalist'. But 'rabid militarist' seems more accurate [1];
    • Shinzo Abe sent a note to a temple ceremony honouring hundreds of WWII-era war criminals - suggesting that they had "sacrificed their souls to become the foundation of their country" [1]
  • Despite opposition by a majority of Japanese people the war-renouncing Clause 9 of Japan's constitution was reinterpreted to allow Japanese troops to be sent to foreign wars in July 2014. This  is seen as a sign that Japan will confront China. It also removes the only constraint on Japan acting aggressively overseas. The way in which the law was reinterpreted to suit the Japanese Government puts the rule of law at risk in Japan (The samurai stirs, Online Opinion, 4/7/14);
  • While Japan's PM (Shinzo Abe) was addressing Australia's parliament, scholars and other experts were launching Active Peacemaking in Australia and Japan because of concern about current direction of Australia Japan relationships. Clause 9 of Japan's constitution is seen by some as just a punishment for its defeat in WWII and they suggest that this should now be put aside to allow Japan to take responsibilities in the Asia Pacific where the balance of power is shifting. Abe is not the first PM to challenge clause 9 - but current events are particularly disturbing because: (a) Japan's internal situation is at a critical turning point - with some calling for a stronger Japan and others distrustful of authority; (b) the change was made without public consultation. Japan is not the only place where government secrecy is growing [1]
  • In July 2015 Shinzo Abe pushed legislation through Japan's parliament that could allow troops to be sent abroad to fight [1]
  • In August 2016 Shinzo Abe described frictions with China and Korea's nuclear / missile development as requiring a military build up by Japan [1]

None of the above is proof that the radical nationalist elements (which most countries have in one way of another - though few are like Japan's) have been able to have any practical influence on events. 

Second there are geo-political circumstances that increase the risk of a more-than-passive attack (eg an interest in disabling the international financial system and the existence of a possible basis for anti-Western cooperation between Islamist extremists and Japanese ultranationalists).

Geo-Political Context to A More-then-Passive Attack?
  • disabling the global financial system might be expected to result in relative economic and political gains by East Asia because:
    • the traditional economic goal in East Asia is to achieve 'real', rather than 'paper', economic strength;
    • the financial system is much less important in the operation of those social-network-based economies than it is in America or Europe (a fact that few Western observers have the 'Asia literacy' to understand). There is, for example, no Chinese word for 'unprofitable' [1]; and
    • international arrangements have already been promoted at Japanese initiative for a social-network-based financial system through the Asian Monetary Fund. 
  • there are possible bases for cooperation between Islamist extremists and radical nationalists in Japan:
    • firstly the Jewish groups, who dominate the US financial system which in turn controls the IMF system that Japan's radical nationalists might with to see replaced by an 'Asian' monetary system, also have an agenda which involves support for Israel as a Jewish homeland; 
    • secondly extremists in Islam and Japan share a  commitment to pre-modern styles of civilization - that modernization on Western principles has impacted on (though those pre-modern styles are not identical). Moreover both styles involve: (a) social elites exerting control over society as a whole; and (b) an expectation that people will live 'ritualistic' lives. In Islam's case this involves: (a) the role of Islamic scholars (given the assumed unity of nature and the Divine - so that everything that happens is seen to be symbolic of God - see About Arabic Thought and Islamic Science); and (b) strict conformity with behaviours prescribed in the Quran. In Japan's case this involves: (a) elite neo-Confucian bureaucracies, who have proved most capable of handling information through educational success, exert power by manipulating information flows and enforcing conformity with behaviours either derived from tradition or from a consensus by social elites (see East Asia in Competing Civilizations).  The 'rituals' involved need not be simply ceremonial, but could involve sophisticated / complex (say) technological or commercially behaviours. While the nature of the 'rituals' by which life should be lived is different, both: (a) reject the notion of social, political and economic change as a result of individual initiative that has been the foundation of Western systems of political economy and progress; and (b) believe that a 'correct' social order is the best way to ensure beneficial outcomes (though as noted above the character of those 'social orders' would be different);
    • thirdly there are parallels between Islamic fatalism and the views expressed by a senior Japanese financial official about the futility of Western societies' characteristic belief in the possibility of 'progress';
    • fourthly there are similarities between the principles that might underpin financial systems that Japanese elites and Islamic bankers might support. Each: involves pre-capitalist traditions; has a problem with gaining profits from pure finance; and seeks to promote 'communitarian' benefits (see Islamic Banking and comments on the differences between Western and East Asian financial systems) [There are also critical incompatibilities between these systems related to: religious versus humanistic goals; whether power would reside in the state or in individuals; the universality (or otherwise) of intended beneficiaries; the attitude to racism; and the role of law and contract]. In developing Islamic Banking and proposals for an Asian Monetary Fund, the proponents would inevitably have become aware of each other's interests;
    • finally, in SE Asia there appears to be some association between countries whose political and economic systems were dislocated by the Asian financial crisis and those in which al Qa'ida reportedly has connections [1].

      The situation of Malaysia in particular seems interesting because it:

      • is widely regarded as providing a model to demonstrate how Islamic societies might become economically successful - and has in fact developed an ideology about how Islam can be associated with modernization [1];
      • has a large ethnic Chinese community who have key economic roles - but have often been subjected to discrimination;
      • has repeatedly emphasized a 'look East' approach in developing policy;
      • inhibited the impact of the Asian financial contagion on its economy by regulating its financial system - which seems likely to have been possible only if substantial foreign exchange reserves were available from somewhere;
      • was in communication with very senior Japanese financial officials during that crisis.

      Moreover its Prime Minister, Mahathir, spoke of:

      • the need for Islamic societies to develop economically in order to defend themselves;
      • opposing Jews who are seen to exert secret control over Western societies;
      • the undoubted fact that Australia (seen as a US ally) does not know everything.
  • while the author is not aware of any evidence of such cooperation or linkages, Osama bin Laden's video calling for jihad in late September 2001 implied - in the context of claiming that Muslim societies have suffered systematic injustice - that the atomic bomb attack on Japan which ended World War II should have been seen as a war crime (see 'This is America, full of fear', The Bulletin, 16/10/01) which is an agenda of Japan's radical nationalists. All similar references seemed to involve 'genuflecting' to groups with whom al Qaeda had been negotiating;
  • radical nationalists in Japan may be facing a very narrow 'window of opportunity' for achieving their long and deeply held goals - for reasons outlined in Section 4 below;
  • if a financial system attack is planned and is linked with the terrorist attack, then other prior or simultaneous terrorist action against the financial system would be almost certain by (say):
    • attacking Reserve Banks (and especially the US Federal reserve) in order to disable their key role in coping with such a financial shock - so that financial losses would be likely to lead to complete failure of the financial system; or
    • release of large numbers of dangerous computer viruses, to cripple business communications.
  • under the primary scenario the attacks on the World Trade Centre etc would best be seen as a diversion - designed to (a) make it very difficult to see the ultimate goal - which would have been very obvious if the US Federal Reserve (say) had been the first to be attacked and (b) ensure that the wrong types of persons would be managing the US response (ie military and Middle Eastern experts, rather than financial and East Asia experts). Perhaps good 'Art of War' tactics! 
    • However it is also noted that 12 aircraft may have been intended to be involved in the September 11 attacks according to one report - of which eight (with presumed-terrorist guest-pilots aboard) were prevented from takeoff by the decision to ground all aircraft (ref? eg ‘Suspicion Aroused on more flights’, Courier Mail, 20/9/01)). If this report is correct, the targets of the eight unsuccessful airliner-bombs are not known (though the following item suggests one way in which other planned targets might be deduced).  
  • the fact that someone appeared to use trading techniques to profit greatly from the terrorist attack (Economist, 'Terror on a shoestring', Australian, 25/9/01) suggests that either the terrorists or some of their associates had sound financial skills. 

Most commentators currently seem to believe that Japan's public, banking and corporate financial position is verging on crisis (see below) - yet no one seems to be drawing the conclusion for America which is open to Asia-literate observers. Bloomberg (and other) articles have recently been drawing attention to the likely withdrawal of Japanese capital from the US - but not to the panic that could occur sometime after 30 September if it is 'discovered' that unfortunately the new international accounting standards that are being adopted to expose losses show (as seems quite possible) that [1, 2]: 

  • virtually all Japan's financial institutions are technically insolvent because of the effect of massive accumulated and previously concealed losses. This situation would be the result of the fact (well known in Japan and East Asia - but to which Western observers tend to be blind) that achieving a paper profit was never the goal of those institutions in the first place.
  • it is beyond the ability of the Japanese Government to bail them out - because of its huge existing debts

Winning Already?

Furthermore there are many reasons that persons holding to a traditional 'East Asian' viewpoint would be able to convince themselves that the USA's (West's) current economic and military strength represents a 'paper tiger' that can't last long, so that (except for reasons like those suggested in Section 4), there would be no need for risky action. Those reasons might include: 

  • the USA (like Australia) has a huge foreign debt - which is balanced by similar foreign asset holdings in North Asia, reflecting the difference between cultural preferences for consumption or savings. While financial systems in (say) Japan and China are plagued by unresolved bad debts, these obligations can never cause real problems because they are to owed to loyal domestic lenders, while the USA's debts are owed to foreigners;
  • the US-dominated global financial system is unstable;
  • financial outcomes are 'rigged' in the US just as in Asia's non-transparent accounting - noting (a) some evidence of distortion of corporate accounts by managements and tame auditors; (b) the role of the IMF / FED in boosting liquidity to protect investors (c) the US's ability to borrow and issue currency more readily than other countries might because US dollars are the world's reserve currency;
  • a great deal of the world's manufacturing has shifted to Asia over the past 20-30 years;  
  • there is vastly less emphasis on institutional capital in the USA (where corporate management and civil services are displaced by the dictates of shareholders and politicians). East Asia relies on the traditions of Confucian bureaucracies involving educated elites who closely study the lessons of history;
  • the West is subject to the dictates of consumers and voters - who express short term selfish goals and have no strategic wisdom; 
  • Western societies are no longer united. For example, in the US the majority have now shifted from reliance on mainstream to 'ethnic' sources of information [1]
  • East Asian human capital would be held to be stronger - because of the emphasis on rote learning (which transmits the wisdom of masters) and the effect of intense educational competition on the overall culture; 
  • Western thinking styles are precise which results in the pursuit of narrow goals in a rational way - where a vague style of thinking is held to be more appropriate to the true complexities of reality. For example, traditional East Asian wisdom is conveyed through ambiguous fortune telling - which provides insights into the dilemmas of life (in the manner of lateral thinking) - as compared with the clear moral precepts derived from Western faith and rationality;
  • 1000 years of history suggest that the strategy to conquer strong foreigners is to serve them - and then be the one, rather than the foreign master, who survives;
  • Western leaders and analysts are unaware of these styles of thinking.  
Other's Views

3.  Other's Views on the Primary Scenario

Reactions have been obtained to the above scenario from persons with varying degrees of expertise including:

  • an ex Asia specialist with Australian Department of Foreign Affair's (who has written extensively on  Confucianism  and been applauded  in Asia for his views) suggested that Japan (like China) is currently likely to be happy to continue to exploit US demand to build their (mercantilist) economic strength for another few years;
  • an International Professor of Political Science at a major US university (with a prior Japan specialization) suggested that the scenario was implausible and that, at present, Japan simply wants to keep out of everyone's way - though he acknowledged the risk of a withdrawal of Japanese capital and the concerns which some observers have about the goals of Japan's current political establishment; 
  • a former finance executive with a chartered accounting background who did an MBA thesis on a comparison of Japan to Australia over the last 50 years - who suggested that "nothing mentioned (was) inconsistent with what I know. On top of which as I have no problem with the thesis that the Japanese banking and insurance system suddenly found to be insolvent as a result of the write down of inter group loans and investments within their keiretsu structures (as a result of newly implemented IMF approved accounting rules) would have to recapitalise by withdrawing huge lines of short term credit extended to both America and Australia, resulting in massive collapses of all types of assets values".

Also Francis Fukuyama's restated views about The End of History can be interpreted as an emphatic rejection of the primary scenario [1]. He suggested that there is now no alternative to Western-style democratic capitalism. However his analysis neglected to mention that Japan (and others in East Asia who have adopted variations on the Japanese economic model) could not succeed economically under the present (US supported) global financial system (as outlined above and in Competing Civilizations). Moreover The End of History seemed to parallel Sakakibara's (Mr Yen's) End of Progressivism  essay in suggesting that the characteristic Western belief in 'progress' (ie meaningful history) might now be at at end because, respectively, (a) democratic capitalism had triumphed; and (b) the complexity of social and environmental challenges now defeated further 'progress'.

Window of Opportunity

4.  Window of Opportunity?

Radical nationalists in Japan MIGHT have seen 2001 as their best and last chance to achieve deeply held goals for Japan to be a 'non-capitalist market economy' (ie one where economic transactions are coordinated by social relations - with the political elites at the top - rather than by money), and being 'Great Japan' with a unique and important role in world affairs, because:

  • Japan's ultra-nationalists have long had aspirations for Japan to be 'No 1'. To be No 1, a strategy could be: to play, with respect to China (who is expected to be a future superpower) something like the role which the New York Jews have played with respect to the USA - ie to be the ones with strategic control of the financial system (though a financial system run differently on 'Asian values'). This role might currently be available to some Japanese elites, but is much less likely to be possible in another 5 years when the abilities of China's own elites have increased in this area; and
  • due to the massive asset bubble that has been created in the US (a bubble which it may be noted was partly funded via the Yen-carry trade using zero-interest credit created in Japan), the US is currently more exposed to a financial collapse than it has ever been in the past, or will ever be again - because the Federal Reserve has apparently realized the problem and has been moving to slowly deflate the bubble without causing disaster;
  • Japan is likely to undergo a large cultural change over the next 5 years as a result of the structural reform which has been devised to meet US and IMF goals. If that reform takes effect then Japan's aspirations about being a non-capitalist market economy  will be steadily eroded - as Japanese people learn-by-doing to behave differently (which is the goal of the structural reforms) and it becomes impossible to restore the traditional practices which give power to the radical nationalists.

It is also noted that:

  • the aspirations of Japan's nationalists to be No 1 were clearly manifest in the 1980s - and frustrated in the 1990s despite which the subject has not really been mentioned and Japan seems content - which suggests that those who have traditionally fermented discontent have a plan; and (again) that
  • Japan's extremists would probably believe that their economy (and China's - being ideally coordinated through social relationships rather than through money) would be able to function effectively through a financial system disaster, whereas most others would not be able to do so;
  • an international framework for a social-relationship-based financial system has been established over recent years through Japan-led developments leading to an Asian Monetary Fund.

However, even if Japan's elites intended that a passive 'attack' would seriously damage the US economy to achieve major strategic economic gains for the cause of a non-capitalist market economy, this does not prove (or even necessarily imply) their association with the terrorist attack.  Furthermore, noting the age-old adage that "the love of money is the root of all evil", there could be virtue in seeking an alternative in which money (a tool) is not treated as a god. 


5.  Responding to the Primary Scenario

If the primary scenario outlined above were real, then appropriate emergency responses could include:

  • ensuring the security of Reserve Banks (especially the US Federal reserve) whose role includes providing liquidity to prevent short term cash flow problems in banking institutions from leading to a banking system failure;
  • an urgent international meeting on the Japanese financial system to find solutions for Japan's financial institutions - and thus prevent any financial 'bomb' from being exploded in America (see notes below).  

These proposals would still leave: Japan with major (and perhaps unmanageable) challenges in dealing with its public debts and banking system losses: America with a financial 'gun at its head';  and everyone with a need to resolve the complex cultural incompatibilities that were outlined in Section 2

Notes: on defusing Japan's 'financial bomb': 

  • Japan's Prime Minister indicated that the US crisis would force a rethink of tough economic restructuring plans (though it would not excuse a delay in making those reforms).  A proposed limit on new debt may have to be reconsidered. Though Japan has huge debts, pursuing fiscal reform could turn recession into depression. The crisis has also allowed Japan to take a more supportive approach to its banks - with a plan now rapidly emerging for a debt reconstruction agency to buy bad debts off the banks (Cornell A. 'Japan forced to rethink reforms', Financial Review, 26/9/01); and
  • President Bush reportedly asked Japan's Prime Minister to concentrate on his country's bad debts (which could amount to half of Japan's GDP) (Cornell A. 'Fix your economy US tells Japan', Financial Review, 27/9/01)
  • Japan's banks and regulators have appeared unable to perceive the level of losses they are facing. For example, 
    • when Mycal Corp, Japan's fourth largest retailer, collapsed with debts of $29.7bn - the biggest default in Japan's history - it had not even been on anyone's doubtful lists. Japan's Financial Services Agency and the government panels charged with cleaning up the decade old financial mess have a myopic approach to such matters (Cornell A. 'Mycal's crash a blunder by banks', Financial Review,  8/10/01)
  • As Japan's government considers again delaying reform of the banking system, credit rating agency Moody's has warned that the banking disaster is now so entrenched that it is beyond the banks themselves to remedy it (Cornell A. 'Japanese financial woes beyond control of banks', Financial Review, 7/11/01)
  • Japanese banks wrote off 3tr yen in the September half year - four times what the market had been expecting (Cornell A. 'Japanese banks wake up to bad loan calamity', Financial review, 27/11/01)
  • Japan's restructuring of the private sector through cutting credit to non-performing companies is likely to further increase Japan's record unemployment. Japan's only solution is to ensure that investment is made in profitable companies (Lunn S. 'It may be time to Japanic', Australian,  8-9/12/01)
  • Japan holds $US403bn foreign exchange - double what it held 7 years ago - and needs to find ways to bring this down or risk losses if $US falls (Mori Y. 'Japan's paradox: too many greenbacks', Financial Review, 13/12/01)
  • The credit ratings of Japan's steel companies have been severely downgraded by international credit rating agencies to speculative grade - though their positions are not as bad as those of Japanese retailers and construction firms. The Mycal case showed that Japan's domestic ratings agencies make large allowances for the value of established business relationships - but that these may not hold together (Cornell A 'rating sound severe alarm for Japan's grants', Financial Review, 10/12/01)
  • Japan's government is facing a $US1tr bailout of its banking sector - or a default could melt-down Asia's financial systems (and be disastrous for Australia). American Enterprise Institute has suggested that Japan's banks have $US1tr negative net worth. The government has apparently set aside much less than could be required. Japan's total public debt might need to increase 15% - which would deflate the yen. Japan's deflation is now a threat to the global economy (Phaceas J. 'Japan warned of $2tn bailout', Australian, 7/1/01)
  • At the World Economic Forum - it was widely admitted that almost all Japanese Banks and many life offices are technically insolvent. The US is nervous because of the $300bn in bonds and Treasury securities that these institutions hold that might be sold in recapitalising them (Gottleibsen R. 'Japan's crisis at centre stage', Australia, 8/2/02)
  • A plan to ease Japan's bank's problems by buying some of their shares has been proposed ('Japan may buy bank's stocks for stability', Australian, 11/2/02)
  • On 1 April 2002, guarantees on bank deposits will expire, leaving investors savings at the mercy of Japan's banks - which have enormous bad debts. 20% of Japan's GDP will be unprotected. Up to half its banks could disappear if left to market forces. 15-20% of loans might be in default, while deflation reduces the profitability of good borrowers. A major economic shock is expected - though some believe that injection of government funds may ease this. If government's official projections are realised, the effects will be bad but manageable. But many worry that the solution will just be a patch-up job because funds provided to bail out the banks are inadequate (Pearson B. Japan: heading for a disaster',  Financial Review,  12/2/02)
  • Major bank failures are expected in Japan in March 2002 (Pearson B. 'Bank fears cast cloud over Japan',  Financial Review,  26/2/02)
  • A rescue of Japanese banks is  likely by seeking injection of private capital is likely to be attempted (according to a Japanese business leader). Government agencies have not been cooperating with recent attempts to solve this problem, because doing so would involve admitting that their own attempts several years ago had failed (Gottleibsen R. 'Japan bank rescue on says Toyota chief',  Australian, 4/3/02) 
  • There is a debate in Japan about changing the way in which its economy works as a 'nation created by ties of blood and the desperate and mostly secret strategies devised in the postwar years to achieve national survival. This, which saw Japan's economy operate like one large family, where individuals were subordinated to national goals, is the opposite of the way economists view an economy. It worked brilliantly for 40 years - but has contradictions (Pearson B. 'Traditions dragging down Japan',  Financial Review,  22/4/02) [Comment: The opportunity for change could well be one that Japan will say 'no' to]
  • reform of Japan's banking system could cripple its recovery. The Japanese government is backtracking from reform - by exempting some accounts from the phase out of deposit insurance. An insurance cap was imposed in April 2002 - and raised the risk of capital flight. About $2.8tr could be unprotected by deposit insurance (Martin N 'Japanese bank rally hangs in the balance',  FR,  6/8/01)
  • Institute of International Monetary Affairs says Japanese banks have written off $120bn in non-performing loans, and have been told to remaining NPLs by 50% by March 2003 - and a further 30% a year later. With high public debts, and near-zero interest rates there is no scope to stimulate the economy. The Reserve bank has a very accommodating policy but money supply is not increasing as banks are not lending. (Chong F 'Painful surgery the only hope for ailing Japan',  A,  23/8/02)
  • Japan may be running out of options in relation to its public sector debt and bad debt problems. Writing off debts would increase unemployment into double figures and slow growth 1-2% (Pearson B 'Japan finally comes to the crunch', FR, 17/9/02)
  • the bank of Japan is to pump trillions of yen into the banking sector (Pearson B. 'Japan prepares rescue operation for troubled banks',  FR,  27/9/02)
  • In Sept 2002, Japanese government ejected those who have slowed reform of its financial system, and gave control to Tanaka with mission to impose shock therapy to rid banks of bad loans - which are seen as either a cause or a consequence of Japan's decade long stagnation and a precondition for recovery. (Pearson B 'Japan braced for shock therapy', FR, 14/10/02 )
  • Japan's new Financial Services and Economics minister is expected to just let firms fail (with massive layoffs) as the only way to resolve Japan's bad loans ('Japan fears zombies', A, 14/10/02)

It appears that the size of the financial 'bomb' that could be exploded in the US financial system was being increased rapidly, noting:

  • Japan is in severe trouble. GDP is shrinking. Unemployment is high. Japan is the world's most indebted country and its current account surplus will disappear next year. Bond yields have failed to follow established theory - and the bond market bubble in Japan is now as dangerous as the equity bubble was in 1989. Spreads between poor and good quality bonds have narrowed. Most surprising however is the currency market where the yen remains strong - despite the tendency for Japanese banks to invest in US treasury bonds. In October, their buying was huge ($80bn). This appears to be based on a passive version of the 'yen carry trade' - ie such foreign assets would strengthen if the yen weakens. Overall foreign holdings of the Japanese banks has grown 42% over the last year (Cornell A. 'Anomalies abound as Japan deteriorates', Financial Review, 19/11/01)
  • Japan's banks must clear the results of 1980s bad debts. Everyone now knows this - but despite record write-offs the volume of bad debts climbed almost 50% last year (Lunn S. 'Japan faces a fate worse than debt', Australian,  27/5/02)

Ultimately the only way to deal with this situation is likely to involve efforts to develop a new global financial system and to accelerate the development of disadvantaged groups worldwide as a key part of the war against terrorism (as suggested in the Competing Civilizations). 

Such steps might, with a huge amount of work, produce good out of evil. 

Alternative Scenarios

6.  Alternative Scenarios 

A second interpretation could be that a 'passive' attack on the financial system could be intended at some future date (eg through being forced to dramatically increase interest rates to slow a by-then rapidly growing economy - a step which could reverse the 'Yen carry trade'). This could create a liquidity crisis that could be catastrophic if reserve banks were simultaneously incapacitated by terrorist attacks - whose linkage to the passive financial attack would be less obvious because the history of terrorist action would have been established.

A third (psychologically implausible) interpretation of the link between a suspected passive financial 'attack' and the 9-1-1 terrorist attack is possible. Could it be that some US or allied interests had anticipated the passive financial 'attack' outlined above and feared it could destroy their economic, military or political positions, and so sought to either render a financial attack impossible or distract attention from financial problems? After all, if this author can see the possibility plainly surely others could do so. 

Aside: There are a large number of conspiracy theories that have emerged in relation to the events of September 11 - from groups with different theories about what happened and why (Hau J. 'Hooked on paranoia',  Financial Review,  27-28/4/02). Many of those theories would be compatible with this second scenario.

A fourth interpretation is that a Japanese 'bomb' in the US financial system might not be intended to be exploded - but to be an ongoing threat to US administrations to provide political influence.

This scenario has emerged (and been added in March 2003) as a result of considering the US administration's strategies for dealing with 'terrorists with weapons of mass destruction' (see The Second Failure of Globalization?). The latter suggests that causing stresses that force others to make global multi-lateral machinery (eg the UN) work (which others would oppose vigorously if the US itself advocated this), may well be the hidden intent of the unilateral action proposed to replace Iraq's regime.  For reasons suggested below, this suggests a plausible scenario under which Japan may be encouraging US administrations to play the role of new Shogun.

A 'New Shogun' Scenario

History: Shogun (ie 'barbarian quelling generalissimo') was the title of the de-facto ruler of Japan from 1192 to 1867. It was first used for military commanders commissioned in the 8th century to suppress Anui tribes in northern Japan. In 1192, after winning military hegemony over Japan, Minamoto Yoritomo was appointed shogun by the Emperor to legitimize his conquests. As the military class acquired increased power, the shogun (whose office was hereditary) became the actual ruler of Japan - although the Emperor retained formal sovereignty. In 1603, after the chaos associated with disintegration of the then shogun's house, the shogunate was re-established by the Tokugawa family. In the 19th century, the shogun's usurpation of Imperial powers was contentious, and the Tokugawa shogan yielded the administration to the Emperor in 1867 (Encyclopaedia Britannica, 1985)

The latter event, the Meiji restoration, was the start of Japan's economic modernization and its acquisition of the 'soul of a merchant' to displace the earlier 'soul of a samurai'.

It needs also to be recognized that Japan's society work on principles that are radically different to those of Western societies (see Asian literacy). In particular, the most powerful are never visible (ie 'the oyabun does not dance on stage'). Power resides with elite bureaucracies who provide nominal 'rulers' (shoguns, emperors, elected politicians) with advice and encourage them to amuse themselves as long as they do not interfere with government.

Indicators that the US administration may now have been encouraged to play the role of Japan's shogun include:

  • the US's 'war against terror' corresponds to the traditional ('barbarian suppressing') role of a shogun;
  • if the 'hidden agenda' of a war to disarm Iraq is to force the global multilateral institutions (eg UN) to be more effective, then the methods that that the US administration is using would correspond to Japanese leadership styles - under which the 'oyabun' creates chaos and it is left to his social subordinates to sort this out. Change in Japan, it has often been noted, always occurs through crisis. The traditional Western leader, by contrast, would seek to define how order could be achieved.
  • likewise if the war in Iraq is a true (dis) information war - and it appears that this could be the base - then it is likely again that the US is gaining advice from Japanese strategists;
  • Japan provided the largest contribution to the cost of the 1991 Gulf War, which would have ensured that its voice was influential. Those and similar payments perhaps allowed the US to be seen in the role of mercenary;
  • Japan will have a huge leverage against the US (encouraging its administration to listen to suggestions) because of the 'bomb' that has been planted within its financial system in the form of (a) the potential insolvency of Japanese financial institutions whose large holdings of US assets would have the potential to collapse the US financial system if they were 'forced' to be sold and (b) the greater ability of East Asia's economic systems to operate independently of an effective financial system; 
  • traditional Japanese ideologies have been presented as a foundation for future US policies (eg a disbelief in further progress / history has been associated with the inevitable global dominance of US ideologies of liberal capitalism and democracy [1], while Japan's highly centralized social hierarchy and Western concepts of a rule of law have been equated in promoting 'high trust' societies). The implications of such arguments for a Japanese audience (ie implying common cause with the US) should also be noted);
  • China's ascendancy poses a huge threat to Japan (because of events in World War II), which can be neutralized if the US administration becomes its shogun for a time;
  • proposals to internationalize Japan's culture were announced in the late 1980s - and 'internationalization' can have several meanings;
  • it appears that Japan's leaders are seeking ways to move Japan back to the 'soul of a samurai' and may be doing so under a US umbrella. For example:
    • Japan has indicated that it might take pre-emptive military action against North Korea if threatened;
    • Japan may acquire missile technology from the US [1];
    • the US has suggested that it might move its forces out of South Korea because the latter does not want them [1] (a move which would increase pressure for increased Japanese military capability).
  • the role of shogun was hereditary;
  • there are indications (Michael Lind, 'Deep in the Heart of Darkness Washington Monthly, 1/2/03) that the tradition southern-confederate character of Texas (which President Bush II, its one-time governor, was said to reflect) was very similar to Queensland in Australia (ie highly conservative, a hierarchical agrarian social order, one-party dictatorship, minimal corporate-friendly state-corporatist government, primitive extractive economy, low wages and low taxes seen as basis for economic advantages, national government seen as enemy). While political and economic influence in Texas from the dark side of Japan is beyond this author's knowledge (and references only to minor oil investments can be located), similar regional characteristics led [based on the author's own observations] to a high level of Japanese investment in Queensland that was (almost-invisibly) facilitated by a Japanese business-man who thus wielded immense political influence in the 1980s, and who appeared to be a front for one of Japan's top-level and ultra-nationalist fixers (a suspected World War II war criminal).
  • the latter individual reportedly was the largest private financial contributor to the UN and financed establishment the US-Japan Foundation in 1980 as a means of influence building (Kaplan and Dubro, Yakuza)
  • Japan is reportedly providing strong diplomatic support to the US in the UN (Sheridan G 'NATO, UN suffer France's mass destruction, Australian,  15-16/3/03)
  • Japan seems to be taking the lead role in organizing the financing and implementation of reconstruction activities following US military efforts (eg in Afghanistan). Handling such practical matters, while the US is a mere 'warrior', would give Japan the real power under Japan's perceptions.

It needs to be emphasized that this scenario is based purely on circumstantial indicators, and a particular interpretation of the 'hidden agenda' of some events.

Furthermore the fact that it is essentially impossible for Japan to succeed economically under the current (US sponsored) global financial system - because as outlined above, Japan's economy is coordinated primarily through social relationships and financial outcomes are of limited relevance - suggests that Japan would not wish a US administration to remain as 'shogun' indefinitely.

A plausible strategy for Japan to achieve its long held vision of being No 1, would involve (a) encouraging the US to pacify the world and suppress potential challengers (b) create in Japan the key practical capabilities that such an empire relies upon and (c) wait for the friction due to the US's role as 'enforcer' to lead to pressure for its removal and (d) inherit the empire. Achieving Peace!

In this third scenario complicity by radical Japanese nationalists in the September 11 events would be conceivable but not likely.

A fifth possible relationship between any planned passive financial 'attack' on the US and the terrorist attack (which is the scenario the author believes most likely) is that it was pure coincidence.  

In this scenario, it can only be said that the terrorists have mounted an attack that should probably go down in history as the least successful of all time, in terms of achieving its presumed objectives. 

Terrorism has a long tradition in history. In revolution it has three main purposes - (a) to radicalize the masses by it provoking those attacked to respond in kind (b) to wear down the will of the existing order and (c) to impose discipline on the masses after the revolution. Bin Laden appears to have miscalculated almost everything. His objective was to radicalize the Islamic masses. But by attacking the US he provoked only anger and resolution - and raised preventing Islamic destruction to the top of US priorities. He was wrong about fighting in Afghanistan - because he failed to note that the Taliban had grown unpopular, and that while the Afghan people have a history of repelling invaders, they will also side with them when convenient. In geopolitical terms he failed to take account of the fact that almost all other major countries had problems with Islamic extremism - and would thus side with the US.  For some weeks it looked as if he might gain support in the Islamic world - but the leaders in those countries saw radical Islam as a threat to themselves. (Rees Mogg W. 'The walls come tumbling down',  Australian,  1-2/12/01)

The terrorist attacks appear to have encouraged many Muslim communities to improve their relationships with the West - because of concern to avoid a real clash of civilizations [1]

This attack handed a massive strategic opportunity to the US in terms of (a) mobilizing its people (b) building an unprecedented international coalition of support (c) allowing economic risks that had built up to be discretely defused and (d) providing a framework in which reform of the global order could both consolidate the position of US-favoured democratic capitalist models, and remove the breeding grounds of terrorism.

Financial Deregulation?

Outline of  Why Japan Cannot Deregulate Its Financial System
Mikuni, Akio, JPRI Working Paper No. 68: June 2000)

Can Japan join the global economy and, if so, at what cost to itself and others (eg US). Japan is a net exporter of both goods and capital - due to historical reasons and bureaucratic imperatives. This has been sustained despite growing market pressure because

  • its governing bureaucracy has an economic policy of maximizing production far in excess of domestic demand. When, production outstrips demand this shows up on national accounts as a current account surplus. Japan's producers and financiers base decisions not on profit maximization but on their roles in this national policy. In turn, their viability is guaranteed by government - and all business transactions are ultimately carried for the government.
  • Japan's manufacturers can sell the dollar proceeds of their exports to their financiers for yen. But authorities ensure that financial institutions do not have to sell their dollar holdings for yen. As long as the dollar proceeds of Japan's exports are held in Japanese entities, the exchange rate is prevented from rising to destroy export competitiveness. Meanwhile, exporters pay workers / suppliers in yen while continuing unlimited expansion of production.

The yen/dollar exchange rate at 100 yen per dollar is too strong in light of a purchasing power parity (around 160 to 180). But given Japan's chronic current account surplus and net creditor position (133 tr in 1998) it is too low. Meanwhile, total indebtedness of Japan's governments has doubled from 60 to 120 percent of GDP. Yet Japan has very low interest rates on the bonds that finance this.

To understand low interest rates despite high fiscal deficits and weak currency despite trade surpluses,  it is necessary to explain how Japan's political economy functions. As the economic system does not rest on profitability or efficiency as defined by Western economists, it cannot allow profit-seeking players into its economy. Japanese producers and financiers know that market forces are controlled by the bureaucracy in their favor. Government socializes credit risk and market risks to provide friendly managerial environments. This requires isolating the domestic economy from outside forces (an unstated goal of Japan's policy makers). However it creates a big public relations problem.

Now foreigners are allowed into limited and much-hyped areas of the economy (eg luxuries such as coffee, hamburgers, and handbags, or troubled firms like Nissan and failed banks). But real foreign participation is not compatible with bureaucratic control, and is covertly resisted.

In Western countries limits to a bank's lending capacity are set by the availability of deposits and the interbank and capital markets. In Japan, banks create deposits by allocating loans to accommodate the funding requirements of borrowers. They do not wait for deposits to accumulate before lending. The Bank of Japan (BOJ) provides them with any liquidity needed to bridge the asset/liability gap. This is why in Japan banks (not capital markets) provide most external corporate financing. The Provisional Law on the Control of Interest exempts banks from anti-trust law. And most household savings take the form of bank deposits. This system separates borrowers' profitability from returns to savers. Savers and borrowers cannot be allowed to compete for higher returns or lower borrowing costs. They accept whatever is offered. Profitable borrowers are not allowed to grow faster than unprofitable ones.

Markets exist in Japan, but only to create the illusion that Japan is a market economy. In actual fact, most markets are tightly controlled by monetary authorities and the financial institutions they control. Thus, financial markets involve small easily-manipulated floats. And withholding taxes and inefficient and risky delivery and settlement systems, discourage outside participation.

Aggregate capital spending is decided by government (eg MITI). Each key industry started life as a consortium led by MITI, thus freeing lenders from credit risk. When capacity expansion plans are completed, domestic demand is inadequate to ensure full capacity utilization - because expansion was undertaken without regard for demand. Thus external markets are vital to full capacity utilization.

Capital outlays and the trade surplus account for large and stable proportions of GDP. Exports and capital spending drove the Japanese economy; export earnings led to capital spending which led to more exports. Domestic demand played no essential role in this cycle.

The Japanese government has often been confused when western counterparts demand an easing of domestic credit to reduce the current account surplus. That makes sense where easier credit results in higher consumer spending and higher imports. But in Japan, extra credit simply goes to export manufacturers and their financiers, thus increasing exports. Government officials do not explain to foreigners how the Japanese system works. Instead, they cave into foreign pressures - so Japan amassed an enormous net creditor position.

Japan's elite knows that a strong dollar is essential in prevent challenges to its power to determine economic outcomes. It is now threatened by Japan's current account surpluses. As Japan learned in World War I and the Korean War, large current account surpluses can pose problems. If not spent on imports (threatening domestic producers), or converted into yen (threatening export competitiveness by producing a stronger currency), they must be held as foreign currency. However, allocating domestic money to hold foreign assets subjects the economy to deflationary pressures.

In the prewar period and during the two decades after WWII, imports of advanced capital goods helped reduce the trade surplus. Since 1970, Japan has produced most capital goods for itself. And , the largest deficit nation, the US, produces nothing Japan needs in sufficient quantities to reverse the trade imbalance. Thus, Japan has had trade surpluses with the U.S. for 30 years. Most of these have been invested in dollar instruments that produce income to expand current account surpluses even faster. The U.S. and other Asian countries are now dependent on Japanese components, so any rise in global economic activity increases demand for Japanese goods. Any reduction in Japan's current account surplus would lead to a sharp / catastrophic rise in the yen's value.

When the floating exchange regime began in 1973, it was hope that a stronger yen would reduce trade imbalances. But with the US unwilling or unable to shrink its deficits, trade imbalances can only be reduced if surplus countries take the initiative. Japan would have to close factories and lay off workers ie end its policy of maximizing production. Such steps are politically impossible. In the early 1990s committees sponsored by the MOF and MITI recommended that exchange rates not be used to reduce payment imbalances, and that Japan should continue to accumulate net claims on the rest of the world - as capital for a capital-hungry world.

The strong dollar policy announced by Rubin in 1995 was a tacit acceptance of the Japanese position. Joint interventions to reduce the yen and strengthen the dollar in August 1995 cemented the policy. This has brought the global financial system into uncharted territory, with the US -- the largest economy and provider of the closest thing to a universal currency-- running a large current account deficit that  will not shrink under any economic scenario except for a sharp and catastrophic US recession.

Given Japan's willingness to hold its surpluses in dollars, the US can experience a "deficit without tears".  Since Japan's dollar holdings remain in the U.S. banking system, they continue to provide the US with credit to enable it to grow and expand the deficit yet further. Imports of goods help stabilize prices while higher growth rates in consumer spending provide more sales and revenues, resulting in higher profits. Higher current account deficits by definition suck capital into the United States, thus automatically creating more credit to fuel the stock market.

In theory, these imbalances will continue forever. But to recycle those surpluses instead of converting them into yen or into imports, Japan must fund them. Unless the Bank of Japan can create credit to fund the growing external assets position, Japan will be faced with the choice of a tightening monetary regime as more domestic money is drained into funding the external position, or converting some of the external assets to yen. As there is virtually no supply of yen outside Japan, the yen/dollar rate would soar, making it impossible for Japanese companies to export.

In the 1980s, the government promoted "excessive" lending by banks to fund Japan's external asset position. As deposits in Japan are a function of the volume of loans, not the reverse - a huge bubble in bank lending was possible because the authorities engineered a concomitant real estate bubble. As banks lend on the basis of collateral not cash flow, astronomical real estate prices allowed lending far in excess of underlying economic activities. Landowners sold their properties at bubble prices. As such people are wealthy they did not spend their funds but kept them as immobile deposits, which the banks used to help fund the permanent external assets.

At the end of the bubble in the early 1990s and the end of the government's ability to prop up real estate prices, Japan has had to use massive public works spending to stimulate the stagnant economy and to create the deposits needed to fund its external position. Efficient investment in public works would have translated into increased wages and stimulated the economy. But this would not provide the purposeless and immobile deposits needed to fund the external assets. Thus the government spent construction funds inefficiently, including transfers to construction companies that they could not spend at once and kept as bank deposits. These deposits were used to fund the external position. However, just as it turned out to be impossible to engineer infinite increases in real estate prices, the government now seems to be bumping up against limits in its ability to flood the economy with fiscal spending.

If the day comes when the government can no longer sustain fiscal deficits (eg if the Government Bond market collapses, bringing on a sharp and catastrophic rise in interest rates) the bureaucracy will be unable to support all those dependent on it. Following the collapse of bureaucratic control, the socialization of market and credit risk will end, followed by wide price fluctuations and a wave of corporate bankruptcies. This will lead to the reduction or reversal of Japan's current account surplus and the US economic expansion it helps finance. This will signal Japan's integration with the global economy - but the price for Tokyo and Washington will be high.