30 August 2005

Japan as a policy model.

Liberal policy makers look to Europe for insight on issues like the viability of universal health care, the workability of ending the death penalty and reducing the rate at which we imprison people, the benefits and costs of high speed rail networks and high gas taxes, and a great many other issues. But, they far less frequently look to Japan as a model. Why? Because Japan is so dramatically culturally different from the United States that it is hard to assess if a policy that works in Japan would also work in the Untied States.

A recent article in the Denver Post on Japanese saving and borrowing habits shows the extent of those differences in the world of personal finance:

The Bank of Japan says Japanese have $13 trillion in assets - 55 percent of it in cash and savings, and only 9 percent in stocks. Of Americans' $36.5 trillion assets, only 13 percent is in cash and savings, and 34 percent in stocks.

Another notable statistic: America has twice as many people as Japan but 23 times as much credit-card debt - more than $800 billion.

For decades, credit-card companies have tried to woo Japanese with little luck. A recent study by JCB International Co. Ltd. found only about 8 percent of transactions here involved credit cards, with the rest carried out in cash. . . .

A recent survey of credit-card holders by Japan's top business daily, Nihon Keizai Shimbun, showed 46 percent of the respondents were seriously considering getting rid of their cards, reducing the number of cards they have or using cards less frequently . . .

Japanese also almost never use checks. They have their rent, utilities and other monthly bills automatically deducted from their bank accounts, and such transactions require no extra fees.

Many Japanese keep their savings in a combination of postal accounts and currency under the mattress, rather than American style commercial banks.

The article goes on to note that personal and small business loans are hard to get, and often carry high interest rates, despite government debt interest rates of nearly zero percent, that there is a high stigma involved in failing to pay loans as agreed (often even resulting in suicide), and that there are few tax incentives for debt (unlike the United States with its mortgage interest deduction).

In contrast, in the United States any cash transaction over $10,000 automatically triggers a report to the government, and people look at you funny if you use a bill larger than a twenty. Most U.S. $100 bills are used abroad. Almost all members of the American middle class have student loans and mortgages at some point, and virtually everyone owns credit cards, even if they don't always carry balances from month to month. The United States operates on a much higher risk basis with very little cash.

Employment arrangements are also very different. The normative employment arrangement in the United States is employment at will (with most worker's working for multiple companies in a lifetime) with the vast majority of middle and working class income coming in the form of regular wages and salaries rather than bonuses. In contrast, the normative employment arrangement in Japan is lifetime employment (basically tenure without layoffs except for the most dire situations), but with a large portion of annual compensation paid in the form of an annual bonus paid only to the extent that the corporation can afford it. The Japanese largely live within their modest salaries and use their bonuses for major purchases.

Neither economy always follows the norm. Not all Japanese workers have lifetime employment, and not all Americans are employees at will or lack a major bonus component in their compensation. There are people in Japan with personal loans and credit cards. There are people in the United States who live on a strictly cash basis. But, the norms, and the averages, are very different, and this makes it hard to take policies that may work in Japan and apply them to the United States.

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