Japan

Have you ever looked up and wondered where the time went? One moment you’re living your life, and the next moment you realize that you’ve just lost time that you’ll never get back? That’s what happened to Japan’s economy at the turn of the century in an episode that’s known as ‘the lost decades’. It was a period of slow or null economic growth. Economists differ with their explanations. One cause was the prevalence of ‘zombie firms’.

Japan’s Economy

Japan had a current account surplus from 1980-2020, which means that they had more savings than they effectively utilized domestically. Metaphorically, they were so full of savings that they exhausted productive domestic investment opportunities and their savings spilled out into other counties in the form of foreign investments. This was driven by high household savings and slow growth in domestic investment demand. The result was the Japanese firms had easy access to credit. Maybe a little too easy…

Private corporate debt ballooned throughout the 1980s. That’s not intrinsically a problem. In the 1990s, households began saving somewhat less, and most firms began to drastically deleverage… But not all firms. The net effect of the mass deleveraging was that interest rates fell. The firms that remained in debt were the ones that risked insolvency. Less productive firms had slim profits and their Earnings Before Interest, Taxes, Depreciation, and amortization (EBITDA) was slim. So slim, that they couldn’t pay their debts. Faced with the prospect of insolvency, firms did what was sensible. They refinanced at the lower interest rates. Firms went to their banks and to bond markets and rolled over their debt, which they couldn’t afford, and replaced it with debt that had a lower interest rate. This occurred across industries, but especially in non-tradable goods and services that were insulated from international competition. Crisis averted.

Except this process of refinancing, while avoiding acute defaults and a potential financial crises, ensured that the less productive firms would survive. Not exactly failing and not exactly thriving, they could sort of just hold on to something that looks like life. Well, high debt and low profits aren’t much of a life for a firm. It’s more like being undead – like a zombie. Between 1991 and 1996, the share of non-finance firm assets held by zombie firms ballooned from 3% to 16%. The run-up differed by industry: Manufacturing zombie assets rose from 2% to 12%, from 5% to 33% in real estate, and from 11% to 39% in services. These zombie firms linger on, tying up valuable resources with low-productivity activities and drag on the economy.

China’s Economy

I’m not prone to China hysteria generally. However, I do have uncertainty about the plans and actions of the Chinese government because I don’t know that domestic economic welfare is its priority. That makes forecasting more political and less economic and outside my expertise. Regardless, the Chinese economy is a constraint on the government, whether they like it or not. And there are some echoes of the Japanese economy’s lost decades.

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This is the first of a series of occasional posts on observations of how some individual initiatives made strategic impacts on World War II. Most major decisions were made by teams of qualified engineers or military staff or whatever. But there were cases where one person’s visionary action made a material difference. There were, of course, many thousands of individual acts of initiative and heroism that went into the outcome of any given battle. However, I will focus on actions that shifted the entire capabilities of their side.

In this regard, I recently read how the intervention of President Roosevelt helped to give the U.S. nine additional aircraft carriers in the Pacific at a time when they were critically needed. As of U.S. entry into WWII in December, 1941, America had a total of 7 carriers, while Japan had 11.

It had been clear for a while that the U.S. needed more carriers, but (pre-Pearl Harbor), the Navy was more focused on building battleships; for centuries, big ships carrying big cannons were the vessels that ruled the seas. Navy brass had run studies of carrier sizing, and decided they would rather have fewer, larger carriers, due to operational efficiencies. A problem was these large carriers took years to construct.

Thus, as of 1940 the projections were that the U.S. Navy would receive no new carriers before 1944. As a naval war with Japan looked more and more likely, the President got concerned. FDR had been Assistant Secretary of the Navy during World War I, and maintained an interest in naval affairs, so he had informed judgement here. In October, 1940, Roosevelt sent a letter to the Chief of Naval Operations, expressing interest in converting merchant ships into carriers for secondary duties such as convoy escort, antisubmarine warfare, aircraft transport, and air support of landing beaches. The Navy’s response was lukewarm. In 1941, FDR proposed that some of the many cruisers under construction could be converted to small carriers. The Navy considered this, and on 13 October 1941, the General Board of the United States Navy replied that such a conversion showed too many compromises to be effective: such carriers would be less stable platforms than the big carriers, and carry less than half the number of planes per ship.

I think most presidents would have given up at this point, but not FDR. He immediately ordered another study (I assume with the implicit message, “…and this time give the boss the answer he wants”). Lo and behold, on 25 October 1941, the Navy’s Bureau of Ships reported that aircraft carriers could in fact be converted from cruiser hulls. They would be of lesser capability, but fast enough for fleet action, and available much sooner than large carriers.

The December 7, 1941 attack on Pearl Harbor changed everything. That ninety-minute raid showed that aircraft carriers were by far the most critical warships. A carrier could reach out a hundred miles and easily sink any battleship with torpedo bombers, as Japan showed on that “day of infamy” and further demonstrated by sinking British battleships near Singapore, and chasing the British navy largely out of both the Pacific and the eastern Indian Oceans. (If the brass had been paying attention, the British Navy had already used carrier-based torpedo bombers to cripple battleships at the Taranto raid and with sinking the Bismarck, well before Pearl Harbor).

The U.S. did end up converting some (slow) merchant ships to carriers, and built a huge number of small, slow, fragile “escort” carriers for transporting planes and for shore bombardment. But there was still an immediate need for better-protected small “fleet” carriers which were fast enough to keep up with the big carriers and which could survive being hit by a bomb. Japanese leaders knew they could not prevail in a long drawn-out war, so their strategy was to inflict so much damage on American military and territorial assets in the first year of conflict that the U.S. would sue for peace under Japanese terms. Japan, like Germany, was very successful at first. The Japanese overran nearly all of Southeast Asia, including the Philippines (an American possession), the Dutch East Indies (a source of rubber, petroleum, and minerals) and the British stronghold at Singapore. They came perilously close to invading Australia. So the first year or so was critical: the Allies needed to survive the onslaught from a better-prepared opponent until American mobilization took full effect.

The Navy settled on repurposing a suite of nine Cleveland class light cruisers which were under construction. These new “light carriers” could carry about 30 planes apiece, compared to a complement of around 60 planes on the full-sized ships. The smaller carriers carried fewer spares, rolled more in heavy seas, and had smaller flight decks which led to more accidents. Nevertheless, they provided a boost to U.S. naval air power at a critical time.

The U.S. entered the war with seven fleet carriers, of which six were assigned to the Pacific. In the course of 1942, four of those six fleet carriers were sunk, and the other two were severely damaged from bombs and torpedoes. Thus, there was a time in October, 1942 that the U.S. had not a single operational carrier in the Pacific, while Japan was fielding around six. That was dire.

No new U.S. carriers were commissioned until the last day of 1942 (U.S.S. Essex). That was a long dry spell. Finally, in the first six months of 1943 eight fleet carriers commissioned. Of these, three were full-sized ships, while five were the cruiser-based light carriers. That finally gave the U.S. some breathing room, which allowed it to defend its assets and pursue offensive operations. These “Independence-class” light carriers fought in many battles, sometimes providing around a quarter of the fleet airpower.

Thereafter, the astonishing mid-century American industrial capacity took over. From mid-1943 through mid-1945 another 17 fleet carriers (including four more Independence-class light carriers in the second half of 1943) poured out of U.S. shipyards, along with some 60 “escort” carriers. By late 1944, this gigantic fleet had utterly overwhelmed Japan’s navy.

But it was largely Roosevelt’s vision and repeated poking of the stodgy Navy staff that produced the first batch of light carriers which helped tipped the balance of forces during the critical first eighteen months of the war.