In January 1989, a far-right Tokyo lawmaker and Sony's CEO published a book in Japanese, sold to a Japanese readership. The Pentagon translated it without permission, bootlegged it, and pushed it into the US Congress. Eleven months later, the Nikkei hit its peak of 38,915.87 - then collapsed. Thirty-five years later, Japan's GDP had fallen from 54% of America's to 14%. Beijing rereads every page - not to follow it, but to know exactly what to do in reverse.
Scope: This piece continues "Trade War - Who Killed the American Factory?" but shifts the vantage point: to the challenger's side. History has three episodes of a nation that "almost overtook America" or genuinely did: America overtook Britain (~1872 by GDP, ~1890 by industrial output), Japan almost overtook America (peaking in 1989), and China is now trying (its ratio peaked at 70% in 2020 and has been falling since). Each is its own story - but they share the same structure.
Note: This piece does not predict that "China will escape" or "China will collapse." The goal is to dissect why Beijing reacts differently than Tokyo did - and the cost of that choice.
Three Near-Misses - One Common Denominator
America overtook Britain in industrial output in 1890. But the dollar didn't overtake the pound as the world's reserve currency until 1955 - 65 years later. This is the most important gap that almost nobody notices: overtaking in production is not the same as overtaking in currency. Japan in 1989 achieved the first (8 of the world's 10 largest banks were Japanese) but never achieved the second. China in 2024 is in the same position - and that's exactly what Beijing wants to fix.
"Japan That Can Say No" - The Bomb the Pentagon Bootleg-Translated
と言える
日本
A collection of essays written independently by the two authors. Printed in Japanese, for a Japanese readership - with no intention of an English release. It was only because the Pentagon's Foreign Technology Division commissioned an unauthorized translation, uncredited and unlicensed. Photocopies spread through the US Congress, and Senator Jesse Helms read from it into the Congressional Record. By the time the official English edition appeared (Simon & Schuster, 1991), Morita had withdrawn his entire chapter - leaving only Ishihara's.
Why did the Pentagon panic? Because the book said things no American general wanted to hear - about America's dependence on Japanese chips, and about Tokyo's ability to say no.
Three bombshells in the book
"If Japan sold semiconductors to the Soviet Union and stopped selling to the United States, the entire military balance would be overturned."
Ishihara specifically claimed that the accuracy of America's MX ICBM warheads depended on Japanese 1-megabit DRAM chips. This was the line that panicked the Pentagon most. In 1988, Japan held ~51% of the world DRAM market; the US share had fallen from 70% (1978) to ~37%.
"The root of the US–Japan friction is racial prejudice. Americans simply cannot stand the Japanese - an Asian people that refuses to be inferior."
Ishihara pushed the argument from economics up to civilization. This was something Morita would never put his name to - and why the official English edition kept only Ishihara's chapters.
"Without newly manufactured chips from Japan, America's military edge cannot continue. If Tokyo tells Washington it will stop selling chips, the Pentagon is completely powerless."
This wasn't framed as a threat - Ishihara described it as an existing fact. US officials who read it called each other in a panic. SEMATECH (the US chip consortium, founded 1987) received an immediate infusion of political funding afterward.
Morita, Sony's CEO, had just bought Columbia Pictures for $3.4B (late 1989). He sold electronics to Americans, bought an American movie studio, and depended on the American market. His chapters criticized American management: quarterly-report worship, lawyer-driven culture, short-termist MBA thinking - business-school stuff. Ishihara's chapters criticized American civilization itself - and threatened to cut off chips. Same cover, different planet. Morita realized the English edition would kill Sony in America - so he withdrew.
1989 - The Moment Japan "Almost" Overtook America
The book wasn't baseless bravado. In 1989, every indicator suggested Japan really was about to overtake America. To capture Tokyo's sense of being "unstoppable" at the time:
The bestselling book by a Harvard sociology professor argued that the Japanese model (lifetime employment, MITI, keiretsu) was superior to the American one. Herman Kahn forecast Japan would overtake US GDP before 2000. Every prominent expert believed Japan would overtake America. This was the atmosphere in which Ishihara wrote his book.
By the late 1980s, Tokyo had bought up every symbol of America: Sony bought Columbia Pictures (1989, $3.4B), Mitsubishi Estate bought Rockefeller Center (1989, $1.4B), Bridgestone bought Firestone, Matsushita bought MCA/Universal (1990). American magazines ran covers reading "Japan Invades Hollywood." The film Rising Sun (1993) cast Japan as the new enemy after the Soviet Union.
This is the mood Ishihara felt as he wrote: nothing could stop Japan. But the crest of the wave - as Hyman Minsky pointed out - is exactly the moment right before the break. Ishihara finished the book in January 1989. The Nikkei peaked in December 1989. Eleven months after the book's release, the party was over.
The Reversal in 36 Months - From Peak to Abyss
The Plaza Accord (September 22, 1985) had planted the mine four years earlier. To cushion the shock of the yen's rise (240 → 120 over two years), the Bank of Japan cut rates from 5% → 2.5%. Cheap money, rising land, rising stocks - a pure bubble. By mid-1989, the BOJ panicked and reversed course - and reversed far too hard.
September 22, 1985, the Plaza Hotel, NYC. Japan, Germany, France, and the UK sign with the US: devalue the dollar, revalue the yen and mark. Yen: 240 → 120 yen/USD over 24 months. Japanese goods become twice as expensive. To offset it, the BOJ cuts rates - and a bubble follows.
Ishihara & Morita - Kobunsha. Japan Inc. at peak confidence. It sells 1 million copies in Japan within months. The Pentagon bootleg-translates it mid-year.
Governor Yasushi Mieno raises rates five times in succession from 5/1989 → 8/1990. The stated goal: pop the bubble. The unspoken reason: US pressure on Japan to restrain itself.
December 29, 1989, the year's final trading session. The total value of Japan's real estate market is ≈ 4x that of the US real estate market. Ishihara's book is still selling briskly. No one believes a collapse is coming.
1990: the Nikkei loses 39%. By 1992: 14,309 - down 63% over 30 months. An estimated $10–15T in wealth evaporates (≈ 2–3x Japan's GDP). Banks are left holding ¥100T+ in bad debt.
The BOJ and Ministry of Finance choose not to force debt write-offs. Zombie banks keep zombie companies alive for 30 years. Richard Koo calls it a "balance sheet recession." Nominal GDP in 2023 is barely higher than in 1995.
On February 22, 2024, the Nikkei touches 39,098 - clearing the 38,915 mark after 34 years and 2 months. Over the same span, the S&P 500 rises from ~350 to ~5,000 (~13x). Japan's DRAM share falls from 51% (1988) to under 10% by 2010, as South Korea's Samsung and Hynix take over. Japan/US GDP ratio: 54% (1989) → 14.6% (2024).
Japan didn't just lose a financial battle - Japan lost to its own book. The book said: "Japan holds the chip card - it can say no." The reality: 20 years later, Japan lost its chip leverage for good. The lesson for Xi Jinping: never grow complacent before genuine independence is secured. This is why China is spending $150B+ on "Made in China 2025" - not to show off, but so it never actually has to say no in name only.
America Once "Almost Overtook" Too - And Actually Did
A century before Japan, another nation also "almost overtook" - and then genuinely did: America overtook Britain. This is the only case study in history where the challenger truly seized the crown. Understanding how America overtook the UK is understanding why Japan failed and why China is now walking a third path.
Per the Maddison Project Database. Britain remains the dominant financial, naval, and colonial power. British newspapers don't even mention it. Per-capita, Britain still leads America until ~1905.
US pig iron 9.3M tons vs the UK's 8.0M. Ten years later (1900): US steel output of 10.4M tons exceeds Britain and Germany combined. By 1913: the US holds 32% of world manufacturing, Britain only 14% (Bairoch).
27 million visitors (≈40% of the US population). Tesla's AC lighting dwarfs London's gaslight. Henry Adams writes that the fair "asked a new question of the universe." This is the moment soft power visibly shifts from London to America.
16 US battleships circumnavigate the globe (12/1907 → 02/1909). Theodore Roosevelt's public message: America is now a world naval power. Britain's response… a dreadnought race with Germany, ignoring the Pacific implication.
Churchill (Chancellor of the Exchequer) returns Britain to the gold standard at the pre-WWI rate of $4.86. Keynes writes The Economic Consequences of Mr. Churchill (1925) - the pound is overvalued by ~10–15%. The blow lands on an already-weakened British manufacturing base.
America's Harry Dexter White defeats Britain's Keynes. Keynes's "bancor" plan is dropped. The dollar becomes the official reserve currency. But the pound still holds ~55% of world reserves in 1947.
After the 1956 Suez Crisis (America forces Britain to withdraw its troops from the canal), the pound loses its last shred of credibility. The dollar becomes reserve currency #1. The gap between "overtaking in production" (1890) and "overtaking in currency" (1955) is 65 years - a number China is quietly calculating.
America overtook the UK using the exact playbook China is using now
Average import tariffs of 35–50% throughout 1816–1913. Morrill (1861), McKinley (1890, ~48%), Dingley (1897, ~52%) - the highest in the developed world. Higher than the tariffs Trump imposed on China.
Samuel Slater (1789): memorized Arkwright's blueprints and fled Britain. Francis Cabot Lowell (1810–12): copied Cartwright's Manchester power loom. The US did not recognize foreign copyrights until the Chace Act of 1891.
Pacific Railway Acts (1862, 1864): granted railroads 175 million acres of land plus $64M in bonds. Morrill Land-Grant Acts (1862, 1890): built the public university system - MIT, Cornell, Berkeley.
US savings rate ~18–20% of GDP in 1900. 1.75 million children under 16 were working (US Census 1900). The Lochner-era courts (1905–37) struck down hours and minimum-wage laws. The Homestead strike (1892) and the Pullman strike (1894) were crushed by federal troops.
The Cambridge economist calls this "kicking away the ladder." Every superpower climbs up through protectionism, technology theft, and labor suppression - then forbids everyone else from doing the same. Britain only embraced free trade after 50 years of manufacturing dominance. America only embraced free trade after overtaking Britain. Now America forbids China from doing it. Same script, different actors.
Three Challengers - Three Stories
- Overtook in production in 1890, but did not directly challenge the pound
- Waited for two world wars to bleed Britain dry - America was the creditor ($4.7B WWI debt)
- Strategy: avoid war, wait for Britain to exhaust itself
- Bretton Woods 1944: it was Britain that came asking for the new system
- Ishihara's book: "Japan can say no" - openly exposing its ambition
- A US protectorate - 50K US troops stationed on its soil, no nuclear weapons
- Forced into signing the Plaza Accord in 1985 → the yen doubles → bubble → bust
- Nowhere else to run - had to obey Washington
- Peak GDP/US ratio in 2020: 70% - higher than Japan ever reached
- Nuclear weapons, a P5 veto, no US troops on its soil, 17.6% of the world's population
- Refuses to free-float the yuan - keeps it tightly managed at 6.0–7.3 USD/CNY
- Internal slogan: 不重蹈日本覆辙 (do not repeat Japan's tragedy)
The Race to Catch America - Three Trajectories
On the same axis: the ratio of challenger GDP to US GDP. America vs. Britain: a steady climb, overtaking, seizing the crown. Japan vs. America: a steep climb, a 1989 peak, then collapse - never recovered. China: the fastest climb, peaking at 70% in 2020, now declining.
The blue line (US vs UK) is the only case study of a challenger crossing the parity line. Japan touched 54% then reversed. China touched 70% - higher than Japan ever did - and is now reversing too. The hundred-billion-dollar question: is China turning into a "Japanified" case, or building up for its next push past the peak?
Comparison Table - US 1900 vs Japan 1989 vs China 2024
Plaza Accord - The Ghost Beijing Fears Every Night
The most important economic event of the 20th century for China's policy today is not the collapse of the Soviet Union, not the 2008 crisis - it's the evening of September 22, 1985 at the Plaza Hotel in New York. The finance ministers of five nations (the US, Japan, Germany, France, and the UK) signed an agreement: devalue the dollar, revalue the yen and mark. Over 24 months, the yen moved from 240 to 120 per dollar. Japanese goods became twice as expensive overnight.
• US protectorate: 50,000 US troops stationed in Japan (Okinawa, Yokosuka). No independent nuclear arsenal. National security dependent on Washington.
• Anti-Soviet ally: 1985 - the Cold War hadn't ended. Japan was the front line. Defying America meant helping the Soviets.
• A democracy under media scrutiny: PM Nakasone couldn't openly defy Reagan. Yasuhiro Nakasone & James Baker had a personal relationship.
• America was its main export market: who did Japan sell chips and cars to? America. Losing America meant economic death.
• Nuclear weapons + P5 veto: China doesn't need American protection. It can threaten Taiwan, the South China Sea, and the Suez Canal militarily. The US cannot "pressure" it the way it pressured Japan.
• Not an ally: China is an officially designated strategic competitor (US National Defense Strategy 2022). There's no alliance obligation to trade away.
• One party - able to endure pain longer: Xi can tolerate a decade of 2% growth without being removed. Japan faced electoral pressure every four years.
• Alternative markets: the BRI (~$1T), an expanding BRICS+ (Iran, UAE, Egypt, Ethiopia in 2024), ASEAN, Africa. America is no longer the only customer.
Roughly translated: "Do not repeat Japan's tragedy." The phrase appears in speeches by Liu He (former Vice Premier, who led trade negotiations with the US during Trump's first term), in CASS reports, and in internal documents on yuan management. This isn't a propaganda slogan - it is the real guiding principle of China's monetary policy. The only reason China hasn't floated the yuan, hasn't fully opened its capital account, and hasn't signed any exchange-rate agreement is that the 1985 Plaza Accord is the wound Japan left on Beijing's policy memory.
Historical Irony - Chips in 1989 vs Chips in 2024
This is the best detail in the entire story. In 1989, Ishihara wrote: "The Pentagon is completely powerless if Tokyo says it will stop selling chips." In 2024, the roles have reversed 180 degrees - and Beijing now sits exactly where Tokyo once implied America stood.
| Aspect | 🇯🇵 1989 - Japan's threat | 🇺🇸 2024 - America's action |
|---|---|---|
| Chip weapon | Ishihara: "stop selling 1MB chips to the US → ICBMs lose accuracy" | BIS export controls, 10/7/2022: bans Nvidia A100/H100, EUV (ASML), and US persons at Chinese fabs. Expanded 10/17/2023 to close the A800/H800 workaround. |
| Memory chip market share | Japan ~51% of world DRAM (1988). NEC, Hitachi, Toshiba hold the top 3 spots. | South Korea 70%+ of DRAM (Samsung, SK Hynix). Japan <10%. China ~5% (mainly YMTC, currently under siege). |
| Advanced equipment | Japan + the US dominated wafer fab equipment | ASML (Netherlands) holds an EUV monopoly. Japan (TEL, Tokyo Electron) ~30% of etch + deposition. The Netherlands sides with the US to block China - 2023. |
| Leading-edge chips | Toshiba's 1MB DRAM = the Japanese state + Pentagon intelligence | TSMC holds a monopoly on 3nm. Apple, Nvidia, and AMD all depend on it. TSMC has a plant in Arizona, but its most advanced node stays in Hsinchu. |
| SMIC's surprise 7nm | - | Huawei Mate 60 Pro · 8/2023: the Kirin 9000S chip, made by SMIC on 7nm DUV multi-patterning. Yield ~50% (costly), but it proves export controls are leaking. |
In 1989, Tokyo believed it held the "chip card" to bargain with America. In 2024, Beijing discovers that it is now playing America's old role - with the leading-edge chip supply controlled by its rival, powerless against export controls. The one difference: America in '89 still had SEMATECH, Texas Instruments, and Intel to fight back with. China in '24 is building from scratch - Made in China 2025, $150B+ poured into the chip sector, SMIC, YMTC, CXMT. The question isn't "will China escape" - it's "how long will it take."
The Three-Sided Trap - Why China Struggles to Become the New America
Michael Pettis (finance professor at Peking University, 25 years in Beijing) offers the sharpest framework: China sits in the middle of an impossible triangle - unable to solve all three problems at once.
Chinese households consume only ~37% of GDP (vs. 68% in the US). Raising consumption requires transferring wealth from SOEs and local governments to households. That's a political reform - one that touches the CCP's own power.
China's exports of ~$3.5T (2024) ≈ 14% of world exports. The EU's CBAM, a threatened 60% US tariff (Trump 2.0), and Mexico/Vietnam clamping down on transshipment. The export ceiling has already been hit.
The IIF estimates that floating the yuan would trigger $1T+ in capital flight. Xi tightened capital controls in 2016 after a $1T outflow. Opening the capital account means losing both political and monetary control.
Pettis's forecast: China will not collapse like the Soviet Union, nor break like the 2008 crisis - instead it will gradually slide into a Japanified state: 2–3% GDP growth for 15–20 years, real estate deflating slowly, banks quietly carrying hidden bad debt, an aging population. Unlike Japan: China's banks are state-owned, so they can "absorb losses" longer; Chinese society was never accustomed to high consumption, so the shock of a slowdown is smaller. But the end result - failing to overtake America - is nearly certain under this analysis.
Where It Overlaps - Where It Differs - Where There's No Precedent
Where does China resemble Japan?
- Real estate bubble: Tokyo 1989 = Imperial Palace > California. Beijing/Shanghai 2021 = home prices at 30–40x income. Both saw real estate exceed 25% of GDP at the peak.
- Rapidly aging population: Japan's working-age population peaked in 1995. China's peaked in 2014, and its total population has been shrinking since 2022 - a decade earlier than forecast.
- Large trade deficit with America: Japan peaked at ~$50B/year (1987). China at ~$280B/year (2024). The same structure of prolonged trade surplus.
- Cast as America's "economic enemy": Japan in the 1980s, China since 2018. The same Washington political script.
- Latent systemic NPLs: Japan's banks held ¥100T+ in bad debt (~20% of GDP in 1995). China's LGFV debt is $7–11T (~50% of GDP in 2024). China's is worse than Japan's.
Where does China DIFFER from Japan?
- Population scale: Japan peaked at 2.3% of world population. China at 17.6%. A drop in China's GDP drags the whole world down with it (especially commodity exporters: Australia, Brazil, the Middle East).
- Nuclear weapons + P5 status: Japan is dependent on the US. China is not. It can threaten Taiwan, the South China Sea, the Strait of Hormuz. The US cannot "pressure" it the way it pressured Japan.
- Alternative markets: Japan only had the US + EU (both American allies). China has the BRI ($1T+), an expanding BRICS+ (Iran, UAE, Egypt, Ethiopia in 2024), Africa, ASEAN. A multipolarized customer base.
- Genuine leadership areas: Japan led in DRAM and cars - but rivals South Korea and Germany caught up quickly. China leads in EVs (BYD), batteries (CATL, 37% of world), solar (80% of world), drones - harder to replicate because the entire supply chain sits domestically.
- A deliberate currency ambition: the yen never exceeded 10% of world reserves. The yuan is ~4.7% of SWIFT (3/2024), but CIPS (its own payments system) is growing fast. The 2023 petroyuan deal with Saudi Arabia - a genuine first step away from the dollar.
- Political system: Japan is a democracy, answerable to public opinion and voters. China is a one-party state - able to endure a decade of pain without a change of government.
Where does China NOT resemble America in 1900?
- Young vs aging population: America in 1900 - young, growing fast, absorbing millions of immigrants. China in 2024 - a shrinking population; projected at 767M by 2100 (down from 1.41B).
- Geographic security: America borders two oceans and two weak neighbors. China borders 14 countries, with disputes against India, Vietnam, the Philippines, and Japan. Military spending must stay permanently high.
- The process of the crown changing hands: America overtook the UK in relative "goodwill" - the UK didn't block it. China is being encircled by the US with tariffs, chip controls, AUKUS, the Quad, and sanctions. Far harder.
- Two world wars bleeding the rival dry: America overtook the UK through historical luck - two world wars drained Britain while America grew richer. China has no such historical luck available (and it would be catastrophic if it did).
Three Scenarios - Who Will Be the "Next America"?
There's no certain answer to this question - but there are 3 historical models to weigh it against:
China shifts to 2–3% GDP growth for 15–20 years. Real estate deflates slowly, state banks carry the debt. The yuan stays stable but never overtakes the dollar. The GDP/US ratio drifts down to ~50% and then stabilizes. Not a collapse, not an overtaking - a standstill.
Pettis · base caseChina overtakes America in nominal GDP by 2035–2050. The yuan replaces the dollar across Asia and Africa, though not globally. America bleeds itself internally (political strife, a debt crisis). Requires two historical-luck events on the scale of the world wars that helped America overtake the UK. Possible, but it needs "Jupiter aligning with Mars."
Goldman Sachs 2003 · few still believe it nowA combined crisis of real estate + LGFV debt + demographics + a Taiwan war. China fragments into multiple economic/political blocs, or enters a long recession like the Soviet Union's in the 1990s. GDP could fall 30–50% within 5–10 years. The world reels along with it.
Gordon Chang style · few experts believe it, but it can't be ruled outHistory's three-for-three record shows that only America ever overtook the UK - and it took two world wars plus 65 years after overtaking in production. Japan almost overtook America, then lost 30 years. China is somewhere in the middle of its journey. The most likely outcome by economic analysis: Japanification with Chinese characteristics. A genuine overtaking would require a black-swan event - especially a major crisis in America. Fragmentation cannot be ruled out if real estate, demographics, and Taiwan detonate simultaneously.
The Final Irony - The Father of China's Playbook Was… An American
America's first Treasury Secretary. His argument: the young United States had to protect its manufacturing through tariffs, subsidies, and infrastructure investment. This was the first playbook on infant industry protection. Friedrich List (Germany) read it and applied it to Germany in 1841. Deng Xiaoping read List and applied it to China in 1978.
The most ironic story in 21st-century economic history: Hamilton is the spiritual father of both modern America and modern China. America grew rich by exactly the playbook Hamilton wrote. China grew rich by that same playbook - passed through Friedrich List's hands to Deng Xiaoping.
Now America criticizes China for doing exactly what Hamilton taught. This isn't a contradiction - it's the "kicking away the ladder" that Ha-Joon Chang named. Every superpower does this. Britain once did it to America. America is doing it to China. If China one day becomes a superpower, it will do it to India + Vietnam + Indonesia.
What repeats isn't the policy - it's the moralizing of policy by whoever wins.
References
Key books
- Ishihara & Morita - NO と言える日本 (Kobunsha, 1/1989)
- Ishihara - The Japan That Can Say No (Simon & Schuster, 1991, trans. F. Baldwin)
- Song Qiang et al. - 中国可以说不 (China Can Say No, 5/1996)
- Ezra Vogel - Japan as Number One (Harvard, 1979)
- Ha-Joon Chang - Kicking Away the Ladder (Anthem, 2002)
- Michael Pettis - Trade Wars Are Class Wars (2020)
- Richard Koo - The Holy Grail of Macroeconomics (2008)
History & data
- Maddison Project Database (Groningen) - historical GDP
- Paul Bairoch - "International Industrialization Levels 1750–1980," J. European Econ. History 11 (1982)
- Adam Tooze - The Deluge (2014) - the USD/GBP transition post-WWI
- Barry Eichengreen - Exorbitant Privilege (2011) - reserve currency transition
- Correlli Barnett - The Collapse of British Power (1972)
- Aaron Friedberg - The Weary Titan (1988) - British decline, 1895–1905
- Dataquest / Gartner DRAM market share data
Contemporary China
- Yu Yongding - "Plaza Accord 30 Years On" (CASS, 2015)
- Liu He - 两次全球大危机的比较研究 (2013)
- BIS Export Controls - 7/10/2022 + 17/10/2023
- CHIPS and Science Act (8/2022)
- Capital Economics, IMF - China GDP forecasts 2024
- Same series: Trade War - Who Killed the American Factory? (same author, 4/22)
- Same series: Dalio · 700 Years of World Order
03 Discussion
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