Digital Serfs

Ichiro Suzuki

Since 2022, the Japanese yen has been under relentless downward pressure not only against the U.S. dollar but also against other major currencies. In order to stem the pressure, the Bank of Japan had intervened in the foreign exchange markets a few times in early May. Interventions had halted the yen’s further fall, but the downward pressure remains unabated essentially. For foreign visitors, everything looks so cheap and the yen is grossly undervalued as measured by purchasing power parity (PPP). The yen’s weakness, however, appears to be supported by fundamentals other than PPP. Japan has been persistently running trade deficits for years as factories have been relocated to where the products are consumed, thus reducing exports. Prices of crude oil, the largest single import item, have been firm lately and hurting trade balances. The current account has been abundantly in surplus, underpinned by interest earned on vast foreign exchange reserves, U.S. Treasury securities to be specific. Dividends from Corporate Japan’s overseas subsidiaries as well and money spent in Japan by foreign tourists also underpin service surpluses. Current account surpluses, however, do not create large inflows of capital from abroad into Japan unlike they way they once did. Interest earned on T-notes is simply reinvested into the same securities and profits earned by overseas subsidiaries are also reinvested into expansion of business in the same region. On the other hand, trade deficits primarily caused by crude oil imports actually requires payments in the U.S. dollar, converted from the yen, to oil producing countries in the Middle East or elsewhere. 

The services account has been in surpluses comfortably. There is, however, a great deal of concerns in its future trajectory. Consumption of services provided by American tech titans has been rising and will only go further up. While Japan runs surpluses in the bilateral trade of goods with the United States, primarily because of cars, U.S. tech titans are dominating services, in online shopping, movies and music consumption, cloud computing services for both public and corporate sectors. On top of these items, there is a burgeoning new service that raises, or perhaps balloons deficits in tech services in the future. It is AI. Consumption of AI services has only begun and will only rise probably exponentially and there is no ‘import substitution’ in this field. No Japanese companies are capable of providing such services. For that matter, no European companies are, either. They have to be bought from U.S. tech titans. The only other choice available is Chinese tech giants but they do not really present a choice for the government or large corporations for mounting security concerns, while consumers may buy Chinese smartphones and routers in the retail market. There are security concerns in retail products, too, but consumers care less about such things. In the service sector balance, inflows contributed by foreign tourists can only rise by so much, due to labor-intensive nature of the tourism industry. In the most optimistic case, it still grows in linear function. On the other hand, there is no physical constraints on outflows caused by digital consumption. It can grow limitlessly, and exponentially. Such a contrast darkens the future of Japan’s current account balance. 

Dominance of U.S. tech titans in digital infrastructure presents a serious problem not only to Japan but also to other countries in the West. There is no substitute for them, and consumers of services have to take the titans’ offerings whether they like it or not. Microsoft’s Azure might offer slightly better conditions and rates than Google Cloud or Amazon Web Services, but such differences are minuscule from a broader perspective. Building purely domestic infrastructure without any foreign influence is simply cost prohibitive and such services would be technologically a few steps behind top notch services and hence wouldn’t be of much use. Whether Japan as a client likes American IT service providers or not, there is no alternative to them and providers confine them within their realm, from which the client can’t escape. In the 1960s import substitutions were popular economic strategy among developing counties, notably in India and Brazil. This strategy proved to be a total failure as these countries ended up with industries that produced second rate products, made under heavily protection from international markets, that no one wanted. 

Such clients of IT services can be compared to peasant farmers in Medieval Europe, who were legally bound to a plot of land owned by a feudal lord. In exchange for the lord’s military protection and a place to live. In exchange for a place to live, serfs farmed the land, giving a portion of their crops as rent and taxes. (Unlike slaves, serfs were not the lord’s property.) Modern age digital serfs don’t have much independence from the services the lord gives them. On top of confinement into a digital sphere of influence of the lord, military protection provided by the lord makes NATO allies and Japan look exactly like the serfs in the Medieval times. Worse, in recent decades, the lord has been demanding serfs higher rent and taxes, to which the latter have been grudgingly responding to. The current lord is aggressively requesting greater payment, totally unaware that serfs have been paying ever larger amount for the digital services they receive. In addition, military protection has never been free for today’s serfs though the lord always thinks they are free-riders. While defense spending in both Europe and Japan are rising rather rapidly in the last several years, that still leaves them militarily dependent on the U.S. The lord, therefore, continues to leverage on its superior position. 

In a struggle to be somewhat better than digital serfs, the European Union had instituted the General Data Protection Regulation (GDPR)  already in 2018 with the aim of becoming a regulatory superpower in the digital age, if they couldn’t produce competitive hard and software. The current U.S, administration, however, simply doesn’t care about regulations, disregarding Europe’s aspirations totally. The EU’s strategy can be effective in a liberal world, from which the world in the 2020s is drifting away. Some tech savvy politicians in Japan on the other hand are advocating further sharpening of what the country does best in digital infrastructure, in semiconductors-related equipments and materials to be specific, to create Japan’a own mini-choke points. In an increasingly transactional world of the 2020s and maybe beyond, this strategy might make more sense than aiming to be a regulatory superpower. 

About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.