The Pitfall of Assumptions in Forecasting: Lessons from “Losing the War with Japan”

In the realm of economic and geopolitical forecasting, the pitfalls of assumptions can prove both humbling and enlightening. A striking example of this can be found in the Frontline report titled “Losing the War with Japan,” which takes us back to a moment in 1991 when prevailing beliefs about Japan’s economic supremacy and America’s decline were pervasive.  

Frontline’s “Losing the war with Japan” is a report on Japan’s economic power and its impact on the United States, broadcast in November 1991. It paints a very bleak picture of the situation at the time, drawing a parallel with the first Iraq war, which the United States had just won brilliantly in a matter of days. The point of the report is that while the US was fighting a real war in Iraq, the Japanese were destroying American industry through economic warfare. The introduction to the report ends with a researcher saying, “The Cold War is over, and Japan has won.”

There are three fundamental forecasting errors in this report. The first concerns Japan’s future as a leading economic power. Undeniably, its economic success since its military defeat in 1945 has been remarkable. Automobiles, iron and steel, electronics, watchmaking, etc. – the sectors dominated by Japanese companies are numerous. In 1991, Japan was a leading economic power, announcing ambitious plans for robotics and artificial intelligence that made other economic powers shudder. But just as the report noted this success and predicted Japan’s inevitable dominance, its growth collapsed. The Tokyo stock market plummeted, and the country entered a period of stagnation that continues to this day, thirty years later. Although Japan remains a major industrial nation, it is hardly a leader in anything.

The second forecasting error concerns the future of the U.S. economy. Based on the prediction that Japan has won the economic war, pessimism about the American economy was widespread. The report used a rather crude narrative technique, drawing a parallel between the Iraq war, which allowed America to demonstrate its smart weapons, and the economic war that Japan somehow won behind its back. At the time, certain sectors of American industry were struggling to keep up with Japanese companies, particularly in steel, manufacturing, and, of course, the auto industry, with its depressing spectacle of layoffs and plant closings. America was in the midst of a recession that cost President George H. Bush his re-election. Meanwhile, the Japanese, buoyed by their success and stuffed with dollars, were buying up the jewels of the American economy: movie studios, prestigious buildings, and works of art at dizzying prices. The contrast was painful. It was the American system itself that seemed unable to keep up with the new challenges. And yet, here again, at the very moment of this decline, the American economy was emerging from recession.

Nobody knew it at the time, but it was on the cusp of a long period of growth that would last until 2008, when the subprime crisis erupted. At the very moment when the decline seemed obvious, the giants of the new period of innovation were born: the Internet revolution. AOL, founded in 1985, revolutionized what was then called the “information superhighway” by offering easy, low-cost access to the Internet. This was followed by the creation of Netscape and Amazon in 1994, Microsoft’s introduction of Windows 95, which democratized computing, the beginning of Apple’s resurgence in 1997, and the creation of Google in 1998. At the time of Frontline, none of this had had an impact; everything was microscopic. Only the factory closings of the old economy were visible, and so that’s all we talked about (that’s what we saw); but the next generation was on the way, and the United States, defying all the usual short-termist prognostications, was at the forefront of the new IT revolution, in hardware and software (that’s what we didn’t see). The report predicted an inevitable decline, but instead an industrial renaissance was underway. The margin of error was considerable.

But there’s a third, perhaps equally important one. The report claimed to explain who has won the race for economic supremacy, pointing to Japan’s success and America’s stagnation. There was no doubt about it: the big winner was Japan. And not once did Frontline mention China! And yet, since Deng Xiaoping’s reforms in the late 1970s, China had already undergone considerable economic development. It was still just a giant workshop, but its impact was beginning to be felt, there was no doubt that it was poised to play a major economic role, but not a word in the report. The error of prediction, this time by omission, is again considerable. This report, which could be an isolated case of bad journalism, was in fact highly representative of the thinking of the time. For instance, In the United States, the book Japan as Number One, subtitled “Lessons for the United States,” became a best-seller. The inevitable rise of Japan and the decline of America (and the West in general) was widely shared at the time, demonstrating the importance of the “group effect” in the persistence of a belief. Many experts supported this call to adopt the characteristics of the Japanese model, or at least what they perceived, often superficially, to be its characteristics: an economy managed by an “enlightened” Ministry of Industry that avoided the “short-termism” of American capitalism.

The story of predictions gone wrong is a familiar one, often illustrating the unreliability of predicting the future. The Frontline report, “Losing the War with Japan,” serves as a warning, offering insights into the dangers of making assumptions when attempting to predict economic and geopolitical outcomes. In examining the report’s three fundamental forecasting errors, it becomes clear how such missteps can blind us to emerging realities and the complex dynamics that shape our world.

📖 This article is an excerpt from my book “Welcome to Uncertainty!

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🇫🇷 French version of this article here.

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