Japan in Bankruptcy & Rise of Militarism

Japanese get effects of slowing world economy
Linda Lloyd

It's like groundhog day in Japan 'having gone through a decade's worth of suffering with a sluggish economy, Tokyo can only watch as the same scenario now overtakes the rest of the world. The problem for them is that having been at the centre of the slough of despond for so long they are now suffering the spinoff effects of a slowing world economy and watching as the yen appreciates against most other world currencies to compound their difficulties.

But, just as the Japanese characters for crisis encompass both difficulty and opportunity, so there are some decided winners emerging from the surrounding mayhem in the world of banking.

It is perhaps no coincidence that Japan was the first country in the world to experience the kind of credit crisis - Japan's lost decade - that the rest of the world is now enduring as a knock-on from the United States. It began there much as it did in the U.S. with skyrocketing property values and all-too-easy credit. The roots of the problem lay in the 1980s when land and property prices became so inflated that, at one point, the land on which the Imperial Palace stands at the heart of Tokyo was worth more than the combined value of the state of California. The banks were left with massive overhangs of virtually worthless loans while property values fell some 70 per cent over the 10 years from the beginning of the 1990s.

Housing prices in the major metropolitan regions nearly tripled from 1985 to 1991, then proceeded to lose two-thirds of their value over the next 14 years. Today, prices have risen slightly but house prices last year were only slightly higher than the level before the boom, more than 20 years ago.

In Japan, government officials not only tolerated the housing price bubble, they actively encouraged it. Fearful that a strengthening yen was hurting Japanese exporters, the Ministry of Finance urged banks to lend to real estate developers so that a building boom and increased consumer spending would lift the economy.

Japan's post-bubble recession should have lasted from 1992 to 1994, according to Adam S. Posen, a senior fellow at the Peterson Institute for International Economics in Washington. But Japanese officials were too conservative and too protective of failing banks, he said, and thus prone to policy steps that were counterproductive, like the decision in 1997 to raise Japan's sales tax to 5 per cent, from 3 per cent.

The response of the Japanese government was to cut interest rates and to go on cutting till they were virtually at zero. That is where they are today, for all intents and purposes, and the policy has done nothing to revive this powerful economy: personal and consumer spending has remained at low levels and while property prices have recovered to some extent they have not resumed their previous buoyancy. For more than a decade the economy limped along unable to benefit from invigorating injections of capital while Japanese companies could only watch as their regional competitors, particularly China, grew in strength and economic effectiveness.

The policy failure which condemned the economy to this sluggishness was the failure to recapitalise the banks on a substantial scale. Timid ministers approached the problem piecemeal instead of in a full-blooded, capitalist manner. Perhaps unsurprisingly the West has repeated the same mistake for much of the present crisis with a case-by-case approach that failed to address the scale of the confidence problem. Both the United States with its $700 billion plan and Britain with a scheme that could be worth as much as $500 billion over the long term now seem to be tackling the problem with the requisite resources though with quite different approaches: the U.S. will buy bad loans and investments from the banks while Britain will make the liquidity available but adopt a much more hands-off approach. Ironically, both are moving rapidly away from full-blown capitalism and moving more in the direction of the continental and even Japanese models though the British seem more intent on bringing salaries and bonuses under control than the Americans.

But while the indicators for the Japanese economy now appear decidedly mixed just at the time that they might have expected to be enjoying a more predictable economic future it would be a mistake to underestimate the country's potential. It is still, after all, second only to the United States in overall economic and industrial might and in some areas it is simply without peer. Faced with falling sales in the U.S. the stock prices of manufacturers such a Toyota have been sliding but in the banking field Japanese firms have moved to profit from the moment and, in the words of one of them: 'Japan is back.'

Nomura Holdings Inc, Japan's largest brokerage, bought the Asian operations of bankrupt Lehman Brothers for $225 million. The deal includes Lehman's businesses in Japan and Australia. Nomura called the deal 'a once in a generation opportunity' and that it certainly is since it includes Lehman's 3,000 employees in Asia, including the regional offices in Japan and Hong Kong. The acquisition now marks out Nomura as the world's biggest independent investment bank and paves the way for even greater expansion.

But neither Nomura nor any of the other Japanese bargain hunters, such as Mitsubishi-UFJ which invested $9 billion for a 21 per cent stake in Morgan Stanley, who have managed to make cheap American acquisitions in the last few weeks would have been in a position to take advantage of this turn of events if they had been embroiled in the sub-prime mortgage crisis. All wisely managed to stay away from that particular swamp but the hiatus has shown that even those who were pursuing conservative banking practices have been swept up in the difficulties, if not directly then in the spillover fall off in trade and commerce and other second-degree effects.

But for the Japanese nation as a whole and other Asian creditor nations of the United States the latest crisis accentuates their already complex difficulties with the holding of American government bonds. At last count Japan held some 22.8 per cent of the outstanding bonds worth about $590 billion. Now might be an appropriate time to repatriate some of those funds to shore up the national finances at home but no one wants to test the true value of one of the key planks of the international finance system at this time and, in any event, it would send out the wrong signal to friends and allies in Washington.

Collapsing stock market prices in Russia, where the stock exchange has been closed several times, declining trade figures in China and Africa, no matter how far removed you are from the centres of western finance, all underline the fact that whether we like it or not the world is irretrievably interlinked in trade, banking and commerce.