Jewish World Review March 7, 2002 / 23 Adar, 5762
http://www.NewsAndOpinion.com | TWO generations of Americans had cause for anxiety about the Land of the Rising Sun, the first during the war, the second during the ascent of Japan Inc. This generation has to worry about a Sinking Sun. Japan today is currently enduring the third cyclical recession of the past 10 years, producing growth so low that it has come to be called the lost decade. How could it be that this once feared economic juggernaut now finds itself in such deep quicksand with so few prospects of getting out?
It all began when Japan's financial bubble burst back in 1990. That revealed a catastrophic waste of capital through overinvestment by both public and private entities. The loss of wealth from collapsing stock and land values exceeded $15 trillion, more than three times GDP. The Nikkei average dropped from 39,000 in 1989, when the Japanese stock market was valued at nearly half of all of the world's stock markets combined, to around 10,000 today; for the first time in recent memory, it went even lower than the Dow.
Japanese businesses, once the envy of the world, have been surpassed by competitors around the globe. Their operating costs are a third higher than the Group of Seven average, they have over 25 percent in excess capacity, and their profits are plummeting. Corporate bankruptcies reached 4 percent of GDP last year, higher than the United States saw during the Depression. Consumers' purchasing power is about a third lower than the G-7 average. The collapse of consumer confidence is reflected in a personal savings rate that is hovering at 13 percent of income, constraining demand to the point where Japan is experiencing a deflationary cycle the likes of which haven't been seen in any developed country since the Depression. Even exports, which compensated for lower domestic demand for decades, have dropped by 40 percent this year. The Japanese banking system is effectively broke because the collapse of land and equity asset values is so great that bank loans against these assets far exceed their value.
Vicious cycle. The picture is, almost unrelievedly, bleak. Government debt has ballooned from 60 percent of GDP to over 130 percent today. That's about four times that of the United Statesand it may exceed 200 percent in 2005. Meanwhile, nearly two thirds of all tax revenues must go to pay for the debt. On the monetary side, the Bank of Japan pushed interest rates down to virtually zero on short-term treasury bills and to as low as 1.2 percent on 10-year bonds. But even at zero percent, banks are unwilling to borrow from Japan's central bank because there's virtually no demand from businesses and consumers. Indeed, new bad loans are piling up faster than the banks can write them off. Even after writing off $1 trillion of nonperforming loans over the past decade, there's still another $1 trillion on the books. If the banks were to set aside sufficient reserves to cover these loans, the level of their equity capital would fall below what they need to stay in business. Given its real negative worth, the banking system may well be on the verge of collapse.
That ensuing maelstrom would suck in many financial institutions. Japan is the biggest foreign investor in U.S. treasury obligations. To cover its losses, Japan might be forced to withdraw the funds invested here, leading to huge capital flight. Around the world, the follow-on effects would be catastrophic.
Since conventional remedies have failed in Tokyo, what is needed now? Nothing less than a shakeout of Japan's industrial base and a leeching of the unhealthy bloat its economy experienced during the "good years." Instead of cutting out inefficient producers, Tokyo just dug deeper into its pockets and prayed for better days. The dominant political party, the LDP, used state-controlled institutions to fund public works and so subsidize political supporters. The result? Billions wasted on projects picked by politicians chasing votes instead of businessmen seeking profits.
The hopes of such a radical restructuring of Japan's economy cannot be high because the Japanese culture is one that is averse to acknowledging error. Combine that with the Japanese ethos of consensus and a long-standing habit of procrastination, and you have a reluctance to changeand politicians fear that reform would accelerate the recession.
Nor are the voters likely to press for change, because the Japanese still remain relatively wealthy and 60 percent in the polls remain satisfied with their lives. The electoral system engenders inertia because it overrepresents the rural votes and underrepresents the 80 percent who live in urban areas.
But could there not be external pressure from the G-7 countries? Alas, here, too, there is not much leverage since 95 percent of Japanese debt is held by the Japanese.
The only sure thing at the moment is that if Tokyo procrastinates for several more years, national debt service will rise high enough to collapse its bond markets and convulse the financial system. That, in turn, would mean a run on banks and the yen that would make what's going on in Argentina right now seem like a mere