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Jewish World Review March 15, 2001 / 20 Adar, 5761

Mort Zuckerman

Mort Zuckerman
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Japan on the brink -- WEATHER forecasters may have sounded a false alarm for much of the East Coast last week, but economists have harder evidence that an economic tsunami is bearing down on Japan. A financial disaster of the size implicit in their latest numbers would send huge waves everywhere. Japan is the largest economy in Asia. The spending power of its 127 million residents exceeds that of the 1.8 billion inhabitants of East and Southeast Asia. It is also the world's largest gross and net international lender, with over $2.5 trillion outstanding–so that its financial troubles could disrupt global financial markets.

A decade has passed since Japan's "bubble" economy burst. Its stock market is now down 67 percent from 1990. Urban land prices have fallen over 80 percent since their peak, with the greatest percentage drop last year. The value of the currency has eroded. The collapse of national wealth is estimated to exceed $18 trillion, or almost four times Japan's gross domestic product. During this period, the United States added $22 trillion in private net worth alone.

The book net worth of Japanese companies is 6.5 times their market value; the net worth of households has declined by at least a third below their cumulative actual savings. This asset collapse has virtually bankrupted the Japanese financial system and suppressed aggregate demand. Japan has failed over an entire decade to restore self-sustaining economic growth. In the past nine quarters, Japan's nominal GDP growth has exceeded zero only twice, and the country is now into its second recession.

Too scared to spend. Virtually all the economic indicators are grim. Output, prices, jobs, profits, incomes, business investments, consumption, and tax revenue are falling. Budget deficits are soaring. Deflation is accelerating. Higher oil prices and a shrinking U.S. economy are limiting net export revenue, which has been the growth engine that has pushed Japan out of past recessions. The Japanese have lost so much confidence in the future that they are deferring consumption and investment and instead are saving about 30 percent of household income, compared with zero in the United States.

Bankruptcies have soared, piling new losses on lenders faster than they can write off old ones. In the past decade, banks have written off almost twice their entire capital and reserves. Bad loans are generally thought to be 50 percent worse than the stated figures, since banks have overstated the collateral they have on loans, forgiven debt, or provided credit to keep deadbeat companies going rather than confront their bankruptcies.

Unsurprisingly, the credit ratings of the banks are suspect. They have to pay a risk premium that translates into higher interest rates, which is tantamount to tightening monetary policy–exactly what they don't need. Large companies are so deeply indebted that it is estimated even a 1 percent rise in interest rates would make it impossible for almost half of them to keep their loans current. Domestic bank lending has dropped to a nine-year low. The banks hoped that a buoyant economy and a rising stock market would save them, since they are huge equity holders. Now share prices are tumbling with the risk that banks will unload equity, accelerating the fall in stock prices.

The government is trying to help. The central bank has lowered interest rates to 0.15 of 1 percent, compared with 5.5 percent in the United States. Hundreds of billions of pump-priming dollars in taxpayer money have been poured into public works, generating an annual debt of 7 percent of GDP. Now Japan's national and regional debt total about 140 percent of the nation's GDP, a ratio higher than any other industrial nation has ever had to deal with. Just servicing debt consumes about two thirds of the central government's tax revenue. So with zero nominal interest rates and massive budget deficits, the government is largely out of policy bullets. Japan faces a loss of confidence by domestic and foreign investors, who are bailing out of yen-denominated assets while they can. The lack of confidence in the ability of policymakers to turn things around creates the risk that any piece of bad news might panic the bond, stock, or currency markets. In a matter of weeks, a run could wreck the financial system and produce an economic collapse of the kind not seen since the Great Depression.

Who would have imagined a decade ago that Japan would be in such a mess? The metaphor Japan expert David L. Asher of the American Enterprise Institute chose a year ago was that the country risked a financial Mount Fuji eruption. The world can hear the rumblings.

JWR contributor Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report. Send your comments to him by clicking here.


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10/18/00: Arafat torches peace
10/03/00: A great step backward
09/08/00: The Perfect Storm
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08/15/00: Voting for grown-ups
08/01/00: Arafat's lack of nerve
07/17/00: Can there be a new peace between old enemies? Or will new enemies regress to an old state of war?
07/11/00: A time to celebrate
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09/21/99: Along with good cops, we need a better probation system
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08/05/99: Squandering the surplus
07/06/99: More than ever, America's unique promise is a reality
06/24/99: The time has come to hit the brakes on affirmative action
06/15/99: America should take pride in honoring its responsibilities
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04/30/99: On Kosovo, Russia talked loudly and carried a small stick
04/21/99: No time to go wobbly
04/13/99: The Evil of two lessers

© 2001, Mortimer Zuckerman