Land of the sinking sun
Nov. 4, 2002
If Japan refuses to muster the political will to avert a looming
financial collapse, the resulting disaster will be calamitous.
Japan is No. 1 again, It was No. l in the 1980s, for all the
right economic reasons. Now it has taken pride of place again for all
the wrong reasons. But that shouldn't prompt any self-satisfied
smirking among the rest of us.
The numbers, like a bad
traffic accident, are mesmerizing. Tokyo is first in wealth
contraction, down $18 trillion, or about four times gross domestic
product. It's first in real estate busts, first in financial busts (the
Nikkei average is down 80 percent over the past 12 years), and first in
national debt levels (nearly 140 percent as a ratio of GDP).
Among developed nations, Japan is the hands down winner for having
endured the worst economic slump since the Great Depression. And guess
what? There's no rainbow on the horizon.
The root of what some economists call the Japanese disease is
the power of vested interests in the leading political party, the LPD.
Just last week, the LPD staged a last minute rebellion against plans to
deal with the huge hangover from the debt fueled equity and real estate
bubble that Tokyo saw burst in the early 1990s. Banks and insurance
companies were left with loans secured by assets that had simply
evaporated. Since 1992, the banks have written off approximately $660
billion in bad loans. But in a weak economy, companies have continued
to default, 19,000 last year alone, at a rate estimated to approach
$100 billion a year. So now the banks must contemplate writing off
another $700 billion. That's more than their roughly $500 billion in
equity capital and reserves. Most of the insurance companies are in the
same soup. They just don't have the net worth to cover their
liabilities. We think we have accounting scandals? In Japan, two big
insurance companies that collapsed last year had publicly stated
solvency margins of more than twice their liabilities when their
liabilities actually exceeded assets by 20 percent. Understatement of
real financial risk is, to put it politely, endemic in Japan.
Failed policy. The government has tried to keep the country out
of a major recession by deficit spending, but it has so far failed to
spark self-generating economic growth. That's no surprise: Fiscal
policy has only limited leverage because most of the deficit comes from
reduced revenues rather than increased pump priming or infusions
through tax cuts.
Talk about a vicious cycle. The banks can't come to the rescue
of businesses with new loans because they are saddled with all the bad
loans they're afraid to call because they have such close ties with
companies that are basically bankrupt. Nor can the banks go to
longer-term lending and make money on the spread between low
short-term, interest rates and higher long-term interest rates. They
compete with public service institutions that receive about 50 percent
of household savings and lend for the longer term at very low interest
Some say the so called
zombie companies the banks sustain should be allowed to fail, since the
revenue from them would be transferred to healthy companies. But there
would be huge costs associated with such shutdowns. First, the banks
would face huge write downs on their loans. Second, soaring
unemployment benefits would have to be paid by the national treasury,
whose credit rating is already so bad that one rating agency has
reduced Japan's to below that of Botswana. And the unemployment would
exacerbate the deflation that has, in the latter part or he 1990s, done
so much to compound the banks' hellish problems.
Deflation is a potentially killer issue. Consumer prices have
fallen every month for more than two years. Retail sales have dropped
for over three years. GDP is plunging, and falling prices have driven
the employment rate to the highest since World War II.
Some argue that Japan should promote inflation, on the grounds
that this would reduce the real value of debt and weaken the yen. That,
in turn, would allow Japan to increase its current account surplus as a
way of stimulating the economy. But depreciation of the yen would
hardly be tolerated by Japan's trading partners. They would, rightly,
refuse to allow Tokyo to get away with a rise in exports on the scale
needed to rescue its economy. Ultimately, to contain inflation, the
Bank of Japan would have to raise interest rates. That would probably
bankrupt thousands of unprofitable companies, throwing millions of
people out of work.
The lack of a clear exit strategy contributes to a growing fear
that the long awaited crunch may finally be near. The Japanese central
bank is so worried that it recently proposed buying shares owned by the
banks to provide them with funds so that they could dispose of
trillions of yen in bad loans. It's unclear whether even that would be
enough to end Tokyo's political paralysis. What is clear is this: If
Japan doesn't do something to avert a financial implosion, the
resulting damage will eclipse the Land of the Rising Sun and cast a
dark pall on the economic health of the West.
BY MORTIMER B. ZUCKEKMAN - EDITOR-N-CHIEF.
Page 64 U.S.NEWS & WORLD REPORT, NOVEMBER 4,