& Tornado Alley
ECONOMIC MALAISE OF JAPAN
On November 24, 1997 Yamaichi Securities went out of business leaving $25 billion in bad debts and 7,500 employees out of work. Two other major financial institutions, Hokkaido Takushoku Bank and Sanyo Securities, with total employment of 8,300 also failed in November. Yamaichi's demise came when Moody's downgraded its debt securities to junk-level which made it impossible to raise short-term funds to continue operations. Its collapse was more an acknowledgement of its past failure rather than a current event. In other words, November 24th represented the removal of the life-support system of a patient that actually had died some time ago. The share price of Yamaichi was about Y100 down from about Y3000 a decade ago.
Following Yamaichi's closing prices on the Japanese stockmarket fell 5 percent and the value of the Yen fell to a five-year low of 128 to the dollar.
Japan generally has discounted the need to reform its financial system hoping that something will happen which will enable its financial institutions to grow themselves out from under the mountain of bad debts left over from the era of the bubble economy. The sound banks such as the Bank of Tokyo-Mitsubishi are setting aside loss reserves of billions of dollars and other such as the Long-Term Credit Bank of Japan are reducing outstanding credit.
The article cites the lessons which other Asian countries can learn from the financial crisis in Japan:
- Don't underestimate required speed and scope for the needed reforms
- Act fast to clean up financial systems hobbled by bad debt
- Promote transparency
- Accept short-term pain, such as lay-offs, for long-term economic gain
- Use capital efficiently
This editorial cites the key structural weakness of the Japanese system
An unwillingness to give an honest
For example, according to the editorial some senior members of the Liberal Democratic Party have been aggitating for the use of public funds, such as from the postal-saving system, to buy shares in ailing banks. Such public support of share prices gives a distorted picture of financial conditions and makes the government the arbiter of survival of organizations rather than the market. Recently one of the four largest brokerage firms in Japan, Yamaichi Securities, went bankrupt after Moody's downgraded its bonds and it was unable to obtain the short-term credit it needed to to continue business. Only after Yamichi's collapse did the public learn of $2.1 billion in bad debts that had been kepts off its books. Similarly Hokkaido Takushoku Bank had kept hidden as much as $3 billion in bad debts. Daiwa Bank had losses of $1.1 billion from its American branch that it and the Ministry of Finance kept hidden from the public and American financial authorities.
The Japanese monthly Sentakucharges that Fuji Bank's recent $5.78 billion bailout of a construction company, Tobishima, is a payoff to keep quiet about Fuji Bank coverup of bad debt problems in 1996.
"Japanese Property: Crumbling," The Economist July 8, 1995, p. 71.
Commercial land prices have fallen 85 percent from their peak in 1991. Japanese banks hold huge amounts of land from defaulting debtors. If the banks sell the land the price will fall even further. Even if they do not sell the land the price of land is likely to be depressed from the knowledge the banks hold this huge inventory of land to be sold. The price of residential land has not fallen as much, down only one third from its peak. But many homeowners now have negative equity; i.e., the market price of their property is less than the amount of the loan on it. Some 5 million Japanese bought homes during the period of 1987 to 1994 and an analyst at the Union Bank of Switzerland in Tokyo estimates that the value of their homes has fallen between $589 and $884 billion.
One measure being considered is a reduction in the level of property taxes which are relatively high compared to an OECD average. But is also considering reducing the availability of subsidized loans for home buying.
In Japan, the System That Soured: The Rise and Fall of the Japanese Economic Miracle, Richard Katz reviews and analyzes the nature of the problems of Japan. One point that he makes repeatedly is that what may be the proper policy some circumstances may be quite the wrong policy under other circumstances. It is hard for Japanese policy makers to accept the possibility that the policies which seemed to have been so successful in the past are not the solution for the problems of the present and may, in fact, be part of the problem. Even when major policy makers recognize the need for new policies and the jetisoning of old policies change is not easy to achieve. Katz compiled some striking quotations on this matter from major players in the policy arena.
A Japanese analysis, Yasusuke Murakami, is even more emphatic about industrial policy:
"If Japan fails to end industrial policy, its postwar developmentalism may be judged a failure."
An Anti-Classical Political-Economic Analysis: A Vision for the Next Century, Stanford Univeristy Press, 1996.
The Economic Planning Agency also asserted in 1996 that the industrial policy practices which once were effective
"are now nothing more than obstacles to future economic development."
There is strong differences of opinion about the role of Japan's industrial policy in its economic development. Some feel that the industrial policy was effective in the past and gave Japan an insurmountable advantage in international competition. American economists holding this position argue for an American industrial policy to counterbalance this Japanese advantage. Other economists feel that the industrial policy was not an advantage for Japan in the past and that perhaps Japan developed in spite of rather than because of these policy. These economists argue then that not only the U.S. need not but should not adopt an industrial policy. These two positions are sometimes called the traditionist and the revisionist position. Unfortunately this terminology is severely flawed because successful revisionism from one era becomes traditionism for the next era and the overthrown traditionism becomes restorationalism of revisionism.
There are of course other positions besides the above revisionism and traditionalism. One reasonable alternative is that Japan's industrial policy was effective during its recovery and catch-up phase of its growth but is counterproductive once it became developed.
Richard Katz in Japan, the System That Soured: The Rise and Fall of the Japanese Economic Miracle makes the case that Japan has a dual economy, one part which is efficient, even super efficient, and another that is notable inefficient compared to the U.S. He substantiates this point by displaying the data on the relative output per hour in the U.S., Japan and for comparison Germany.
|Indices of Output per Hour in Various Industries, 1990|
|Machinery and Equipment||100||114||88|
|Basic and Fabricated|
|Chemicals and Allied Products||100||84||77|
While Japan has some industries that have higher labor productivity than the U.S. overall in 1990 Japanese manufacturing was 22 percent less productive than American manufacturing. Overall German manufacturing industry, while less productive than the U.S., was more productive than Japan. The relative importance of these various industries is shown below.
|Proportions of Employment in Various Japanese Manufacturing Industries, 1992|
|Machinery and Equipment||39|
|Basic and Fabricated|
|Chemicals and Allied Products||5|
Thus in Japanese manufacturing 39 percent of the jobs are in industries which are super efficient relative to the American industry, 12 percent are in industries which are basically of the same level of efficiency as the U.S. industry and about 60 percent are in industries that have an efficiency roughly half of the U.S. level.
Katz also present comparative data on the manufacturing sectors of industrial countries.
per Hour, 1993
The conclusion is that Japan industry is a mixture of efficient and inefficient sectors and the overall mix is such that Japan's manufacturing has a lower labor productivity than the U.S. and other industrialized countries such as Germany and France.
Some of the industries of Japan are moving their lower level operations out of Japan to take advantage of cheaper labor and other factors. This is called the Hollowing Out of Japanese businesses. The corporate headquarters and top level functions remain in Japan but these become more and more like a shell of the companies.
HOME PAGE OF Thayer Watkins