[OPE-L:5140] Re: the capital-form and the state

From: Rakesh Narpat Bhandari (rakeshb@Stanford.EDU)
Date: Sat Mar 10 2001 - 12:50:42 EST

As Japan's Economy Sags, Many Favor a Collapse
By Clay Chandler
Washington Post Foreign Service
Friday, March 9, 2001; Page A01

Japan's deteriorating economy, after stagnating for a decade, has strained
the government's resources to the breaking point, Finance Minister Kiichi
Miyazawa warned yesterday, saying that "Japan's public finances are very
near collapsing."

Miyazawa's reference to Japan's huge public debt -- even though he later
apologized for speaking so bluntly -- was a staggering concession for
leaders of the world's second-largest economy. His aides were quick to point
out that he wasn't predicting an imminent default; rather, his comments were
attempting to underscore the growing debate in Japan over how much longer
the government can, or should, keep spending money to prop up the economy.

Numerous government bailout packages that pumped hundreds of billions of
dollars of taxpayers' money into the economy over the past decade have left
the government with the worst debt problem in the industrialized world.

Even with all that spending, the economy shrank in the July-September
quarter, and some analysts expect the government to report Monday that it
contracted as well in the October-December period. More recently, machinery
orders plunged in January at twice the anticipated rate. Household spending
dropped. So did bank lending. The benchmark Nikkei-225 stock index hit a
15-year lowlast week. Public confidence in the government has plummeted with
daily media reports that Prime Minister Yoshiro Mori is struggling to cling
to power.

The government is scheduled to unveil today yet another set of measures to
prop up the economy. But a growing number of critics contend that such
spending is a waste and will only add to a debt burden that by 2015 will
make it difficult for Japan to care for its aging population.

These critics -- which include financial analysts, economists and
entrepreneurs -- argue that Japan's biggest mistake has been to keep
propping up a once triumphant but now outdated economic system. They say
that letting it collapse, while painful in the short term, would free
capital and other resources for more productive ventures that would foster
real growth in the long term.

A shrinking economy? Falling stock prices? Foundering banks? Massive
layoffs? Bring it on, say some. "Yes, of course!" said Yoshiaki Murakami,
who worked at Japan's powerful Ministry of International Trade and Industry
until two years ago.

Murakami, 41, snaps impatiently when asked if he's suggesting that Japan
would actually benefit from an economic crisis. "A crisis would be good!
Good, good, good, good, good!"

"Even if such a crisis does strike, it could provide an excellent
opportunity to rebuild the economy," wrote Yasuhiko Shibata of the Yomiuri
Research Institute, a respected research group, in a recent newspaper column
assessing some of the various disaster theories.

Under Japan's system -- a kind of socialist-capitalist hybrid -- the
government ensures that the major banks can keep their doors open by
providing financial and political assistance. In return, the banks are
expected to funnel funds into industries the government considers critical,
even if the firms' earnings prospects are weak or nonexistent. Companies
that do business together buy one another's stock to keep prices stable -- a
practice that insulates management from U.S.-style shareholder pressure for
improved performance.

The postwar system worked for years but has been incapable of generating
economic growth for the past decade. And without growth, Japan will never be
able to pay down its debt, maintain or raise living standards, or care for
its elderly.

This problem has led many financiers and academics to advocate restructuring
the economy into a more market-driven, survival-of-the-fittest system. That
would involve deregulation, stronger incentives for individual achievement
and the elimination of decades-old cross-shareholding arrangements. They
argue that with world-class global companies such as Toyota Motor Corp. and
Sony Corp., an educated workforce and superb technology, Japan would take
off after a painful transition.

But the old system -- with its deeply intertwined interests -- is difficult
to take apart gradually. If a bank goes under, so do its weakest customers.
If the stock market drops, so does the value of assets held by companies.

Japan's politicians fear the chaos that enveloped Eastern Europe and Russia
after they embraced free markets. Unlike those countries, Japan has a high
standard of living, but that's largely because the government has prevented
the bankruptcy of many insolvent companies.

Each brush with recession has sparked impassioned talk about the need for
fundamental economic reforms. Two successive prime ministers -- first Keizo
Obuchi, then Yoshiro Mori -- spoke grandly of revitalization and rebirth.

But when the time came to cut off inefficient producers that had supported
them for decades, ruling Liberal Democratic Party elders opted to dip a
little deeper into the national treasury and pray for a recovery.

Meanwhile, banks still are forced to make loans to longtime customers that
cannot repay them, preventing those companies from going bankrupt and making
it harder for new firms to borrow money. Companies still own a lot of their
business allies' stock, protecting them from the harshness of the market.

After the 1998 banking crisis, "we all had a big debate about whether the
economy would be better off with a soft landing or a hard landing," recalled
Motohisa Furukawa, a leading member of the opposition Japan Democratic
Party. But in the end the LDP bosses opted for a "never landing," he said:
"They tried to defy gravity and just keep flying higher."

The current environment has led to widespread gloom-mongering. The cover of
one prominent business weekly, for example, recently featured an image of a
bomb with a burning fuse below the headline "Japan's Economy: The Nightmare
Chain Reaction."

That popular crisis scenario focuses on the deteriorating balance sheets of
Japan's banks. Meager business profits and a sharp jump in bankruptcies over
the past six months have piled new bad loans onto the banks' books almost as
fast as they could write off old ones.

In the past, Japanese banks were able to fall back on unrealized stock
gains -- the difference between what they paid for shares originally and
their year-end market value -- to cushion lending losses. But many will have
trouble doing that this year because of the recent plunge in stock prices.

Nozumu Kunishige, a financial analyst with Lehman Brothers Inc. in Tokyo,
estimates that if the Tokyo stock price index, which is broader than the
Nikkei-225 index, remains mired at its current level of about 1250 points,
unrealized gains will be wiped out for all but two of Japan's 10 major
banks. If the Topix slips below 1200, all the major banks will be required
to declare losses under new accounting rules that take effect in the fiscal
year beginning April 1.

That could pose an enormous problem for banks and for Japan. Under terms of
the 1998 bank bailout, the government injected capital into weak banks by
purchasing non-voting preferred shares. But if the banks' results slip into
the red, those preferred shares will convert to voting stock.

Many analysts are bracing for the de facto nationalization of at least two
major Japanese banks in the next year -- possibly as early as September, the
first time banks must issue half-year profit and loss reports under the
stricter accounting rules.

As Miyazawa's statement indicated, even the ruling party is worried about
its strategy of piling up debt because of the country's quickly shifting
demographics. The average age of Japan's population is rising faster than
that of any other nation in the industrialized world. The government
estimates that the population will begin to shrink in 2007, and that by 2015
one in every four Japanese citizens will be over 65.

Analysts say government and corporate pension programs are woefully
underfunded. And in pushing through ineffectual public stimulus programs
year after year, Japan's politicians have raised the nation's ratio of total
public debt to gross national product to almost 130 percent -- higher than
that of any other industrial economy. By comparison, the total U.S public
debt ratio was estimated to be 59 percent last year, and peaked in 1946 at
122 percent.

To maintain current living standards in the face of those challenges,
Japan's workers would have to achieve Herculean gains in productivity -- the
amount of economic output per hour of labor. But a host of recent studies
show Japan's productivity has been stagnant for some time.

Some individual Japanese are trying to force change. Murakami attempted last
year to bring off Japan's first hostile takeover but was easily deflected by
one of the country's weakest industrial groups. Convinced the company could
be run more profitably under new management, Murakami had offered to buy all
of its outstanding stock at a hefty premium over market price. Shareholders
affiliated with the financially troubled Fuyo group, who together hold about
60 percent of the company's stock, merely scoffed.

"I couldn't even get an audience with the CEO," Murakami fumes.

So while his former colleagues, in league with Japan's top business and
political leaders, are scrambling to shore up Japan's creaking foundations,
Murakami is rooting for a crackup.

Special correspondent Akiko Kashiwagi contributed to this report.

 2001 The Washington Post Company

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