Robert, you are absolutely correct about there being similarities between the current mess in Japan and the past mess in the US, particularly with respect to inflated asset prices. There are, however, profound differences.
(1) The first and biggest difference is the magnitude of the problem. The problem in the US was sector related, primarily due to real estate development loans made by S&Ls in Texas, Louisiana and Oklahoma to property developers that were counting on the continued expansion of the oil industry related businesses in those areas. When oil went from $35 to $13 per barrel after the collapse of OPEC, there went the profits that would fuel that expansion across a variety industries, and the developers failed and down went the S&Ls connected with those loans. S&Ls in other regions were by and large unscathed, and many resented that the whole industry was tarnished by what happened (although even at that time another crisis in the real estate market was looming in the Northeast because of a change in the tax code.) Commercial banks were much less affected, and much less tempted to go after risky RE development loans.
By contrast, in Japan, the problems are across the entire banking sector. There will be no domestic Resolution Trust type cure for the problem without the participation of foreign (particularly American) banks, because there are not enough healthy banks left in Japan. Furthermore, the problems are not just a function of bad loans (both domestic and foreign) to property developers in property markets that have burst, but rather the banks also hold large portfolios of Japanese equities, and those are heading south. A big part of the problem in Japan is that the population is aging, so you don't have a population of rabid consumers to but Japanese products. Sales figures for almost all Japanese firms with mostly domestic sales are experiencing downturns, due in part to the current economic uncertainty, but due also to the fact that there are, and will continue to be less consumers in Japan (the birth rate has been negative there for a long time.) This translates into real trouble for all of the banks because (a) they'll make less domestic loans in the long term, and (b) in the short term these economic realities will soon translate into declines in equity values. As these declines happen, the value of the equity in Japanese banks necessarily will continue to fall, and one by one, the banks will fail to meet the Basle capital standards that allow them to do business internationally. In fact, most of them are already in violation of those standards. For that very reason, they CANNOT write off the bad loans. If they did, they would all immediately fall into violation of those standards, since the decline in asset values would be mirrored by a decline on the right hand side of the balance sheet in the value of equity.
(2) An exacerbating problem for the Japanese (and the rest of Asia in general) is that they do not have here well developed and efficient bond markets. This means that if the banks cannot lend, there will be no debt funds available AT ALL. That is a huge function of the IMF right now with the bailout packages - to provide liquidity to keep existing loans funded so the banks don't collapse. This is why the Japanese CANNOT recognize the bad debt. Without bond markets, if the banks could no longer lend, there could be ZERO economic expansion and the result would be the Great Depression II. Kind of the ultimate credit crunch.
(3) There are real cultural differences that are providing huge problems with getting the bad news out and fixing the problems here (I live in Hong Kong but am primarily speaking about Japan.) I refer to
(a) Saving Face: a deterrent to the free flow of information, which obstructs the admission of mistakes so that problems can be discovered and remedies put into place.
(b) A Proclivity for Gambling: people here view 'playing the market' much more like gambling than investment. This makes it difficult for bond markets to gain acceptance while there is wide acceptance of stock and futures markets. (This is by no means a problem exclusive to Japan, and may not be as bad in Japan as it is in places like Hong Kong and China)
(c) The Custom of Implicit Trade Contracts: the Oriental 'way of doing business' often involves 'families of businesses' (keiretsu in Japan and Chaebols in Korea) that tie member banks into making loans that should never be made.
(d) An Opposition to 'Western Economic Imperialism.' The Japanese (and others) do NOT want American Banks intruding in Japan any more than they absolutely have to allow.
There's more, but I've lectured enough. There are REAL problems ahead for the Japanese, and all of this region.
jess. |
