Second half of previous post
Obviously unfair
and uneven redistribution of wealth, which was not at all related to
individual personal industry or diligence, took place in a great scale
between old owners and new purchasers of land and housing units. As
the real estate prices rose rapidly, the average amount of loans of
those, who purchased their houses and lot separately or built houses
on owned lot, also widely increased from 16.7 million yen in 1987 to
23.4 million yen in 1990 and further to 27.4 million yen in 1992. As
it became too hard to set up a necessary amount of loan to purchase a
residential unit on a shoulder of a single person, banks and other
financial institutions not seldom promoted housing loan projects with
contracts of return payment over two generations.
Along with the increasing speculative demand for real estate, banks
and other financial institutions' easy expansion of loans positively
promoted speculative purchase and trade of office buildings, houses,
condominium units, empty land, and further vendible memberships of
golf clubs. Soaring prices of shares and real estate were regarded as
secure mortgages for banks and other financial institutions to set up,
expand or renew loans to business firms and individual persons.
4.2 The Burst of Bubbles and the Depressive Pressure
4.2.1 The Process of Collapse of Bubbles
The bubbly elevated prices of shares and land, which went up by
speculative transactions far beyond the trend of real economic growth,
were destined to setback. It was, however, hard to predict when, and
how the setback would cause reciprocal reactions with real economy.
Turning points came in 1989. Internationally, the appreciation of yen
peaked out in 1988, and yen began to slide down. At the same time, the
dollar price of oil turned upward. The Japanese wholesale price index
thus had to go up beginning from import prices. Domestically, as a
result of continuous broad economic recovery, the rate of unemployment
declined to 2.2 per cent and the active vacancies ratio (i.e. the
ratio of vacancies over applicants) went up beyond 1.3 in 1989,
reflecting the actual shortage of labour-power. Consequently the wages
in manufacturing rose fairly widely by 6.5 per cent in that year.
In the meanwhile, the US Federal Reserve Bank raised the official rate
from 5.5 per cent in 1986 gradually to 7 per cent in 1989. The widened
gap in the rates of interest between the USA and Japan induced more of
international capital flow and thus served as a cause of tendentious
fall of yen against dollar. Under these circumstances, the Bank of
Japan pulled up the official discount rate from 2.5 per cent in the
middle of 1989 three times to 4.25 per cent at the end of that year so
as to prevent inflation. It was anticipated that the Bank of Japan
would raise the official rate soon again in the early 1990. Actually
the official rate was elevated to 5.25 per cent in February 1990, and
further to 6 per cent from the summer 1990 until the autumn 1991.
As we have seen, the Nikkei Dow average of 225 shares in Tokyo Stock
exchange began to rise from 13,137 yens at the beginning of 1986 to
38,915 yens at the end of 1989 almost by three times. As the lowered
interest rate promoted the speculative zaitech mainly among business
firms and financial institutions to swell such bubble in prices of
shares besides land prices, the elevated interest rate served as a
decisive factor to setback the bubbly share prices. The Japanese share
prices actually turned to a falling process from the very beginning of
1990. The Nikkei Dow average fell by about 10,000 yens or by 25 per
cent already by March 1990. The capital loss in the financial asset
was estimated to reach 160 trillion yens by that time. The fall in
share prices did not easily stop in the following years. The Nikkei
Dow average declined to around 150,000 yens, or to the level of 38 per
cent of its peak in the latter half of 1992. The estimated capital
loss just in the share market by that time amounted to 430 trillion
yens. The Nikkei Dow average slid further down below 130,000 yens in
the autumn 1998. The Japanese bubble economy entered into the process
of collapse from 1990 with such a fall in share prices. However, the
prices of land did not instantly synchronize with share prices. As we
see in Chart 4-2, the peak in land prices was shown in 1990. The land
prices in three major urban areas did not fall much below that peak
even in 1991, and remained higher than the level in 1989. The decline
in land prices came in more slowly than that in share prices, became
conspicuous from 1992, and proceeded persistently in the following
years. The real economic growth rate also maintain a relatively high
level of 5.1 percent in 1990 despite of the fall of share prices, and
entered into depression from the spring 1991.
What did signify the difference in timing of the processes of collapse
of bubbles? There worked several factors.
Initially the business firms and financial institutions still had a
lot of latent capital gain in mutually owing shares of companies in
the same keiretsu group, and sufficient money funds obtained by equity
finance in the bubble economy. Therefore, most of firms need not yet
to sell out their idle land or to abandon the projects to acquire the
real estate or investment in plants or in area development. Banks also
could assume that they could maintain the loans relating the land and
other real estate upon the basis of their latent capital gain of share
prices even under the BIS regulation to keep at least 8 per cent of
own capital against total asset. Various real estate developing
projects such as the plan to construct Tokyo littoral sub-center took
long time to complete, and were difficult to stop in the middle of
construction. Business firms and individual persons tended to believe
in the myth on tendentious rise of land prices and often continued the
speculative trading of land and other real estate, by expecting to
offset the capital loss in share prices by the capital gain in land
prices. Similarly, investment in plants and equipment continued to
maintain a fairly high level until about the spring 1991, despite of
collapse in share prices. Projects to construct plants and equipment
also often take long time to complete. Many firms already had obtained
sufficient money fund by equity finance among others to continue the
construction projects. Investment demand seemed still considerably
strong.
However, the land prices, which had been swollen by speculative
trading using flexible credit expansion, could not continue to
maintain the widening gap with the falling share prices, and the
bubbly distance from the real economic basis. The government, the Bank
of Japan, banks and other financial institutions became worried about
the worsening loans relating the real estate market, seeing the
contemporary wave of bank failures in the US economy. For example, the
Ministry of Finance advised banks to regulate total quantity of loans
to real estate in April 1990, and thus concretely expressed such a
worry. Nevertheless, banks initially continued to roll over, and even
to expand loans relating with real estate, often through the tunnel of
non-banks. They believed together with many business firms and
individual persons that the land prices would sooner or later come
back to the upward trend again to solve the current worsening loans in
relation to real estate, and tended to postpone the sharp collapse of
bubble of prices of land.
In such a process, however, banks had to see a fall in the ratio of
own capital against the total asset, as their loans to real estate
even through non-banks one-sidedly increased with less return payment.
This situation proceeded, because the stockpiling of real estate at
highly speculative prices became more and more difficult to realize.
The reduction of banks' latent capital gains in prices of holding
shares also worked to the fall in their ratio of own capitals. Since
Japanese banks were positively expanding the international banking
activities, they had to follow BIS Basel agreement to keep the ratio
of own capital against total asset more than 8 per cent from April
1993. To meet this regulation, banks had to restraint loans, and had
to strengthen credit crunch resultantly.\footnote{Lapavitsas, C. (1999)
presents a detailed analysis on the financial instability in current
Japanese economy, by underlining the central position of banks in
the whole economy.}
Accordingly, an increasing number of firms among medium and small
firms, especially in the field of real estate business, were enforced
to restrict and further reduce their business, as they had depended
much on borrowing from banks and non-banks to expand their activities.
Such like Toyota which constructed a huge new plant in Kyushu island,
big firms also had to reduce investment in plants and equipment, when
their newly built capacity to produce began to work with much
increased supply effect after the gestation period for construction.
The intensified competition worsened their profitability, and the
reduced investment demand spread the depressive feeling broadly.
Thus when the Japanese economy entered into the actual depression
clearly from the spring 1991, the effective demand for office rooms,
vacant land, residential units, and membership of golf clubs began
largely to contract, enforcing a decline in their prices. An obvious
decline in land prices in Tokyo area and in three major urban areas in
1992 shown in Chart 4-2 exemplifies such a general movement. As we see
in the same chart, the decline in land prices persistently continues,
though more slowly than share prices. Resultantly, the land price fell
to one half of the peak in Osaka area, and to about 60 per cent of the
peak in Tokyo and three major urban areas. The fall in asset prices in
such a scale has destructively worked and continuously depressed the
Japanese economy in the 1990's.
4.2.2 The Complex Linkage of Depressive Spiral
It is estimated that the total meltdown in Japanese asset values
mainly by the fall in prices of shares and land amounts to 1,000
trillion yens (about one half comes from financial asset and the other
half from real estate). This caused an important basic tone for the
complex depression in the 1990's, which is composed from depression
both in stock and flow of the economy.\footnote{Miyazaki, G. (1992)
presented a pioneering analysis to characterize the 1990s depression
as a complex depression of stock and flow, as the adjustment process
of financial stock induced a minus growth in flow of DNP. His
analysis was, however, insufficient in identifying the depression
factor of flow just with a short-run inventory adjustment. The
actual depression of flow economy was more serious, going deeper to
the increasing pressures of excess capacity and unemployment with
depressed consumer demand and investment. Takumi, M. (1998) then
defined the 1990s Japanese depression as of a `Great Crisis (from
1929) type' with the deflationary spiral, not having a cyclical
nature. In my view, this definition is dubious, as the monopolistic
behavior of big businesses is not so crucial to the difficulties of
the contemporary Japanese economy unlike in the 1930's. The workings
of monetary and financial system under the floating exchange rates
system with managed currencies are also different from those at that
time. Historically, comparison with the great depression in 1873-96
must also be attractive, as it was non-explosive but more persistent
than the Great Crisis.}
As latent capital gains in prices of shares and land as stock melt
down, many of business firms can hardly expand their activities either
by self-finance or by borrowing on mortgage. They tend to lose the
flexible power to resist against the repressive pressure by the credit
crunch.
Thus, as business firms had to restrict and reduce their activities,
the employment conditions became severer, and the real wages
stagnated. In 1993 the real wages actually declined. Wage income for
overtime work was also cut down. Resultantly the real disposable
household income (i.e. real household income minus taxes and social
security payments) began to fall from 1993. Therefore the consumer
domestic demand had to cool down, and the depression deepened in the
aspect of flow of household income.
Correspondingly, the capacity utilization rate in Japanese
manufacturing firms widely declined in the 1990's as it was shown in
Chart 1-1. With huge excessive capacity to produce, Japanese firms
sharpened mutual competitive pressure in the market. Thus a vicious
circle for depressive spiral was set in the Japanese economy among
falling pressures in prices of shares and land, in workers' household
income, as well as in the markets for products and services.
As a reaction to the depressed domestic market, Japanese firms
intensified attempt to export again. However, as the trade surplus
resultantly increase, yen appreciated widely and gave a severe
difficulty to Japanese exporting industries. The yen exchange rate
with a dollar in yearly average appreciated from 145 yen in 1990 to
127 yen in 1992, and more to around 100 yen in the late 1994. Further
in 1995, as credibility of dollar was shaken with the monetary and
financial crisis of NAFTA (North American Free Trade Agreement)
beginning form the Mexican crisis, yen appreciated against a dollar to
79.75 yen in April. As we noted in the previous chapter, such an
appreciation of yen in these years gave a serious difficulty to
Japanese exporting industries, and promoted them to transfer their
factories abroad with a tendency for industrial hollowing out.
Thus, the Japanese economy continuously deepened depression both
domestically and from international relations, and failed to join the
economic recovery in the USA and other advanced economies since 1993.
Hansin-Awaji great earthquake in January 1995 gave an additional shock
especially to Kansai region, the second largest business center in
Japan. The rapid decline of birthrate and transition to an aged
society is another important basic factor to repress the Japanese
economic growth rate. All in all the Japanese economy has come into an
extremely lower growth trend compared with the growth trend until the
1980's, not to say with the trend in the period of high economic
growth.
In reciprocal reaction with such a continuous difficulty in real
economic growth, the destructive pressure from the asset deflation to
generate bad loans in banks and other financial institutions also
continues and repeatedly intensifies. When Financial Times reported in
May 1992 an estimation of total bad loans in Japanese banks as about
42-56 trillion yens, or around 10 per cent of their total loans of
450 trillion yens, the Bank of Japan instantly announced an objection
that it was too exaggerating. In March 1994, an official estimation
defined that the total amount of bad loans (those impossible to
collect, and those payment deferred more than 6 months) in city banks,
long-term credit banks, and trust banks was 13 trillion and 570
billion yens. This number was clearly underestimation in order to
avoid financial unrest, by neglecting a large portion of practical bad
loans whose interest payment was enabled by new additional loans
through the tunnel of non-banks. Such an operation to cover up the
substantial bad loans was regarded as necessary and reasonable not to
reckon up the decisive loss by such loans as a whole, in so far as the
asset prices in mortgage were still expected to recover. The operation
could not continue, however, as the expectation for asset prices to
recover failed to realize. Actually, after several years of attempt to
reduce bad loans, in January 1998 a survey of the Ministry of Finance
revealed that the total of bad loans still amounts to 12 per cent of
total loans of various banks, or 76 trillion yens. (The definition of
bad loans in the survey refers to loans impossible or seriously
worried of the possibility to collect, and those require appropriate
risk control). Even this amount can easily increase more, if the asset
deflation goes on.
The Bank of Japan reduced the official rate of discount from 6 per
cent in 1990 step by step to 1.75 per cent in 1993, further to 0.5 per
cent in September 1995, and maintained that unprecedented low interest
rate for four years by now. This monetary policy clearly intends to
mitigate the huge difficulties of banks and other financial
institutions with a huge amount of bad loans. With such a monetary
policy, disposal and liquidation of Japanese bubble especially
relating speculative trading of land and other real estate has taken
much longer time than otherwise. For instance, it is often commented
in comparison that in case of the USA liquidation of bubbles in the
same late 1980's was taken place in shorter time through a wave of
failures of financial institutions. However, in case of Japan, the
size of bubble in relation to real estate was huge when compared with
the USA, as we have noted. The scale of many banks and other financial
institutions are also much bigger, not easily to be allowed to fail in
a wave from the view of the government and monetary authority. Thus
liquidation of difficulties in Japanese banks and other financial
institutions had to go gradually with official support including
almost zero official rate of interest.
As we shall see soon in the next section (4.3.2), a huge amount of
public money was also injected for rescue operation of banks and other
financial institutions besides additional public investment. These
monetary and fiscal policies were enabled by a large amount of foreign
exchange reserves with continuous trade surplus. Though they brought
serious distortions in income redistribution and prolonged the
depression in the Japanese economy, they were still of some effect not
to cause an acute total crisis of deflation spiral unlike in the case
of the US Great Crisis from 1929.
Despite of some effect of supportive monetary policy, however, the
latent capital gains in prices of shares held by banks continued to
melt down. Then, the BIS 8 per cent regulation, which allowed to count
45 per cent of the latent capital gains in share prices into own
capital of banks, turned to torture Japanese banks more and more
severely. In order to keep own capital more than 8 per cent of total
asset as international banks, they had to press down total asset by
reducing loans. This worked to worsen the real estate market through
credit crunch, affecting not only directly the real estate business
but also broadly business activities especially of medium and small
firms. The worsened real estate market deteriorated the mortgages and
expanded bad loans by a fall in prices of land and other real estate.
Thus the financial positions of banks and other financial institutions
were further worsened to complete a vicious circle.
As the complex depression continued including such successive
difficulties in financial institutions, scandalous illegal financial
operations which expected a recovery in prices of shares and land
failed to be covered and were revealed one after the other. The
general belief that banks and other financial institutions in Japan
would not fail any more in the post World War II period was broken
down. Actually failures have occurred intermittently among banks and
other financial institutions including the biggest class of them. For
example, Hokkaido Takushoku Bank (the leading bank in Hokkaido
region), Yamaichi Security Company (one of top four security
companies), Sanyo Security Company, and Tokuyo City Bank failed in
November 1997. These failures together with the Asian monetary and
financial crises in process gave a serious impact to the Japanese real
economy including the employment situations.
In retrospect, the Japanese economy intensified its characteristics as
a company-centered society through its whole process of continuous
economic crisis and restructuring. By spreading ME automation systems,
the proportion of female irregular workers was increased. While real
wages was stagnated, international competitive power of big businesses
was strengthened. The financial structure of big businesses was
improved, forming a large quantity of idle money fund and the latent
capital gains through zaitech with equity finance. The swell of huge
bubbles in prices of shares and land in the late 1980's was in a sense
a result of such a success of Japanese capitalism to strengthen a
company-centered character of the society. Dialectically the
consequent results of such a success brought a series of setbacks to
the Japanese economy in the 1990's. As the huge bubbles collapsed, a
vicious circle between asset deflation and financial instability with
bad loans continued to proceed. The appreciation of yen accelerated
industrial hollowing out. The fall in birth rate and depopulation
especially of young productive generation is causing a rapid trend for
aged society. All of these setbacks were the results of formation of
excessively company-centered society in one way or the other as we
have seen. Since all of them are not yet solved and over, the Japanese
economy will have to grope its way probably still along the trend for
an extremely low rate of growth, though a tentative short recovery may
always occur.
Moreover, after almost a decade from the end of the bubbly economy,
there still remains a serious concern on the possibility to see a
sharp financial crisis in relation with cumulative bad loans and asset
deflation, besides these setbacks in the Japanese economy. In
addition, there is a larger fear of global crisis possibly due to the
burst of recent bubble in New York Stock Exchange. Though it is in a
sense remarkable that the Japanese economy with so serious setbacks
managed not to have seen so far an explosive total crisis unlike the
great crisis after 1929, we are not at all live in a reliable and
stable economic order.
What roles then did economic policies play in such a process and
setbacks in the Japanese economy?
4.3 The Failure and Confusion in Economic Policies
4.3.1 The Failure of Neo-liberalism
The fact that the Japanese economy has been suffering from the endless
vicious circle of setbacks and instability is a clear evidence to show
a failure of neo-liberalism. As neo-liberalism has become a dominant
tone for Japanese economic policies since the beginning of the 1980's
following the UK and the USA.
Although Keynesianism dominated the capitalist world in the post World
War II period until the 1970's, it could not prevent or solve the
inflationary crisis at the beginning of 1970's, rather worsened the
situations by promoting inflation, and lost its prestige. Thereafter
neo-liberalism became the basic trend for economic policies in major
capitalist countries for economic recovery. Against Keynesianism, it
demands to reduce the economic roles of the State, and believes in a
competitive market order to achieve a rational and efficient economic
order. As we have noted in Chapter 3 (section 3), it is not just a
simple reaction to Keynesianism, but has a character suitably reflect
in economic policies the direction of restructuring among capitalist
firms. By introducing ME information technologies, capitalist firms
has re-intensified flexible competition in a market, through
multiplying models of products, relocating factories and offices both
domestically and internationally, and developing labour management to
increase non-regular part-time workers.
The neo-liberal economic policies in Japan was initiated and promoted
by five reports of the second blue-ribbon commission on the
administrative reform in 1981-83. These reports recommended a series
of administrative reform for reconstruction of a balanced national
budget without tax increase. Following the recommendations in the
reports, financial support to health and medical service expense, as
well as subsidies to private universities and colleges, was cut down.
Three State-owned enterprises---the Japan National Railways (JNR), the
Nippon Telegraph and Telephone Public Corporation (NTT), and the Japan
Tobacco and Salt Public Corporation---were privatized in 1985. It
became generally believed that the basic strategy for economic
recovery must be in the vitality of private firms to pursuit profit
upon the competitive market principles. Militant trade unions had
better be dismantled in such a neo-liberal spirit. Actually the JNR
trade union active members were discriminately discharged in the
process of privatization. Among others this gave a serious damage to
the Japanese left wing of trade union movements. As a result, the
General Council of Trade Unions in Japan (Sohyo), which had been the
national center of left trade unions, had to dissolve itself in 1989,
and was unified into the Confederation of All Private-Sector Trade
Unions (Rengo), which is more cooperative with firms. Thus Japanese
firms have been facilitated to implement managerial strategies to
economize labour costs in various ways flexibly by means of
information technologies. The labour laws and regulations in labour
relations have been also altered so as to enable firms to use various
types of workers flexibly in combination.
Under the neo-liberal policy trend to believe in free competitive
market principles, Japanese big firms introduced broadly ME
information technologies, 'rationalized' labour management, suppressed
real wages, and re-intensified international competitive power.
Company-centered endeavour to improve profitability obtained workers'
cooperation, managed to increase trade surplus, appreciated yen.
Japanese model of management attracted global attention as a
successful model to overcome the economic crisis. Indeed, Japanese big
firms improved their financial positions, accumulated a large amount
of money fund both by retained profit and by equity finance in
domestic and international capital market. They expanded foreign
investment, rapidly increased Japanese external asset, and swelled
foreign exchange reserve. With appreciated yen, national income per
capita in Japan surpassed that in the USA, and Japanese
company-centered restructuring under neo-liberalism seemed really a
miraculous success story.
However, neo-liberal belief in competitive market principles did not
actually realize a rational, efficient and fair economic order. Wide
fluctuations in foreign exchange rates along with an enormous amount
of international flow of speculative fund have anarchically caused
unduly economic loss and damages to a broad range of firms and workers
in the affected industries. At the same time, the whole process of
swelling the huge bubbles and the subsequent damage of their burst as
a result of company-centered profit making within free market
principles clearly revealed the fundamental instability of speculative
development, intrinsic in free competitive capitalist market economy.
Neo-liberal economic policies could not do anything to this irrational
and unfair economic disaster. They rather promoted a political and
social atmosphere to admit company-centered speculative profit making
in the name of market principles, and in fact worked also to ferment
and to encourage private moneymaking even among politicians and
bureaucrats as if it were a natural right in economic activities.
Scandalous corruption and unfair grafts have continuously been
exposed. Though Japanese bureaucrats had been regarded as an excellent
contributor to the success of the Japanese economy together with the
Japanese model of company management, their credibility, prestige,
real functions and confidence were largely discounted in the 1990's.
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