Heavens...
For Private Use Only. From the Manchester Guardian
Defenceless Japan awaits typhoon
Last week's rise in the price of gold came as Japanese investors rushed to find an asset safer than shares in Japanese companies or bonds
Larry Elliott
Monday February 11, 2002
The Guardian
There was bemusement in the financial markets last week when the price of gold went surging through $300 (£205) an ounce. Gold is supposed to be a hedge against inflation and a haven in times of war, but here it was going up at a time when America has sorted out its little local difficulty in Afghanistan and the real threat is not of rising but falling prices. It did not take long, however, for the markets to come up with a one-word explanation: Japan. The buying spree for gold was concentrated in the far east, with a rush by Japanese investors to find an asset that looks safer than shares in Japanese companies or Japanese bonds. Almost any asset looks safer at present than Japanese assets, and the flight into gold is entirely rational. Japan faces political and economic meltdown, and we are talking premier league stuff here. Argentina was only the third-biggest economy in Latin America; Japan is the second biggest economy in the world.
The prospect of Japan going down the tubes has yet to make much impact on the rest of the world. The weekend G7 meeting had its ritual show of concern about the need for stronger growth and structural reform. But there is a sense that Japan has already been designated a basket-case, so when the crunch arrives it will have been discounted.
Japan has made such a limited contribution to global growth recently that it will hardly matter if it continues to do badly. Similarly, as Marc Hendriks of Société Générale noted last week, the idea that Japanese institutions will respond to a domestic financial crisis by selling off foreign-owned assets seems far-fetched. If you were a Japanese bank what would you rather be holding, US treasury bonds or Japanese government bonds? No contest. The fact that the Japanese government was last week seeking to prop up the Nikkei index of leading shares after it clattered down towards the 9,000 level proves the point.
Even so, the west cannot afford to be complacent about what is happening in Japan, unless it intends to use the country as a test case to explore whether a full-scale depression is less painful now than it was 70 years ago. Action is needed, and quickly because this is an economy that could soak up some of the world's excess capacity if functioning properly. A strong Japan is not only essential for the long-term health of the global economy, it is also needed as a counter-weight to the growing power of China. A collapse in the Japanese economy, which looks ever more likely, would have profound ramifications; some experts believe it could even unleash a wave of extreme nationalism that would push the country into conflict with its bigger (and nuclear) neighbour.
Japan's problem is that it is bankrupt - not just financially but politically. This is a country crying out for leadership, and there was hope that Junichiro Koizumi would prove to be Japan's Winston Churchill, offering the country blood, sweat and tears, and a way out of its downward spiral. Sadly, Koizumi has turned out to be more of an Anthony Eden than a Winston Churchill. Japan is fast approaching its Suez.
Koizumi is struggling to cope with three interlocking problems. The first is the damage to his personal credibility caused by the sacking of Makiko Tanaka, the foreign minister, under pressure from the reactionary (and corrupt) elements in Japanese politics. When he became prime minister, Koizumi was supposed to be the clean-up kid who would cut through Japan's Gordian knot of bureaucratic inertia and political torpor to bring about reform. That now looks like a forlorn hope. Koizumi has lost public support and control of his own party. This has serious short-term implications for the government's ability to cope with the financial hurricane about to blow in.
Charles Dumas of Lombard Street Research believes a full-blown financial crisis is likely "in weeks rather than months". Koizumi's loss of credibility, Dumas says, has ensured that the government can only react to the banking crisis after it has occurred rather than take the action now to head it off.
"If, as Koizumi inanely requests, banks recognise and tackle the problem of bad loans, the financial system will collapse unless the government recapitalises the banks. The Japanese government is going to recapitalise the banks. The only question is whether it will do so proactively or reactively."
The imminent financial crisis is only a symptom of a wider economic malaise that is partly the result of the collapse of the bubble economy at the end of the 80s. What happened in the subsequent decade is that what were once seen as virtues of the Japanese system - the close relationship between companies and the banks, the culture of a job for life, to name but two - have become weaknesses. Japanese firms are unprofitable by western standards and many of them have only been kept going by virtue of the generosity of banks, which are now sitting on a mountain of bad debts. Consumer confidence and consumption are weak; deflation is already a reality making monetary easing less effective; the limits to fiscal pump-priming were reached some time ago.
Koizumi's plan to make the banks clean up their balance sheets by getting rid of bad loans would only intensify the slump. "Japan is in danger of slipping into the classic vicious circle of rising bankruptcies, higher credit costs, deteriorating balance sheets and yet more bad debts", says Graham Turner of GFC Economics. "The market is crying out for decisive political leadership but in truth the position of Japan's banks is so serious that more reform is not the answer. The only solution to Japan's difficulties lies with outright nationalisation of the banks. But few politicians in Japan appear willing to countenance such a proposal. The result will be more muddling through until Japan's financial institutions finally collapse under the weight of their bad debts."
Deep and structural reforms will be needed if Japan is not to become the Soviet Union of the 21st century. At a meeting organised by the Royal Institute of International Affairs last week, Jean-Pierre Lehman of the IMD in Lausanne argued that Japan's crisis was not cyclical but systemic. "Bad loans are symptoms of the problem. Japan suffers from institutional sclerosis, social anomie and gerontocratic governance. Unless these are addressed we are talking about rearranging the deck chairs on the Titanic."
In the 60s and 70s, Japan's policy of outward-looking protectionism worked, mobilising resources to achieve economic goals while keeping out foreign products. But command and control has its limits, and they were reached in Japan some time ago. Japan's first moment of truth came in September 1985 when its pivotal role in the Plaza accord to drive down the dollar showed that the country had come of age. This, says Lehmann, was the moment to open up, to re-culture its corporations, to deregulate. "But it went the other way, full throttle down the track to puffed-up nationalist arrogance."
The second date with destiny came in January 1995, the Kobe earthquake. Lehman says that the government froze; it was incapable of coping with the disaster. "That is the origin of the crisis of confidence, the total loss of faith in the system and the future." Japan should do what it failed to do 17 years ago: liberalise, become less racist, sexist and chauvinist. There are painful times ahead even if it does. If it does not, the risk is of domestic implosion and conflict with China. Scary stuff.
larry.elliott@guardian.co.uk |
