By Eva Cheng
Japanese banks are sinking in a sea of bad debts, threatening to drag the already ailing economy down with them. Japan is a key supplier of capital to many countries, including the US. A financial collapse there could have serious repercussions across the world.
Japanese investors are already liquidating part of their US$77 billion property holding in the US. They are also the biggest holders of US government bonds. A massive cashing out would undermine Washington's ability to finance its budget deficits.
The Japanese government plans to announce shortly a package of measures which finance minister Masayoshi Takemura has hinted include using public money in a direct bail-out of the banks. Japanese banks are estimated to be collectively sitting on 80 trillion yen (US$950 billion) of bad loans — a sum roughly equal to 20% of the country's GDP.
Since the mid-'80s, Japanese banks have become the world's biggest and most profitable. Now that there's a change in their fortunes, the government is poised to make Japan's working people to foot the bill. The move comes at a time when unemployment in Japan is at a record high (3.2% in April, measured in the Japanese way, roughly double that in Western terms).
The banks' problems are a product of the same forces as Japanese capital's successes, including its huge trade surplus.
The post-second world war economic boom restored and consolidated Japan as an imperialist economy. A small domestic market prompted Japanese capitalists to rely more on exports than other imperialist countries. A lack of natural resources was overcome by extensive investments in the Third World for cheap raw materials and minerals.
Japanese real wages are much less than they appear if the widespread and long uncompensated overtime hours are included. All this made Japanese goods relatively cheap and competitive. Japan has consistently recorded a significant trade surplus since 1981.
Much of the surplus comes from trade with the US, which, suffering from crippling budget as well as trade deficits, forced Japan to sharply lift the value of its currency in September 1985. The hope was that a stronger currency would undermine exports and encourage imports.
It was expected that the imbalance would be sufficiently redressed if the yen rose to 180 to the dollar from 240. That level has long been passed, but the trade imbalance continued. Japan's surplus rose to a record $129 billion last year, of which $66 billion arose from the US.
The rising yen, meanwhile, unleashed an even bigger capital exodus to US. Japan's net foreign assets in 1985 were already the highest in the world. The strong yen made foreign assets cheaper. A huge chunk of capital went into US real estate, which cost only a fraction of Japan's. More has gone into US government bonds, turning Japan into the US's biggest creditor.
In Japan, the enormous sum of trade dollars far exceeded the opportunities for productive investment. Much of the capital went into stock and real estate speculation. The government's policy of keeping credit cheap in the mid-'80s made things worse.
This explains the astronomical price of Japanese stocks and property, which were way out of line with the real economy. The bubble burst in 1990, the Nikkei Index diving from 38,914 in December 1989 to around 20,000 within weeks. It was less than 15,000 recently.
Banks were key in this speculative boom. It is costly for banks to sit on idle funds, but their eagerness to make profitable use of them often led banks to compromise on loan quality. Companies realised that funding was cheaper by borrowing, after inflation. The rising inflation of the '70s was a driving force behind the debt explosion of the '80s.
Banks grant loans usually against collateral, often property and/or shares. Sharp asset inflation in Japan in the '80s meant that lending on that basis looked safe. But many borrowers could not even service their loans following the collapse of asset prices five years ago. Banks were left with collateral worth a fraction of what it used to be. Japanese banks also sustained enormous loss on their own share investments.
The Japanese banking system is now being forced to face the reality of these bad loans. While some big banks are recording their first losses in 40 years, some smaller credit institutions are finding it hard even to stay alive.
The rumour in April of the impending bankruptcy of small credit union Noshiro Shinkin triggered a panic withdrawal of 10% of its deposits in one afternoon. That is already a very dangerous level, as banks today maintain very limited assets in liquid form. Most cannot survive a serious run without outside help, and trouble with one can easily have an knock-on effect on others. That's why the Japanese government is keen to stop the rot from spreading — even if it means handing over billions in public funds.