JAPAN: On the edge of an economic abyss

Issue 

BY ALISON DELLIT

Yet another Japanese prime minister is set to fall onto the well-polished sword of the ruling Liberal Democratic Party as Japan lurches inexorably towards a deep recession. Amidst mounting calls by capitalist investors for his resignation, on March 12 Prime Minister Yoshiro Mori announced that the LDP would hold leadership elections in April, instead of September. In office for less than a year, Mori is Japan's 14th prime minister in 11 years.

The latest political crisis in Japan was sparked as the Nikkei stock-market index dropped to its lowest levels in 16 years, reflecting increased unease among investors about the prospects for the moribund Japanese economy. In an attempt to stop the drop, the government released its 11th economic rescue package in a decade on March 9, only to be greeted by yet another fall in the Nikkei.

Japan's economy has not recovered from the speculative "bubble" of the 1980s, when the price-to-earning ratio of Japanese stocks reached ridiculous levels. When the bubble finally burst a decade ago, and these inflated values were reassessed at more realistic levels, the economy was plunged into a crisis that it has proved unable to shake.

At the heart of Japan's economic malaise is massive productive overcapacity, causing very low profit levels for Japanese industry. The period of wild speculation in Japan during the 1970s and '80s resulted in a huge build up of industrial capacity. Throughout the '90s more than 80% of Japanese industry has been operating at below full capacity. In this climate, there is no incentive for companies to invest in further expansion of plant and equipment. The stagnation in new industrial investment has led to average gross domestic product (GDP) growth of under 1% per annum throughout the '90s.

The severity of this stagnation can be seen in the negligible profits-to-capital ratio of the biggest Japanese companies as compared with those of the United States. While the labour cost per unit of output is identical for Japanese and US companies, Japanese companies average 60% more capital per unit of output than US ones. In 1994, the 151 US companies on Fortune magazine's list of the world's largest 500 corporations earned 12 times as much on assets as the 149 Japanese companies on the list.

While in previous decades growing exports increased Japanese corporate profitability (Japan is now the largest exporter of goods in the world), today its potential markets are shrinking, not expanding. The 1997 Asian economic crisis cut Japanese sales in the Asian region by roughly 60%.

In increasingly desperate attempts to boost business investment throughout the '90s, the Japanese government lowered interest rates all the way to zero. This strategy was based on an expectation that the information technology-based "new economy" would provide new opportunities for investors. In reality, the opposite happened and as the bottom dropped out of the dot-com stocks, Japan has seen its financial assets devalue even more rapidly.

Debt out of control

Consequently, far from encouraging investment, the free credit policy of the government has simply allowed private business debt to spiral out of control, without increasing corporate profitability.

The other aspect of the government's strategy was to launch major public works initiatives in order to keep large agricultural and construction companies afloat. These projects have ranged from the sublime (the building of new public amusements parks) to the ridiculous (the concreting of the bottom of Japan's rivers).

But no amount of digging holes and filling them in again has been able to stave off the growing debt crisis facing Japan's banks.

This Japanese banking crisis began to unfold after the 1997 Asian economic crisis, when the abrupt devaluing of Japan's Asian investments led to the collapse of several banks. In a desperate attempt to avoid a wholesale collapse of the banking system, the Japanese government used public savings funds to deliver a ¥30 trillion (US$25 billion) rescue package to the biggest banks, while forcing some of the smaller ones to collapse.

But this has not been enough. The constant line of credit that Japan has kept open to "stimulate" its economy has resulted in a banking system squeezed between an estimated ¥60 trillion of bad debt and constantly devaluing assets (mostly real estate and share portfolios).

When Japan's banks release their end of year figures in April (the Japanese fiscal year finishes on March 31), many, if not most, are expected to be in the red. (This is the first year that the banks will be required to give estimates of the real worth of their share and real estate holdings).

The recent plunge in the Nikkei was related to massive sell-offs of shares in profitable companies by banks ahead of the March 31 deadline, in an attempt to make their published balance sheets look better.

But it's not just the banks that are in deep trouble. Ten years of enormous "stimulatory" packages has left the Japanese government with debt figures that are estimated at 130% of GDP, the highest among the developed capitalist countries. If the devaluation of assets held by the state pension funds are taken into account, the figure could rise as high as 250%. Two thirds of the annual government budget is dedicated to servicing the debt.

If this situation wasn't bad enough, several factors during 2000-01 have pushed the economy to the brink of collapse. The first is the continuing impact of the economic crisis which has limited opportunities for Japanese investment in Asia. While in 1995 Japanese investments in Asia totalled ¥119.2 billion, in the first half of 2000 they totalled just ¥3 billion.

The second has been the slowdown in the growth of the US economy and the consequent decline in the growth of US imports of Japanese goods. The US provides more than 20% of Japan's export market.

The third factor is a decline in domestic spending in Japan itself, resulting from working people's fear that the financial crisis will lead to a big increase in unemployment. With this fear hanging over their heads ordinary consumers have not been seduced into accumulating household debt by the banks' near-zero interest rate charges on consumer credit.

This is not surprising, given that the crisis is already being felt by workers. Unemployment in Japan rose sharply in 1998, and grew to 4.9% over the course of 2000. Real income declined by 4% in December alone, and liabilities arising from bankruptcy increased by 120% during 2000.

The steady decline in "consumer confidence" indicates that most Japanese are sceptical about the government's assurances that things will get better, and not worse.

So while Japan has narrowly escaped falling back into a technical recession, with real GDP growth of 0.8% in the December quarter, when deflation is taken into account nominal GDP contracted by about 0.5%.

The economic data for January is even starker. Industrial production fell by a 3.9%, and core machinery orders, which had shown only modest growth in 2000, also fell.

The situation has the US corporate elite, and its government, squirming with frustration.

US yells jump

The US rulers' solution to the crisis is that Japan must "restructure" and "recapitalise". In other words, the banks must force a large section of the country's businesses into bankruptcy by cutting the credit lines, leaving more market share for those that survive. However, while US economic policy advisers acknowledge that their prescription will involve "economic pain", they fail to point out that — given the depth of the overcapitalisation problem afflicting the Japanese economy — this is likely to be on a scale comparable to the 1930s Great Depression.

The US is pushing this solution in the deluded belief that it is possible to isolate the effects of a Japanese economic collapse from the rest of the world.

On March 21, the LDP government announced proposals to "reflate" the economy by printing more money and buying off the debt. This would have the effect of stimulating inflation, which would devalue the debts of the banks and big corporations.

The LDP's approach is less motivated by concern for rising unemployment than for its construction industry and agricultural business mates. Bribes to LDP politicians from these sectors of Japanese industry for lucrative government contracts has been so prevalent that the new construction minister told the media last year that she was forced to take the job, being the only minister left who had not been caught taking bribes from construction companies. These links mean that the LDP is unwilling to force the huge number of bankruptcies necessary to reduce the country's excess productive capacity.

The danger for the US in the LDP's approach, as Washington and Wall Street are only too well aware, is that rapid inflation will drive down the exchange rate of the yen, making Japanese exports to the US even cheaper, and making the Japanese market, which accounts for 10% of US exports, much less accessible.

In contrast, a general financial collapse might open up opportunities for US business in Japan. As the London Economist put it in 1998, "[The Japanese government] should take over failed assets and sell them off... And if foreigners should want to buy the assets ... the government should be only too willing to take their money."

However, the US is able to place only limited pressure on the Japanese government. For the last decade, the US has used the sale of Treasury bonds, bills and notes to finance its enormous trade deficit. And Japan is now the US's biggest creditor, holding at least US$300 billion of bonds, and possibly as much as US$600 billion. If Japanese banks and corporations were to sell these off, as they threatened to do in 1998, the resulting shock wave could cause Wall Street to collapse.

While US economists are not publicly discussing the possibility that the crisis may force Japanese corporations to sell their bonds in order to raise ready cash, President George Bush's financial advisers are desperately working on a plan to pay off the enormous federal government debt as quickly as is possible, and to cease issuing new Treasury bonds. To achieve this will mean severe austerity measures, or tax increases or both.

Any crisis in Japan, however, will have implications much broader than just the US debt. Japan controls over one third of the world's savings, and has the highest overseas investment per capita of any country in the world. If Japan's economy contracts sharply, as it must at some point, the withdrawal of this investment will push economies all over the globe into severe recession. In the context of the current US-led world-wide economic slowdown, this could be devastating.

Mori's resignation will not solve the stand-off between the United States and Japan. The peculiarities of the Japanese political system, where the LDP has governed for 50 years with a break of only a few months, mean that there is no alternative capitalist government in the country. As a result, cynicism and frustration are widespread within the population.

Mori's approval rating was down to just 6% in January, and more than 50% of Japanese voters say they do not support any electoral party. The LDP is likely to do very badly in the July elections, probably resulting in an even more unstable coalition government.

Neither the US demand for an immediate depression nor the LDP's wishful reflation strategy will make things better for the working-class people of Japan. It is becoming clearer that the LDP cannot stave off economic collapse forever. The question is no longer whether Japan will go into depression, but when.

If you like our work, become a supporter

Green Left is a vital social-change project and aims to make all content available online, without paywalls. With no corporate sponsors or advertising, we rely on support and donations from readers like you.

For just $5 per month get the Green Left digital edition in your inbox each week. For $10 per month get the above and the print edition delivered to your door. You can also add a donation to your support by choosing the solidarity option of $20 per month.

Freecall now on 1800 634 206 or follow the support link below to make a secure supporter payment or donation online.