The 'yen bubble' bursts


By Reihana Mohideen

Japan has been the "economic miracle". Everywhere it turned, it conquered markets; its "recessions" would have been considered semi-booms by most of its competitors. From 1986 to 1990 it outgrew every other OECD nation every year — an unprecedented run. It seemed almost unscathed in 1987, when the stock market plunge sent to the wall major companies in other countries.

Yet last week, the Nikkei stock market index hit its lowest level November 1986. Around $A3000 billion has been wiped out since the market's peak capitalisation in December 1989: Japanese companies have lost half of their market value since then.

For the past year, Japanese investors have all but boycotted the stock market. Only foreign investors, thinking they were getting bargains, have put big money into the market: in 1991, Japan actually became a net importer of capital, taking in $36 billion more than it sent out.

Land prices, which skyrocketed in the 1980s, have collapsed by as much as 30% in Tokyo and 40% in Osaka. Land, mostly in Tokyo, is the collateral for some 35% of the assets of Japanese banks.

At the peak of the land boom, banks had loaned about $A1000 billion to land developers and speculators. According to the April 8 Financial Review, they will be lucky to get a third of this money back. Many of Japan's major banks may be broke, although no-one knows for sure, because Japanese banks are no longer required to disclose the level of their bad loans.

What made the "yen bubble", as it came to be known, burst?

The simplest answer is that bubbles always burst eventually. Put another way, bubbles aren't a very sound foundation for economies or anything else.

Japanese GNP grew 5% a year in the latter half of the '80s. But that growth was fuelled by massive speculation in the property market and in the money market, helped along by record low interest rates: the official discount was only 2.5% until May 1989.

As the stock market soared, corporations, which in Japan hold large stock portfolios, made huge paper profits. Some manufacturing companies made more money through trading in the financial markets than through producing actual commodities. The booming real estate markets made corporate land holdings more valuable than the factories built on them.

Businesses used this bubble of inflated stock and real estate values as collateral to raise capital for expansion. Companies retired their bank loans and financed a spending boom by issuing shares.

From 1985 to 1990, Japanese companies raised $800 billion in new issues on the Tokyo market. Capital investment in 1986 accounted for an unprecedented 60% of the economy's growth (every year since 1987 Japan has invested more in capital than the US). From 1986 to spent on new factories and equipment, and $600 billion more on research and development. Cheap cash kept Japanese companies in the forefront of technology.

Huge sums of capital went offshore to build new manufacturing facilities, in Asia in particular, and to purchase assets ranging from golf courses to cinema studios to car plants in the US, Britain and Canada. This "excess money" made Japan the world leader in the finance sector. The world's 10 largest banks are based in Tokyo.

Labour productivity in Japan is far higher than in the US or West Germany. Extremely long annual working hours, very poor social services and widespread use of subcontracting and part-time workers are the norm, while real wages have increased only marginally.

These factors combined to make Japan one of the most competitive economies in the world. But they also limited its domestic market, making it even more reliant on exports. The massive investments of the late '80s are wasted if they don't eventually result in products that can be sold.

Such sales have been increasingly hampered by protectionism in the US and Europe, by the US recession (every 1% drop in the US domestic market is said to knock 2.5% off Japanese exports to the US) and by the rising exchange rate of the yen against the US dollar. This last factor has also massively devalued Japanese investments in the US.

By 1989 there was serious concern in Japan that the speculative boom had gone too far. In December 1989, the Bank of Japan began tightening credit; by the following September, the official discount rate had reached 6%. The forecast was that the "real economy" would be unharmed, and that the bank would achieve a perfect "soft landing": 3.5% growth in 1992.

That forecast is now thoroughly disproved. Although the figures are not yet in, the expectation is that Japan will record its first two quarters of declining output — for the last quarter of '91 and the first quarter of '92 — since the oil shock of 1974.

Major companies are slashing capital investment. According to Japan Development Bank figures, after a 3% increase in capital investment in 1991, investment in new plants and equipment in fiscal 1992 will fall almost 1% — the first annual decline in two decades.

Manufacturing companies' capital spending is expected to decline in the coming fiscal year by 8% and industrial production by 4% in the three months to March, the biggest decrease since 1975.

Bankruptcies are already breaking records, with the liabilities of ruined firms in 1991 totalling $63 billion. In the financial year to next March, company profits are expected to fall for the third consecutive year, the first time this has happened since 1945.

Partly because of the rise in interest rates, consumer spending is down. Car sales are depressed, with Nissan's sales falling by around 4% in February. Consumer electronic companies, which at the moment have no "new angle" products, are being pounded particularly hard. Toshiba's profits were down almost 60% last year. Sony, the country's irm, in February reported its first annual operating loss since 1957.

Japan's balance of trade surplus might cushion the recession, particularly if the US recession, as some claim, is coming to an end. But an increase in Japanese exports would be certain to exacerbate existing trade frictions.