Japanization

What the World Can Learn from Japan's Lost Decades

William Pesek

• Publisher: Wiley
• Year: 2014
• Print ISBN: 9781118780695
• eBook ISBN: 9781118780725
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Asian Politics
• Index: Politics & International Relations

An in-depth look at Japan's economic malaise and the steps it must take to compete globally

In Japanization, Bloomberg columnist William Pesek—based in Tokyo—presents a detailed look at Japan's continuing twenty-year economic slow-down, the political and economic reasons behind it, and the policies it could and should undertake to return to growth and influence. Despite new Prime Minister Shinzo Abe's promise of economic revitalization, investor optimism about the future, and plenty of potential, Japanization reveals why things are unlikely to change any time soon.

Pesek argues that "Abenomics, " as the new policies are popularly referred to, is nothing more than a dressed-up version of the same old fiscal and monetary policies that have left Japan with crippling debt, interest rates at zero, and constant deflation. He explores the ten forces that are stunting Japan's growth and offers prescriptions for fixing each one.

• Offers a skeptical counterpoint to the popular rosy narrative on the economic outlook for Japan
• Gives investors practical and detailed insight on the real condition of Japan's economy
• Reveals ten factors stunting Japan's growth and why they are unlikely to be solved any time soon
• Explains why most of what readers believe they know about Japan's economy is wrong
• Includes case studies of some of the biggest Japanese companies, including Olympus, Japan Airlines, Sony, and Toyota, among others

For many investors, businesspeople, and economists, Japan's long economic struggle is difficult to comprehend, particularly given the economic advantages it appears to have over its neighbors. Japanization offers a ground-level look at why its problems continue and what it can do to change course.

Chapter 1
How Japan Papers Over Economic Cracks with Monetary and Fiscal Policy

On November 24, 1997, Lawrence Summers was having an unusually busy Monday morning on a trip to Vancouver, and things were about to get steadily worse. The Asian financial crisis was ricocheting around the globe, and at that very moment claiming its biggest victim yet. South Korea, then the world’s eleventh-largest economy, was days away from receiving a $57 billion international bailout. But on that day, the deputy U.S. Treasury secretary had a far bigger problem on his hands, not in Seoul but in Tokyo: the collapse of 100-year-old Yamaichi Securities Co., an event that sent the Dow Jones Industrial Average down 113 points nearly one month to the day after Asia-crisis worries drove the index down 554 points in a single day, the largest drop ever.

I was among a handful of journalists traveling with Summers to British Columbia for a two-day Asia-Pacific Economic Cooperation summit of 18 world leaders. It started out innocuously enough for the star economist. On the schedule for the twenty-fourth were a bunch of bilateral meetings with finance peers from around the Pacific Rim and the occasional debriefing rendezvous with his boss, President Bill Clinton. At a dinner with his traveling press the night before, Summers seemed to relish a few days away from the madness of Washington and the mounting number of demands ending up on his desk as he prepared to replace Robert Rubin as Treasury secretary two years later. Summers gazed out onto Vancouver Harbor, breathed easily, and enjoyed the calm before the proverbial storm.

Yamaichi’s breathtaking implosion the next day represented the largest business failure in Japanese postwar history, and it raised the specter of the then-second-biggest economy joining Indonesia, Malaysia, South Korea, and Thailand in turmoil. For Summers, November 24 was a marathon of frantic face-to-face meetings with Japanese officials, including then–Prime Minister Ryutaro Hashimoto, and International Monetary Fund staffers. By day’s end, the most optimistic assessment Summers could offer was that Japan probably wouldn’t require a bailout from the International Monetary Fund (IMF). This was a good thing, considering an economy Japan’s size might not be too big to fail, but too big to save.

The next day, Hashimoto sought to buttress the point by making a pledge that seemed insignificant at the time. He said Japan is considering a variety of measures to support its shaky financial system, including using public money to bail out the nation’s debt-strapped banks. “Japanese citizens, parliament, and the ruling Liberal Democratic Party are all conducting serious debate on this matter, and I’m watching it with real interest,” Hashimoto said in Vancouver on November 25. “I’m looking at all possible options and considering further policy steps.”

The “options” and “steps” to follow would play a big role in why Japan’s first lost decade, the 1990s, would give way to a second and perhaps even a third. Pinpointing the exact moment when modern-day Japan became Japan is fraught with risk and subjectivity. But the downfall of Japan’s oldest securities house in 1997 offers a variety of fascinating bookends. Between 1997 and 1998, for example, a year of historic upheaval and big layoffs, Japan’s suicide rate jumped 35 percent and has remained around 30,000 per year ever since.

Yamaichi was founded in 1897, at the height of the Meiji Restoration, a period of enormous political, economic, and social change that marked Japan’s emergence as a modern power. In the years following U.S. Commodore Matthew Perry’s arrival in Tokyo Harbor in 1853 and the end of the Tokugawa Shogunate in 1868, Japan sought to leave its feudal past behind and build a market economy. As the nineteenth century wore on, the seeds of Japan’s industrialization and economic rise were planted. It was during this era that family business conglomerates, or zaibatsu, bearing still-familiar names like Sumitomo, Mitsui, Mitsubishi, and Yasuda, began to dominate. These fabled giants would later make their way into Japanese pop culture, as well as Tom Clancy novels and Western video games like Grand Theft Auto. These early corporate formations eventually gave way to Japan’s better-known keiretsu system of large, state-protected conglomerates that dominated the economy in the twentieth century. Elements of the keiretsu’s corporate ways persist even today. The most obvious is the practice of strong parts of an organization carrying weaker ones. Another is the custom of cross-shareholdings, whereby companies friendly with each other loan shares of their companies to avoid hostile takeovers.

As the 1800s were drawing to a close, Yamaichi opened its doors and persevered, decade after decade. It survived World War II and helped provide financing for the nation’s impressive rise from the rubble and its ambitions for global domination. From the economic launching point that was the 1964 Tokyo Olympics to the heady bubble days of the 1980s, Japan’s star rose and rose and its companies couldn’t lose. That was until an impossible thing happened as 1989 gave way to the 1990s—at least from the vantage point of top executives in Tokyo. The real estate prices Japanese conventional wisdom said could never fall did just that. The stock market that even many skeptics felt would never stop rising did as well. The proverbial music was stopping and Yamaichi President Shohei Nozawa was left without a chair.

Few Japanese can forget Nozawa’s tearful news conference following Yamaichi’s 1997 bankruptcy filing where, between sobs, he begged for mercy from the nation. As corporate theater goes, it was unbeatable. Television footage of the bawling Nozawa made the rounds again in February 2010, when Toyota Motor Corp. President Akio Toyoda wept openly at a Washington meeting with car dealers amid a series of safety lapses. Yet Toyoda was no match for Nozawa in the hanky department.

That November week started with one of the masters of Japan’s financial universe apologizing and Hashimoto saying he was “ashamed” the Finance Ministry didn’t spot the 265 billion yen ($2.6 billion) in hidden losses that brought the brokerage house down. And it seemed like an epochal turning point for Japanese bureaucrats. It’s often said, quite correctly, that prime ministers don’t run Japan, the bureaucracy does. These largely nameless, faceless policy makers had long decided which companies would live and die—which would get financing to grow and spread their tentacles abroad and which would stay modestly sized backwaters. Yet Yamaichi was a tantalizing example of markets deciding, Lehman Brothers–style. It was skeptical traders who ferreted out Yamaichi’s concealed losses and creative accounting. A week later, those same market sleuths were already on to a new target: Yasuda Trust & Banking Co., one of Japan’s biggest banks. Moody’s Investors Service had said it might knock its debt rating down to junk status. As Yasuda’s stock plunged, depositors lined up to withdraw their money, a scene all but unthinkable in wealthy, cosmopolitan, and finance-savvy Japan. Fear was in the Tokyo air. Yamaichi marked the first time Japan allowed a bank to fail in the five decades since World War II, and no one knew who would be next. Who else, a nation of 127 million wondered, might be hiding devastating losses on their balance sheets?

The same week Yamaichi failed, Daiwa Securities, Japan’s second-largest brokerage, held an emergency press conference to deny that it, too, was harboring massive losses. That November week is significant because it’s arguably the point when global markets began to understand the true depths of Japan’s bad-loan crisis and the breadth of the culture of concealment that enabled the problems to fester for many years and at the highest levels of government. It also, with the benefit of hindsight, could have been a major turning point for Japan’s approach to dealing with its bad-loan crisis.

That Tokyo let Yamaichi, the oldest of the big four securities houses, fail was seen as heralding a wave of Schumpeter-esque reform. (Joseph Schumpeter was the Austrian economist who championed “creative destruction” and free markets to make nations more competitive.) Financial systems, after all, need to be seen as punishing their weakest links, especially if they lack the transparency global banking norms demand. Yet it would be five years before Japan began getting serious about forcing debt-laden banks to write off the 52.4 trillion yen ($500 billion) of bad loans the government admitted to the industry harboring. For example, in 2002, Standard & Poor’s put the number at three times that. That came under then–Prime Minister Junichiro Koizumi (2001–2006), whose economy minister, Heizo Takenaka, clamped down on the banks.

In October 1998, Japan saw its next traumatic banking experience when Long-Term Credit Bank of Japan Ltd. (LTCB) crashed, this time under Hashimoto’s successor, Keizo Obuchi (1998–2000). Rather than allow one of the three main banks Japan used to fund its economic miracle to fail, Prime Minister Obuchi’s government took control as it launched what at the time was the world’s biggest banking industry rescue. The government moved to take over insolvent banks and recapitalize weak ones with a 60-trillion-yen fund. The bailouts continued under Obuchi’s successor, Yoshiro Mori (2000–2001), until Koizumi’s government said “enough.”

Yet the five-plus years between Yamaichi’s crash and eventual Koizimi-era reckoning is a period Japan will never get back. It was a window of opportunity to rein in financial excesses, restructure the banking industry, and keep Hong Kong and Singapore from encroaching on Tokyo’s place as Asia’s premier financial center. How did Japan manage to delay painful and destabilizing change? By employing the so-called Bubble Fix, a term popularized by former Morgan Stanley economist Stephen Roach, whereby central bankers and government officials soothe markets with monetary and fiscal stimulants in the short run in ways that create financial imbalances in the long run, essentially curing bubbles with new ones.

It was during the turmoil of Yamaichi failure and LTCB’s nationalization that the Bank of Japan first cut interest rates to zero. That honor will always be Masaru Hayami’s. His unsteady run as Bank of Japan (BOJ) governor between March 1998 and March 2003 set the stage for the monetary policy regimes later adopted, to varying degrees, by Ben Bernanke at the Fed, Mario Draghi at the European Central Bank, and current BOJ leader Haruhiko Kuroda. The problem with this monetary largess is that it reduces the need for structural change and artificially pumps up asset prices. By creating the illusion of vibrancy in stocks and real estate, and in turn, entire economies, all this free money does more harm than good.

Marc Faber, Hong Kong–based publisher of the Gloom, Boom, & Doom report, likens the last 15 years in markets to a relapsing alcoholic, and central banks to irresponsible bartenders. To dole out more booze, as monetary officials have been doing, is the wrong medicine. The problem, particularly in Japan’s case, is the lack of an exit strategy. Even when the world’s third-largest economy is churning out growth of, say, 3 percent, it’s more artificial than organic. Free money sapped the urgency from Japan Inc. at the very worst moment, just as it needed to keep up with a cast of growth stars in Asia, China included. All the liquidity the BOJ has been pumping into the economy since the 1990s was meant to support so-called zombie companies and industries that employ millions. In reality, it led to a zombification of the broader economy, complicating Prime Minister Abe’s revival efforts. Japan is still reluctant to abandon the strategies that propelled it into the orbit of Group of Seven nations.

One problem was that even when Japan tweaked its regulatory system, its underlying core remained very much intact. In the 1980s, for example, Japan’s “convoy system,” whereby stronger banks protected weaker ones, survived, as did the moral hazard policy of not letting banks, large or small, fail. In the first half of the 1990s, even as banks began approaching failure, bankers still felt certain Tokyo wouldn’t let a major one fail. While Yamaichi’s collapse a few years later altered that view somewhat, Japan spent much of the decade of the 2000s bailing out financial institutions. It can be argued that Japan’s entire economy operates in a convoy-system capacity. Because Japan lacks an expansive national safety net, banks inadvertently became one. The government would bail out banks so that they could keep even the dodgiest of companies afloat—and unemployment low.

This arrangement deadened the urgency for banks to write down the bad loans of the past, but so did regulatory structure. In an October 2001 paper, Bank for International Settlements economist Hiroshi Nakaso explored the two main structural problems behind Japan’s foot-dragging both on recognizing the depth of its nonperforming-loan crisis and addressing it: insufficient provisioning for debts that go bad and totally inadequate transparency.

“Public disclosure on NPLs was virtually non-existent before 1992,” Nakaso wrote.

The initial disclosure requirement introduced that year was based on tax law standards and covered a limited range of loans to legally bankrupt borrowers and loans past due 180 days or more. Moreover, borrowers’ creditworthiness was not necessarily reflected. For example, if a borrower close to bankruptcy had two loans of which one was performing and the other was past due more than 180 days, the disclosure standard required only the latter to be included in the disclosed figures. Consequently, a substantial portion of NPLs remained outside the scope of public disclosure.

Also in 1992, Lombard economist Brian Reading published his prescient Japan: The Coming Collapse, tracing the nation’s economic miracle, one that formed the core of a development model pursued from South Korea to China to Thailand. The former Economist editor has described Japan as “communism with beauty spots, not capitalism with warts.” Hyperbole aside, Reading’s point is that the mechanics of Japan Inc. have long been rigged in labyrinthine ways to thwart the forces of capitalism.

The core of this system is often referred to as Japan’s “iron triangle” of politicians, bureaucrats, and big business, each occupying a corner. Each facilitates the others in achieving their goals and aspirations—rising status for politicians, power for bureaucrats, and riches for corporate chieftains.

“Each side involved exchanges of favors for money,” Reading said.

Under the single-vote multimember electoral constituencies, factional party politicians needed money to buy votes and career advancement. They delegated executive power, and to a large extent policy formulation, to bureaucrats. The bureaucrats used their power to do big business favors and were rewarded with sinecures on retirement. In return for preferential treatment, big business supplied politicians with money. Corruption was endemic.

In Reading’s view, one could also call this a “plywood trian...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Dedication
• Preface
• Acknowledgments
• Chapter 1: How Japan Papers Over Economic Cracks with Monetary and Fiscal Policy
• Chapter 2: The Female Problem
• Chapter 3: The 1,000,000,000,000,000 Yen Monster
• Chapter 4: The Fukushima Effect
• Chapter 5: Galapagos Nation
• Chapter 6: Hello Kitty Isn’t a Foreign Policy
• Chapter 7: Will Abenomics Save the World?
• Bibliography
• About the Author
• Index
• End User License Agreement