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Issue 55, April 2001

When bubbles burst

    Biggest-ever Keynesian programme
    Political paralysis
    It hurts when bubbles burst

With the US economy now clearly in a downspin, parallels are being drawn with the situation ten years ago when Japan's stock market 'bubble' collapsed, plunging the economy into a prolonged period of stagnation. LAURENCE COATES looks at the Japanese experience.

This article first appeared in Offensiv, the weekly paper of Rättvisepartiet Socialisterna (Socialist Justice Party), the Swedish section of the Committee for a Workers' International.

AT THIS YEAR'S World Economic Forum in Davos, Japan's prime minister Yoshiro Mori revealed that the so-called 'lost decade' of the 1990s had cost the Japanese people 1000 trillion yen ($8,000bn), an amount equivalent to twice the country's gross domestic product (GDP). At the same meeting, Goldman Sachs economist Kenneth Courtis summed up the mood of world capitalism: 'The only way you can be optimistic about Japan is to look at the charts upside down'.

The collapse of Japan's asset bubble delivered a knock-out punch from which the economy has not recovered. Now the country is heading for an even worse downturn.

The Tokyo stock market's Nikkei 225 index has plummeted 35% in the ten months (up to February) since Mori took the helm, wiping out $884bn in share values - about four times Sweden's GDP. Stock markets plunged around the world last year, especially in Asia, taking their cue from the NASDAQ. In Japan, given the web of cross-shareholdings which link banks to huge business clusters called keiretsu, the Nikkei's slide is causing panic. It could drag bank balance sheets into the red, by the time accounts are filed in March, the end of the fiscal year. This could trigger a new banking crisis.


At the time of the last crisis (1998) the government set-up a rescue operation (costing $70bn) to prop up 15 banks. In 1999, Mori's predecessor, Keizo Obuchi, claimed to have raised the financial system 'off its deathbed'. He spoke too soon. An analyst at ING Barings points out that 'it's becoming clearer and clearer that the government never pumped enough money into the banks'.

Last year the economy experienced rapid growth in the first quarter, 10%, prompting loud claims of a recovery. In reality, this temporary surge was due to a massive injection of government spending (and some fiddling with statistics). Like trying to shock-start the heartbeat of a dead person - if you run enough electricity through it you'll succeed in making the limbs jump!

In August, the governor of the Bank of Japan, Masaru Hayami ended the country's so called 'zirp' - zero interest rate policy - a policy urged upon Japan by Washington and Brussels to stave off recession. Hayami justified his 0.25% rate increase - the first for ten years - claiming that the problem of deflation (falling prices) had subsided. He also spoke too soon - prices are still falling at an annual rate of 0.5% - and he has now been forced into a humiliating U-turn. Private consumption, which accounts for 61% of GDP, continues to decline. Partly, this decline reflects the squeeze on incomes as overtime, bonuses and wages are cut, and part-time jobs replace full-time ones. But it also reflects the desire for an insurance policy as the population dread what's coming next. Economists complain of the Japanese 'obsession with saving'. Unemployment has already reached a post-war record of 4.8%. It would be double this amount if measured same way as in Europe. Meanwhile, reflecting the insane logic of capitalism, the pressure on those in work increases: 10,000 people die every year from karoshi (overwork). Japan's suicide rate rose 35% in 1998.


top     Biggest-ever Keynesian programme

DURING THE 1990s Japanese governments have presided over ten stimulus packages worth a total of $1.15 trillion - equivalent to the entire GDP of Italy. This is the biggest Keynesian spending programme ever seen, costing as much as the US New Deal programme of the 1930s and Washington's war against Vietnam. Much of the money was spent on roads, bridges and other infrastructure projects in areas where the ruling Liberal Democrats (LDP) need votes. This has enabled the Japanese economy to achieve a pitiful average growth rate of 1.69% per year over the last decade. While these policies have not overcome the problems inherited from the 1980s bubble - massive debts, a profits squeeze and falling consumption - they have created new ones. Gross government debt has ballooned to 140% of GDP (from 60% in 1990), the highest level of any industrialised country. This debt mountain exceeded $6 trillion last year. In the long-term such a massive level of debt is untenable. At some point there is, as the Financial Times put it, 'a rendezvous with bankruptcy'. The working class will be asked to pick up the bill, in the form of tax increases and cuts in services. The OECD is calling for huge cuts, equivalent to 10% of GDP by the year 2010, claiming this is necessary merely to 'stabilise' the debt at 150% of GDP.

Last year's growth figure - 2% - is misleading. One section of the economy boomed - IT and electronics - while most of the 'Old Economy' languished in recession. Industries like retailing, chemicals and steel have excess capacity coming out of their ears. The government forecasts growth of 1.7% for the coming year, but even this modest figure is unrealistic given the dramatic slowdown in the US economy. The Japanese car industry ships 40% of its exports to the US market. Japan will suffer still greater damage indirectly, as key markets in its East Asian hinterland are sucked into the vortex of a US downturn. Taiwan, Thailand and Malaysia, which all rely heavily on Japanese technology and loans, will be hammered by collapsing US demand for their electronics exports. Last year Japan shipped 50% of its electrical-machinery exports, 60% of its IT-related exports, and 68% of its electronic-components exports, to Asian countries.


A true measure of last year's 'recovery' is the number of bankruptcies - 25,000, a new record - which left behind them a total of $218bn in unpaid debts. This is five times the level of bankruptcies and ten times the level of debts of four years ago. In October, Chiyoda Mutual, the country's twelfth largest insurer, became its biggest bankruptcy since the second world war. For Chiyoda to have turned a profit on its share portfolios, it needed the Nikkei to rise above 22,000 points (it was 16,000 when the company collapsed and has fallen subsequently).

There are growing fears that even bigger corporate collapses are looming, with the prospect of a credit crisis. Companies are sinking deeper into debt because banks won't give them new credit and consumers won't buy their goods. This is what economists call a debt trap. Domestic bank lending is at its lowest level for nine years. As companies fail, the risk they will pull banks down with them grows.

The FSA - the banking watchdog - estimates that Japan's banks had problem loans of 63.3 trillion yen ($550bn) last year. The true figure could be double this. In fact banks are probably in a worse state now than they were at the time of the 1998 crisis.

Every 500 point fall on the Nikkei makes matters even worse. One solution being mooted is to force the state-owned postal savings system - the country's largest bank - to pour funds into the stock market. Even Business Week commented that 'for state-controlled postal savings institutions to siphon private nest eggs into this black hole smacks of irresponsibility'.


top     Political paralysis

THERE ARE GROWING calls for the government to intervene in the stock market to support prices. On this, as on all issues, the politicians are facing in every direction. Paralysis at the top is a clear sign that the Japanese capitalists have lost their way. Young Turks in the LDP favour a 'short, sharp shock' for the economy, with South Korea in mind. The opposition Democratic Party of Japan, which made gains in the 2000 election, favours faster deregulation and restructuring. The old guard in the LDP muddle on, less inclined now to return to the party's dirigiste (state interventionist) tradition, but not ruling it out.

The public standing of the political elite has sunk to new lows, with Mori recording single-figure support in some opinion polls, and his three-party coalition government reeking of scandal. Three cabinet ministers have been forced to resign, most recently the Economics minister, Fukushiro Nukaga, after accepting bribes. The political system is notoriously corrupt, with links between top politicians, policemen, businessmen and organised criminals.

The traditionally faction-ridden LDP has seen frantic plotting in recent months from pro- and anti-Mori groups. Last November, LDP-dissident Koichi Kato threatened to support an opposition no-confidence motion. Kato was defeated, but the outcome left Mori no stronger. "The Mori administration stands on even shakier ground than it did when the Kato rebellion failed", laments The Japan Times (2 February 2000).


The pessimistic tone in virtually all bourgeois media coverage could give the impression that the Japanese government has defiantly resisted the pressure from global capitalism to 'reform' its economy. Some, laughably, compare the country's powerful bureaucracy to a 'communist regime'. This is completely misleading. In reality, the pace of globalisation - foreign investment, acquisitions, deregulation and privatisation - is accelerating as elsewhere.

Recent years have seen a series of ground-breaking departures: The 'Big Bang' financial deregulation; measures to speed up the unwinding of cross-shareholdings and disband the keiretsu; and in January this year a major shake-up of the civil service under the heading 'smaller government'. Mori compared this piece of 'reform' - by which one in four civil service jobs will vanish over ten years - with the 'Meiji restoration' (of the emperor) in 1868.

The direction of economic policy - despite government hesitation - follows an all too familiar pattern. The Financial Times (27 June 2000) makes an interesting observation: "The experience of the last decade has shown that the times when the LDP has become most 'reform minded' is when the markets have tumbled".

Japan provides brutal evidence that unless capitalism is overthrown, the juggernaut of globalisation will roll onward, even in conditions of an economic downturn. The economic crisis has increased Japan's dependence on the world market. Half of Honda's cars are sold on the US market. While Japanese car exports have declined during the 1990s, production from 'transplants' in the USA and Europe has increased and are now the main source of profits.


Similarly, dependence on finance capital from abroad has increased. By 1999 foreigners controlled 14% of the Tokyo stock market. The trend in the 1980s when Japanese companies conquered Europe and America has been reversed with a big increase in foreign takeovers in Japan. "Economic reforms have triggered a dramatic surge in foreign investment into Japan's once protectionist markets", writes the Financial Times (17 November 2000), adding that "the arrival of these new foreign companies is threatening to unleash shockwaves into Japan's corporate world".

Total foreign direct investment (FDI) reached $20.8bn in 1999, double the 1998 figure, which was itself double the figure for 1997. The stock market collapse has left many companies with modest market capitalisations in relation to assets. This has helped fuel a wave of so called 'mergers' (in reality takeovers), for example, in the car industry. These have (naturally) been accompanied by downsizing, plant closures and slashing of payrolls to 'purge' chronic overcapacity. Japan's big four car makers sacked 30,000 workers between 1991 and 1998.

Renault, the world's tenth largest car maker, paid $4bn in 1999 for a controlling share in Nissan, the world's fifth largest. Ford took a 34% stake in Mazda while General Motors took a 40% stake in Isuzu and 20% of Suzuki. DaimlerChrysler paid $2.1bn for a 34% stake in Mitsubishi Motors, giving the German company a veto and four seats on the board from where it is carrying out 'western-style restructuring'. Nissan, with debts of over $40bn, has seen the biggest shake-up, under its new Renault-appointed president, Brazilian-born Frenchman, Carlos 'Le Cost Killer' Ghosn. Nissan management were delighted by the way Renault butchered plants in Europe in the mid-1990s with the support of the French government. This provoked the first ever 'euro strikes', with workers in Belgium, France, Spain and Slovenia taking action together - an important example for Japanese car workers facing the same management methods. Ghosn plans to close five Nissan factories, sack 21,000 workers, and halve the number of suppliers.


Against this background it is hardly surprising that the term gaiatsu - foreign pressure - is back in circulation, conjuring up the ghost of Commodore Perry, the American whose 'black ships' forced Japan to open up to the outside world in 1853. Just as the EMU project facilitated 'market reforms' across Europe, and China has seized upon WTO-membership to speed up its privatisation and restructuring program, the Japanese bourgeoisie need gaiatsu to force through job cuts and closures. This was spelt out by economist Koji Endo: 'Gaiatsu is a tool. Because of gaiatsu there was no choice but to do it (restructuring). The excuse was not available to them'.

On the basis of capitalism there is a logic in this: debt-laden Japanese companies need foreign investment and 'partners' in order to survive. And then again, why not let someone else do your dirty work?

top     It hurts when bubbles burst

IN THE 1980s, speculator George Soros argued that 'Japan is fast becoming the leading economic power in the world'. This view was not exceptional among bourgeois economists. In the interval since then Japan has been transformed from an economic model into the sick man of world capitalism. Its industry produced less in 1999 than it did in 1990.

Japan is a warning of what happens when speculative bubbles - which are an inevitable feature of parasitic capitalism - finally burst. During the 'Roaring Eighties' share prices in Japan soared into the stratosphere. Nippon Telegraph and Telephone (NTT) became the world's most valuable company - worth for a brief period more than the five biggest US corporations combined! The Tokyo stock market sailed past Wall Street in terms of total market capitalisation (the value of all the listed companies) in 1987, while the US economy was twice as big as Japan's. Two years later, Tokyo's total market capitalisation was equivalent to half the world total. Today it's only one-fifth the size of Wall Street. Speculation on the stock market was accompanied by a bubble in property prices. The land area of Japan - roughly the same size as California - would have cost seven times more at that time than the whole USA!


For a period Japanese capitalism, like the US economy more recently, defied the laws of economic gravity. Such a situation cannot exist indefinitely. When the bubble burst it triggered a devastating chain reaction. Property prices have since fallen by 80%. The Nikkei index has fallen to a third of its 1989 level. Could the same happen in the US? Two years ago the Japanese finance minister warned Federal Reserve chairman, Alan Greenspan, that the US was heading for a bubble.

The collapse on Wall Street which started last year was absolutely inevitable, and was predicted in the pages of Socialism Today. Last year's 50% fall in the NASDAQ was the worst decline it its 29-year history, wiping a colossal $2.5 trillion off share values. This has created a 'negative wealth effect', reversing the trend of recent years.

The so called 'wealth effect' was a result of soaring share prices which enabled US households to borrow against their assets (shares) in order to finance a spending spree. This provided the rocket fuel which drove the consumer boom in the USA - the single most important factor propelling world growth. Until last March, the US stock market had been rising, with only short-term interruptions, for 18 years. People attributed almost mystical powers to Greenspan, who they believed would be able to shield them from a market collapse. This mistaken belief that somehow the government wouldn't allow the stock market to collapse, was also a crucial factor in the growth of Japan's asset bubble.


Today 49% of US households own stocks compared to just 4% in 1952. This is a much greater proportion than in Japan. The average American is far more exposed to the stock market and more heavily in debt at the present time than the average Japanese was in 1989.

During the Japanese boom, despite its overwhelmingly speculative character, there was a significant expansion of productive forces due to a huge increase in investment in new plant, machinery etc. Deutsche Bank estimates that between 1988 and 1992 Japan added the productive equivalent of France to its economy. Here again we see a parallel with the US economy in the recent period. US industrial production rose 38% between 1990 and 1999. Corporate investment has reached historically high levels, creating a huge extension of productive capacity which can't be utilised on a capitalist basis. As Marx explained, 'the last cause of all real crises is the inability of society to consume what it produces'.

As the stock market value of companies surged they had no problems getting new loans to finance investment. The collapse of share prices, however, left Japan's corporate giants saddled with massive debts. There is a growing realisation that US corporations have also borrowed too much during the boom and will have trouble paying back their debts. Major corporations are already bracing themselves for recession with big job cuts already at General Motors, Lucent Technologies, WorldCom, DaimlerChrysler, Gillette, AOL Time Warner and many others.


This goes a long way to explain the action of the Federal Reserve in cutting interest rates. Greenspan fears a liquidity crisis like that in 1998, when world financial markets were balanced on a knife-edge. In Japan, the economy continued to grow for almost two years after the bubble burst. The US economy, however, has seen no such delay. As The Australian newspaper points out: 'In little more than a quarter, US growth has fallen from around 4% to no growth - one of the sharpest falls in history. That's why there is an element of panic in the moves to stimulate the economy'.

The policies now favoured by Bush and Greenspan failed to stimulate Japan's economy. Japanese governments slashed interest rates to zero, to no avail. Therefore we are not surprised when we read in The Economist (27 January 2001) that "the big worry is whether America might follow a similar road to that taken by Japan ten years ago: a burst bubble followed by a deep and prolonged recession, or even a slump".

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