Japan’s bank crisis deepens
AS JAPAN’S banks struggle under a mountain of
uncollectable debt, the government of Junichiro Koizumi seems to be preparing
for nationalisation. This is implicit in the so-called Takenaka plan, the latest
package of ‘reforms’ for the financial sector unveiled by Liberal Democratic
Party (LDP) minister, Heizo Takenaka.
Takenaka has emerged as one of the most influential members
of Koizumi’s cabinet. His proposals have been attacked as ‘economic fascism’
by bank directors. Even within the LDP, underlining a growing split, a senior
figure branded Takenaka as ‘nothing more than an agent of the [foreign]
vultures’. In November 2002, the minister issued a deadline to banks: adopt
new proposals, within four months, to deal with non-performing loans or face
nationalisation.
If, as expected, a review of bank balance sheets in February
2003 uncovers a more desperate position than is currently acknowledged, the
nationalisation of several big banks is likely. The filing of annual accounts
each March has become a near-death experience for Japanese banks in recent
years. Last March, a banking crisis was only averted by government intervention
in the stock market.
The country’s dysfunctional banks are a legacy of the ‘Roaring
Eighties’ the decade of ‘zaitech’ financial engineering (similar to the
later swindles at Enron and Worldcom) and a stock market boom which lifted Tokyo’s
Nikkei index to 40,000 points (compared to 8,700 today). In 1990 this
speculative bubble burst, unleashing a deflationary spiral which has since
dragged share prices down by 75% and property prices by 90%. The banks, which
were instrumental in creating the bubble, took on huge amounts of risk.
Today, they are squeezed from every direction. Their capital
base has been undermined by large holdings of ‘junk’ stock and property. The
problem loan epidemic worsens as more and more firms turn into ‘zombie’
companies, unable to meet repayments – less than a third of Japanese firms
actually made a profit in 2001. Finally, 13 years of economic stagnation have
meant little or no demand for new profitable lending. According to a study by
Goldman Sachs, Japan’s non-performing loans now total $2 trillion, or half the
country’s gross domestic product.
The Takenaka plan is the latest in a series of measures
which aim to make workers pay for the crisis. Nationalisation will be used to
install new ‘reform-minded’ managers and speed up cost-cutting measures. The
Koizumi government has studied Britain’s private finance initiative (PFI),
involving private funding and control of public services, and this has been
incorporated into the Takenaka plan. A sprinkling of private funds, they hope,
can be attracted by a ‘fire sale’ of financial assets from bank
restructuring. Meanwhile, the astronomical cost of recapitalising banks will be
borne by taxpayers.
While Japan’s fractious ruling party has proceeded with
caution for fear of provoking a social explosion, the policies of the last
decade have seriously undermined the living standards of the working class.
Unemployment has risen from 3.4% in 1998 to 5.5% today despite a series of
Keynesian pump-priming packages worth $2 trillion over the past decade. To avoid
job losses, trade unions have accepted cuts in wages, pensions and other
benefits. Wage differentials in Japan have grown by 50% since 1995.
An earlier, unsuccessful attempt to bolster the banking
system in 1998-99 cost $85 billion. Two banks (Long Term Credit Bank and Nippon
Credit Bank) were temporarily nationalised. While this failed, it also aroused
popular resentment against big business cronies being bailed out by corrupt
politicians. At that time a new watchdog, the Financial Services Agency (FSA),
was set up to replace direct government monitoring of the banks. This was one of
many failed attempts to develop new structures to meet the crisis. The forced
merger of ten banks into four super-banks two years ago was another such
initiative.
The FSA has since joined the long list of discredited public
institutions accused of hiding the extent of the banking crisis. In September, a
dramatic conflict erupted between the Bank of Japan (BoJ – Japan’s central
bank) and the government/FSA. The BoJ announced it would buy shares from
commercial banks to shield them from the effects of a falling stock market. This
clash forced the dismissal of Takenaka’s predecessor and a shake-up of the FSA.
The threat of state intervention from a Thatcherite central bank chief, Masaru
Hayami, underlines the desperate predicament Japanese capitalism finds itself
in. Through fits and starts, periods of paralysis and crisis, Japan’s ruling
class seems to be positioning itself for more resolute action.
Takenaka’s proposals are clearly influenced by the
measures adopted in South Korea in 1998, when the financial system was
nationalised under an IMF programme. Seoul pumped $150 billion roughly one
third of GDP into recapitalising the banks. A quarter of these were closed
and over 100,000 bank workers were sacked. Today, a third of South Korea’s
banks are still state-owned, but the rest have been sold back to the private
sector including to foreign companies a conscious strategy to speed up ‘reform’
and break up traditional alliances between banks and industrial groups. This
short, sharp shock is increasingly held up as an example for Japan to follow. In
reality, however, corporate indebtedness (the ratio of debts to assets) is
actually higher in South Korea than in Japan.
While South Korea rebounded swiftly from its slump, due to
strong export growth to the USA, the Japanese government faces an entirely
different global environment today. Without the export boom of 1999, South Korea’s
economy could have contracted by 25% instead of 6% according to a study by
Deloitte Consulting. The thought of such a development in Japan terrifies the
country’s rulers. And they are not alone. Japan is the world’s second
largest economy, accounting for two thirds of Asia’s combined GDP. The
strategists of capitalism understand that a slump in Japan will have serious
regional and global ramifications and have therefore supported the LDP’s
efforts to stave off a downturn using Keynesian methods.
But while, for example, the Bush administration favours
nationalisation of the banks in Japan, there are growing concerns about the
deflationary impact of the Takenaka plan. As in South Korea, a wave of
bankruptcies will almost certainly follow as banks cut credit to struggling
companies. Deflation (falling prices) increases the real cost of debt, thereby
completing a vicious circle. The big banks have already responded to the
Takenaka plan by announcing ‘more aggressive’ restructuring: job losses,
wage cuts and branch closures. Mizuho, the world’s biggest bank in terms of
assets, has announced an ‘accelerated cost reduction programme’ involving
6,000 job losses and a 10% cut in wages.
In an apparent u-turn, the government has breached its own
budget limits, announcing additional spending proposals. But the emphasis has
shifted away from old-style public works schemes to the construction of a ‘social
safety net’ to cope with the effects of the Takenaka plan.
What happens if Takenaka’s ‘cure’ is worse than the
disease? By exerting more pressure on the banks, his measures could themselves
trigger bankruptcies and even a systemic collapse most probably via the stock
market. Such a scenario would pose a threat to the global financial system. Of
the top 100 banks worldwide, 19 are Japanese. Japan holds one fifth of all
actively traded US Treasuries. A forced sale of the latter could unleash a chain
reaction: downward pressure on the dollar, followed by further dumping of
dollar-denominated financial assets. No wonder Takenaka’s ‘reforms’ are
being watched nervously by capitalists worldwide.
Laurence Coates
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