1990s >> 1992 >> no-1059-november-1992

Keynes — in the land of the sinking sun

For more than a decade, Japan has been portrayed as a non-stop growing economy based on new concepts of social harmony that somehow made it different from the other major industrial powers which were characterized by strikes and general social unrest as well as by inferior production records. The Japanese workers employed by the big multinationals such as Nissan, Sony and Honda were looked after in terms of regular employment, access to company hospitals and modern housing. Workers and managers wore the same company-style clothes, ate in the same canteens and worked in teams on the production line where the responsibility was shared by the team, with a resultant increase in production.The Japanese economy has tripled in size since 1967. To many observers Japan has been, in economic terms, “the Land of the Rising Sun”. The Labour Party have been impressed to the extent that they suggested in their 1991 Policy Review document that the management of the Japanese economy indicated how a country can work its way out of recession:

  In Japan they train their way out of recession . . . Wc want to create a new training culture across British industry, one which recognises the relationship between training, innovation and profit.

With this rapid growth in the Japanese economy and the resulting surplus of funds available to Japanese banks huge loans were made abroad for the purchase of assets which were perceived to be cheap. By June 1990 Japanese banks had 12.4 percent of American assets or $408 billion-worth (Economist, 18 January 1992). The scale of this lending abroad is exemplified by the State of California. In the inflationary 1980s nearly every new office block in downtown Los Angeles was financed by the Japanese. The Japanese banks own the fifth, sixth and seventh largest banks in California.

Today, however, Japan faces an accelerating banking crisis as asset values inevitably decline as the world economy, including Japan, enters the deflationary phase of a world depression.This has resulted in a credit crunch and the consequent downgrading of the credit rating of Japanese banks and institutions. Because the accounting methods of Japanese banks fail to report loan defaults for periods as long as a year after the borrower has stopped paying, and because the Finance Ministry in Tokyo will not compel the banks to report them, the American regulatory authorities are rigorously examining the accounts with the result that the banks have to make higher loss provisions. These problems can be duplicated in Europe, Australia and throughout the industrial world.

The property boom in Japan involved levels of borrowing exceeding that of the UK and the USA. Mortgages of 99 years are not uncommon and housing is bought as an investment as well as a place to live with a view to passing it on to future generations. Availability of land is an important factor since Japan is a mountainous country, 68 percent of which is uninhabitable. Although in land area it is roughly the size of Italy the population—twice that of Italy— is confined to an area about the size of Austria.

This inevitably affects land prices and the banks have accumulated property loans on both domestic and commercial property. A one-bedroom flat in Tokyo could cost $500,000 before the market began to fall. Furthermore, large sections of the Japanese population have used the property they were buying as collateral for further bank loans to invest in the Japanese stock market. Along with the banks and institutions buying shares, this pushed the Nikkei Dow index to astronomic levels.

The Japanese economy is now moving into recession following on the banking crisis and credit crunch. Property prices are on the slide, business bankruptcies are increasing. The major Japanese banks have been put on credit watch by the major debt rating agencies. The worsening economic conditions are reflected as elsewhere in social disorder, as instanced by riots in Osaka:

  Trouble flared on Thursday after labourers tried to storm a municipal centre in protest against a decision to cut benefits to many of the local jobless, who do not qualify for full unemployment pay . . . About 2500 riot police dispersed hundreds of protesters early yesterday after cars and bicycles were set ablaze . . . Japan’s unemployment rate is only 2.2 percent but that disguises the fact that many companies arc saddled with surplus staff, whose jobs may be in danger.

(Daily Telegraph, 3 October).

In a recent quarterly report the Bank of Japan acknowledged the worsening state of the economy:

  The outlook for profits, sales and investment were all down . . . The survey was reinforced by Nippon Steels forecast of a 74.6 percent drop in pre-tax profits for the half year ending this month . . . Job losses have so far been relatively few but with consumer demand waning, output falling, inventories growing and profits plunging many economists say it is only a matter of time before the manufacturing sector contracts with big job losses. (Financial Times, 13 September).

Some workers deemed to be no longer useful to their companies are being paid to stay at home but this is unlikely to continue indefinitely.

As in other countries the ruling politicians have been making proposals in order to convince the public “that something is being done to put things right”. And it is Keynesian methods that have been proposed as the solution: injecting large sums of money into the economy in order to upgrade the infrastructure. Undoubtedly the infrastructure badly needs improving. The bulk of the Japanese population do not enjoy the facilities of those who work for the big corporations. Sixty percent still live in backward agrarian conditions in dwellings whose toilets are not connected to outside main sewers. Japans roads are not adequate for the traffic which has increased five times in the last 25 years (Wall Street Journal, 28 September). Traffic holdups 50 miles long are not infrequent. But this is not the reason for the proposed Keynesian spending spree on which the government has embarked.

These plans have already run into difficulties about how the government should finance them:

  Mr Hat, Japanese Finance Minister, giving a lecture in Tokyo ruled out a return to special borrowing to finance the emergency spending package announced in August. He also rejected demands from retailers and industrial leaders for an income tax cut in 1993 to boost flagging consumption . . . His comments signal an intensification of the political struggle over how the government should finance higher public spending, which is virtually the only domestic source of economic growth at the moment. (Financial Times. 30 September, our emphasis).

In other words, the economy is moving into deep depression with zero growth in the private sector. So how can the Keynesian-inspired government bail-out plan revive the Japanese economy? Attempts to avert slumps by increased public spending have never yet been effective in a contracting economy. It failed to revive the American economy in the depression of the 1930s in spite of schemes such as the Boulder Dam under the New Deal. There are many similarities between the 1929 crash in the USA and the crash that is beginning now in Japan where the Nikkei Dow has lost over 60 percent of its value. The instability of the Japanese banking sector bears some comparison with the state of the American prior to Roosevelt closing them.

The socialist analysis, using the scientific Marxist economic approach, shows that this proposed solution (or any like it that are propounded by the Labour Party) is doomed to failure. The world depression that today engulfs all countries in varying stages, and the human tragedies that go with it of which the Osaka incident is but one example, are inherent contradictions of the capitalist system whether market-orientated or state “controlled” and cannot be solved by tinkering about with government finances.

But Japan may prove to be different in one sense, namely that the depression may reach depths not seen in previous ones as the huge mountain of debt is liquidated. The world depression is causing contraction in the Japanese economy and is exposing the phoney myth of permanent Japanese social tranquillity between workers and employers. The economic sun is no longer rising in the East. It is sinking and taking Keynesian theory with it.

Terry Lawlor