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11/18/1999
Japan...yes, Japan
So why choose Japan as a "hott spott?" After all, by most
definitions a hot spot would be a place where the potential, or
outright existence, of military conflict is high and of concern to
the U.S. But after looking at the Asian financial crisis of 1997-
98, I think you''d agree that crises of this kind are just as
worrisome, and, in the case of Indonesia, a financial crisis spilled
over into the military realm when we witnessed the removal of
their longtime leader Suharto.
As for Japan, what happens with their economy going forward is
a key to the global recoveries taking shape across the rest of Asia.
If Japan can turn it around, it will only help the others.
The other reason for looking into Japan this week is a purely
selfish one. I had to do a little research on the country for a
newspaper story so as I thought about a topic for the week, a
light bulb went off in my head and I said, "Hey, why not Japan?"
The Japanese economy has certainly received a fair amount of
press over the past few years. The country has suffered through a
severe recession, the result of a classic "asset bubble" from the
excesses of the late1980s. Only in the past year or so have there
been signs that the economy is about to recover. But I would
argue they have a long way to go.
For starters, let''s take a look at the latest government stimulus
package announced just last week. I think this is about #9 in the
past few years. By some estimates the latest plan is worth up to
$170 billion. The economy seems to have leveled off the past few
quarters according to the government''s own surveys. Is this
latest stimulus package the last boost needed to generate
sustainable growth or is it a monumental waste of money?
The problem with all of the stimulus programs is that they have
tended to focus on two areas. Infrastructure, or construction,
projects, and employment and loan subsidies. What these
programs have failed to do in the past is stimulate consumer
spending. The programs typically are a conglomeration of classic
pork barrel projects, designed to ingratiate local politicians with
their constituencies. They tend to favor traditional industries, like
construction, instead of startups. And the loan guarantees prop
up small and medium companies, many of which should be
allowed to fail.
To understand the problems of today in Japan, it is necessary to
take a look at the traditional bureaucracy which has stifled true
economic development. Since World War II, the real power in
Japan has rested with the "Keiretsu." These are the old-line
classic corporate groupings that controlled the economy. [They
are similar in structure to South Korea''s "chaebols."]
In the old days there were six giant Keiretsu''s: Mitsubishi, Mitsui,
Sumitomo, Fuji Bank''s Fuyo, Sanwa, and Dai-Ichi Kangyo. Each
one was grouped around a large bank. And each Keiretsu also
included a company from every large industrial sector.
Relationships between the Keiretsu were cemented through cross-
shareholding whereby Keiretsu members would hold up to 60%
of one company''s shares.
This cross-shareholding was seen as a strength because it allowed
companies to take a long-term perspective towards growth. [In
contrast, they would argue, to U.S. companies that had individual
shareholders who were worried about the short-term.]
The bubble years of the late 80s were the last hurrah for the
Keiretsu system. The lead banks were supposed to be guardians
of corporate governance, but they got caught up in the asset
bubble. Simply put, capital was misallocated on a massive scale
in value-destroying projects. Plants were built when none were
needed. There was an abundance of capacity and this was a
problem that affected the whole of Asia. In addition, the region
was opened up to foreign investment and the "crony capitalists,"
the families or corporate groupings, encouraged the massive
projects that the foreigners, to a large extent, financed.
Well, you know what happened. The economies in the region
collapsed. In Japan, workers who had long been used to career
employment, literally sticking with one company for their lifetime,
suddenly found themselves without work. A tremendous feeling
of uncertainty over the future enveloped the nation. And the
people stopped spending, thus adding fuel to the crisis.
Today, Japan is finally taking the first steps to straighten out their
problems and they have begun to address the structural issues as
well. The banking system, which is loaded down with about $1
trillion worth of bad debt (it''s very difficult to get an exact
figure...trust me, it''s a lot), is beginning to reform itself and the
government has set up a fund specifically for closing down non-
performing banks and merging those who are in a position to
survive. Three big bank mergers have already taken place: Fuji
Bank, Dai-Ichi Kangyo and IBJ; Sakura and Sumitomo; Asahi
and Tokai; with many more to follow. The big banks are cutting
back on their lending and they are adopting more rational overall
lending criteria. They are also now trying to maximize profits.
The structure of the Keiretsu''s has changed, forever, since the
lead banks have scattered all over and the practice of cross-
shareholding is being greatly reduced, if not abolished in some
cases.
But you might be asking yourself, if the banks are drastically
curtailing lending, what does that mean for a businessman looking
to get a loan? It means that many of the struggling businesses
would be doomed to fail if they couldn''t receive any capital to
stay afloat. But it''s restructuring of this kind that is most needed.
We went through this gut-wrenching process in the U.S. in the
early 80s and look where we are today. Let the poor-performing
companies go by the wayside in order to make more room for the
strong. Cull the herd. Except the government keeps stepping in.
As I mentioned in the beginning, the government''s latest stimulus
program continues the practice of loan guarantees to small and
mid-size corporations. In the long run, these kinds of subsidies
are counterproductive. And the government keeps wondering
why the people don''t spend.
The Japanese don''t spend because they see no real vision for the
future. The government doesn''t seem to be able to come up with
a plan for wealth creation. They keep trying the same old
hackneyed solutions. A little public works subsidy and some
social welfare there.
And when it comes to the government, some of the past policies
have been downright idiotic. Back in 1997 the government
actually raised the consumption tax at the height of the recession.
Then the economic turmoil across Asia hit all at once. And today
it''s possible that the government will interfere again.
It seems that Prime Minister Obuchi is afraid that his ruling
coalition is falling apart. While he doesn''t have to call for new
parliamentary elections until next October, he may call for them
sooner, in effect saying that he doesn''t stand a chance of staying
in power if he waits until next fall.
Obuchi is not a reformer. The moves his government have taken
so far are minimal (but admittedly important). Sentiment is,
however, ever so slowly beginning to improve. But here is the
crux of the matter. Business sentiment is improving but business
investment is still trending down because there is still a
tremendous amount of excess capacity and excess employees.
And the Japanese people still feel it''s best to hoard their cash
instead of going shopping.
It''s possible, though, that the global recovery which is beginning
to take shape in places like South Korea, Thailand and Malaysia,
will pull Japan along for the ride. [It''s important to note that the
recovery is still fragile.]
No, the only real way that Japan will resume a path of sustainable
growth is through a combination of loose fiscal policy (which
hasn''t worked, yet) along with a firm policy of corporate
restructuring. Japan still must go through some wrenching
societal changes. They have taken some solid steps, like in
banking and financial services reform, but there is a long way to
go and politics keeps stepping in the way.
Finally, there is the curious case of the government''s statement
last week that the citizens should stockpile food, water, fuel and
medicine in preparation for Y2K. No other government that I''m
aware of has issued a warning of this kind. So one can draw only
two conclusions. First, the government feels that they really do
have structural problems facing them come January (and the U.S.
had warned Japan last spring to get their Y2K house in order) or
second, that the government is trying to stimulate consumption.
There are also a lot of other major issues that will have to wait for
another day. Items like Japan''s aging population, coupled with a
declining birth rate, which is bound to place a severe strain on the
social services and pension systems. Then there is the situation
on the Korean peninsula and the "games" that North Korea has
been playing the past few years, firing missiles over Japan, scaring
the hell out of them. Plus there is the ever present issue of
organized crime in Japan. I might hold off on this last one for
awhile, if you catch my drift.
Next week I am going to embark on a rather politically sensitive
issue as I begin to explore the foundation of the religion of Islam
and what it has to do with today''s hot spots.
Brian Trumbore
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