Japan's Yen for Debt

...Treasury Secretary James A. Baker III, agreed to ease credit...

...In one of the more common scams, a crooked manager in Bank A issued a phony certificate of deposit—in effect, a negotiable receipt for money never collected—which subsequently was put up as collateral to secure a huge loan from Bank B. No one was any the wiser until the borrower, who risked the funds on stocks or property, went bust...

...And the bottom is nowhere in sight, since Nikkei stocks today are selling at a heady 60 times expected earnings...

...Such incest is hardly conducive to prudent credit practices, as can be seen from the country's most immediate problem, falling stock prices...

...The increasingly visible fact of debt deflation in the 1990s has finally made the more thoughtful among their number realize that a repeat of the 1930s general fall in prices may not be so impossible after all...

...property...

...If the Nikkei dips below 13,000, Wood warns, Japanese banking capital will be wiped out...

...redoubling the downward pressure on share prices...

...Revelations that its leaders took payoffs from the yakuza, Japan's criminal underground, are eliciting the public outcry that would be heard here if George Bush and Bob Dole were found in bed with John Gotti...

...As Wood aptly remarks, "Money became virtually free in Japan...

...Mitsubishi, the nation's premier industrial empire, acquired a controlling interest in Manhattan's Rockefeller Center at a ridiculously high price...

...Much of what these institutions count as reserves is unrealized capital gains (primarily on stocks), a practice shunned in Europe and the U.S...

...Beginning in 1985, he argues, Japan, like much of the First World, got caught up in an orgy of speculation...

...The distinction is hardly academic...

...But that would make little sense in an age when governments can print money with impunity...

...by early this November it was down to around 16,400...

...In the Diet, an $80 billion fiscal stimulus package is stalled while the governing Liberal Democratic Party deals with its latest scandal...

...Another problem is that when asset prices fall creditors, fearful that the collateral they hold will no longer cover outstanding loans, often pursue policies that exacerbate matters...

...its rivals made equally reckless real estate moves...

...Reviewed by Harvey H. Segal Author, "Corporate Makeover: How America's Business Is Reshaping for the Future" When Commodore Matthew Perry came ashore from the sidewheeler Susquehanna at Uraga, Japan, in 1853, he was accompanied by armed Marines with bayonets at the ready and a band that struck up Hail Columbia...

...In roughly the same period as the real estate boom, the Nikkei average of 250 issues traded on the Tokyo stock market rose from 10,000 to 40,000...

...Investors were spurred on by access to seemingly inexhaustible credit as lenders, both in the Tokyo and international money markets, threw caution to the winds...

...In addition, companies could exploit rising stock prices by borrowing dollars in London's offshore Euromarket at extremely low rates and converting them into the then weak yen...

...Incidentally, had it not been for the exigencies of the Cold War, those improvements might well have been forced upon Japan in the late 1940s...

...In 1990, a year after the bubble burst, the total value of land and buildings (assuming sales prices that approached official assessments) still was a staggering $15 trillion—five times Japan's Gross National Product and four times the value of all U.S...

...By early 1986, bank loans were available to large corporate customers for as little as 4 per cent...

...The 59 per cent drop wiped out nearly $2.77 trillion of paper wealth, or more than five times the estimated cost of our S&L bailout...

...investment banking houses already are active lenders in Tokyo...

...The Ministry of Finance might slyly sidestep the morass through an accounting gimmick, but the international central banking authorities in Basel...

...and Japan (a euphemism for sharply limiting imports) often assert that our Pacific rival enjoys unfair advantages in the competition for global markets...

...Together with the International Monetary Fund, they could assemble (at a high price, to be sure) the credits required to rescue Japan's financial institutions...

...In Japan, the struggle over abandoning the gold standard in 1931 was a prelude to the rise of military fascism...

...Repaying these loans would be a struggle if the yen were to slide against the dollar...

...But the same cannot be said of the Japanese economy: Along with its German counterpart, it was developed in the late 19th century and consciously patterned on Western models...

...One of these, they say, is its immunity to the forces that trouble most capitalist economies...

...21.00...

...Of course, prices also would decline sharply if people everywhere hoarded cash...

...As Wood demonstrates, Japan's banks, insurance companies, investment houses, and credit unions are about as resilient as England's feudal squirearchy on the eve of the Industrial Revolution...

...Now it is the Japanese who mystify us...

...For the first time since 1945, leading Japanese companies are reporting losses and laying off workers, thus breaking the social contract calling for lifetime employment...

...The issue then was the sharp decline of the general price level (today "deflation" is merely an ebb in the rate of inflation), which made debt burdens intolerable...

...Before long, sleazy players with shallow pockets were drawn into the game, bringing about an epidemic of fraud and a host of clumsy government efforts to conceal it...

...The market interest rate could be as low as 3 per cent, but if the price level is dropping at 10 per cent, the real rate of interest is a murderous 13 per cent...

...Wood turns to Irving Fisher's powerful analysis of the disastrous debt-deflation of the 1930s...

...The key is built-in buffers—adequate capital, reserves for soured investments, statutory lenders of last resort—that preclude a chain reaction of failures...

...In the social and, to a lesser extent, political realms, Japan's inscrutability is firmly rooted in ancient cultural traditions...

...Rationality fell victim to the temptations of speculation...

...Angered and bewildered by this invasion of their sacred soil, the onlooking samurai dubbed him "the high and mighty mysteriousness...

...Neither the ministerial bureaucracy nor the legislature is in a position to put forth measures that might avert the impending crisis...

...In predicting the outcome of Japan's predicament...

...In Japan, Wood observes, "a general fall in the price level is what central bankers are desperately trying to avoid...

...Prices decreased because countries whose currencies were backed by gold pursued savagely restrictive monetary policies that resulted in massive unemployment...

...The Finance Ministry's demands that the strong banks rescue the weak are being stubbornly resisted, and there is no deposit insurance fund to fall back on...

...Destroying that pernicious myth is perhaps the most notable achievement of Christopher Wood's splendid study...

...Crazed gambling on golf course construction became reminiscent of the 17th-century tulip bulb mania...

...At the end of 1989, though, despite several government-orchestrated efforts to break the fall, the index began to plummet...

...What Wood fails to take into account is the pivotal role the gold standard played in the '30s...

...Unlike Japan's superbly efficient manufacturers, the cartel-bound financial institutions are at best unsophisticated and at worst venal...

...In the end, however, the thoroughgoing financial and political reforms demanded by the new creditors would lead to a healthy economy...

...Under the paper standard prevalent today, it is difficult to imagine how or why central banks would constrict the global money supply by the 20 or 30 per cent necessary for a replay of the great deflation...

...What has made the situation so dangerous is the way Japanese banks and other financial intermediaries are capitalized...

...A more likely scenario than Wood's disruptive deflation is an externally financed bailout that, though painful and humiliating to the Japanese, would ultimately be constructive...

...Wood's thesis, derived from his reportage and analyses as the Tokyo-based finance editor of the Economist, is that the best economic performer in the second half of this century is becoming a basket case...

...Moreover, under a system of cross-shareholding that is unraveling, banks hold large slices of equity in their corporate customers and these borrowers are, in turn, major holders of bank stocks...

...Although such portfolio losses certainly are painful, they can be absorbed without devastating industrial consequences where financial sectors are resilient...

...who made a questionable exception in the first place by permitting Japanese banks to count half of their share appreciation as capital—would surely limit, if not bar, their participation in the global financial markets...

...The boom began after the Plaza Accord of September 1985, when the Japanese central bank, responding to pressure from then U.S...

...Japanese banks responded to the tumbling Nikkei by cutting back sharply on new loans and calling in old ones...

...American protectionists seeking to "manage" trade between the U.S...

...The ensuing credit crunch resulted in reduced capital spending, lower profits and fewer new jobs...