Japan is
the second biggest industrial economy in the world. In the 1980s it experienced
a huge speculative bubble, just like the housing bubble that has burst in the USA and is on the point of bursting in Britain now.
When the bubble burst, the Japanese people, who up till then were regarded as
living in a ‘miracle economy,’ experienced a decade of recession – a ‘lost
decade’. Hillary Clinton has warned in the USA, “(We) may be drifting into a
Japanese-like situation.” Could it happen again?
After the Second World War Japanese
capitalism was a smoking ruin. But within a few years it had reconstructed
itself and by the 1950s was growing at an annual rate of 10%, a speed which no
other capitalist nation had achieved till then. This growth was export-led. Japan was
widely recognised as an economic miracle. Rivals muttered bitterly about the
‘yellow peril,’ sensing that a great capitalist nation was emerging.
Japan was
a different type of capitalism from the Anglo-Saxon model. Firms were organised
in groups called keiretsu, held together by an interventionist bank or banks. The
banks provided the funds for long term investment, under the direction of MITI,
the Ministry of International Trade and Industry. These banks were like the
German banks described by Hilferding in his book Finance Capital, which
influenced Lenin when he wrote Imperialism,
the highest stage of capitalism in 1916. By contrast British and American
banks were historically unconcerned with industry and reluctant to lend
long-term to manufacturers.
After 1945 world trade was conducted by
means of fixed exchange rates against the dollar, which was the world’s reserve
currency. For much of this early post-War period there were 360 yen to the dollar.
This proved to be a very competitive rate, central to Japan’s export
success.
It
was for a time the most competitive capitalist nation in the world and built up
huge surpluses with other countries, particularly the USA. The
emergence of dynamic capitalist powers such Japan
and Germany challenge the US hegemony.
Eventually the edifice created at Bretton Woods cracked, as the international
balance of forces changed in the course of the post-War economic boom. The USA, no longer
able to pay its bills, floated the dollar in 1971.
The world moved to a floating exchange rate
system. The yen appreciated and exports became dearer and less competitive. By
the mid-1970s the dollar would only buy 210 yen, not 360. By 1988 it bought
just 120 yen. Japan
was still able to achieve 5% growth rates throughout the 1970s, and 4% in the
1980s, but the rising yen was hurting.
Under Reagan, the American economy was in a
worse and worse state. At the Plaza Accord in 1985 the Americans decided to
pistol whip their ‘trading partners’ and rivals into letting the dollar slide
and pushing up their own currencies in order to correct the US deficit. This
meant putting the yen sky high.
Japanese banks had their arms twisted to
liberalise, to lend more money. The loans were often secured by land as
collateral. This was the prime cause of the land price bubble after 1985. More
lending increased the demand for land, so its price went up. So people borrowed
still more money to buy land, in order to borrow even more. (More recently our
house price bubble fuelled the uncontrolled lending splurge in the same way.) Interest
rates in Japan
were slashed from 5% to 2½ %. The Japanese government supported this as they
felt it would stimulate growth at home now the export market was under threat.
Liberalisation led to two classic bubbles.
Borrowing drove prices up for land and for shares. From 1985 to 1990 land
prices soared. By the end of this period the land beneath the emperor’s palace
was ‘worth’ more than the whole of California.
Land in Japan
was ‘worth’ more than all the land in the rest of the world put together. Sky
high land prices are not good for business. “At the height of the land price
explosion the market value of the land owned by the non-financial corporations
(NFCs) exceeded the value of the machinery, buildings and inventories, thus
halving the profit rate and bringing it to a very low level by the end of the
boom.” (Andrew Glyn Capitalism unleashed p.
141)
At the same time the Nikkei share index soared
to 40,000. We can see now that all this was madness. Yet people who can see
this clearly in the case of Japan
were unable to spot that the recent house price boom in the UK, the USA,
Ireland and Spain was also
a bubble.
The bubble in Japan did stimulate economic
activity for a time. In the late 1980s Japan was regarded as a world
leader in cars, in consumer electronics and in robotics. Commentators began to
talk about a ‘new paradigm.’ The next time the phrase was used was during the
IT share price bubble that burst in 2001. When the sages speak of a ‘new
paradigm’ it’s time to sell the shares!
While the bubble is blowing up, people feel
rich. They’re actually living in a house of cards. When the bubble finally bursts
they really do get poorer.
It was rising interest rates that pricked
the bubble, which burst on the last day of 1989. Over the next few years asset
prices fell in Japan
as much as they had done in the Great Depression worldwide. House prices fell
to a tenth of their top level. Commercial property was worth a hundredth of what
it had been in the bubble. Over the decade the Nikkei lost three quarters of
its ‘value.’ It was at 15,000 in 1992 and 12,000 by 2001.
More important the modern dynamic Japanese
manufacturing sector could generate growth of only 1.5% a year over the decade.
Business investment in 2002 was no higher than it had been in 1990. There was
indeed a lost decade.
The evaporation of paper claims to wealth
had real effects on people’s income. As land prices collapsed, the banks found
they didn’t have enough capital backing for their loans and reined in lending.
But the ‘main banks’ of the keiretsu were too committed to the firms they
serviced to drive them to the wall. Japan stagnated, but production did
not collapse.
It will be interesting to see if the
Anglo-Saxon banks, committed to nothing but feathering their own nests, will be
as reluctant to enforce bankruptcy on insolvent firms in the future; or whether
these banks will just collapse from their own profligacy, bringing chunks of
industry down with them.
The government had connived at the blowing
up of the bubble. But they couldn’t magic away the consequences. In the same
way Bernanke in the States is now engineering below inflation interest rates to
reflate the bubble in the housing market. He realises that the alternative – a
banking collapse – doesn’t bear thinking about. But capitalist bubbles – once
they have blown up – are not under the control of the authorities.
The Japanese government tried hard. It
tried Keynesian methods of spending money it didn’t have and cutting taxes to
get consumers back in the shops. This fiscal boost was worth 1% of Japan’s (big)
GDP every year. The government spent 100 trillion yen in ten years. A lot of
this money went to construction firms linked to the ruling LDP or to rural
projects benefiting the traditional LDP-voting farmers. All that happened from
the boost is that the government was lumbered with a massive deficit by the end
of the decade Japanese national debt was 182% of GDP last year. The real
situation is probably worse. The Japanese national debt is a murky affair,
supplemented by all manner of slush funds and off-balance sheet transactions.
They tried monetary policy, reducing
interest rates to just ½ %. (Are you reading this, Ben Bernanke? This is what
you’re trying now. It didn’t work then.) The Japanese weren’t attracted into
borrowing by these low rates. They just led to the development of what became
known as the ‘carry’ trade. Speculators borrowed money at very low rates in Japan and invested in other countries such as
the USA,
where returns were higher. You can take a horse to water, but you can’t
necessarily make it drink. Capitalism is essentially an unplanned system. It
can’t be controlled. The Japanese boom and its aftermath are a warning to us
all.
