THE JAPANESE ECONOMIC CRISIS RECONSIDERED
Makoto Itoh *  

Today’s newspaper (11 April) reports that the World Bank widely revised its outlook on the Japanese economic growth rate in 2001 from 2.1 % (forecast in last December) to 0.6%. The lost decade for the Japanese economy in 1990s, with a continuous economic crisis and the lowest growth rate (of less than 1.2% in annual average) among the major countries, is thus still in process, despite of domestic and international expectation for its recovery.

Complex Linkages in the Spiral of Depression

The reasons why Japan has not been able to solve her continuous crisis are not simple. There are complex linkages to cause a spiral depression. As is broadly recognized, bad loans in banks and other financial institutions have tortured the Japanese economy as a haunted legacy of the burst of huge bubble in the late 1980s. It is estimated that the total decline in Japanese asset values, mainly due to the fall in prices of shares and land, amounts to 1,000 trillion yen (about twice of annual GDP, roughly one half of it comes from financial assets and the other half from real estate). This asset deflation is a major background for a continuous financial distress with frequent failures of banks and other financial institutions. After several years of attempting to reduce bad loans, in January 1998 the Ministry of Finance revealed that the total of bad loans still amounted to 12 per cent of total loans by various banks, or 76 trillion yen. (Bad loans are defined as loans impossible, or very unlikely, to collect, and loans requiring appropriate risk control). This amount can easily increase, as asset deflation continues. In addition, the Basel agreement of the Bank of International Settlement (BIS) in 1988, which required banks doing international business to maintain own capital of more than 8% of total assets after the end of 1992 fiscal year, worked to deepen the bank crisis. Especially because this agreement allowed Japanese banks to include 45% of their latent capital gains (an assumed gain between current prices and old book prices) of holding shares into their own capital, it facilitated them to invest in shares in the bubbly boom, and then it widely reduced their lending capacity in the process of asset deflation. Resultant credit crunch hit severely the small and medium firms and real estate businesses, which much depended on bank loan for their operation, and contributed to the asset deflation, making a vicious circle. The Basel agreement adds to ironical examples for destabilizing effects of mechanical regulation of money and finance against its intention in the long history of capitalism. It was also unsuitable to Japanese banks, which could traditionally operate with a relatively low rate of own capital upon the basis of high rate of saving among households. As latent capital gains in the prices of shares and land melted away, many business firms also found it difficult to expand their activities, either by self-finance or by borrowing on mortgage. They tended to lose the flexible ability to resist the deflationary pressure of the credit crunch. Failures among business firms especially of small and medium size have increased and continued incessantly. As business firms restricted and reduced their activities, employment conditions became more severe and real wages stagnated. In 1993, real wages actually declined, and wage income from overtime was also cut. As a result, real disposable household income (i.e. real household income minus taxes and social security payments) began to fall in 1993. Thus, domestic consumer demand cooled down, and the depression deepened in the flows of household income. Correspondingly, capacity utilization in Japanese manufacturing declined sharply more than 20 per cent in the first half of 1990s. With huge excess productive capacity, Japanese firms sharpened their competitive pressure in the markets. Thus, a vicious circle leading to a spiral of depression set in the Japanese economy, comprising falling prices of shares and land, falls in workers’ income, and falling prices in the markets for products and services. Reacting to the depressed domestic market, Japanese firms again intensified attempts to export. However, as the trade surplus increased, the yen appreciated sharply and created severe difficulties for Japanese exporting industries. The yen exchange rate with the dollar (annual average) appreciated from 145 in 1990 to 127 in 1992, and to around 100 in late 1994. Further, in 1995, as confidence in the dollar was shaken after the monetary and financial crisis of NAFTA (North American Free Trade Agreement) that started with the Mexican crisis, the yen appreciated against the dollar to 79.75 in April. This appreciation of the yen created serious difficulties for Japanese exporting industries, and encouraged them further to transfer their factories abroad leading to industrial hollowing out. Probably for the first time since Meiji Restoration in 1868, the beginning of Japanese modernization, the absolute number of workers in Japanese manufacturing industry started to decrease in a peaceful time, signaling a industrial hollowing out tendency. Moreover, the rapid decline of the birthrate and transition to an aging society added another further important factors repressing Japanese economic growth. In the process of severely competitive restructuring since the middle of the 1970s, Japanese firms increased more and more of cheap irregular female workers (typically housewife part-timers) by means of information technologies both in factories and offices. Without sufficient social facilities for child-care for working people, the rapid increase in participation of women in workplaces resulted in a sharp decline in the Japanese average birth rate per woman. It has declined from 2.05 in 1974 to 1.34 in 1999. The Japanese population will begin to fall and become halved within the 21st century. This demographic change would necessarily lower the long trend of Japanese economic growth. It also tends to depress consumption demand directly and indirectly by worry for the future (of pension funds among others). All in all, the Japanese economy has assumed an extremely low growth trend compared with that of the 1970s and 80s, not even to mention the period of high economic growth until 1973. Thus, depression deepened in the Japanese economy for both domestic and international reasons, and the country did not participate in the economic recovery led by the USA and other advanced economies after 1993.

Failure of Neoliberalism

The fact that the Japanese economy has been suffering from complex linkages in the spiral of depression as we have seen is a clear evidence of the failure of ‘neoliberalism’ in several means. Neoliberalism set the tone of Japanese economic policies since the beginning of the 1980s, on the wake of UK and the USA. Contrary to Keynesianism, which had dominated until 1970s, it demanded reduction in the economic role of the state, and believed in the ability of the competitive market to bring about a rational and efficient economic order. It is not simply a reaction to the practical failure of Keynesianism to cope with economic crisis in the 1970s, but its character suitably reflected in economic policy the direction of restructuring among capitalist firms. By introducing ME information technologies, capitalist firms have re-intensified flexible competition in the market, through multiplying models of products, relocating factories and offices both domestically and internationally, developing labor management to increase numbers of competitive irregular part-time workers, and globalized capitalist activities in various aspects. Under the neoliberal policy trend of strengthening free competitive market principles, Japanese big firms introduced ME information technologies, ‘rationalized’ labor management, suppressed real wages, and re-intensified their international competitive power. Company-centered endeavors to improve profitability obtained workers’ cooperation, and led to increases in the trade surplus and to appreciation of the yen. The Japanese model of management attracted global attention as a successful model in overcoming economic crisis especially in the 1980s. Indeed, big Japanese firms improved their financial position and accumulated large money funds by both retained profit and equity finance in domestic and international capital market. They expanded foreign investment, rapidly increased Japanese external assets, and swelled foreign exchange reserve. With appreciated yen, national income per capita in Japan surpassed that of the USA in 1987, and Japanese company-centered restructuring under neoliberalism seemed a miraculous success story. However, neoliberal belief in competitive market principles did not produce a rational, efficient and fair economic order. Wide and anarchical fluctuations in foreign exchange rates along with enormous international flows of speculative funds have caused economic damage to a wide range of firms and workers. At the same time, company-centered profit-making within free market principles led to the swelling of a huge bubble that caused large damage when it burst. These events demonstrate the fundamental instability of speculative development intrinsic to a free competitive capitalist market economy. Neoliberal economic policies could not prevent this irrational and unfair economic disaster. Rather, they promoted a political and social atmosphere in which company-centered speculative profit-making became acceptable in the name of market principles. They even worked to ferment and encourage private money-making among politicians and bureaucrats, as if that were a natural right in all economic activity. Scandalous corruption and graft have been incessantly exposed. Japanese bureaucrats had been regarded as excellent contributors to the success of the Japanese economy but their credibility, prestige, functions and confidence were largely disparaged in the 1990’s. Neoliberalism not only failed to achieve its promises but could not even result in a consistent framework of economic policy. Intervention in the market economy by means of fiscal and monetary policy has not been eliminated. This reminds us of the historical fact that even in the classical stage of liberalism capitalist economy could not dispense with a degree of political regulation such as the Peel’s Act and its discretionary relaxation in the phases of financial crisis. Intervention of the Japanese government and the Bank of Japan was more influential, inconsistent, and against the free market principle. For instance, Japanese government and monetary authorities actively operated economic policies to lower the rate of interest from the end of 1986 onward, and greatly expanded public expenditure in the spring of 1987. These policies were partly a response to strong pressure by the US government especially after the Plaza accord to expand Japanese domestic demand in order to mitigate trade friction. They obviously contributed to the initiation and swelling of the bubble. The Bank of Japan together with the government neglected the danger of swelling huge bubble, and regarded the relative stability of general price level as an evidence of soundness of monetary policy at that time. It was then inevitable that the setback was caused by tightening monetary policies in 1989-90, giving rise to the burst of the speculative bubble. Contrary to the neoliberal creed, economic policy actively influenced the working of the market order in this period in Japan. However, policy could not effectively control the destructive volatility of the market economy, but rather initiated and widely amplified its instability. In the subsequent depression of the 1990s, despite its neoliberal policy stance and practice to deregulate working conditions, or to reduce the public support for welfare and education, the Japanese government has continued to intervene strongly in the workings of the market economy. It positively operated monetary and financial policies. In this regard, Keynesianism could not be dispensed with. However, such Keynesian policies were not sufficiently effective. We have to ask why.

Why did Keynesian policies not work?

In the deepening process of the Japanese economic and financial crisis, Keynesian type of emergency economic policies mainly in the form of increased public expenditures has been repeated. As a result, the proportion of government fixed capital formation (total investment in public utilities, including attached facilities and equipment of central and local governments minus the costs of purchasing necessary land) against GDP increased to 6.9 per cent by 1996 from around 4 per cent before 1970. In absolute amount, such public investment stood at more than 30 trillion yen in 1996. Its share in GDP is almost 4 times that of the USA, and more than 3 times that of Germany. If we add to it public corporation costs of purchasing necessary land and undertaking highway construction, total investment in public utilities rises to 50 trillion yen. This takes up about 10 per cent of GDP, and is close to the total tax revenue of 55 trillion yen of the year. It is not much of an exaggeration to characterise Japan as a civil engineering and construction state. Therefore, inconsistent with the formal neo-liberal policy stance, the Japanese government implemented rather a large-scaled fiscal policy. This policy was not just for general Keynesian purpose to restore macro-demand. As a large portion of bad loans in financial institutions is related to real estate, construction businesses, public expenditure in this period obviously rested on the political intention to help financial institutions faced with the heavy burden of bad loans. It also expected a growing out policy effect to solve the financial difficulties, by mitigating the deterioration of mortgaged prices of land and other real estate with the general recovery of the economy. However, increased public investment has not much worked either as an effective pump priming policy or as a policy measure to solve the difficulty in banks and other financial institutions. Why? Reasons must be as follows. Firstly, pressures from asset deflation due to the burst of huge bubble have been extremely pronounced. While 1000 trillion yen of asset value was melting away, even a large-scaled public expenditures could not be effective enough to overcome its depressive pressure both on the whole economy and on the financial sectors. Secondly, consumption demand, which occupies about 60 per cent of total demand, has been so depressed because of worries among general people about the future of their economic life. Most of public expenditure has been out of real needs among people such as social care-facilities for children and elderly persons. As the fiscal crisis of the state in the form of increasing outstanding government bonds deepens, both consumer tax and individual costs for medical services were increased in 1997, suggesting a future trend against welfare for mass of people. Thirdly, construction and repair of roads and highways have now much less effect than before on the volume of domestic car sales. The employment effect of public investment has become smaller and smaller as civil engineering and construction industries introduced more heavy machinery to economize on direct labor costs. Thus the multiplier effect of public investment in civil engineering and construction has as a whole been substantially reduced. In this regard, the real contents of fiscal policy do matter, if fiscal policy is ever to be effective. Together with the fiscal policy, another device of Keynesianism in the form of monetary policy has also been practiced. The Bank of Japan reduced the official rate of discount from 6 % in 1990 to 1.75 % in 1993 and to 0.5 % in September 1995. It maintained that unprecedented interest rate for more than five years, then further deduced the rate to 0.35 % in February, and more to 0.25 % in March this year. This monetary policy has surely intended a general effect to stimulate real capital investment so as to solve the depression in the economy. At the same time, however, it also targeted to solve the crisis in banks and other financial institutions in particular. Even just by investing money, which are available from the Bank of Japan with so low rate of interest, into State bonds say with 2.0 per cent interest, banks have been enabled to earn safely a huge profit to meet some part of loss from canceling their bad loans. It is remarkable to find how ineffective such a monetary policy as well as the fiscal policy was in solving the Japanese economic crisis. We should again ask why. Firstly, the basic difficulty of real capital accumulation with excessive capacity, the depressed consumer demand due to worries for the future among people, and the asset deflation have formed a persistent vicious circle so hard to solve. Increasing cheap imports from surrounding Asian countries, including those produced by Japanese firms, adds to competitive hardship by tendentiously pressing down prices of products. Even much lowered interest rates could not induce positive domestic borrowers. Idle money capital has been frozen without finding a profitable way out within the economy. Keynesians would call it a depression with a liquidity trap. Secondly, such a monetary policy to maintain an extremely lowered rate of interest has actually had an effect continuously to induce a huge amount of Japanese money to go abroad especially to the Asia and the USA for higher interest or earning ratios. It has thus greatly contributed to the bubbly booms in the surrounding Asian countries and then in the New York Stock Exchange or more broadly in the USA. From the view of the domestic economy, this aspect of globalization of economy with a leaking out effect apparently spoils Keynesian monetary policy. Thirdly, while Keynes assumed euthanasia of rentier class by means of reflationary monetary and fiscal policies, there is not such a distinctive class in Japan but rather mass of workers and especially elderly persons after retirement who were hit badly by the extremely lowered rate of interest. Since the major source of saving is mass of households and the major borrowers are business firms, the lowered rate of interest actually works as a powerful means of income redistribution between these two sectors, having a depressive effect on consumer demand.

Increased Social Inequality

As Keynesian fiscal and monetary policies were not effective enough to mitigate the depressive pressure of the economy and the resultant crisis in the financial sector, a new type of policy measure in the form of public money injection directly into banks and other financial institutions became implemented. This measure was first introduced in the case of failures of 7 specialized housing finance corporations (jusen) in 1996. This operation was accused as unfair just politically protecting Agricultural Cooperatives and their managers, rather than their depositors. Thus, public money was not used when Hokkaido Takushoku Bank (Hokutaku) failed in November 1997 together with Yamaichi Securities and other two banks. As Hokutaku was the tenth largest city bank and by far the leading bank in Hokkaido region, its failure caused serious difficulty including failures of many businesses in that region, and spread financial unrest in the whole economy. Therefore in 1998, public money of 30 trillion yen was made available both to protect depositors and to provide capital injection to ‘sound’ banks with liquidity crisis. The amount was then increased to 60 and further to 70 trillion yen. The policy to provide capital injection into banks is called ‘too big to fail’ or ‘too big to liquidate’ policy. Its theoretical ground is hard to find either in traditional Keynesian or neoliberal economic theories. It seems clear that the USA and other countries strongly requested this policy device so as to avoid a global financial crisis originating from Japan. The practice of this policy is also difficult to be consistent and fair excepting its possible function to protect depositors up to a certain amount. For instance, in late 1998, 7 trillion yen of public money was injected to failed and nationalized Long-Term Credit Bank of Japan and soon this bank was sold with its asset of more than 10 trillion yen to an American bank, Lipplewood Investment Bank generously just at a billion yen. From the view of majority of working people who are suffering from increased taxes and reduced pension scheme, such expenditure of public money seems extravagant and just protective for financial sectors, big businesses and richer persons as creditors and debtors. Indeed, all through inconsistent economic policies, an obvious trend appears to be in favor of capitalist firms and richer persons by spreading economic burdens for restructuring more and more among mass of people. Neo-liberal policy stance was applied not to the troubles in banks and constructing companies, but to reduction of welfare policies by stressing individual self-responsibility in a market economy. Neo-liberal attack of militant trade-union movement successfully dismantle Sohyo (The General Council of Trade Union in Japan), the national center of left union movements, in 1989 through the process of privatization of three public corporations. This weakened a traditional social ground for the Japanese Socialist Party (JSP). Although JSP used to occupy about one-third of all parliamentary seats, it continuously lost its seats, changed its name into the Social Democratic Party of Japan (SDPJ) in 1996, and SDPJ got just 14 seats of the 500 in the House of Representatives in 1998. The change of electoral areas from medium-sized into small units after 1996 also worked badly to SDPJ. Though the Japanese Communist Party (JCP) became to occupy 26 seats in the House of Representatives in the same year, the whole scenery of Japanese politics clearly moved toward conservatism, or pro-business. Nevertheless, we have to admit also that the Japanese economy has not caused a catastrophic acute financial and economic crisis. The Japanese depression in the 1990s has been both prolonged and relatively stable at least partly due to certain effect of economic policies. However, the relative stability of the Japanese economic and financial order was not at all sustained just by economic policies. A huge amount of costs of emergency economic policies including public money injection into banks itself has been enabled by direct or indirect burden on the part of working mass of people in the form of increased consumer tax and cuts of welfare schemes. The continuous high rate of saving among Japanese people as well as diligent return payment for most of consumer (and housing) loan have also a contributing factor for the relative stability of the financial system. Anyway, through the economic reform and restructuring political process allegedly to form a fairer and more competitive market order under neo-liberalism, the Japanese society is strengthening its company-centered capitalistic nature. It tends to suppress mass of working people in these regards in combination with severely competitive labor market with much weakened trade unions. Although the Japanese economy had shown a tendency to realize an egalitarian social order in the period of high economic growth, the tendency was obviously reversed toward a more and more uneven class like economic order to favor the richer persons, big businesses and bigger banks and other financial institutions. By a statistical research Tachibanaki (1998) revealed that the degree of unevenness of Japanese income distribution rose rapidly in the 1980s and 1990s, and became amazingly even more than that in the USA. Such a social change for greater unevenness in the Japanese economy must also be counter-effective for economic recovery, even if it may be in a sense an ironical result of success in restructuring a competitive capitalist market economy. Although globalization may be inevitable in many aspects, the basic policy options to cope with it can be and are diverse in the actual world. The desirable policy options for mass of working people in view of sounder political economy should be more widely presented for the Japanese future, even if the lowered economic growth trend might be continuously hard much to lift up again. How to reconstruct such a social concern for mass of general people in the Japanese politics on the ground of workers and citizens movements is a most important but also worrying task to be pursued now for the future.

References;

Itoh,Makoto (2000), The Japanese Economy Reconsidered, Houndmills and New York: Palgrave.
Itoh,Makoto(1990), The World Economic Crisis and Japanese Capitalism, London: Macmillan, New York: St.Martin’s.
Tachibanaki,Toshiaki(1998), Japanese Economic Inequality (in Japanese), Tokyo: Iwanami-shoten.

* Professor, Kokugakuin University, Tokyo