IP: Yamaichi and Falling Skies

[Dave Farber <farber () cis upenn edu>]

Date: Mon, 24 Nov 1997 13:59:55 -0800
From: Richard Katz <rbkatz () ix netcom com>


The sky may not be falling but the webs of mutual support that lie at
the heart of "Japan Inc." are surely cracking. Up to now, Japan has
shown an immense capacity to absorb shocks through its "convoy system"
whereby the stronger bail out the weak. While that system has so far
avoided mass layoffs or financial meltdown, it has also slowly sapped
the vitality of the economy. As that happens, demands for further
bailouts increase while the ability to provide such bailouts diminishes.
Thus, cracks occur -- as we are now seeing.


Yet the political system is still in denial. Reform is very much
stalled. In the (approximate) words of Winston Churchill vis a vis the
appeasers of Hitler, "they are resolute for irresolution; they are
adamant for drift." I doubt very much that the current political
gridlock can continue indefinitely because the economic shock absorber
system cannot go on indefinitely. Muddling through doesn't work.


No one disagrees with bringing the sick back to health. However, trying
to prop up the living dead has a real and unavoidable economic cost. Bad
debts mean more than paper losses. They reflect tons of steel, cement,
machines and labor hours that went into building offices and factories
that cannot pay for themselves. There was a drawdown of society's
economic resources, but not enough replenishment. The result is that the
real productive capacity of the economy reduced. That's why, even if
Japan were running at full capacity it could no longer muster more than
2% growth for any length of time. On top of that, the "headwinds" of
financial stress mean the economy cannot run at full capacity. The most
optimistic forecasts for growth in fiscal 1997 are 1%. More common
forecasts are for negligible growth and some even see a new recession
this year or next.


Consider the following cracks in the shock absorber system:


1) By most accounts, the MOF tried desperately to get stronger banks to
take over Takugin but the latter refused. The reason the bank was "let
go" was not because of any change in the MOF "convoy policy" but because
the financial system is too stretched and the MOF could not execute its
policy. 


2) It remains to be seen what pressure, if any, the MOF applied to Fuji
to keep Yamaichi afloat. However, one reason Yamaichi failed was because
it was playing its own shock absorber role: by illegally bailing out
rich clients who had lost money in the stock market.


3) As of Sept. (I think), total bank loans in Japan were down about 0.5%
(I don't have exact number in front of me) below the year-before level.
This is not the level of new loans, but of total outstanding loans. Bank
balance sheets are so threatened that, on average, banks are not rolling
over loans to normal clients or extending new loans. This is the kind of
thing that normally causes recessions or depressions. The only reason
things aren't worse is because other financial intermediaries have taken


up some of the slack. However, while big corporations can go to the
commercial paper or Euroyen market, Japan's host of small and medium
firms cannot. Firms that normally would have been kept afloat are being
let go. Bankruptcies and job losses are going to grow. When banks don't
issue new loans, the ability of the BOJ to monetary policy to stimulate
the economy is negligible. Figures show the so-called "money multiplier"
(how much a given rise in monetary base by BOJ yields to overall rise in
money supply and thus to additional economic activity) is falling
rapidly.


4) In the failure of Nissan Life, more than stockholders were hurt.
Ordinary customers found their promised annuities cut. People counting
on money for retirement won't get it. Consumers now wonder what will
happen if, as expected, other life insurance companies also go. In the
face of this, will customers transfer their policies to sounder, perhaps
foreign, institutions? At the very least, recent figures show that they
are now holding back on spending and lifting their savings rates out of
anxiety. This is yet another reason why stimulus programs have proved so
ineffectual.


Bailing out failed firms merely disguises the failure; it doesn't
eliminate it. It just spreads the failure to society at large. The price
must still be paid one way or another. Japan is now paying it.




Richard Katz
The Oriental Economist Report








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