The Japanese economy is like a heart attack victim for whom the prescribed treatment is currently a manicure. Japan was gasping and sliding off its economic throne even while the Western economies were enjoying their long boom. Now that the whole world is faced with the gloomy downturn, Japan’s health is becoming even worse.
There is still no danger that the Japanese patient will die. This remains a strong country with great reserves of wealth. The problem for Japan is confidence, or rather the total lack of it. Though the cost of funds is effectively zero, no one, neither consumers nor business is prepared to borrow. Nor for that matter are banks particularly keen to lend, because within their vaults lie the causes of the country’s economic heart attack. What has brought this mighty economy to a stand still is a mountain of bad debt. In the good times, companies, the government and the banks seemed to move as a single, well-coordinated unit. Great industrial-banking alliances, the keiretsu, were created by cross-shareholdings. Funds moved easily between connected companies, channeling capital toward the most effective opportunities. Japan Inc. boomed and was able to produce goods for export, of a quality and at a price which its overseas competitors struggled to match. Its commercial and industrial system became the envy of the world.
Even a strong yen did little to lessen the attraction of Japanese goods for buyers around the world. But in the end, the sheer magnitude of funds flowing into Japan could no longer be usefully reinvested in new business ventures. The Japanese began to invest in property and fine art, both favorite haunts of speculators because their worth rests purely upon what people are prepared to pay for them.
The Japanese borrowed heavily to fund speculative property purchases and the frenzy drove the prices ever higher until, as was inevitable, the bubble burst. Banks ended up with billions of dollars of credits secured with assets worth a tiny fraction of the total. Worse, incestuously linked companies within the keirestu owed each other billions. Japan’s collapse triggered even more damaging failures among the Asian tigers, whose economies and currencies are still so closely tied to Japanese fortunes. They must now wait until Japan begins to heal.
Unfortunately, until the patient becomes confident of its own recovery, little improvement is likely and recession will continue. The key to renewed confidence lies in the colossal bad debts that still live within the economy, principally inside the banks. Until these are cleared out from the main arteries of the financial system, the lifeblood of commerce will not flow again. Unfortunately, writing this debt off is not a mere technical operation. It will require major restructuring of the entire financial system, which will boost the already substantial flow of bankruptcies and job losses. Prime Minister Junichiro Koizumi cannot delay the long-overdue major surgery very much longer, or his popular mandate and his government’s political will could start to evaporate. His administration, along with the Bank of Japan, should start to wield the economic scalpel now, excise the great lumps of bad debt in their entirety and hurry the patient into the recovery room.
