"Flat on its back for years and showing few signs of life, Japan's economy was nonetheless still in the world of the living. When we last checked, that is. Reports of its imminent demise are now coming thick and fast. A world that had grown bored with the 'Japan isn't growing' story is suddenly paying attention to the new 'Japan will collapse and take the rest of us with it' story." The Economist, 11/4/98. Phil Mitchinson analyses the reasons behind.
"Flat on its back for years and showing few signs of life, Japan's economy was nonetheless still in the world of the living. When we last checked, that is. Reports of its imminent demise are now coming thick and fast. A world that had grown bored with the 'Japan isn't growing' story is suddenly paying attention to the new 'Japan will collapse and take the rest of us with it' story." The Economist, 11/4/98
Japan is the world's second most powerful economy. Those economic wiseacres who told us that South East Asia would be the saviour of the world economy, are now claiming, despite overwhelming evidence to the contrary, that the crash there has little impact on the rest of the world. To make the same claim in relation to Japan would be patently absurd. Yet they have the nerve to try. "Even a worse Japanese recession (than the one they're all predicting - PM) need not scupper the world economy. One reason is that Japan, economic giant though it is, accounts for only 13% of global GDP." The Economist (11/4/98).
Such economic illiteracy goes a long way to confirming the old adage that economists are experts who will tell you tomorrow why the things they predicted yesterday did not happen today.
Japan accounts for more than 60% of the value of all the goods and services produced in Asia. It's economy is ten times the size of Korea's and twenty times larger than Indonesia's, and constitutes one eighth of the world economy. The flapping of a butterfly's wings over Tokyo causing a storm in Chicago may be only a metaphor for chaos theory, but the chaos unleashed by Japan's recession becoming a depression would send a tidal wave flooding over the world economy.
Is that likely? Martin Wolf writing in the Financial Times (7/4/98) comments, "The forces now working on the economy could even turn this incipient recession into a depression."
Japan's most widely read daily paper, Yomiuri Shimbun, writes "Is the Japanese economy destined to share the fate of the Titanic?...unless some effective measures are taken, Japan...could even trigger worldwide economic chaos."
Ominous
More ominous still were the remarks of Norio Ohga, Chairman and Chief Executive of Sony, "The Japanese economy is currently facing its most difficult time ever. I am concerned that if Japan falls into a deflationary spiral it would affect the Asian economies. In that case, not even the US economy would be able to maintain its healthy state...If you look at what Hoover was saying at the start of the great depression and what Mr. Hashimoto is saying at the moment, they are very similar."
Comparison with Herbert Hoover, US President during the onset of the Great Depression in 1929, would make any Prime Minister nervous. When the comparison is made in public by the boss of Sony, Mr. Hashimoto must be close to breakdown. Seiji Tsutsumi, head of the Saison group of companies, has called for him to resign.
Japan's bosses are tobogganing toward an economic catastrophe with their eyes closed. Hashimoto has been kept in power until now because none of his opponents know what to do with the economy either. They are as baffled by slump, as they are by a boom.
The economic crisis is preparing a new political crisis. Bribery and corruption scandals have once again brought a whiff of decay into the LDP regime. Six bureaucrats and one MP have committed suicide, both the Minister of Finance and the Governor of the Bank of Japan have been replaced. In the run up to the forthcoming election Mr. Hashimoto may well be dumped, but that will solve nothing. Japan's crisis is more deep rooted than the policy mistakes of the government. It is inherent in the capitalist system.
The insoluble dilemma for capitalism is that its profits are derived from paying workers less in wages than the value produced by their labour. Since the consumers of goods and services are also their producers, the market has definite limits. The workers can't buy back everything produced. The surplus must be exported. A ferocious struggle for export markets opens up as each capitalist nation struggles with the same problem. However logic dictates that the world market has its limits too. Ultimately, capitalism is forced to defend its profits by attacking our wages and conditions, cutting the market still further.
Since the bubble economy burst in 1989 Japan has been a no-growth economy. Real wages have fallen by 1% over the last year, according to US investment bank Goldman Sachs. For the first time in two years, overall employment fell by 0.1% in February. A fear of unemployment, coupled with fewer people employed, lower bonuses, less overtime pay and historically low pay rises have inevitably led to lower consumer spending.
Everyone wants to save and pay off debts rather than spend. As a result the Japanese economy is slipping into a deflationary cycle. The consumer price index, excluding fresh food, rose just 1.8% last month. If you subtract last year's 2% rise in sales tax, prices are now actually falling. This is what capitalist economics calls debt deflation, where debt holds back both consumer spending and investment. The combination of debt, job insecurity, and generalised uncertainty places Japan in the classic dilemma diagnosed by Keynes when he spoke of governments who attempt to revive demand by lowering interest rates as "pushing on a string." In Japan in the late 1990s, as in the US during the Great Depression, even interest rates as low as 0.5% have not stimulated borrowing.
In the last quarter of 1997, domestic demand was falling at an annual rate of 4%; industrial output fell 3.3% between January and February; retail sales fell at an annual rate of 7.1%; and unemployment has reached a record level.
Without net exports GDP would have shrunk last year. Vehicle exports for example, continued to grow to Europe, rising 37% last year. Exports to the US meanwhile rose just 7.3%. Exports to Asia collapsed 51% due to the economic crisis. This year there will be an actual contraction for the first time since 1974.
On April 3rd, Moody's credit-rating agency said it was unsure whether Japan deserved its top credit rating. They reduced the outlook for Japan's sovereign debt from stable to negative. For a credit agency in the world's largest debtor country to cast doubt on the solvency of its chief creditor, a country that runs a huge current-account surplus and is by far the world's biggest creditor nation, the extent of the panic is clear.
Alex Kinmont a strategist at Morgan Stanley, expects manufacturing profits to fall by 30% during the current financial year and those of non-manufacturers by 20%, though he says his forecasts may be too optimistic. Unlike Japan's bosses. The latest Tankan survey of business confidence (which measures those businesses confident in the future minus those less confident) fell from an already awful -11 last September to a deeply depressed -31. Proof once again that it isn't confidence that leads to economic growth but growth that builds confidence. The euphoria of the boom years has been replaced by a depression which accurately reflects the state of the economy
Huge sums are held back in savings. Despite low interest rates there is little investment. When you already have overcapacity and even overproduction, there is little incentive for the bosses to invest in producing without a market for the ensuing goods. They aren't even investing in the stock market. Earlier this year, Taku Yamasaki, policy chief of the ruling Liberal Democratic Party, warned that the country's financial system could not survive intact if the Nikkei 225 average closed below 18,000 at the end of the financial year. Despite a last hour rally, the index ended the year nearly 1500 points short of Mr. Yamasaki's target, at 16,527. With genuine irony the date chosen for Japan's financial Big Bang reorganisation was April Fool's Day. Some of Japan's biggest financial institutions have already collapsed. Meanwhile the banks are weighed down by Y77,000 billion of problem loans - a sum twice the size of Australia's entire economy
These statistics are ample proof of the scale of the crisis. But figures are not always the only or even the strongest kind of evidence. As the Financial Times (11/3/98) reports, "The 42 Japanese companies that collapsed in January do not quite convey the depth of the problem. The handful of corporate suicides do. Japan's credit crunch is hitting the factory floor, where managers are throwing in the towel, and in middle class homes, where executives are taking their lives"
What medicine do our experts prescribe? While Keynesian deficit financing and pump priming have been abandoned everywhere as the cause of runaway inflation, now in Japan, the country of classical capitalist development, a classical crisis has matured, and Keynes has been rescued from the wastebin, temporarily at any rate.
Stimulus
The Government has announced five fiscal stimulus packages in the last five months, the latest for Y16,000 billion (£74 billion). Many are demanding more. John Makin of the American Enterprise Institute believes the best all these packages could achieve would be to move the growth forecast from -1% to -0.6%.
The longer run solution, say our friends the "experts", to Japan's economic dilemma is the one adopted by the UK a century ago; it should invest a far higher proportion of its savings abroad. Like Britain then, they must "export or die."
In the last year Japan's exports to the US have grown by $400 million, while imports from the US have fallen $500 million. The US has declared its intention to export its way out of trouble by increasing its penetration of the world market to 20% of GDP. If Japan were to do the same the political reaction to the resulting trade surpluses would be devastating.
US politicians prance over the world insisting on the merits of capital market liberalisation, and lowering barriers to trade. Yet the one inevitable consequence of such liberalisation has to be very large scale capital flows from countries with surplus savings such as Japan. In Japan's case those surpluses could be as much as 5-10% of GDP. The consequences would be tit-for-tat protectionism, trade and currency wars, a sharp downward spiral, unravelling all the developments in world economy since the second world war. The US already has problems of its own. The current stock market hype and merger mania are sure signs that the end of the boom is in sight. The US economy is running out of steam even before the full effects of the South East Asian crisis have been felt. A collapse in Japan would drag the US, and the entire world economy, down into a major slump.
A cloud of gloom-ridden despair has descended over many of capitalism's strategists. John Gray, former arch-monetarist and advisor to Thatcher, writes in his latest book - False Dawn: the delusions of global capitalism - "If Japan's policymakers yield to the demands of the Washington consensus, Japan will join all those western societies in which mass unemployment, epidemic crime and the collapse of social cohesion are problems without solutions."
From a source of stability, world trade is turning into a source of unprecedented economic instability. From a country displaying a classical development of capitalist economy, Japan has become a model example of a classical capitalist crisis, not just overcapacity (the ability to produce more than can be sold for a profit), but actual overproduction. According to The Economist (11/4/98) firms need to "slash output and prices in order to get rid of the mountains of unsold goods now cluttering stores and showrooms." In so doing, of course, they cut the market still further and embark on a vicious downward spiral.
The Japanese model, like many others before it, is gone and gone for good. There is a solution however. Competition and the market, private ownership and nation states have outlived their usefulness. Japan alone could satisfy the world's Information Technology needs, but competition is wasteful of human and natural resources. Capitalism can only offer a miserable growth rate of 1, 2 or 3% in boom times. Planning on a national and international scale could achieve growth rates surpassing those achieved by Japan even in its "miracle years." But planning of this kind is not in the nature of capitalism. The solution to this crisis lies not in the hands of bankers, stockbrokers or corrupt politicians. It lies with the working class.