SocialismToday           Socialist Party magazine

Issue 72, February 2003

Japan’s bank crisis deepens

AS JAPAN’S banks struggle under a mountain of uncollectable debt, the government of Junichiro Koizumi seems to be preparing for nationalisation. This is implicit in the so-called Takenaka plan, the latest package of ‘reforms’ for the financial sector unveiled by Liberal Democratic Party (LDP) minister, Heizo Takenaka.

Takenaka has emerged as one of the most influential members of Koizumi’s cabinet. His proposals have been attacked as ‘economic fascism’ by bank directors. Even within the LDP, underlining a growing split, a senior figure branded Takenaka as ‘nothing more than an agent of the [foreign] vultures’. In November 2002, the minister issued a deadline to banks: adopt new proposals, within four months, to deal with non-performing loans or face nationalisation.

If, as expected, a review of bank balance sheets in February 2003 uncovers a more desperate position than is currently acknowledged, the nationalisation of several big banks is likely. The filing of annual accounts each March has become a near-death experience for Japanese banks in recent years. Last March, a banking crisis was only averted by government intervention in the stock market.

The country’s dysfunctional banks are a legacy of the ‘Roaring Eighties’ ­ the decade of ‘zaitech’ financial engineering (similar to the later swindles at Enron and Worldcom) and a stock market boom which lifted Tokyo’s Nikkei index to 40,000 points (compared to 8,700 today). In 1990 this speculative bubble burst, unleashing a deflationary spiral which has since dragged share prices down by 75% and property prices by 90%. The banks, which were instrumental in creating the bubble, took on huge amounts of risk.

Today, they are squeezed from every direction. Their capital base has been undermined by large holdings of ‘junk’ stock and property. The problem loan epidemic worsens as more and more firms turn into ‘zombie’ companies, unable to meet repayments – less than a third of Japanese firms actually made a profit in 2001. Finally, 13 years of economic stagnation have meant little or no demand for new profitable lending. According to a study by Goldman Sachs, Japan’s non-performing loans now total $2 trillion, or half the country’s gross domestic product.

The Takenaka plan is the latest in a series of measures which aim to make workers pay for the crisis. Nationalisation will be used to install new ‘reform-minded’ managers and speed up cost-cutting measures. The Koizumi government has studied Britain’s private finance initiative (PFI), involving private funding and control of public services, and this has been incorporated into the Takenaka plan. A sprinkling of private funds, they hope, can be attracted by a ‘fire sale’ of financial assets from bank restructuring. Meanwhile, the astronomical cost of recapitalising banks will be borne by taxpayers.

While Japan’s fractious ruling party has proceeded with caution for fear of provoking a social explosion, the policies of the last decade have seriously undermined the living standards of the working class. Unemployment has risen from 3.4% in 1998 to 5.5% today despite a series of Keynesian pump-priming packages worth $2 trillion over the past decade. To avoid job losses, trade unions have accepted cuts in wages, pensions and other benefits. Wage differentials in Japan have grown by 50% since 1995.

An earlier, unsuccessful attempt to bolster the banking system in 1998-99 cost $85 billion. Two banks (Long Term Credit Bank and Nippon Credit Bank) were temporarily nationalised. While this failed, it also aroused popular resentment against big business cronies being bailed out by corrupt politicians. At that time a new watchdog, the Financial Services Agency (FSA), was set up to replace direct government monitoring of the banks. This was one of many failed attempts to develop new structures to meet the crisis. The forced merger of ten banks into four super-banks two years ago was another such initiative.

The FSA has since joined the long list of discredited public institutions accused of hiding the extent of the banking crisis. In September, a dramatic conflict erupted between the Bank of Japan (BoJ – Japan’s central bank) and the government/FSA. The BoJ announced it would buy shares from commercial banks to shield them from the effects of a falling stock market. This clash forced the dismissal of Takenaka’s predecessor and a shake-up of the FSA. The threat of state intervention from a Thatcherite central bank chief, Masaru Hayami, underlines the desperate predicament Japanese capitalism finds itself in. Through fits and starts, periods of paralysis and crisis, Japan’s ruling class seems to be positioning itself for more resolute action.

Takenaka’s proposals are clearly influenced by the measures adopted in South Korea in 1998, when the financial system was nationalised under an IMF programme. Seoul pumped $150 billion ­ roughly one third of GDP ­ into recapitalising the banks. A quarter of these were closed and over 100,000 bank workers were sacked. Today, a third of South Korea’s banks are still state-owned, but the rest have been sold back to the private sector including to foreign companies ­ a conscious strategy to speed up ‘reform’ and break up traditional alliances between banks and industrial groups. This short, sharp shock is increasingly held up as an example for Japan to follow. In reality, however, corporate indebtedness (the ratio of debts to assets) is actually higher in South Korea than in Japan.

While South Korea rebounded swiftly from its slump, due to strong export growth to the USA, the Japanese government faces an entirely different global environment today. Without the export boom of 1999, South Korea’s economy could have contracted by 25% instead of 6% according to a study by Deloitte Consulting. The thought of such a development in Japan terrifies the country’s rulers. And they are not alone. Japan is the world’s second largest economy, accounting for two thirds of Asia’s combined GDP. The strategists of capitalism understand that a slump in Japan will have serious regional and global ramifications and have therefore supported the LDP’s efforts to stave off a downturn using Keynesian methods.

But while, for example, the Bush administration favours nationalisation of the banks in Japan, there are growing concerns about the deflationary impact of the Takenaka plan. As in South Korea, a wave of bankruptcies will almost certainly follow as banks cut credit to struggling companies. Deflation (falling prices) increases the real cost of debt, thereby completing a vicious circle. The big banks have already responded to the Takenaka plan by announcing ‘more aggressive’ restructuring: job losses, wage cuts and branch closures. Mizuho, the world’s biggest bank in terms of assets, has announced an ‘accelerated cost reduction programme’ involving 6,000 job losses and a 10% cut in wages.

In an apparent u-turn, the government has breached its own budget limits, announcing additional spending proposals. But the emphasis has shifted away from old-style public works schemes to the construction of a ‘social safety net’ to cope with the effects of the Takenaka plan.

What happens if Takenaka’s ‘cure’ is worse than the disease? By exerting more pressure on the banks, his measures could themselves trigger bankruptcies and even a systemic collapse ­ most probably via the stock market. Such a scenario would pose a threat to the global financial system. Of the top 100 banks worldwide, 19 are Japanese. Japan holds one fifth of all actively traded US Treasuries. A forced sale of the latter could unleash a chain reaction: downward pressure on the dollar, followed by further dumping of dollar-denominated financial assets. No wonder Takenaka’s ‘reforms’ are being watched nervously by capitalists worldwide.

Laurence Coates


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