28.05.2008
May 24, 2008 (the date of publication in Russian)
Konstantin Dymov
SUNSET IN THE LAND OF THE RISING SUN
Lessons of the Japanese economic miracle crash
WHAT IS BEHIND THE CAPITAL INFLOW?
In the beginning of the XXI century, Russia got involved in the stock market fever – in fact, in bubble-making. After the crisis of 2000-2001, the most acute in the whole postwar history, Western investors have become cautious, not believing any longer in "dot.com" miracles. Meanwhile, Russian stock market indices rose some 50-60-fold. The global increase of prices for hydrocarbons and non-ferrous metals, along with inflow of currency into the country and the related revaluation of the Russian ruble, have boosted the quotations of Russian stocks, predominantly of oil-, gas-, and metal-producing companies, as well as banks, and the indices of Russian stock markets. The investment boom is supposed to boost Russian economy. However, it is provided mostly with fictitious, merely speculative capital.
Today, the global economy is in a state of fever. The world is anticipating a new recession of US economy, forecasts becoming more and more alarming. The situation is still under control due to interventions of central banks and huge financial injections. These measures, however, can only postpone the mudslide of global economy that promises very serious implications.
Russia's economy is still afloat. The RTS index does not grow but does not fall as well, fluctuating around the figure of 2000. Meanwhile, oil prices are continuing to grow. This trend arouses euphoria among "conjuncture economists". However, in the era of globalization a crisis in one major country can hardly bypass other nations, integrate into the global market. In the Soviet period, economists used to describe the cyclic tendency in capitalist economy. But this view, along with other Marxist "prejudice", seems today to be neglected.
Meanwhile, the implications of bubble-making are very illustrative in the example of Japanese economy. The protracted crisis from which Japan has not yet overcome, originated after the collapse of the financial bubble which is compared by Japanese observers with the national catastrophe of 1945.
The story of the Japanese bubble started in 1980s when Japan's huge surplus in trade with the United States and Europe triggered significant tensions that could be described as a sequence of trade wars. Under pressure of partners-competitors, Japan was forced to elevate the yen (in accordance with the so-called Plaza agreement of 1985), and to re-orient production to the domestic market with support of consumer imports. The yen rose from 200.5 per 1 USD in 1985 to 135.4 per 1 USD in 1990 (the ruble/USD rate is also now steadily increasing). An expensive yen restricted competitiveness of Japanese exporters but stimulated accumulation and outflow of capitals. At that time, annual foreign investments of Japanese companies zoomed from $6.5 billion to $40 billion.
Exactly at that time, Japan became the largest world's creditor, as well as the largest holder of US securities. (Similarly, Russian corporations are today purchasing assets outside the country, while the state has accumulated a huge currency reserve mostly made up of foreign securities).
Thus, the revaluation of national currency stimulated the outflow of capitals. Japanese auto and electronics producers were transferring most of their capacities to North America and Western Europe while production of parts was outsourced to countries of South-Eastern Asia. Japanese observers were then warning of deterioration or ablation of national industries.
By 1996, production of foreign daughter companies of Japanese corporations reached 11.6% from their total sales at the domestic market (while in 1985 it was not more than 3%). Investments in foreign-based capacities reached 36-37% of the amount of domestic industrial investments. In export-oriented industries, the figures were higher, reaching 79% in electronics and exceeding 60% in auto industry.
The yen's revaluation resulted in intensified accumulation of capitals, rise of stocks, and massive increase of crediting, due to cheap credits. Meanwhile, the banks mostly invested not in real economy but mostly in stocks and real estates, the price of 1 sq. m of land in Tokyo reaching $50,000 in late 1980s.
The financial bubble was inflating in late 1980s, and eventually burst. On the last trading day at the Tokyo stock market, the Nikkei index reached the highest level of 38915 points, but since the beginning of 1990, it started sinking, reaching 14309 points in August 1990. Stocks, as well as estate prices, collapsed as well. During one year, the value of the aggregate financial assets (stocks and land) reduced by more than 1000 trillion yens, which was equal to Japan's GDP for almost two years.
It is noteworthy that in 1992, Nikkei did not exceed 13000 points. In 2006, on the background of economic growth, it reached 18000, in order to fall to the same 13000 shortly later; today, it is continuing to decline.
As most of the investments in land and securities were provided by bank loans, devaluation of these assets resulted in bad debts of huge dimensions. That is why a number of major Japanese banks went bankrupt in mid-1990s, for the first time since the war. Top banking management tried to conceal information about their debts. In particular, Hego Bank, which burst in 1995, acknowledged only one half of its debt. Because of these manipulations, "trust towards bank accounting, audit, and corporate management of major companies, as well as to the state supervision system, has collapsed", concludes analyst Yelena Leontieva. That was really serious.
The eclipse of Japanese banks is illustrated with the following figures: while in 1994, Japanese banks comprised a 63.5 share in the aggregate capitalization of the world's largest banks, by 1998 it shrunk to 8.5%. The Japanese banking system has not since recovered from this blow.
THE EFFECT OF THE EXPLODED "BUBBLE"
The history of the sunset of the Japanese economic miracle is very illustrative. It suggests, among other facts, that the nation should primarily develop real economy, elevating the level of life and satisfying people's demands, especially in the sphere of innovations, instead of playing risky games in order to derive superprofits. The nation should build plants and factories, equipped with modern technique, create technopolises, elevate the scientific and educational potential. While Japan was following this way, it was the most dynamic economy of the globe. As soon as Japan chose the pattern of parasitic financial capitalism, it underwent a heavy blow, being plunged into stagnation.
In the aftermath of the financial collapse, the Japanese economy is not growing any longer, despite energetic efforts to boost growth. Japan still impresses other nations with its technological achievements but its economy is deeply stagnated. Even in Brezhnev's USSR, the rate of growth was much higher.
In 1950s, Japan's annual GDP surplus reached a fantastic level of 14.9%. Later, it gradually declined, collapsing from 11.3% in 1960s to 0.9% in 1990s. As recently as a decade ago, Japanese economists and political scientists were convinced that the XXI century would become the time of Pax Japonica. Today they admit that the country has lost the status of leader in the global economic competition.
In 2003, Japan repeatedly managed to demonstrate a relatively high surplus of 7%. However, the success was temporary. Already in 2006, the growth repeatedly ceased. Trying to stimulate economy with cheap credit, the Central Bank was keeping its discount rate on a zero level for almost three years, actually providing money for free, and elevated it to 0.25% only in 2006. However, these efforts were in vain.
The liabilities of Japan's government reached 1000% of GDP in 1999, while the aggregate foreign debt of Japan reached 130% of GDP. According to Yelena Leontieva, even the zero discount rate of the Bank of Japan did not induce the corporations to invest into the nation's real economy.
Meanwhile, the state has to spend a lot for renovation and development of road infrastructure that is wholly financed from the state budget. Today, the expenses for servicing the state debt constitute 43.6% of the total expenses. This is the third crisis of Japan's budget system after 1946-49 and 1976-81. According to economist Ishii Nakatani, the budget crisis has become so serious that the total amount of state bonds issued for its reimbursement reached 240trln yens. "That means that in the nearest time, the government will have to curtail a number of major state projects", indicates the author. That means that the government-supported companies will lose profit. Meanwhile, the government also has to support the pensioners, as Japan is the world's "oldest" country. In order to service the huge state debt, the government will have to increase taxes. In case it prefers not to deteriorate the investment climate, it will try to derive incomes from privatization of universities, clinics, and the post system, thus undertaking most unpopular reforms.
The mounting economic problems have already forced the Parliament to amend the budget, reducing expenses in almost all the items by 3%. The dismay of the population frequently reaches the level of generalized despair, writes Nakatani.
Certainly, Russia differs from Japan in both economic and cultural aspects. Still, the outcome of bubble-making in Russia may be quite similar. Despite assurances of short-term analysts, Russian economy is much more dependent on foreign circumstances, and the hangover after the speculative "abuse" may appear to be far harder.
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