A look into the eye of the tiger
Behind the recent confidence boosting headlines about a recovery in share prices in New York and London, due, we are told, to Dr Greenspan's miracle' cure of lowering interest rates, the serious financial press live in fear of the growing financial bubble, a world excess in productive capacity and the failure of Japan to stimulate its economy and home market. Dave Packer looks at the Japanese economy, and asks why this key player in the unfolding world economic crisis has a trade surplus up 45 per cent and a government which is giving money away.
The serious financial press in Britain is not fooled by the temporary recovery of share prices to their August levels and fresh talk about overcoming the crisis. Behind their own confidence boosting editorials, or their praise of the Governor of the US Federal Bank, Greenspan, for his interest rate cuts, or the so-called strength of the American economy, which has been their leitmotif, they dread the future. The Economist has been warning for months that much of the agony of Asia will move in due course to the rest of the world economy. However, it does not blame the problem on overproduction or excess capacity or supply, which it considers "mainly bunk". As a champion of free market capitalism it riles against the idea; "that capitalism has somehow fixed things so that the world's capacity to produce has overtaken its willingness to consume." (Nov. 15th 1997)
As a neo-liberal, money supply, magazine, its editorials consider that the Japanese crisis is mainly due to; "bank lending that is incompetent, reckless or downright corrupt." It writes about a "mountain of bad debt. It is already an ugly sight, and there is worse to come."(Ibid)
The Japanese banks are certainly mired in a crisis of bad, unrecoverable loans, with increasing numbers of its borrowers defaulting. The government stated this much when it refused to reveal the result of a government audit into the state of its biggest banks. These banks are sitting on suspect loans of between Y87 and Y140 trillion ($600 to $1000 billion). The bulk of the collateral is land, and as land prices are still spiralling downward, the amount the banks can reasonably hope to recover is following likewise. The National Tax Administration Agency revealed that land prices in Japan have fallen for the sixth year in a row.
Already many of the country's nineteen largest banks are probably insolvent. Controversial rescue packages for the Long Term Credit Bank of Japan, and other big banks, pumping in huge amounts of new capital, are seen as ways to stave off wider economic collapse. This has frightening social and political implications for the Japanese bourgeoisie! The social contract involving Jobs for life' in Japan still has a powerful ideological and material attraction; the class struggle might be unleashed if unemployment was allowed to reach its natural' level.
In August The Economist reckoned that at least 15 of the 119 construction firms listed on the first section of the Tokyo Stock Exchange are bankrupt in all but name, because the value of their land holdings, bought at the height of the bubble, had plummeted and loans guaranteed to subsidiaries and property developers have turned sour. Big general contractors and huge employers, such as Fujita, Kumagai Gumi, Tokyu, Aoki, all have suspect liabilities, and things have got worse. Costly rescue packages, which eat into reserves and push up government borrowing are seen as the only way to hold the line.
However, Japan's disastrous problems are not just due to an explosion of a debt, rather, this is a symptom. The underlying crisis is to be found in the so-called real economy, in a crisis of over-accumulation.
At least 15 of the top 119 construction firms are bankrupt in all but name
Gretchen Morganson of the New York Times reported as early as June, 1998, wrote that inventories in Japanese warehouses had risen to double the amount piled up in the recession of 1991-2, a recession which Japan never really recovered from. (Quoted by Socialist Action USA) By August, Japan's Economic Planning Agency reported that seven of the country's ten regions were officially in a slump and two others were stagnant. The agency also found in a survey of 4,500 big Japanese companies that they plan to cut foreign direct investment by 57% this year to Y1.2 trillion ($8.3 billion). At its peak, in 1990, investment reached Y4.2 trillion. (The Economist August 22.) All these figure are being continually revised downwards.
The end of the Japanese miracle can be dated as far back as 1985 when the USA responded to its disastrous trade deficit with Japan, by imposing the Plaza Accord. This forced the Japanese government to raise the value of the Yen against the dollar. By 1990, this had led to a 40% reflation of the Yen against the dollar.
Although this failed to solve the American trade deficit, it did precipitate a rush of capital out of Japan into the South East Asian dollar zone, to the tune of $15 billion by 1990. This stimulated a flood of new speculative investment into the region, resulting in overaccumulation and a financial bubble, which eventually broke in the summer of 1997. Stock markets collapsed and a there was a huge round of major currency devaluations, as the speculative capital outflowed. This scenario, had the effect of pushing the Japanese economy deeper into recession and stagnation. Its economy had never recovered from the deep recession of the early 1990s, and it staggered along with an average growth rate of only 1% p.a. from 1992 to 1997, when Asia crashed.
Since 1993, in response to this developing crisis and in opposition to current neo-Liberal thinking, Japanese governments have embarked on the biggest ever neo-Keynesian reflationary, pump-priming programme in the history of capitalism: seven huge government spending packages, with the latest package announced this month of $112 billion, bringing the total cost to an estimated $760 billion! Large amounts of cash have gone to construction companies to re-equip the country's infrastructure (described as roads to nowhere'). However, the government undermined some of the earlier packages by attempting to claw back part of the huge cost by raising taxes to reduce its budget deficit. Although these massive stimuli have kept employment levels up and avoided a full scale slump, for the time being, they have not succeeded in jump-starting the economy, even when combined with near zero interest rates. The latest figures show a fall in production of 3%, with unemployment rising.
In an increasingly globalised economy the effects of the Japanese crisis, the second largest economy in the world, is far-reaching, with repercussions on the rest of the world. Its impact on Russia and Brazil has been widely discussed, but the crisis is also impacting in Europe and America too. As Japan retrenches, its huge foreign investments are halted or withdrawn, resulting in factory closures around the world. Worse is to come. Even more serious, as Japanese inventories increase, so prices fall and inter-Imperialist competition intensifies. Although trade in the South East Asian markets is down by nearly a third, Japan's trade surplus with the rest of the world, jumped in September by 45.6%!. Japanese exports to the USA have continued to rise, up 3.9% year on year while overall US imports to Japan fell 9.3%. In 1996 Japan took 44% of all US exports, which has today been significantly reduced because of the shrinking Japanese home market - a market where they now hope to stimulate spending by giving money away! The trade surplus will have serious knock-on effects in the USA and Europe and could lead to calls for protectionism.
Japan has begun the biggest ever reflationary programme costed at $760 bn
The Financial Times ( Nov 8 1998) reported the threats made by William Daley, US commerce secretary, who told a meeting of US and European business leaders that Japan's growing trade surplus with non-Asian economies was a major source of instability' which could create political unrest by causing workers to fear for their jobs. US imports of hot-rolled steel from Japan had increased more than five times this year. But his warning was directed against the European Union which he said had to open its markets and take a greater share of Japanese imports or it would run the risk of a protectionist backlash in the USA. "We will not be the dumping ground for troubled economies . . . Unless Europe does more, there could be a huge public outcry that is loud enough to rekindle the fires of protectionism," he said. Both Daley and Sir Leon Brittan warned that they would rigorously implement anti-dumping policies against unfair trading practices from other countries. In the name of the free market, The Economist, more rigorous in its neo-liberal ideals, does not approve of such anti-dumping policies, or expensive rescue packages.
The Economist is right when it says the bubble will burst and that neo-Keynesian pump-priming will fail to stop the inevitable, as the Japanese experiment is showing us. But the idea of a free-market, de-regulated, crisis-free capitalism, properly managed through controlling the money supply, is also a dream. The world has been down this road for nearly 20 years and the proof of the pudding in the eating.
Contrary to the neo-liberal dogma peddled by The Economist, a crisis of overproduction and falling prices is maturing. In Asia there has been a serious over-capacity of probably more than 30%, especially in computers, electrical consumer goods and motor vehicles, but not just in these worst hit sectors. World capitalism is actually producing far more goods than can be absorbed by consumers with money to buy them. Only a massive destruction of productive capacity and even higher levels of mass unemployment over the next decade will create the basis for a new recovery - that is if the working class and its allies don't deal with this rotten system once and for all.
But now we should fight for a united front with the neo-Keynesians for a massive programme of state expenditure on public works to defend jobs and services. We should demand that Brown breaks with Tory neo-liberalism and takes his lead from the spending proposals made by LaFontaine. But for us this can only be a first step.