Journalist Sam Jameson sees banks as weakest point in shaky recovery.
Reporter and columnist Sam Jameson has spent over 30 years covering Asian affairs, including ten years as Tokyo bureau chief for the Los Angeles Times. He offered his views on the Japanese economy at a June 4 luncheon of the UCLA Center for Japanese Studies. Jameson previously held a one-quarter appointment as the Paul Terasaki Endowed Chair in U.S.-Japan Relations for the Center. He was introduced by Fred Notehelfer, professor of history and director of the Center, and Geoffrey Garrett, vice provost of the UCLA International Institute. The following report is based on Sam Jameson's presentation with some additons from his notes for the meeting.
Jameson cautiously suggested that Japan is finally pulling out of its fifteen-year economic downturn, the worst in more than a century. "Japan right now is in the best condition it has been since 1996," he said, referring to a previous brief uptick in the long period of stagnation.
The length of the downturn has itself been surprising to economists. Jameson contrasted the 15-year downturn to the post-World War II reconstruction of a devastated economy, which took only 11 years, including the reabsorption of millions of Japanese citizens repatriated at the end of the war from lost colonies such as Manchuria, Korea, and Taiwan.
Japan had been buffeted before: President Nixon's repeal of the gold standard in 1971, the OPEC oil embarago of 1973 and the oil crisis during the Iranian revolution in 1979, the Plaza Accord of 1985 that doubled the value of the yen "all staggered Japan. But each time, Japan rebounded." No so after 1990.
Before the 1990 crash, Jameson said, the economy had been weaker than it had appeared. Only a few of the large corporations were really modern and efficient, of which Toyota was the model. When the bubble burst, the era came and went when Japanese companies "could buy up all the major buildings in Los Angeles," he quipped.
Between January and March, 2004, Jameson said, "the economy grew 1.4%, or 5.6% annualized, the eighth straight quarterly gain." Exports and capital spending "expanded strongly and even consumption showed signs of an upturn." This time the United States was not Japan's biggest customer. "China and South Korea, along with Southeast Asia are providing the big spurs in demand for Japan's exports." China alone buys 19% of Japan's exports while the United States has dropped from 33% to somewhere in the low 20s. In part this is because assembly has moved from Japan to the Asian mainland: "Japanese-made components and materials are being used by other Asian assemblers to finish products for export to the U.S."
The recovery still has some weak spots, Jameson cautioned. It "remains centered on large manufacturers and has yet to reach nonmanufacturing sectors as well as small and medium-sized businesses. Deflation has not yet been conquered. Stock prices are still less than a third of their peak of 38,916 on December 29, 1989. The government continues to flounder in a sea of red ink financing -- nearly half of the annual budget is funded through borrowing."
Banks remain a particularly troubled sector. The banks have virtually stopped paying interest on deposits, while carrying a large volume of bad loans. "The question is when will the vitality come back. I cannot understand how a country can recover its vitality when the banking industry is suffering terminal cancer. They are saying the banks will lower their nonperforming loans from a peak of 8% down to 4% by next year, but since 1990 they have lied so many times in announcing figures for bad loans that this is the proverbial shepherd crying wolf; except that they are crying sheep when only wolves appear."
The major banks claim to hold 10% reserves. Jameson said there was a lot of trick accounting in putting the figure that high. "This announcement was in the fall of 2002, but a little investigation revealed that 40% of the claimed reserves represents a rebate they would get in taxes five years into the future if the banks were making profits at that time, and 10% was from the government, so this was not real money. Instead of having a 10% capital ratio they had 2%."
The main reason for the problems in the banking system is the outlandish speculative bubble in real estate prices at the end of the 1980s. In June of 1989, a 915 square foot condo in Sam Jameson's Tokyo building that had sold for US$220,000 in 1979 was listed for US$3 million. "All the land in Japan came to be valued at more than all of the real estate in the entire United States." Many properties on which banks held mortgages lost up to 80% of their value in the next decade and a half.
When the problems with the banks are finally fixed, Jameson predicted that there would be "a spurt of growth that could hit 6% and could stabilize for a period at 3%." But that might not be around the corner. While some economists are saying that the long recession is over, many see a new downturn next year. "The weakness of the financial sector remains breath-taking," Jameson said.
On hidden unemployment: "More and more workers are being made part time. Young people under 30 are 10% unemployed. Many young people work for a few months and then are out of work for a period."
On the status of women: "I do see an improvement in the treatment of women, though not as much as it should be. Ten years ago if you asked called a company for information and a woman answered she would not be entitled to answer a question. Today she usually is authorized to answer."
On Prime Minister Junichiro Koizumi: "Koizumi has been a bit disappointing. But his reforms are having some effect. One is the new construction in Tokyo, which is amazing. Look out the window and there are 18 new skyscrapers."
Problems for the pension system: "They have been lowering benefits and raising payments in the pension system. Large numbers of Japanese have stopped making pension payments. Japan has laws that do not penalize you for not doing things."
The demographic transition: While the return of 6 million Japanese from abroad at the end of World War II produced a labor surplus for the reconstruction, today "Japan faces the opposite situation -- a population that will be too small to produce the goods and services needed to maintain the present standard of living." Jameson estimated that the labor force will decline by nearly 14 million by 2025. This, he said, "will force Japanese to carry out restructuring that will produce an unusually large gain in productivity." He added, "the spurt in productivity in Japan will create a growth far greater than other countries experience because Japan has tolerated far grater inefficiency than most other countries."
"The other thing that amazes you about Japan," Jameson said, "is that it doesn't matter what happens in the economy, they return the LDP to power. The LDP was responsible for the crash. They were thrown out of power in 1992 when a group of their own leaders led 48 incumbents out of the party, and they did not get a majority in that election. But by 1996 even without an absolute majority there were enough independents in the gray zone so that by 1998 they regained their majority in the lower house. In almost any other democracy, voters this time would have thrown out any ruling party that presided over, first, a bubble economy, and then an uncontrolled bursting of the bubble, a collapse of land and stock prices, a flood of bad loans crippling the banking system, rising unemployment, and 14 years of economic stagnation. What are the voters in Japan thinking about if they tolerate this kind of misperformance and let it go on for so many years?"
Published: Monday, June 21, 2004
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