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Seismic changes rumble in Japan’s economy with enormous implications for the rest of the world, despite the near-paralysis of the political system [see A Sense of Asia: Japan on Auto Pilot, March 7, 2001]:
A series of currency swap agreements with other Asian economies, in effect a first step in establishing a yen bloc.
An unprecedented wave of megamergers among Japanese brick-and-mortar companies and banks as an answer to globalization.
Serious talk about dipping into Japan’s massive postal savings to bail out the banks and establish a genuine capital market.
By far the most important is “reform” of postal savings. One leading candidate for the premiership, Junichiro Koizumi, says he is willing to tackle the issue as one major restructuring measure long postponed.
Japan’s postal savings system, like so many Japanese institutions with similar nomenclature, is very different from Western counterparts.
Here is an oversimplified explanation: Most Japanese savings have been, historically, household savings. And the Japanese housewife has been custodian. Traditionally, the husband -- more often than not paid in cash -- brings the salary packet home. The housewife allocates to run household, feed, cloth and educate the children, and doles out shujin’s allowance [even his famous bar money]. The rest is put into postal savings.
By law, postal savings were “protected” from competition of nongovernment institutions by interest rate and tax incentives. Although there was a cap on deposits, accounts often were set up for children and even pets to avoid the limits.
These savings were accumulated in the Finance Ministry’s Special Fund. Its operations were so secret that when I was deputy chief of mission in the World Bank’s Tokyo Office in the 1970s, only three officials knew the total and it was kept from the minister, a politician.
These savings were doled out to Japanese infrastructure and for plant expansion. In effect, it was how -- building on the peculiar personal propensity to save [double the traditional rate in Germany, four or five times the US rate] -- Japan expanded at an incredible rate postwar, and minimized consumption.
But by the 1960s, it had become apparent to Finance Ministry yakunin-- perhaps the most skilled bureaucrats anywhere -- that the system had to be changed. Japan’s economy had become too big and diverse to centrally devise investment strategy. Unlike many Westerners, Japanese economists rarely bought into central planning omnipotence -- even though they had more than any major industrial country [except the Soviet Union, of course]. A consensus grew that capital markets had to be created that would devolve industrial policy out of the Ministry of International Trade and Industry [MITI] with its “administrative guidance”. Furthermore, postal savings had become a slush fund for politicians [every Diet member wanted a railroad built to every village in his constituency] and deficit-ridden government corporations [Japan National Railways, Japan Airlines, etc.]
But, while the decision had been made “cerebrally”, how could the most powerful bureaucracy in the world voluntarily surrender power? And how to abandon an incredibly successful system that had produced the only non-European industrial power [for it was largely preWWII methodology], the world’s second economy from the ashes of WWII? Ironically, Washington -- often from ignorance of the Tokyo system -- forced controls on Japan in an effort to stem the onslaught of exports.
By 1990, “the Japan model” was a disaster. Hubris blinded many, especially younger people ignorant of the 1920s depression, the march to war, and the grind of postwar rehabilitation. Capital went astray into macroeconomic strategies [like IBM, Japanese planners thought hardware was the route to success and software incidental], into real estate speculation [in a mountainous country where less than 5% of the land is arable] and amateurish foreign investment [from Rockefeller Center to French chateaux at the height of The Bubble]. The landscape is littered with corpses -- including the “semi-government” development banks.
Corrupt/traditional practices hid billions in bad loans. Japanese banks with huge equity positions in their clients saw paper assets turn to dust. The Japanese consumer, the older segment living far beyond its wildest expectations in the nadir of WWII, turned even more parsimonious. Domestic retail sales collapsed. Economic stagnation resulted but with its huge savings pool, Japan became, willy-nilly, the principle source of world liquidity at bargain rates. As foreigners rushed in to borrow, the yen was pushed higher and higher, eating into competitive ability to sell against the new Asian exporters, many of whom Japanese industry, in search of lower costs and profits, had put into international trade.
Government resorted to ineffective pump-priming, fearing a public rarely touched by ideological political concerns but highly vocal on the issue of bailing out the banks with taxpayers’ money. Yet, it seems “inevitable” that the hoard of postal savings will have to be tapped to refinance and rev up that Japanese economic powerhouse -- especially at a time when both the US and the European economies are sputtering.
But who in the political elite has the nerve to touch this “third rail” in Japanese politics?
He writes weekly for World Tribune.com.