- The Washington Times - Friday, November 9, 2001

After its defeat in World War II, Japan rebuilt itself rapidly over the next 15 years.
For three decades, it experienced an "economic miracle," growing at an average 10 percent per year in the 1960s, 5 percent a year during the 1970s and almost 4 percent per year in the 1980s. The "bubble economy" in which Japanese consumers and companies piled up cash savings and overinvested in real estate and the stock market was the envy of all, and even raised concern in the United States, which regarded Japan's prosperity as a threat to its own.
But since 1990, Japan's good fortune has crumbled. Its economy has grown at a meager 1 percent per year. The Nikkei stock index, which peaked at 38,916 on Dec. 29, 1989, had lost more than 60 percent of its value by July 1991.
Japan's unemployment rate also was affected badly. It hovered between 1.1 percent and 1.4 percent from 1961 to 1974. It reached 2.1 percent in 1991, but stood at a record high of 5.3 percent in September, the latest month for which final figures were available.
Today the stock market has fallen to 17-year lows, at about 27 percent of its 1989 high. The Nikkei index closed at 10,431.79 yesterday.
At the height of the bubble economy from 1988 to 1991, Japan made huge investments in new factories both at home and overseas. The Japanese went on a buying spree, snapping up almost anything.
Now, a decade later, Japan is mired in economic doldrums. Economists don't see any sign of full-grown recovery anytime soon.
What went wrong?
The bubble economy had two prerequisites: ever-rising land prices and the speculation-driven stock market. Excessive lending by Japanese banks based on overvaluation of real estate and other inflated assets also sustained the bubble.
After more than 30 years of continual growth, most Japanese couldn't imagine that property and stock prices could crumble.
Between 1985 and 1989, the benchmark 225-issue Nikkei blue-chip stock index tripled in value. Mergers and acquisitions were announced almost daily, and many Japanese corporations bought foreign companies and "trophy" real estate, including the Rockefeller Center and Universal Studios in the United States. Such heavy buying in foreign countries incurred much criticism of Japan Japan-bashing, as seen from the receiving end.
At the height of the bubble economy between 1989 and 1991, banks competed to lend money based not on the company's earnings but solely on the value of real estate, often land, as collateral. Banks trusted the value of land because its quantity was finite and its price had never decreased significantly in the past; in fact, it had only risen.
Rumors had it that the land value of the Imperial Palace grounds in Tokyo alone was higher than that of the state of California, or that the value of Japan's total land area which is smaller than California's was worth many times more than all of the United States.
In the 1980s, property values rose exponentially. Commercial land prices shot up more than 45 percent in one year because of soaring demand in major cities. As long as land prices were secure, the banks always could collect on a bad loan by putting up the property for auction.
The assumptions that the values of land and stocks always would rise finally proved false in the early 1990s. First the stock market collapsed. About a year later, land values plummeted 50 percent, suddenly making nearly $1 trillion in loans uncollectible. Houses bought at the top of the real estate boom in 1991 are now worth only a fraction of their cost.
For years, the Japanese Finance Ministry rejected the idea that the bubble economy would end, hoping economic growth would wipe away the problem. But the "bubble" finally popped and the whole economy ground to a halt.
Japan's central bank finally started cutting the interest rate in July 1991, and after a series of moves, the interest rate dropped to half of 1 percent on Sept. 8, 1995. Despite such actions, Japan's gross domestic product grew at an average of just 0.6 percent a year between 1992 and 1995.
In early 1999, the Bank of Japan slashed the overnight interbank rate to zero.
When land prices started to fall, commercial banks found themselves vulnerable. More than 5,000 companies went bankrupt in 1991, leaving more than 4 trillion yen ($33.3 billion) of unpaid debt.
The banking system, which in the 1980s the Finance Ministry had called the world's safest, collapsed with bad debt worth more than $550 billion. In 1998, Japan's legislature approved pumping more than $500 billion of public money to rescue troubled banks.
Consumer spending declined during much of the 1990s, leading to deflation falling prices for commercial goods, a rare phenomenon in developed countries. Analysts say cheaper imported goods from abroad, especially China, were partly responsible, but from a consumer's point of view, it made no sense to buy durable goods today if they were likely to cost less next week.
From 1990 to 1994, automobile production dropped 22 percent, prompting car manufacturers like Nissan to close factories. Another corporate survival tactic was the "convoy system," in which weaker companies stayed in business by relying on the assets of affiliated stronger companies.
Meanwhile, the Japanese government pumped more than $25 billion each year into public-works projects to generate economic activity. Then, to cut government spending, it raised the age for receiving national pension benefits from 60 to 62, and eventually to 65. The number of government ministries was cut to 13 from 22 to reduce redundancies.
Prime Minister Junichiro Koizumi, who enjoys the highest approval ratings of any Japanese leader since World War II, is trying to achieve structural reform, including the privatization of the post-office system, which handles mail and acts as a government savings bank.
Mr. Koizumi also has promised an annual government bond issuance cap of 30 trillion yen (about $250 billion) from fiscal 2001, but the spending might exceed the amount with sudden uncontrollable expenditures like the deployment of the Japanese Self-Defense Forces to support the U.S.-led war against terrorism in Afghanistan.
As the economy stagnated in the 1990s, Japan's deficit worsened. The budget deficit reached $5.57 trillion at the end of March, nearly 130 percent of GDP, the highest percentage in any developed country.
Japanese companies, which prided themselves on providing secure, lifetime employment, suddenly were blamed for this as other firms went bankrupt and the jobless rolls climbed. So surviving companies slashed bonuses, cut back on overtime, and froze salaries and other benefits.
Employers started trying to force workers to resign "voluntarily" using humiliation and harassment tactics, such as pay cuts and nonsense assignments. The number of psychiatric clinics in Japan increased tremendously during the past decade.
Corporations making consumer electronics and cars increasingly have shifted production overseas to take advantage of lower labor costs. This so-called "hollowing out" of industry eliminated thousands of jobs in Japan, mainly in the manufacturing sector.
There are concerns that Japan's expected negative growth in fiscal 2002, which starts in April, may lead to another Asian economic crisis as in 1997 and 1999.
The future of Japan seems to hinge on structural reforms which the prime minister is advocating. Business activity is still sluggish, and Japanese household spending in September dropped 3.7 percent from a year earlier.
Analysts say "transparency" in government and businesses, large and small, is also needed. Transparency is expected to increase after Standard & Poor's announced this week it would develop Japan's first advanced evaluation of smaller companies to help banks assess the financial health of potential borrowers.
"The problems of the 1980s and 1990s have revealed a fairly severe problem in Japan concerning the ability of banks and nonfinancial corporations to hide bad news," said Edward J. Lincoln, senior fellow of foreign policy studies at Brookings Institution. "That has to be stopped."
Japan always has been good at catching up with other advanced nations, especially the United States. Maybe the time has come for Japan to lead others, especially in Asia, the only region in the world with no free-trade zone.
As China and the Association of Southeast Asian Nations agreed this week to create a free-trade zone within a decade, Mr. Koizumi vowed that Japan would not be left behind in Asia.


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