September 25, 2003


Japan's promise - and problems (John Berthelsen, 9/26/03, Asia Times)

While the Japanese authorities have taken important regulatory and legal steps to strengthen the financial sector, and banks have attempted to improve their capital adequacy, raise provisioning and accelerate the disposal of non-performing loans (NPLs), "it has become clear that financial institutions have not been able to solve the problems on their own", the IMF says, noting:

# The banking system's capital cushion has been run down to minimal levels, and most new capital has been in the form of interest-bearing paper that is not the basis for stronger balance sheets.

# Life-insurance companies are under considerable stress as a result of the declines in investment income and stock prices, which have weakened their capital base.

# The corporate sector is highly leveraged and deflation has increased the real burden of debt.

# On a macroeconomic basis, land values remain weak, reflecting the sluggish economy and overhang in the real-estate market. Despite the broad run-up over the last seven months, the Nikkei index of 225 stocks is hovering near 11,000, hardly more than a third of the 38,000-plus where it closed in 1989.

# Although Japanese banks have disposed of more than 90 trillion yen worth of non-performing loans amounting to 16 percent of GDP since 1992, official NPLs still account for more than 8 percent of outstanding loans as new problem loans continue to emerge.

# Return on assets (ROA) on an operating-income basis in the corporate sector has remained flat since 1993. To compare this with other Group of Seven countries, ROA in Japan is about half to a quarter that of Canada, the United Kingdom and the United States.

In another IMF report issued this month on selected issues facing the health and vulnerability of the Japanese economy overall beyond the financial sector, a team of five economists wrote that "we find that weak companies account for a significant portion of total debt and continue to make losses".

In 2002, despite record negative real interest rates, companies with non-performing debt accounted for 16 percent of Japan's total debt, while those with losing money on operations accounted for 10 percent of total debt. A quarter of those weak companies had reported negative operating profit for two years or more. While debt-to-equity ratios in the corporate sector have fallen from a peak of 287 percent in 1975 to 155 percent in 2002, debt leverage is still breathtaking. That 155 percent compares with an average of 80 percent in Germany, 70 percent in the US, and 45 percent in the UK.

Otrher than that, they're poised for precipitous population decline, an inability to fund their retirement system, and they're contemplating developing a serious Defense for the first time in sixty years, which will waste even more money.

Posted by Orrin Judd at September 25, 2003 10:27 AM

Tanks and ships and troops are expensive. If you already have space and nuclear programs, ICBMs are relatively cheap...

Posted by: Mike Earl at September 25, 2003 11:48 AM

I'm not certain why Defense spending is a "waste of money", particularily surprising for this blog.

Hasn't it been discussed here that defense spending has some profound philosphical and psycho-sociological ramifications, best summed up as.... "if you are not willing to spend for defense, maybe what you have (like your civilization or society) is not worthy of defense... or perpetuation".

Could this not be an explanation as to why Europe and Japan are suffering this, while the US is not?

Posted by: Andrew X at September 25, 2003 1:04 PM

No, Europe suffered the crisis of confidence and then abandoned any pretense to power, not vice versa.

Posted by: oj at September 25, 2003 1:31 PM

Ten years ago, I bought the financial services explanation for Japanese stagnation. After 15 years, however, it is untenable. Only government can screw an economy up this badly this long. All other economic problems are self-correcting.

Posted by: David Cohen at September 25, 2003 3:05 PM


Even government isn't that powerful. Only the people can do it themselves.

Posted by: oj at September 25, 2003 5:03 PM

You're quite right, Orrin. On the subject of loans, something that proves your point in your last comment; it's Prime Minister Koizumi's government that's been trying, though admittedly not terribly hard, to get the banks to foreclose on bad loans. It's the banks that stubbornly refuse to do so.

And there's the matter of the extremely antiquated method of wholesale-to-retail distribution in Japan. You just don't see very many of the superbig superchain stores we're accustomed to in the U.S. The Japanese - and this isn't just the government, it seems to be a thoroughgoing cultural preference - prefer those thousands of little shops all over the place. In all honesty, that's not always a bad thing, but it does have a lot to do with why consumer prices are so high in Japan.

One point of disagreement; it's way past time Japan took some real responsibility for its own defense. I wouldn't count that as "wasted" money.

Posted by: Joe at September 25, 2003 6:58 PM


Two minor nits.

1) The retail situation may be changing. WalMart is heading for Japan.

2) Japan's defense spending is third or fourth in the world. It's right around 1% of GDP which is still quite large. Japan can't take a more active role in its defense because most of the leaders of other Asian nations were children during the Pacific War.

Posted by: Annoying Old Guy at September 25, 2003 10:17 PM

Tne 11,000th 7-Eleven opened in Japan a few weeks ago.

The antiquated distribution system is a thing of the past.

Posted by: Harry Eagar at September 26, 2003 3:49 PM