A Roller Coaster, Made in the U.S.A. : Japan: America insists that Tokyo liberalize its capital markets. But if we push too hard, the result could be a worldwide crash.
The jitters that have rocked the Tokyo stock market should give Americans pause.
In a single day late last month, the value of the Tokyo exchange plummeted 4.5%, the second-worst crash ever. Japanese observers attributed the plunge to two factors: a rare open disagreement between the Finance Ministry and the Bank of Japan over interest rates, and the effect of new, highly un-Japanese practices imported from the West, such as program trading, which makes the Tokyo exchange a more speculative and volatile market.
There are some awful ironies in all of this. First, it is necessary to recall a few things about how Japan works.
Although Japan is fiercely capitalist, it is not a market system in the same sense as the United States. Most corporate stock is never traded, but simply held for the long term by other corporations and banks. Investors live with extremely low rates of return--the flip side being extremely low capital costs for Japanese industry and spectacular long-term gains.
Land use is heavily regulated and land prices are astronomical. Japan, a relatively barren archipelago the size of California, is “worth” $14 trillion, or twice the value of the entire United States. Inflated real estate, in turn, collateralizes stock purchases and helps push up stock prices. Japanese investors, enriched from the stock boom, then bid up land prices even further. In an unregulated system, this would be a disastrously speculative bubble.
But Japan is not a country where everything is for sale. There is no such thing as a hostile corporate takeover. Firms, rather than putting everything out for bid, prize long-term relationships with customers and suppliers. This system, while very different from our own, manages to combine competitive discipline (albeit by a very different route) with institutional stability. It has led to record rates of economic growth for four decades.
Traditionally, Japan’s capital markets have been as different from ours as its product markets. Banks, brokerages and insurance companies function as a loose cartel, taking guidance from the government. Most interest rates have been regulated. Most Japanese government bond issues are parceled out to underwriters rather than auctioned, which helps the government discipline investment houses and hold down rates. And certain highly speculative maneuvers, such as computerized-program and stock-options trading, have been prohibited or discouraged.
Until lately, foreign stockbrokers and banks had only limited operations in the Tokyo money market. There were equally tight controls on the ability of Japanese investors to send their yen overseas. The Reagan Administration, however, began pressuring Japan to “liberalize” its capital markets.
The purpose was partly ideological, partly practical. Ideologically, the United States wanted Japan to become a Western-style, deregulated market economy. As a practical matter, the U.S. Treasury, ever deeper in debt, needed Japanese investors to buy its bonds.
The so-called yen-dollar talks were a partial success. The Japanese readily agreed to allow yen to flow outward and they quickly became a major buyer of U.S. debt and a major player in the New York stock market.
The Japanese, understanding the dynamics of their economic system, were far slower to unleash market forces on the Tokyo money exchange. Belatedly, however, the Tokyo money market is being slowly liberalized.
Unfortunately, a Western-style capital market is entirely at odds with the deeper logic of the Japanese system. In a shallowly traded stock market, the introduction of program trading turns a managed market into a speculative roller coaster.
A relatively small volume of program sales by one American firm, Salomon Brothers, last month threw the whole Tokyo market into a tailspin. Japan’s own behemoth stock brokerages, like Nomura, are waiting in the wings. Officials at Japan’s powerful Ministry of Finance worry that if Normura ever jumped into unregulated, computerized program trading, there could be a speculative meltdown.
By the same token, if control of entire corporations were up for grabs based on U.S.-style speculative takeovers, the logic of Japan’s carefully built system of long-term relationships would unravel. And if land prices were ever deregulated, as Americans want, the speculative over-valuation of Japan would come tumbling down like a house of cards.
America is in a pickle. We’ve come to a dead end trying to export products to Japan, but we’ve been all too successful in exporting ideology. This particular export could be the ultimate poison pill: It could undermine the financial system of our trading rival and principal creditor.
As a debtor nation, we’ve become fatally dependent on managed Japanese capital markets. But as merchants of laissez-faire, we insist that the Japanese liberalize. If the Tokyo stock market were as speculative as, say, the New York stock market, Japan’s entire system could come crashing down. An unmanaged collapse of the Tokyo market would lead to huge sales by Japanese investors in New York, London, Frankfurt--and a worldwide crash.
Maybe we should spend less effort exporting ideology and more effort exporting products. Maybe we should let Japan be Japan and jointly figure out how best to coexist in a fragile world.
