With Yen’s Bubble Burst, Japan Plays Waiting Game

From the early-1980s perception of Japan as No. 1, we are now witnessing the spectacle of Japan as Distant No. 3.

The latest sign came a few weeks ago. Soon after European governments launched the euro, Japanese Prime Minister Keizo Obuchi jetted off to Paris, Berlin and Rome to curry favor. He virtually begged for the yen to be taken seriously as the world’s third international currency, alongside the dollar and the new euro. European leaders politely brushed him off.

How times have changed. A few years ago, after the breakup of the Soviet Union, it was fashionable to predict that the world would divide into three huge economic blocs: a Western Hemisphere dominated by the United States, a European bloc centering on Germany and an Asian one led by Japan.

In fact, rigid trading blocs haven’t emerged, at least not yet. But Europe is coming together in economic terms far more than Asia. Japan has failed where the Europeans are succeeding.

Each day, it seems, brings more symbol-laden demonstrations of Japan’s economic plight. Two weeks ago, history was quietly made when America’s unemployment rate dropped to 4.3%, lower than Japan’s 4.4%. It was the first time since records were first kept in the 1950s that a higher percentage of Japanese than Americans were out of work.

Japan’s political leadership is responding with full-court cliches. “It’s easy to grieve and say that the glass is half empty,” Obuchi declared Tuesday, as he opened a new session of the parliament, “But I believe what we need to do is shift our mentality and say instead, ‘The glass is half full.’ ” To build on Obuchi’s metaphor, Japan’s cup no longer runneth over.

How did Japan get into this mess? And can it ever get out?

A particularly incisive answer to the first question has just been published by Peter Hartcher, an Australian writer, in the National Interest magazine. Hartcher focuses on Japan’s financial system, which provided the crucial help the country needed to catch up to advanced Western economies after the ruin of World War II but, like the sorcerer’s apprentice, kept on running until it was out of control.

Japan’s Finance Ministry was never dismantled during the Allied occupation, Hartcher says. It controlled both lending and savings as though Japan were mobilized for war, except that the purpose became economic reconstruction. Interest rates were kept extraordinarily low, enabling favored Japanese industries to borrow and invest freely. Banks did not compete to lend money to households.

“Restricted in their ability to borrow, families were obliged to save strenuously for the big-ticket items of housing and education,” Hartcher writes. “At the same time, they were forced to accept poor returns on those savings, because the interest rates offered on savings accounts were virtually identical across the banking system . . . and it was very difficult to move money out of the country.”

By the 1980s, Japan had far more money in savings than it could possibly invest. Capital began to flow overseas. Japanese banks were loaning money for any project, no matter how flimsy.

Japanese firms, still borrowing at low rates, had money they were virtually throwing away: Hartcher describes how Mitsui Real Estate “deliberately overpaid by $235 million to buy the Exxon Building in Manhattan [for the price of $610 million], just so that it could claim the record for the world’s most expensive building.”

The bubble inevitably burst in the early 1990s, and Japan’s economy has stagnated ever since. Its financial system has begun to open up, although gradually; the pre-World War II banking system is being overhauled. Japanese consumers can now move their money into and out of the country.

Obuchi’s recent effort to talk up the yen as a currency comparable to the dollar and the euro struck U.S. officials as particularly ironic.

In the early 1980s, the U.S. tried to persuade Japan to let the yen be used as an international currency--and Japan said no. “They fundamentally failed to act,” recalls one U.S. official who took part in those talks. “They refused to liberalize their capital markets.”

The question remains whether Japan can recover. Hartcher’s article begins with the gloomy predictions of leading Japanese experts that their country faces at least a quarter-century of stagnation. And yet he concludes that “Japan can and will rise again” because of its human talent, resilience and regenerative powers.

You can already see the outlines of a possible future strategy for Japan. Tokyo seems to be quietly nursing along the dream of an Asia where the yen reigns supreme.

Two years ago, Japan proposed creating an economic stabilization fund for the region, one that would have helped other governments avoid having to go to the American-led International Monetary Fund. At the time, the Clinton administration rebuffed the idea. But last fall, Japan bounced back with a new version of this plan.

Similarly, Japan seems to be embracing the idea of having regular meetings of central bankers and finance ministers from around East and Southeast Asia. Excluded would be the United States, Australia and Canada, even though they are members of the group of Pacific Rim nations that is Asia’s leading economic organization.

“The Japanese still believe they are in a dynamic part of the world and that their manufacturing sector is good,” observes Chalmers Johnson, of the Japan Policy Research Institute. “Japan’s strategy right now is to wait for the American bubble to burst.”

Jim Mann’s column appears in this space on Wednesdays.