Socialism Today

Socialism Today The monthly journal of the Socialist Party

Home

Issue 55

About Us

Back Issues

Reviews

Links

Contact Us

Subscribe

Search

When bubbles burst

Biggest-ever Keynesian programme

Political paralysis

It hurts when bubbles burst

With the US economy now clearly in a downspin, parallels are being drawn with the situation ten years ago when Japan's stock market 'bubble' collapsed, plunging the economy into a prolonged period of stagnation. LAURENCE COATES looks at the Japanese experience.

This article first appeared in Offensiv, the weekly paper of RÐ"¤ttvisepartiet Socialisterna (Socialist Justice Party), the Swedish section of the Committee for a Workers' International.

AT THIS YEAR'S World Economic Forum in Davos, Japan's prime minister Yoshiro Mori revealed that the so-called 'lost decade' of the 1990s had cost the Japanese people 1000 trillion yen ($8,000bn), an amount equivalent to twice the country's gross domestic product (GDP). At the same meeting, Goldman Sachs economist Kenneth Courtis summed up the mood of world capitalism: 'The only way you can be optimistic about Japan is to look at the charts upside down'.

The collapse of Japan's asset bubble delivered a knock-out punch from which the economy has not recovered. Now the country is heading for an even worse downturn.

The Tokyo stock market's Nikkei 225 index has plummeted 35% in the ten months (up to February) since Mori took the helm, wiping out $884bn in share values - about four times Sweden's GDP. Stock markets plunged around the world last year, especially in Asia, taking their cue from the NASDAQ. In Japan, given the web of cross-shareholdings which link banks to huge business clusters called keiretsu, the Nikkei's slide is causing panic. It could drag bank balance sheets into the red, by the time accounts are filed in March, the end of the fiscal year. This could trigger a new banking crisis.

At the time of the last crisis (1998) the government set-up a rescue operation (costing $70bn) to prop up 15 banks. In 1999, Mori's predecessor, Keizo Obuchi, claimed to have raised the financial system 'off its deathbed'. He spoke too soon. An analyst at ING Barings points out that 'it's becoming clearer and clearer that the government never pumped enough money into the banks'.

Last year the economy experienced rapid growth in the first quarter, 10%, prompting loud claims of a recovery. In reality, this temporary surge was due to a massive injection of government spending (and some fiddling with statistics). Like trying to shock-start the heartbeat of a dead person - if you run enough electricity through it you'll succeed in making the limbs jump!

In August, the governor of the Bank of Japan, Masaru Hayami ended the country's so called 'zirp' - zero interest rate policy - a policy urged upon Japan by Washington and Brussels to stave off recession. Hayami justified his 0.25% rate increase - the first for ten years - claiming that the problem of deflation (falling prices) had subsided. He also spoke too soon - prices are still falling at an annual rate of 0.5% - and he has now been forced into a humiliating U-turn. Private consumption, which accounts for 61% of GDP, continues to decline. Partly, this decline reflects the squeeze on incomes as overtime, bonuses and wages are cut, and part-time jobs replace full-time ones. But it also reflects the desire for an insurance policy as the population dread what's coming next. Economists complain of the Japanese 'obsession with saving'. Unemployment has already reached a post-war record of 4.8%. It would be double this amount if measured same way as in Europe. Meanwhile, reflecting the insane logic of capitalism, the pressure on those in work increases: 10,000 people die every year from karoshi (overwork). Japan's suicide rate rose 35% in 1998.

Biggest-ever Keynesian programme

DURING THE 1990s Japanese governments have presided over ten stimulus packages worth a total of $1.15 trillion - equivalent to the entire GDP of Italy. This is the biggest Keynesian spending programme ever seen, costing as much as the US New Deal programme of the 1930s and Washington's war against Vietnam. Much of the money was spent on roads, bridges and other infrastructure projects in areas where the ruling Liberal Democrats (LDP) need votes. This has enabled the Japanese economy to achieve a pitiful average growth rate of 1.69% per year over the last decade. While these policies have not overcome the problems inherited from the 1980s bubble - massive debts, a profits squeeze and falling consumption - they have created new ones. Gross government debt has ballooned to 140% of GDP (from 60% in 1990), the highest level of any industrialised country. This debt mountain exceeded $6 trillion last year. In the long-term such a massive level of debt is untenable. At some point there is, as the Financial Times put it, 'a rendezvous with bankruptcy'. The working class will be asked to pick up the bill, in the form of tax increases and cuts in services. The OECD is calling for huge cuts, equivalent to 10% of GDP by the year 2010, claiming this is necessary merely to 'stabilise' the debt at 150% of GDP.

Last year's growth figure - 2% - is misleading. One section of the economy boomed - IT and electronics - while most of the 'Old Economy' languished in recession. Industries like retailing, chemicals and steel have excess capacity coming out of their ears. The government forecasts growth of 1.7% for the coming year, but even this modest figure is unrealistic given the dramatic slowdown in the US economy. The Japanese car industry ships 40% of its exports to the US market. Japan will suffer still greater damage indirectly, as key markets in its East Asian hinterland are sucked into the vortex of a US downturn. Taiwan, Thailand and Malaysia, which all rely heavily on Japanese technology and loans, will be hammered by collapsing US demand for their electronics exports. Last year Japan shipped 50% of its electrical-machinery exports, 60% of its IT-related