On 25th March, European leaders have promised us a comprehensive solution to the eurozone risis. I am not holding my breath but, at the same time, I am redrafting the Modest Proposal for resolving the crisis. It will appear in this blog next week. In the meantime, I return to my Global Minotaur theme. The last post ended with an assessment of the Crash of 2008 and its creation of a new regime: Bankruptocracy. Today I embark on a region by region assessment. Japan is our first port of call.
The dimming sun: Japan’s lost decades
As a pillar of the Global Plan, and under the loving patronage of the United States, Japan’s export-led post-war growth was nothing short of miraculous. It materialised in two phases: By the late 1950s, Japan was already exporting light industrial goods while importing heavy industrial goods from the United States plus raw materials from elsewhere. Very quickly it graduated to a more mature pattern of trade, exporting heavy industrial goods and limiting its imports to scarce raw materials.
Japanese wages rose throughout the post-war period but never as fast as growth and productivity. The surpluses that this gap occasioned where guided by the Tokyo government to building infrastructure for the benefit of the private sector (e.g., transport, R&D, training, etc.) and, to a much lesser extent, toward a social safety net for the population at large.
Production was based on large scale capital investments yielding impressive economies of scale. It took place within highly concentrated oligopolistic structures known as keiretsu (e.g. Mitsui, Mitsubishi, and Sumitomo). The keiretsu were vertical conglomerates. Hierarchical organisations that included their own large bank, factories, plus an intricate subcontracting system that involved countless small-to-medium sized enterprises (SMEs) or chusho-kigyo. Though the SMEs accounted for up to 80% of total employment, their contribution to overall productivity was quite low, less than half of the average level of the larger firms.
The Japanese economic miracle was built on this combination of large interconnected conglomerates, the many small businesses that revolved around them, and a government that looked after the infrastructural and financial needs of both. From this perspective, it is easy to understand Japan’s reliance on foreign demand: With so much emphasis on investment and production, with wages trailing productivity, and with minimal social spending, the Japanese economy cannot consume but a fraction of its output. This is why, after the Global Plan‘s passing, the Global Minotaur was so important to Japan’s economy. And why, with the Minotaur bleeding on the proverbial floor, Japan is currently so seriously destabilised.
Of course, Japan entered into its path of long decline in the 1990s. Commentators shine their searchlights on its banking sector for clues of what went wrong. Free market aficionados think they have spotted the problem the moment they found out that Japanese banks are, largely, controlled by the state. However, the trouble here is that the state-dependence of the banks is not only a problem for Japan’s economy: it is also the reason for its success. Indeed, the longstanding alliance of government and banks afforded authorities leverage over investment, the result being a relatively easy implementation of the ‘national policy’ of industrialisation in the post-war period. The Japanese miracle would not have been possible without that tight embrace. It allowed government to discourage Japanese firms from financialisation while the Ministry of Finance performed that task, on their behalf and in association with the Bank of Japan. Industry was instructed to mind its core business (of making ‘things’ well) while government, and each bank affiliated to each keiretsu, were responsible for the flow and circulation of capital into and around these industrial groups.
During the Global Plan, and under America’s tutelage, authoritarian de facto one-party rule (by the almost invincible Liberal Democratic Party) ensured that the Japanese state was semi-detached from civil society. Its policy makers had a major part in the unfolding drama that followed, after 1971, the Global Plan‘s replacement by the Global Minotaur. In particular, the Japanese social economy faced a major overhaul in response to the dollar’s initial devaluation. Japanese officials quickly reacted to the prospect of collapsing exports to the United States in two ways: First, by finding new technological solutions to maintain competitiveness. Secondly, by exporting capital to the United States in the form of foreign direct investment, purchases of US Treasury bills, and placements on the New York stock exchange. In short, to keep its oligopolistic industry going, Japan chose to nourish the Global Minotaur, exactly at the US authorities had anticipated.
The tacit US-Japanese accord was simple: Japan would continue to recycle its trade surpluses by purchasing US debt and investing in America and, in return, it would be granted continued privileged access to America’s domestic market, thus providing Japanese industry with the overall demand that Japanese society was incapable of producing. However, there was a snag: When one buys foreign assets, at some point these assets start generating income which must be, eventually, repatriated. Japan thus ‘ran the risk’ of ceasing to be able to remain a net capital exporter, turning into a rentier nation. This prospect was at odds with the post-oil crisis Japanese growth strategy, which was to concentrate on high value-added, low energy-using industries like electronics, integrated circuits, computers and mechatronics (industrial robots).
On 22nd September 1985, the United States, Japan, W. Germany, France, and Britain signed the Plaza Accord. The agreement’s stated purpose was to devalue the US dollar in an attempt to rein in the Global Minotaur: to reduce America’s trade deficit (and, by extension, its budget deficit). Today, many commentators recall the Plaza Accord as a model of an agreement that America should be imposing on the Chinese, in order to reverse China’s large trade surplus with the United States. While it is true that the Plaza Accord did succeed in devaluing the dollar vis-à-vis the Yen by more than 50% (within two years of its singing), these commentators are missing out the Accord‘s real purpose: The aim was, at least in part, to prevent Japan from becoming a rentier nation, a development that would jeopardise both Japan’s own long term plans and the Global Minotaur, whose wont was to remain the undisputed global rentier.[1]
The Yen’s post-1985 climb forced the Japanese economy into the lap of a major, sustained slowdown. In an attempt to keep up the rate of investment, as Japanese exports were becoming dearer in the United States, the Bank of Japan pumped a lot of liquidity into the keiretsu system. The result was the largest build-up of excess liquidity in modern history. The side effect was massive speculative activity in Japanese real estate. And when in the early 1990s the authorities tried to deflate the real estate bubble by increasing interest rates somewhat, house and office prices crashed. The nation’s banks ended up with huge loans on their books that no one could repay.
It is often argued that Japan’s authorities neglected to force the banks to come clean regarding these bad loans. While this is accurate, it ignores the fact that the banks were intimately connected, via the keiretsu structure, to an intricate network of firms, small and huge. Had the state allowed the banks to write off their bad debts, they would have gone to the wall and the Japanese industrial miracle would have ended there and then. Instead, the government and the Bank of Japan injected as much liquidity as was required into the banks. Lamentably, most of these injections were absorbed by the black holes within the banks (the non-performing loans) without generating substantial new investment.
For the first time since the mid-1930s, an advanced capitalist economy had been caught in a recessionary liquidity trap: Despite the monetary authorities better efforts to boost investment by pushing interest rates down to almost zero and pumping liquidity into the banks, Japan’s zombie banks could not deliver the hoped for investments. The government tried one fiscal stimulus after the other. Roads were built, bridges erected, railway projects criss-crossed the nation’s islands. Even though they helped keep the factories going, the ‘malaise’ could not be lifted.
Interestingly, before 2008, the Japanese ‘malaise’ actively boosted the Global Minotaur. Japan’s next-to-zero interest rates resulted in the accelerated migration of capital from Tokyo to New York, in search of better returns. To the already large amounts of capital that the government of Japan was investing in US government debt, and the equally large amounts of capital that Japanese firms were diverting to the United States in the form of foreign direct investment (e.g. the purchasing of American shares, of whole firms or the setting up by Sony, Toyota, Honda etc. of production facilities on US soil), a third capital flow was now added: The so-called carry trade by financial speculators who would borrow in Japan at rock bottom interest rates and, subsequently, shift the money to the United States where it would be lent for much higher returns. This carry trade expanded significantly the Minotaur‘s inflows, thus speeding up the financialisation process that was to be, paradoxically, the Minotaur‘s undoing.
After 2008, and the Global Minotaur‘s forced abdication, the United States and Europe, to their horror, were to discover that the Japanese liquidity trap had spread to them. At that point all the chastisement that Japanese authorities had received from American and European commentators, for not having taken tough action against their zombie banks, was quietly forgotten. Indeed, Europe and the United States followed the same recipes that delivered Japan’s lost decades. Zombie banks became a feature of the whole wide West. Moreover, unlike Japan’s zombie banks which remain politically weak, America’s and Europe’s zombie banks rule the roost in the new socio-economic configuration that I call bankruptocracy.
[1] The other purpose of Plaza was to accommodate the United States’ determination that its multinationals should play a larger role in the global electronics market that Japan and Germany threatened to dominate.
