Ivan Hall, "Bamboozled," and the State of Japanese Banking
The Japan scholar and former U.S. diplomat Ivan P. Hall has just published a new book entitled Bamboozled: How America Loses the Intellectual Game with Japan and Its Implications for Our Future in Asia. Instead of accepting the prevailing orthodoxy that Japan is suffering from a prolonged recession, Hall argues that the Japanese economy is as buoyant as ever. He goes on to show how Japan has been running intellectual rings round the West in the last decade -- not least in the matter of trade. It is a theme I strongly endorse and, as I have said in a comment for the book's cover, the book is an intellectual box of chocolates for serious Japan watchers. In advance of a talk he gave in New York on September 25 before the Overseas Press Club of America, he asked me for help in rebutting the American media myth that banking problems threaten the collapse of the Japanese economy. This is how I replied:
Dear Ivan:
Here are some points I would emphasize:
$$$ Japan's banking problems are purely internal and in no way have they cramped Japan's "juggernaut style" in acquiring foreign assets. As measured by the International Monetary Fund, in the eleven years to December 2000, Japan's net foreign assets rose from $294 billion to $1,158 billion . By comparison America�s net foreign **liabilities** rose from $47 billion to $2,187 billion in the same period.
$$$ Irrespective of what the Western press may think, the greatest risk of systemic default in the Japanese banking system was reached as far back as early 1993. Since then the banks have enjoyed superb "spreads" -- the margins between their deposit and lending rates -- and thus have been rapidly digging themselves out of the hole created by their 1980s excesses.
$$$ All through the problems, the Japanese banking system worked normally as far as its customers were concerned. In sharp contrast to the American banking system in the 1930s, not a single bank in Japan was forced to close its doors and where banks had to be rescued the rescue was completely seamless and disruption-free as far as the public was concerned. Any further problems that emerge can be expected to be similarly bereft of side-effects for the larger economy.
$$$ Tokyo stocks have fallen less than is generally understood and in particular they are little changed on their August 1992 post-bubble bottom. A key point is that the Nikkei index was rebased in 2000 in a way that misleadingly exaggerates the extent of the fall. Essentially a lot of solid stocks were thrown out of the index and replaced by highly speculative Internet-related stocks. To state this in American terms, it is as if in 2000, the Dow Jones company rebased the Dow Index by replacing General Electric, and Procter & Gamble, and IBM with Boo.com and Worldcom, and Enron. The rebasing of the Nikkei Index is an important piece of evidence in my contention that the Japanese system is deliberately trying to exaggerate its financial problems. (Everyone who is serious in Japan saw through the Internet bubble at the time.)
$$$ The fundamental problem the banks have suffered, the collapse in real estate values, ended in 1995-96. Since then downtown real estate prices have generally been treading water, and there has been some evidence of a recovery in prime areas, notably the fashionable shopping districts of Omotesando and Harajuku (where retail rents in some cases have doubled in the last four years). The key point is that there has been little or no net deterioration of capital values (and therefore of the banks' loan problems) in the last six years -- at a time when their strong underlying profitability has enabled them substantially to restore their balance sheet strength.
$$$ Those analysts who claim the real estate problem has continued to worsen are easily rebutted by the evidence of foreign companies trying to buy or rent space in Japan. Such companies will tell you that both rents and capital values in Japan remain today among the world's highest. After dropping by about 50 percent in prime districts in the early 1990s, rents have been stable to rising for six years. Foreign "vulture" funds trying to buy sizeable pieces of property in Japan have been consistently frustrated and several have closed their offices for want of business. How many major buildings in central Tokyo have been bought by foreigners in the last decade? I can't think of a single one. Certainly if there had been many we would have heard of them.
In explaining all this, I suggest a metaphor might be useful: think of the SS Nippon as a giant version of The World, the new German-built luxury liner on which wealthy people will live permanently in their own apartments. If The World's passengers engage in an orgy of gambling among themselves (as passengers on the SS Nippon did in the late 1980s), the result will be a lot of losses -- and a lot of gains. The point is that one man's loss is another man's gain. Thus the passengers' total net worth will not be diminished by the gambling. Even if some of the passengers sell, say, fake antiques to their more gullible colleagues, there is no net diminution in wealth: what happens merely is that wealth is transferred from the pockets of the gullible to those of the crooked. Essentially every loss that was sustained after Japan's bubble burst was balanced by a gain by someone who sold real estate or securities at peak prices in the late 1980s.
Remember too that few members of your audience are very competent in the technicalities of finance (even though of course they may pretend to be otherwise). Rather they depend on securities analysts to tell them what to think. And if there has been anything we have gained from Wall Street's turmoil of the last few years, it is that it has exposed the Wall Street securities industry for what it really is -- and whose interests it really serves.
The same inferences apply a fortiori to the Tokyo securities industry. For generations Tokyo has been a by-word for a level of securities fraud and malfeasance that is orders of magnitude more nefarious than anything Wall Street gets up to. Essentially the Japanese securities industry is more akin to organized crime than it is to honest finance. For that reason, decent Japanese parents discourage their daughters from marrying into the Tokyo securities industry -- in much the way that decent American parents discourage their daughters from marrying into the Gambino family. The message is that the Western press should constantly look for axes grinding in the Tokyo securities industry's comments on Japanese banking (and of course on everything else).
It is necessary to say all this because almost everything the Western press thinks it knows about Japan's banking problems comes from Tokyo-based securities analysts. The best that can be said is that these analysts have been consistently about five years behind the game in reporting what is really going on. Thus although to some independent observers, it was obvious that the banking industry was headed for a crash as far back as the late 1980s (see my analysis in the September 1987 issue of Euromoney ), the analysts only began to make a noise about the problems in the mid 1990s. And although these problems peaked in 1992-1994, it was not until 1997-1999 that these problems became widely discussed in the Western press.
All the best, Eamonn
Eamonn Fingleton is the author most recently of In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (Houghton Mifflin, 1999).
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