Deepening Japanese Financial Crisis

The Peoples' Star

The Japanese economy rushes on the road towards such an unprecedented historical crisis as would remind many people of the Great Depression in the 1930s.

The burst of 'economic bubbles' in the early 1990s broke up the tale of the so=-called 'perpetual prosperity of Japanese capitalism.' In order to save the monopoly bourgeoisie from this crisis, the government poured huge funds from the national finance, produced an artificial market for the monopoly bourgeoisie, and made every effort to support stock prices and salvage those bad debt-ridden banks with a record-low interest.

However the economic growth rate marked less than minus 10 percent in the second quarter of 1997 for the first time in the past 32 years. Like this, all the economic indexes show that the country is falling again into a deeper over-production crisis without enjoying any sufficient recovery after the burst of its 'economic bubbles'.

The auto, electric machines and other industrial makers ballooned their exports, taking advantage of the low exchange rate of the yen against the dollar. But now they are plagued with heaps of products in stock. The investment, production and sales even in such growth industries as the information and communications have already hit the ceiling. This why the economy has shrunk in all industries.

It is true that a number of over-production crises have hit the Japanese economy since the end of World War II, but this crisis is developing into a catastrophic financial one. This represents the seriousness of the contradictions and crises accumulated historically in the postwar capitalist economy.

Since the collapse of the 'bubble economy,' the financial institutions have gradually aggravated their crises. In July 1991 the Toho Mutual Bank fell into a crisis to be merged and acquired by the Iyo Bank. Later, failures of the financial institutions have increased year by year, while their sizes have ballooned from credit associations and other smaller ones to the Hyogo Bank and other relatively big banks. At the beginning, those financial institutions in crisis were merged and acquired as measures for salvage, but later they broke off their unprofitable sections and handed over their other business operations. This way degrees of crisis have become deeper. In 1997 there were large financial failures like Nissan Mutual Life Insurance Co. and Ogawa Securities Co. Especially in November, we had a collapse of giant share companies and banks.

The growth of the over-production crisis pushed down the stock prices again. This heavily hit the management of those financial companies which had a great deal of securities as assets. The Japanese financial firms are allowed to regard as their 'latent assets' the balance between the purchase prices (on-the-book prices) and the market prices (current prices) of the stocks. Including 45 per cent of these 'latent assets in the equity capital, those companies have achieved eight per cent of the return on equity (ROE) as the criterion set by the Bank for International Settlements (BIS). They even have netted 'business profits' to deal with their bad debts (some 100 trillion yen in total) through several measures. For instance, they have used the 'latent assets' of stock and land properties as capital, plundered the depositors and embezzled 'public funds' through the lowest interest rate (The city banks borrow funds with official interest rate of O.5 percent from the Bank of Japan and lend them with interest rate of 4 to 5 percent, thus earning reportedly a profit margin of four trillion yen a year). They have also invested in loans of the national and local governments. The key Nikkei average of 225 selected stocks at the Tokyo Stock Exchange once reached 39,000 yen at their peak, but it has declined to 16,000 yen level while some indexes predict a further decrease. This will not only prevent the financial institutions from attaining the BIS criterion but also reduce the funds for repayment of their bad debts and push down their credit further internationally. Consequently, uncertainties about operations of financial institutions have grown further.

This has invited a 'credit crunch' among financial companies in the short- term money market (or call money market), resulting even in a collapse of big financial business due to a 'stalemate in cash position.' The latest serial bankruptcies are literally 'breaks in chains of credit.'

In the call money market, the financial companies borrow necessary funds every day in preparation for withdrawals and repayments and pay them back next day. The average balance of this market among banks reaches even 38 to 40 trillion yen. It supports the financing of those companies.

Nevertheless, uncertainties about the management of financial institutions evoked withdrawals of individual depositors and the outflow of funds from the stock market. This made the financial institutions short of cash for such withdrawals.

The Sanyo Securities Co., which collapsed last November defaulted on loans in the call money market. As this was the first in this market, it sharply pushed up interest rates to aggravate 'credit crunch,' resulting in the bankruptcy of the Hokkaido Takushoku Bank on November 17. Hokkaido Takushoku, which started in 1900 as an instrument for a national policy of settling the Hokkaido Island (the second largest main island in Japan), was a bank designated by the Hokkaido prefectural and other local governments, had transactions with 60 per cent of all the companies in the prefecture and was one of the nation's 10 biggest commercial banks. Its bankruptcy proved that the government had no choice but to change the postwar financial policy, by breaking its public promise not to let the nation's 20 largest banks go under. During the period of the 'bubble economy,' Hokkaido Takushoku largely expanded its loans to middle-sized construction companies and real estate firms. The burst of economic bubbles resulted in huge bad debts of 930 billion yen according to its official announcement (but the real amount is far bigger reportedly). Under the nose-dive of share prices especially after early 1997, it drastically got caught in a 'financial crunch' and its request for fund procurement was rejected in the call money market. After everything, it went bankrupt.

The Bank of Japan issued an exceptional official notice that there were no more defaults ahead for financial businesses. Following Hokkaido Takushoku, Yamaichi Securities Co. collapsed on November 24.

Yamaichi was a giant and core stock company of the Fuyo financial capitalist group (one of the Big Six financial groups in Japan) consisting of Fuji Bank, Yasuda Life Insurance, Marubeni, Nissan Motor and so on. And it was also one of the nation's Big Four securities houses. Its deposited funds and securities amounted to 24 trillion yen, while its total assets summed up to 3.15 trillion yen with 7,500 employees, 117 local branches at home and so many associated companies.

After the burst of 'economic bubbles,' its stock brokerage has declined sharply. Like other stock businesses, Yamaichi incurred the hidden debts in transactions called 'tobashi' and also the illegal compensation for losses of big client companies, in order not to lose its customers. These illegal transactions have brought the company more than 200 billion yen in off-the-book debts which was just an amount announced officially by the company itself. Actually, the real amount should be five or even ten times bigger than the announced one. Its main bank refused new loans for fear of chain bankruptcy. Finally, it went bankrupt, being burdened with debts to the tune of three trillion yen.

On November 26, the Tokuyo City Bank Co. collapsed following Yamaichi.

Against such a background, the Bank of Japan flooded the call money market with nearly four trillion yen. This way, it manages to prevent the chain reaction of the credit collapse.

The retrench and crunch of credibility heavily hit smaller businesses at the beginning and even big companies these days. This further deepens the over-production crisis and then rebounds upon the financial crisis. Such a bad circulation has started.

Besides, Japan is the 'biggest creditor' in the world, so its financial bankruptcy will inevitably exert serious influence upon the Asian and US economies and draw near a danger of global financial crisis.

The economic crisis in the Asian region was triggered by the monetary crisis which started from Thailand. It has been drastically deepened, bringing even South Korea into a serious financial crisis, a country which stands as the 11th biggest economic power in the world.

The outstanding loans by the Japanese banks account for 20 per cent of all those in the world market. Their borrowers are mainly in Asia and the U.S. If fund supply from Japan to other Asian countries shrinks and if the Japanese money refluxes from the US, the financial crisis in the Asian region will be further aggravated and hit drastically the US economy, although the latter enjoys now a boom under the 'bubble economy.' No one can deny the possibility that it will develop into the biggest global financial crisis in post war history.

The US as a ruler of the global capitalist economy fears spread of such a financial crisis starting from Japan.

Nevertheless, it schemes in this critical period to dominate the Japanese economy further directly and deeply. What we must not miss is the fact that this crisis has been originally accelerated by the U.S. as a dominator of Japan through its policy towards our country.

The Japanese government accepted financial liberalization and globalization of the country according to the report of the Japan-U.S. Commission on Yen and Dollar in 1984 and allowed a sharp appreciation of the yen in line with the agreement of the Group of Seven financial ministers' conference at the Plaza Hotel in New York in 1985. Consequently, it incurred a fierce 'bubble economy,' with inflating bank credit through an all-out loosening of the money market. After the burst of the 'bubble economy,' there remained a huge amount of bad debts. These debts have heavily affected business operations of the financial companies and underlie the present financial crisis.

In the deregulation of the financial industry - dubbed the Japanese Big Bang - to be completed by 2001, it is not surprising that the Japanese financial business with lower managerial ability will disappear as losers. This will pave the way for domination of the country's economy by the US financial companies. In the Tokyo Stock Exchange, some foreign-based securities companies have already exceeded the local Big Four securities companies in terms of stock dealings. They have also started their schemes to purchase some local financial businesses and watch vigilantly for 1,200 trillion yen of individual financial assets in the country.

A report on the US strategy toward Japan, issued in 1990 by the US Central Information Agency, stresses that the US should deprive our country of financial market with its own financial capability as a weapon. Taking advantage of its financial skills, the US undertook the world strategy of controlling the global market. On the other hand, Japan with huge bad debts expanded its loans to other Asian countries in the traditional manner. While this has spread 'economic bubbles' to the region and widened over-production, Japan is faced with the economic failure of those countries.

The government is planning to use 30 trillion yen of public funds for salvage of crisis-ridden financial companies. According to its plan, it will issue 10 trillion yen in bonds to strengthen the Deposit Insurance Corp., and guarantee the Bank of Japan's special loans to the tune of 20 trillion yen. On the other hand, it is shifting all the burden of relief measures onto the backs of the working people. With all these measures, the financial crisis is deepening and inviting far bigger over-production and financial crisis.

From: 'The People's Star', International Bulletin of the Communist Party of Japan (Left), January 1998.

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