Executive Intelligence Review
This article appears in the December 14, 2001 issue of Executive Intelligence Review.

IMF Shock Therapy in Japan
`Just Not Functioning'

by Kathy Wolfe

[PDF version of this article]

According to official statistics just released, Japan is now in its worst economic crisis since the 1971 collapse of the dollar from gold and the 1974 Oil Shock. A flat loss of 1.03 million jobs net in the twelve months to October 31, the government said Nov. 30, brought unemployment to a record high of 5.4%. It was the first loss of a million jobs in a year since 1974, dwarfing anything during the 1997-99 "Asia Crisis." Most layoffs were in basic industries such as manufacturing, transportation, communications, and construction. Another 2 million jobs, net, are slated to go by Spring.

Japan's exports to the U.S. have been dropping since July, 2000, projected to fall 2.5% in the fourth quarter this year, and Japan's global trade surplus has been contracting for 16 months, falling by 33% during October compared to October 2000.

Industrial production has been shrinking since July.

The Nikkei Commodity Index hit a record post-war low Nov. 30, of 99.2% on the scale of 1970=100, meaning wholesale prices of physical goods used in production such as steel, chemicals, and refined fuels are actually lower than in December, 1970, before Nixon pulled the plug on the dollar in 1971 and almost doubled the value of the yen. Consumers, fearing layoffs, have slashed buying. Businesses, fearing banks will call in loans, are cutting outlays and prices like the U.S. airlines after Sept. 11.

This deflation of the physical goods sector has accelerated, with both wholesale and consumer prices falling at increasing rates for the past seven months, despite extreme central bank monetary hyperinflation,

Standard & Poor's, London Fitch Ltd, and Moody's Nov. 28-Dec. 4 made their third downgrade this year of Japan Government Bonds (JGBs), from AA+ to AA, putting the nation's credit at the bottom of the G-7, after it began 2001 at the AAA top notch. "Deep-seated economic woes," led by "crippled banks, bloated public debt," and "a political system hostile to economic reforms," are to blame, S&P said, led by Prime Minister Junichiro Koizumi's "slowness in enacting deep structural reform."

Tokyo's fourteen largest banks hold some $350 billion in such JGBs, perhaps 10% of their over $3 trillion in assets. Hedge funds in response are now speculating down Japanese banks stocks, betting banks' JBG portfolios will crash. Major bank shares fell more than 20% in November; the Nikkei bank stock index hit a one-year low Dec. 5. "Increasing numbers of analysts say they can't predict how much lower bank stocks will go," one trader said.

"Put People on the Streets"

The International Monetary Fund (IMF) meanwhile sent its fourth high-level delegation to Tokyo this year Dec. 6, to check on "serious problems" at Japan's banks, a source close to IMF senior adviser Stanley Fischer said.

The IMF has been privately demanding mass layoffs in Japan for months. "Officials in Japan are too reluctant to see people on the streets," the IMF's Japan Desk said in June, as EIR reported. "There's not enough pressure by the Japanese government on banks to act to close companies! Banks are sustaining their corporate customers at low rates by just rolling their loans over, and the regulators let this proceed. We want the regulators to get tough on the banks. If they get do, the banks will be forced to get tough on the borrowers. That would lead to many more bankruptcies — and that's what they need. That may mean a lot of unemployed forced onto the streets, but this is what is needed." [EIR June 15, 2001]

After "annual consultations" on Japan's economy in Tokyo in August, the IMF stepped up pressure on the Financial Services Agency (FSA), Japan's key regulator. In a 66-page assessment of the economy August 10 which the media ignored, the IMF on paper endorsed the views of Wall Street "private analysts" such as Goldman Sachs and Morgan Bank who are calling for layoffs. "While Directors recognized that restructuring could adversely affect output and employment in the short run, they stressed that Japan has little choice," the IMF wrote. "While welcoming the progress already made by the FSA in strengthening loan classification and provisioning [ie, enforsing writeoffs- ed], Directors saw room to adopt a more forward-looking approach... They noted questions raised by private analysts about the magnitude of the bad loan problem, and urged the FSA" to do more.

The outright bankruptcy of major Tokyo retailer Mycal Corp. Sept. 17 indicated new FSA concessions to the IMF, the Japan Research Institute said. Mycal's bank Mizuho Holdings called in both "at risk" ie "bad" loans, and also "loans requiring caution" aka "grey zone loans," not usually considered bad. The FSA officially totals $343 billion in loans as "bad," but three times as much as "grey," meaning forced bankruptcies could triple. The FSA then launched a new round of "special examinations" in mid-November, combing over banks books to spotlight the status of loans to all large corporate borrowers. Lo and behold, in the last week of November, Tokyo's 13 major banks wrote off a record $52 billion in bad loans, 3.4 times the amount projected for the quarter.

IMF Model 'Not Functioning

Amidst reams of global media comment on Japan's crisis, these intrusions by the IMF have been blacked out of the U.S. and Japanese press. Behind the scenes, Tokyo and Washington officials say, a showdown is brewing between the IMF, which is demanding a replay in Japan of the 1997-99 IMF program which destroyed South Korea, and Japan's technocrats, who have begun to say that the IMF free market model "simply is not functioning."

Japan should remodel its banking system based on what the IMF did in Korea, top State Department diplomat Steven Bosworth recommended openly in a Tokyo interview with Nikkei Nov. 23. "Japan's financial system is very similar to South Korea's before 1997," said Bosworth, who was U.S. Ambassador to Korea at the time, when "distribution of capital was decided by the government, and neither credit quality, nor efficiency of assets, were examined." But since the 1997 IMF program, "South Korean markets have become much more involved in distribution of capital. As a result, capital is flowing into companies with high returns. This system, in which the markets determine capital distribution, could be a model for Japan."

The IMF is only chartered to make short-term cash loans to countries such as Japan and Korea which have trade and payments surpluses, Asian analysts charge, but wildly overstepped its bounds in Korea by demanding hundreds of banks and industrial companies be simply shut down or sold to the highest foreign bidder. Twice in November 2000, the IMF issued "recommendations" that Seoul "liquidate" a dozen Daewoo subsidiaries here, or a list of 50 medium-size companies there. "The IMF was way out of line, but it was very profitable for Wall Street banks," who bought chunks of Korean industry for a song, a Korean insider told EIR.

The IMF's Aug. 10 "assessment" of Japan was just as "out of line," stating that "un-viable financial institutions should be encouraged to exit." Where a bank is deemed viable but the government has to give it a capital transfusion, the banks' loans require "strong restructuring plans involving debt workouts and satisfactory returns on equity," ie a lot of corporate borrowers have to be shut down like Mycal, or else "it will be critical for the government to take appropriate action" and close the bank. "Directors emphasized that success of the program to accelerate bad loan disposal depends on achieving the restructuring of distressed firms and the prompt exit of nonviable entities." Japanese banks and their corporate clients are making too many sweetheart deals in an attempt to keep companies open, the IMF charges, and more restructuring agreements should be "vetted by credible outside experts," ie Wall Street observers.

During October and November, foreign investment in to Japan reached an all-time high, as Wall Street firms rushed to buy up failing companies.

Hyperinflating the Deflation

While pushing this "free market" policy of "just write off the debt and let them scream," which is resulting in a deflation of the physical economy, the IMF is simmultaneously promoting hyperinflation of Japan's paper monetary base. Their August assessment notes that the BOJ has raised its target for the monetary base, the current deposits of cash available to banks at the BOJ at the end of each day, from Y4 trillion at the start of 2001, to Y5 trillion in March, reverting to the "zero interest rate" policy, but demands that "the BOJ should not delay in raising its quantitative target," which the BOJ then did, raising the monetary base to Y8.6 trillion ($72 billion) at the end of November. Now the IMF and Washington are demanding the BOJ go beyond its "zero interest rate" policy to "inflation targeting," in which the BOJ agree to add "whatever it takes" to the monetary base to stop producer and consumer prices from falling.

Tokyo sources say this is insane because the Bank of Japan, which is itself alarmed enough to take any measure available to stop the physical commodity deflation, simply has no mechanism to do so. No matter how much cash the Bank of Japan tries to force into the banking system, consumers and corporate borrowers are cutting back activity and repaying loans-so "no one wants to borrow any money," as one official put it, "and the banks are being told to cut their loan portfolios, so no one wants to lend any. The banking system is entirely dead."

The rate of rise of BOJ's monetary base (Figure 1) has gone up logarythmically lately, from 7-8% to 14.3% in October. But money supply, the total amount of cash and bank CD deposits which consumers and businesses are actually putting into circulation by doing business, continues at a flat 3-4% rate no matter what the BOJ does. And not only is bank lending not responding, the more the BOJ prints, it seems the more the banks cut back their loans. The IMF keeps talking about the market, "but the market simply is not functioning any more." One is reminded of Korean complaints that "we did everything the IMF recommended, and we're in worse shape than before."

Whose Bad Loans?

After downgrading Japan's government debt Nov. 28, Standard & Poor's also warned in a separate release that it may soon cut its ratings on 12 major Japanese banks, including the first and second largest banks in the world. S&P said it had placed on "Credit Watch," with negative implications the Bank of Tokyo-Mitsubishi, Dai-Ichi Kangyo Bank, Fuji Bank, the Industrial Bank of Japan, and Yasuda Trust (part of Mizuho Holdings); Sanwa Bank and Tokai Bank (part of UFJ Holdings), and others. This "is the result of the increasingly negative impact on the banks' asset quality from Japan's faltering domestic economy, with the risk of a deeper recession increasing month by month," S&P said. " Japanese banks' asset quality is particularly sensitive to weaker economic conditions. Furthermore, there is a high risk that the financial condition of corporate borrowers will continue to deteriorate and at a faster pace than previously."

During the 1990s, EIR and many Japanese argued that the loans made to ridiculous Tokyo 1980s real estate speculation "Bubble" which went bad in the 1990-91 crash should be written off. Most of the "Bubble" loans, numerous sources agree, were written off in the 1997-99 "Asia Crisis," when Japan's government spent almost a $1 trillion transfusing new capital into the banks to pay for the resulting losses out of taxpayers' pockets.

The problem now, officials agree, is that it is basic commercial and industrial loans, loans to manufacturing and all types of loans across the board, both in Japan and to corporations in the rest of Asia, which are going bad, because of the collapse of activity reported above. "What sectors the borrowers are in for the non-performing loans is highly confidential," one official says, "but if you just look at the published figures for where Japanese banks are making their total loans, sector by sector, you can pretty much figure that a good percent of all of it is non-performing."

Not only does Japan have to junk the IMF's insanity, that is, but leaders have got to take a good look at what it is that they and the whole Japanese economy have been doing, which is also "just not functioning." The big picture is that Japan is an appendage of the global dollar bubble, a tail being wagged by a very large dog, and will never really get out of this hole until the entire dollar-based monetary system is put through a top-down global bankruptcy reorganization. But Japan's own preoccupation with "just making money" selling the products of the "Information Society," or worse, the "Pokemon culture," has also created a mess.

As EIR warned in a 1995 study, until 1965, over 63% of loans by the top 150 banks went to the productive sectors of the economy, which we define as manufacturing, agriculture, construction, utilities, transport, and communications, only a very small part of which was Pokemon-style consumer electronics opiates with no productive use. Only 6% of loans went to physically non-productive sectors such as finance, insruance, real estated, and other services [Figure 2]. In 1975, loans to the productive sectors were still more than half the total. In 1985, productive loans were 38% of the total, but still more than the nonproductive sector at 26%.

By 1990, these percentages had actually reversed, a very significant inflection point, and by 2000 the non-productive loans had taken over the ballpark. To this it should be added that a large proportion of what are today called "manufacturing" and "communications" loans are actually non-productive credits tied up in forms of consumer electronics and telecommunications which have nothing more than an addictive "entertainment" value but little or no productive value to the physical economy.

Put it this way: the total assets in Japan's top 150 banks grew from Y32 trillion in 1965, to Y478 trillion (about $4 trillion) at their gross peak in 1994, before the current loan collapse began. Had Japan thus increased the size of its banking system, but seen to it that 50% or 60% of this continued to be loaned to science, to improvements in basic industry, and creating new technologies, to creating new kinds of machine tools and machinery, new transportation systems, and to other sectors which increase the productive potential of the economy as a whole, the world would be a very different place today. Now Japan will have to chose between the Pokemon economy, which "is just not functioning," and the challange of building something entirely new.

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