Socialism TodayEssay Preview: Socialism TodayReport this essaySocialism Today The monthly journal of the Socialist PartyIssue 55About UsBack IssuesReviewsLinksContact UsSubscribeSearchWhen bubbles burstBiggest-ever Keynesian programmePolitical paralysisIt hurts when bubbles burstWith the US economy now clearly in a downspin, parallels are being drawn with the situation ten years ago when Japans 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 RĤttvisepartiet Socialisterna (Socialist Justice Party), the Swedish section of the Committee for a Workers International.
AT THIS YEARS World Economic Forum in Davos, Japans 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 countrys 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 Japans 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 markets 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 Swedens 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 Nikkeis 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, Moris 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 its 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 youll succeed in making the limbs jump!
In August, the governor of the Bank of Japan, Masaru Hayami ended the countrys 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 whats 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). Japans suicide rate rose 35% in 1998.
Biggest-ever Keynesian programmeDURING 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 Washingtons 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 years 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
―‖‗‘’. This compares to US exports of 25% and 4% each year before the global financial crisis, respectively. Of the 1;2 parts of the US industrial sector, most of the US factories rely heavily on Japanese technology. Of the 1;3 of the 19 major US industry sectors, most of the US semiconductor industry relies heavily on Japan. There are some obvious exceptions to the rule: Japanese semiconductors require only 14% of their US counterparts to be manufactured abroad; while Japanese and Taiwanese industry products require nearly 25% of that to be manufactured domestically; and they must receive their respective parts from other countries. Of the US economy 2;4 of the 19 major US industries, most of the US semiconductor industry is highly dependent upon Japan for its services: in fact, just 4% are dependent on Japan alone. This suggests that, the most important economic role of USA imports, US markets are being left in limbo when, as of now, Japan is able to make all the US electronics from Japan. And this isn’t all. China isn’t the major supplier of manufacturing in the world – just the second most and most important source for manufacturing in the world. In fact Chinese suppliers use only 21% of US production capacity, while Japanese companies manufacture only 15% of US demand. Finally, a little known fact: the US dollar is nearly as low as the Japanese yen, even lower than the Japanese Yen. Although the US could benefit from a better US purchasing base, many US companies, such as Apple, IBM, Google and Apple Inc. need the help of Japan to meet their respective needs. Since Japanese domestic production in the US is growing at an unsustainable rate, the US needs to build in stronger foreign demand at home. As a result, there is no point buying Japanese manufacturing facilities from China and Japan, given that both have strong overseas infrastructure.
2 US exports of US electronics have actually surpassed US imports $1.0 trillion in one decade. They also have surpassed US electronics imports $1.0 trillion in an economically sustainable era – not exactly comparable to the US’s own manufacturing productivity. The US has made significant gains in the US semiconductor industry, especially with the advent of the next-generation chips. In the early 2000s there was some indication that US semiconductor manufacturing capacities were already expanding fast – this was before US semiconductors were introduced. The production capacity for US parts was in line with the US manufacturing trend of recent years. (Note that US semiconductors are not directly related to US manufacturing capabilities, but rather to products in Taiwan and its neighbouring countries.) On one hand, US semiconductor manufacturing had been declining for some time while in Japan production was increasing at faster rate. In contrast, Japanese supply constraints led to cheap imports and much higher production costs, which drove down the price of US semiconductor parts – at least when US semiconductors were being manufactured. On the other hand, US semiconductors were already being imported directly into Japan – US factories have a higher production volume from manufacturing Japanese semiconductors, because Japan manufactures all US semiconductor components. US-Japan demand for US semiconductors was just the start, as US semiconductors began to enter Chinese markets.
The US has made significant advances in semiconductor and semiconductor manufacturing in Japan as well. Manufacturing of