The corruption culture and the wrong leadership in Korea can lead to the same economic fate as in Japan

Joseph H. Chung (정희수), Ph.D. Professor of Economics, Quebec University in Montreal

 (지난 호에 이어)

3. Asset Bubble and Corruption

The primary cause of the ailment of the Japanese economy was the asset bubble of the 1980s. After three decades of phenomenal growth of the Japanese economy, 1980s were the decade where the oligarchs could enjoy the fruits of Japan's economic success. As we saw above, the Japanese GDP reached 40% of American GDP and even threatened the economic hegemony of the U.S.

In the 1980s, money was plenty due to the global integration of finance, low interest rate, the access to the huge postal savings and the money generated by exports of goods and services.

The easy access to money led the oligarchs to pour money into speculative stocks and real estate. There were undoubtedly illegal and immoral transactions of assets by the oligarchs, but due to the complicity of the corrupted judicial system, these illegal or immoral activities could have been ignored or overlooked. This would have surely expanded and intensifies the asset speculative activities and inflated the asset bubbles.

The outcome of the asset speculation had produced asset bubble never seen in modern time. For example, the value of stocks which had accounted for 60% of GDP in 1985 increased to 152% of GDP in 1989. In the period 1985-1989, the Nikkei Stock index rose from  13,000  to 39,000.

Large corporations made quick money through "Zaitech" (method of making quick money). In fact, almost 40% to 50% of the income of large corporations came from Zaitech activities.

The land value of the Imperial Palace was large enough to buy the entire land of the State of California. Between 1980 and 1989, the value of commercial buildings rose six times, while that of residential properties rose by four times.

As for the value of real estate, the value of Japanese real estate was four time of that of the U.S. despite the fact that the Japanese territory was mere 3.7% of that of the U.S.

I am just scandalized to learn that such insane thing could happen.  How in the world the Japan could have let this happen? The simple answer to this question is clear enough. It was the short-sighted egoistic greed of the ruling oligarchs led by the LDP. There is another disturbing question.

It was obvious that the asset bubble would sooner or later bring a catastrophe. Then, why did somebody not warn the coming danger?

Surely, there were competent economists in Japan; surely there were asset market experts in the country of rising sun. Why in the world, they did not speak up and warn the clearly foreseeable tragic outcome?

There are two possible answers. Either, they kept silence, because they became rich through asset speculation Or, they had no access to media to publicize their view. What had to come has happened.

In short, the asset babble was the results of the oligarchs' corruption culture.

The bubble was too large to be held; it had to explode. It did explode with thunder in 1989. This is what happened. Given the danger of sky rocketing asset bubble, the Bank of Japan jacked up the interest rate from 2% to 6% in 1989.

Well, that was it. The panic hit the entire Japan. The price of stocks in the Tokyo stock market fell by 60%. The real estate price had free fall of 80%.

The national policy designed to fight the bubble explosion was also very problematic, if not a complete failure. The obvious results of the bubble explosion were economic recession. Countless companies went bankrupt; the value of dwelling went below the due amount of mortgage debt; banks had to cope with bad loans. The fall of asset price was just too deep to recover.

Thus, the recession and even deflation was imminent. The Bank of Japan should have cut down the interest rate immediately, but it cut down the interest from 6% to 0% only in 1994. God knows why the Bank of Japan waited so long before reacting to the recession. It was too little and too late.

The Japanese economy just could not come out of the deepening economic slowdown. The fundamental ailment of the post-bubble Japanese economy was something no country had experienced before; it required something bold as policies. But, Japan applied the usual economic policies comprising the fiscal policy and the monetary policy.

But, they did not work. Japan had to wait for the saviour. The saviour came in 2012 on back of the white horse with three arrows raped in the bag of Abenomics.

In Abenomics, the first arrow was the monetary policy; the second arrow, the fiscal policy; and the third arrow, the structural adjustment.

But, Abenomics failed for the simple reason that the policy relied almost exclusively on the expansion of money supply through traditional fiscal policy and monetary policy.

In fact, the money provided by public debt was as much as 250% of DGP. The money coming from the policy of Quantity Easing (QE) policy represented as much as 88% of GDP as of 2019.

The fiscal arrow flew too far and missed the target. The monetary arrow went too far and went to the wrong direction. The structural adjustment arrow even failed to leave the quiver.

The deluge of money was not able to revive corporate investments, exports of goods and services and domestic demand. You ask why?

The answer was that the ailment of the Japanese economy was not a problem of the shortage of money. The root of the problem was the structural problems.

Abenomics did not handle the deep structural malaise of the Japanese economy. True, on paper, third policy of the Abenomics was the policy of structural adjustment, but this policy went nowhere largely due to the corruption culture of the oligarchs. (다음 호에 계속)

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