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

(지난 호에 이어)

 In 1985, to get one US dollar, Japan had to pay 242Yens, but in 1988 the cost of one US dollar declined to 120 Yens. This was an increase of 50% in the value of Yen.

 But the real factor was, most likely, the speculative investments in stocks and real estate undertaken by the well connected Japanese individuals, big business firms and banks.

 The 1980s were an era of economic honeymoon for Japan. GDP grew more slowly, but things were plenty for most of the Japanese people. Japanese were proud of having caught up with the U.S. economy, in part any way.

 Catching up with US in economic development was the ardent dream of the Japanese; this was perhaps their way of revenging for Hiroshima-Nagasaki humiliation.

 The money was abundant. There was a lot of savings at banks. The amount of postal savings alone was 70% of the regular government annual budget. The liberalization of the global finance opened the door for banks and companies to international money market. The Keiretsu corporations had their own banks.

 So they had the money, they had the chance to make money in the stock market and the real estate market. In fact, the members of the Japanese elite groups engaged themselves in the game of "Zaitech" meaning "techniques of making quick money"; it was the favoured pass time for the elite groups to make money by buying and selling assets for capital gains.

 Some of the Japanese investors went to the country of Uncle Sam and bought the Rockefeller Center, the Columbia Picture Company and, even the Pebble Beach Golf Course.

 The champion of speculative investors in real estate and stocks was, most likely, the powerful tripartite oligarchy composed of policy maker (politicians), policy executors (bureaucrats) and money makers. (Keiretsu).

 The interesting and important question is why the government let the human greed to go wild and paralyze the whole economy.

 The possible answer lies in the complicity of the oligarchy members to ignore the danger of the bubble so that they all can become millionaires.

 If the oligarchy was responsible for the creation of the bubble, it was also responsible for the failure of properly dealing with the post-bubble problems.

 There is no doubt that the oligarchy was the master of the Japan Inc. which made the Japan miracle possible. But, the oligarchy's policies designed to restore the Japanese economy after the bubble relied on the conventional economic policies, namely the monetary policy, the fiscal policy and the structural adjustment policy.

 True, these conventional policies were strengthened by Abe to make it, in 2013, his Abenomics policies, but still they were conventional policies.

 Japan should have applied non-conventional policies such as a bold reform of Keiretsu and the expansion of the domestic market through more equal income distribution in favour of the ordinary people

3. Government Policies

 The monetary policy applied before global financial crisis of 2007-2008 was the monetary policy based on the manipulation of interest rate. This policy was applied during the violent recession after the explosion of the asset price bubble in 1989.

 The price of assets rose so high and increased so rapidly that the Bank of Japan had to do something; it did something all right; it jacked up the bank rate from 2% to 6 % in order to stop possible hyper-inflation.

 This was too much. Everything came down. The stock price index in Tokyo hit the ground from 30,000 to less than 15,000; the average real estate price had a free fall of 80%. The panic was inevitable. Japan had to face the threat of a huge recession which could invite deflation.

 The phenomenon of deflation is something which happens rarely. It starts with the drastic fall of asset (real estate) price below the value of mortgage (debt). This means that the debtor has no longer the capacity to pay back the debt. The debtor has one realistic choice; the debtor has to sell the property. If many debtors do the same thing, then price falls more.

 Since the amount of debt is greater than the value of the asset, the borrower cannot pay the debt, the banks end up with huge amount of bad debts. Then, cash crunch follows; banks cannot make new loans.    The consumer demand weakens; the production of goods and services falls; the number of jobless increases. The household income goes down and the vicious circle gets worse. The vicious circle continues until such time as the economy crumbles.

 This was what happened in 1991 in Japan. The policy measure needed immediately was the downward adjustment of the central bank rate. But, the Bank of Japan waited until 1994 before its rate came down almost to 0 %.  Here, Japan made the first mistake. The pulling down of interest rate came too late; the recession after the bubble explosion never recovered; the period of deflation followed.

 The post-1994 policy was the conventional monetary policy of adjusting the central bank interest rate in order to adjust the demand for money for business investment and consumer demand. Given the depth of the deflation, the Bank of Japan had to keep the interest as low as possible to near 0 % until the middle of the 2000s.

 Once you have zero interest rate, you have what is called "liquidity trap" and the conventional monetary policy is no longer working.

Having failed to produce expected results with the conventional monetary policy, the Bank of Japan began the policy of "quantity easing" (QE) in the 2000s. It became the major tool of Abenomics in 2013. The QE policy consists in opening at the central bank the current account of commercial banks. This means the creation of money which can be used by the commercial banks

 It amounted to no less than US$ 923 billion in 2013, US$ 1,055 billion in 2014 and US$ 656 billion in 2015. By 2018, the cumulated amount of QE was as much as 88% of GDP in Japan as compared to 24% in the U.S., 34% in EU and 24% in UK.

Many countries including the U.S. and China used QE after the 2007-2008 global financial crisis produced by the American financial sector. But no country was flooded with liquid money as much as Japan.

Such huge injection of money has ended up by increasing the supply of money (M3) so much that, in the early 2010s, it accounted for 252.1% of Japanese GDP as against 151.5 % in Korea, 199.1% in China and 89.5% in the U.S. Money was not scarce; there was huge money flood in Japan.

 The question is: "What did QE do in order to revitalize the ailing Japanese economy?" Most of the money was spent for prolonging the life of companies which were unproductive, insolvent and uncompetitive. This policy has prevented the Japanese companies from improving their global competitiveness. The money was spent for giving grants, bailing out and nationalizing companies in trouble.

In 1997, the Sanyo Securities and the Yamaichi Securities were bailed out. In 2000, the Deici Retail chains were bailed out. In 2013, Rosana Bank got the same treatment. Countless zombie firms were saved.

 In 1999, Daiwa Bank and Asahi Bank were given large amount of grants. Similarly in 2002, the Sogo Retail Store chain received generous financial aid. (다음 호에 계속)

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