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A purely analytical perception...


Japan
AN EXAMPLE TO FOLLOW

 

Updated 2/20/03

The State of the State

Japan, once known more commonly as the Land of the Raising Sun historically has in the last century gone from a country which had little or no contact with the outside world, to one that found imperialism a capital export. From there they became a country of constitutional pacifists that were content to export their way into the exploitation of others. More recently after having early successes in all these endeavors followed by catastrophic failures have once again changed course and  are about to become China’s marketing and back office arm in an attempt to once more redefine who they are and where they are going. They have learned little from past catastrophes and only recently their culture has found their anal compulsive cadre of executives have led them once again down a garden path.

Moreover, these folks actually believed that they were the only country on earth that could mass-produce high quality items that would sell at premium prices because of nation’s industrious nature, a highly motivated and educated non-unionized workers and an ethic that required loyalty first to the company, then to the country and last to the worker. Not to say that the Japanese weren’t good, they were. However, Japan has created a lemming like population who did as they were ordered and bought “Japanese” until they could burst and they had spent until they could spend no more. They have now learned that good things do end and have yanked their belts in a notch or two while waiting for the Japanese Government to show them that they are not just a bunch of lucky stiffs that were in the right place at the right time, instead of the incompetent bunglers that they look like today. The fact that Japan is now hanging is foilability out to dry might to a degree be a means to their salvation, the people will now have their first opportunity in centuries to think for themselves. Who knows what may come out?

While infrastructure spending continues at almost an insane pace; lawmakers are literally afraid to rein it in because of the already massive unemployment (at least by Japanese full employment standards) and contracting wages. Companies now are doing what had been considered only short years ago, unthinkable, they are actually laying folks off when faced with immanent corporate financial ruin. Historically, this had not been an option even under these circumstances. Although hiring is spotty at best and when they do it is in job categories rated substantially under those held by the unlucky group of “employed for life” workers that had joined the unemployment lines. Many Japanese companies are coming to the realization that training a young new worker without family restrictions is a cheaper way to go than continuing to go with highly skilled employees whose benefits were making Japan uncompetitive. The great majority of employers in Japan have announced plans to actually cut their employees salaries in 2002, one way or the other.

However, as this new employment methodology takes hold, logically, quality has plunged and production per man hour has hit a wall in spite of ever more sophisticated use of electronics. At best the Japanese economy is moribund, at worst it is suffering death pangs from excesses in every possible direction brought on by a national ego that believed the good-times would never end. The old saw that said, eventually goods would be produced without people doing the work has been proven by the Chinese to be an utter fabrication and the Japanese are now earnestly jumping on humans that get paid almost nothing for their labors are better than robots that have to be oiled now and again. That indeed is a strange bandwagon for the Japanese but it is probably the only way they had to go. With the country outsourcing more of its production to the Chinese Mainland, it is rapidly becoming a service economy that will be specializing in reselling goods produced in China under the Japanese logo. For the first time in Japan’s history some of their goods bear the label, “made in China” a thing that only a few scant years ago would have been deemed as impossible.

The result of this total undermining of the historic Japanese economic model has wrought substantial dislocations and angst. The Japanese stock market has gone down so far that many Japanese companies are even buying their own stocks back because they seem to believe that it represents the best value they can get for their money. Only time will determine whether they have caught the low or that this period of economic destabilization is only the beginning of more dire news yet to come. Interestingly enough, the last time that the American stock market as represented by the  Dow Jones Averages were above those of the Japanese Nikkei was August of 1957, a time when most Americans had not yet been born. Generations of Americans have grown up knowing that our market was second to the one in Tokyo in terms of the price earnings ratios that their stocks carried. Would you believe that Dwight D. Eisenhower was president of the United States at the time and we were far too busy competing with the Russians for control of outer space to worry about how Japan’s stock market was faring on a comparative basis to ours. This was a time that many Americans were building air-raid shelters under their houses.

Japan has also recently set new global futility standards in the area of their exports with a stunning drop of almost 40%, a number that is so dramatic that economists found it to be almost unbelievable. It represents a screeching halt to an industrial machine that had been traveling on overdrive of four-decades. In spite of catastrophic problem with Japanese exports, for some unknown reason the yen for a time was holding its own at historically lofty levels which did not allow the Japanese to export their way out of this problem. Now this situation has eased and the yen has collapsed but not yet enough to make a significant difference. Moreover, there is always the danger that China could devaluate undoing any benefit that the Japanese economy could hope to realize from their less expensive products hitting world markets.

Unemployment in Japan is running at its highest level since the end of World War II and is approaching 6%, virtually an unheard of number in this land of historically full employment. Over the previous decades Japan’s unemployment stood at about the same rate as residential apartment availability in New York’s Borough of Manhattan, In a real sense, they both hovered around zero when you take into consideration a deduction for time off for moving from one job to another or from one apartment to another. Just as unemployment in Japan is an excellent yardstick to use when measuring that country’s economic health, residential vacancies in Manhattan are the Japanese economic equivalent of that statistic in the United States. However, recently, this ratio has become lopsided in favor of no-vacancy signs on the upper-east side as people are still scrambling to find affordable housing in a city where this has become an oxymoron.

With a stock market that is in the tank, unemployment rising faster than a hot air at a political rally and exports continuing to plummet in spite of a recently more favorable rate for the yen, the Japanese were wondering what was coming next as their government stood around with their hands up their posterior making nonsensical speeches of what wonderful things they were going to do next. Next never quite arrived but what did happen was not anything that the government could control while standing around sucking their collective thumbs, industrial production and sales collapsed to the tune of 8% as Japanese consumers went on a literal  buyer’s strike.  In a country where consumers are blessed to get any interest at all on their money, the people voted with their feet and stopped going to the store. It was felt that money, what was left of it was better in the mattress drawing no interest at all then invested in Japanese funny money.

And the rise in unemployment comes at a time when the number of those in the workforce of working age has peaked. In the next several years, more people will retire than will probably be added to the workforce, putting a strain on financing for public services as well as the social security system. But Japanese bureaucrats  continue to believe as they did in the past that they can spend their way out of the current crisis by once again creating make work projects that will employ countless people aimlessly wondering around doing little or nothing. At one time, projects of this type were indeed producing real economic benefits but today they are laughable. Bullet-Train lines that make unnecessary stops at small cities because of locals making financial contributions to the projects, politically connected builders skimming off the gravy in government infrastructure projects and the sending the money abroad by those that are not all that optimistic about Japan’s future. Bridges that don’t go anywhere worthwhile in spite of the fact that the fairy boats could handle the traffic an 20% of the cost and condemnation proceedings that tie up portions of these projects for decades at a cost of billions of dollars all make up one of the most serious economic problems on earth. And yet, nothing tangible is being done. Bureaucrats are promising to make changes that never happen and industrialists project a rosy future for the country as they move money and assets offshore.

Thanks to unabated construction in this country literally for the pure sake of building, Japan now has the highest debt to gross domestic product ratio in the world relative to any of the other industrialized countries. What’s more, there is seemingly no end in sight anytime soon to this out-of-control spiral. Moreover, considering the fact that for all practical purposes, the debt is already beyond repayment, you ain’t seen anything yet as projections for the coming year call for another double digit rise in the same old construction silly season. And if that wasn’t enough to dampen anyone’s ardor, the Japanese threw $56 billion into bailing out their banks just a few years ago and because they did not tighten up the system at that time, the situation has now become infinitely worse. 

Remember how bad we in the United States thought that the “Savings and Loan” crisis was and the inordinate amount of money that economists were projecting it would take to set the matter straight. Congressional investigations were started, trials were held, people went to jail and the fallout of that matter is still being heard. However, the American economy is approximately double the size of that of their Japanese counterparts and yet their banking problem is at least three-times more critical in terms of U.S. Dollars as was our Savings and Loan debacle. We don’t hear a word about investigations in Japan over bad lending practices or jail time for those that had a hand in it. While the comparison seems mathematically straightforward enough, there are numerous additional complexities involved but simple arithmetic will get you to the fact that in a country heading in the wrong direction at the speed of a bullet-train, Japan is hardly in a position currently to even think about plugging the leak in their banking problem. They actually blew their opportunity a decade ago when the banks were in far better shape then they are today. Net assets of the Japanese Banks have collapsed like the airless segment of an accordion’s deflation rhythm along with their stock market. The Japanese economy is appearing more and more like a massive Humpty Dumpty being pushed over the economic edge by mysterious forces without a safety net and it is about to make the biggest splat in history. At one point in time, a collapse of Japan would probably have sent shockwaves throughout the rest of the world, but today, it looks like it could be a non-event.

Simultaneously along with the generally bad economic news in Japan is the fact that China is attempting to eat most of the whole Pacific Rim for lunch and Japan is probably on top of its dinner menu. This is  primarily due to Japan’s hostile acts that it committed during the Second World War and the lack of remorse that it has shown over the killing of millions of Chinese citizens. Meanwhile, as if that weren’t bad enough, North Korea is turning the Sea of Japan into a bombing range while Japan’s constitution continues to forbid anything but preparation for a defensive war. In addition, Japan has taken stupidity to an unheard of degree by picking a period of economic morass to change their text books in way that literally blames the rest of the world for Japan’s aggressive actions during World War II. This has created hard feelings in South Korea, Philippines and Singapore among others in the region.

Moreover, money is flowing out of the country as though a hole had opened in some massive dike and the managers of Japan’s big-businesses are running for cover abroad while hastily moving their assets offshore. It will not be too much longer before the people of Japan wake up to what is going on around them and then they too are going to desire to take the same course of action. This will come as the Japanese economic “big bang” takes hold and allows the public more freedom to invest elsewhere. It will not take them too much time to realize that they should take advantage of that right.  If nothing else, American brokerage firms which are currently opening up all over Japan are going to be teaching the people of that country how to maximize their savings through a systematic approach of international investments. Once the money is out of the country, it will be a cold day in the summer when it comes home. Don’t hold your breath.

However, in spite of the dire predictions, you wouldn’t want to entirely bet against this land of industrious and bright  people, moreover, you wouldn’t want to bet for them either because no country that was really trying to do things right could suffer a fourth recession in a decade. Every time Japan seems to have buried out of their problems, another “ugly” sticks it nose out of its hole.  

Coal

Japan as we have mentioned has literally no natural resources of their own and even many of those precious few that are indigenous to the country are rapidly becoming depleted. For example, Japanese soil historically is very rich and the climate is quite conducive to certain crops. However, over the years population growth and infrastructure development have depleted this resource to an extent that Japan’s must import most of its agricultural products. This has also affected grazing land and today most high-quality Japanese beef is imported from Australia, Argentina and the United States. Even Kobe Beef which is supposed to be only created within that country is now in some respects bearing a “made in the USA” label. Additionally, Japan’s waters were once abundantly populated with enough fish to feed the country with enough available for export has literally run dry. Japan’s waters no long are productive enough even to supply the indigenous population and the country is forced to send their fishing fleets throughout the world in search of just enough food to feed their own population.

These long-line fishing dreadnoughts have played havoc with the populations of many fish species and because of Japanese over-fishing a number of formerly popular varieties are no long available and their very survival is currently in question. The Japanese have also had an insatiable appetite for whales, using all of their body parts for one thing or another. Once Japan had run out of whales in their own territorial waters they began fishing for them elsewhere and between Norway and Japan these behemoths of the sea have become highly endangered. In spite of this, Japan continues to act as an international pariah by still engaging in non-stop whaling by disguising it under the name of scientific research. Japan has shown little regard for either their own natural resources of those of the rest of the world by indulging themselves at everyone elses expense.

Japan has had to literally import all of its energy needs as well, with the exception that the country did have some coal reserves in the northern part of the country. They were located on the island of Hokkaido near the city of Kushiro and were the last vestiges of an industry that in 1961 produced almost 60 million tons of coal and employed almost 300,000 Japanese. This made it one of the largest employers in the country during that time. However, wages were rising rapidly in those years and it was soon apparent that the cost of importing coal from a foreign source was only one-third of what it was to mine it in Japan. Time for another fruitless government action. As we have explained previously, businesses in Japan are not allowed to die a normal death and the government’s theory has historically been that current full employment is substantially more important than future economic reality. Because of this unflappable suicidal tendency, uneconomical mines were kept in operation long after they should have been put to pasture. They were left in operation by an edict of the government which stated that all Japanese industries must buy no less then 5 percent of their coal from local sources whether it made sense or not. Good thinking. Once again defeat is snatched directly from the hands of victory by the Tokyo bureaucrats.  

However, the coal was running out faster even than the 5% could be mined and in order to find enough products to fulfill the government edict the mines had to be dug ever deeper. This in turn caused substantial safety problems resulting in the death of numerous workers that shouldn’t even have been on the job. Moreover, the deeper they dug, the more they permanently scared the land, causing cave-ins, rockslides and the disengagement of natural water-flow. This in turn made these former productive sites look like lunar landscapes and the water-runoffs started carrying a more than prudent quantity of coal dust onto farm lands and drinking water which completed the disaster. Both streams and topsoil became highly polluted making the land agriculturally unproductive and unlivable. Worse yet, this was all accomplished at a horrific economic price to the country because of the substantial subsidies that had propped up this unnecessary industry.

In January of 2002, the last of these mining dinosaurs were finally put to bed probably forever. The Taiheiyo Coal Mine closed leaving a remaining diehard 1,500 coalminers out of work. The City of Kushiro for all practical purposes had closed for business as well. While coal mining was not the only business in town, all of the others were inter-dependent on the mineworker’s paychecks to stay alive. But Kushiro was only a small stop along the way as this had been occurring throughout the country since mining had peaked in 1961. This town as others before it is ill-equipped to replace the coalmining industry with anything else because of the topical disaster that the industry brought with it. A full cleanup of the area would cost more than the city can bear and the central government is offering little in the way of help. It turns out that they have their hands full in other more important areas.

Crime

Unusually for Japan, an industry that is growing while others are slowing down is crime. However, to call what goes on in Japan, crime, is probably using too strong of a word. The yakuza criminal gangs that operate all over the country would probably be better called people that operate in the shadows where there is no law. Most of what these people do would be considered illegal almost anywhere in the world, but in Japan’s ordered society, unless large waves are created by their operations, it is felt that there is no need to change the statutes so that the good guys with the white hats operate in harmony with those occupying the dark side. Many foreign businessmen that had not done their homework in advance got quite a surprise when they found that things that they would have thought of as horrific crimes elsewhere were not illegal in Japan and these businessmen were forced in many cases to pay homage to these folks in order to operate in that country.

There are approximately 100,000 of these yakuza and contrary to popular belief they are really not very much given to hiding in the shadows. These folks are readily identifiable because of their telltale hairstyles, usually an afro cut with a curl; their gaudy tattoos which often illustrate their particular gang affiliation along with the unforgiving missing finger tips which is almost a code of honor among their soldiers. But why should they hide? They really don’t have to as they are usually well connected with the local police and in the past they have often gone into partnership with them. Their businesses are often located in central business districts with gaudy store front locations which often allows them to advertise their wares in the picture window. These include such legitimate items as dispute resolution, debt collection, bankruptcy advice, corporate governance and landlord tenant disputes.

Many of these areas would be covered by lawyers in the United States who would bring the matters to court for resolution should there be a dispute. However, this could not fly in Japan where there are fewer lawyers in the whole country then there are in New York City and absolutely no laws on the books that would cover any of the above offenses. The tight government control over the number of lawyers allowed to graduate is a substantial part of the problem, but the profession of law itself has not been any help in its solution. The lawyers are pleased with the system where they are literally guaranteed of becoming fabulously rich upon graduation from school. They believe that the yakuza’s continued operation is a small price to pay for the continued restrictions on those entitled to practice law in Japan. The court system has been bought and paid for by the yakuza not to pass new laws that would cover their areas of expertise.  It is clear why the lawyers and yakuza’s in Japan are often thought of walking hand-in-hand. A rather strange twist of fate to say the least.

The reasons for this strange sociological condition are based on the Japanese culture itself. The country believed in full employment and supported it until very recently. Their people are the biggest savers in the world and as individuals are not used to going deeply into debt over purchases. Corporations which do most of the Japanese borrowing would always be supported with whatever additional loans should that become necessary rather than face reorganization and lay people off. Thus the term bankruptcy literally did not exist in the Japanese society. How or why would anyone want to create a law for something which was just not a problem?  

Although many of the larger corporations in Japan are public, shareholders rights are extremely limited. It would almost be sacrilegious for shareholders to attempt to unseat management even if they were performing very poorly. In addition, in Japan, almost always the control of the corporation was held by what we would call an interlocking directorate representing sister companies which would own stock in one another. Should there be a stockholders insurrection, these affiliated companies would come to their associated company’s aid and make short order of any proxy problems. These yakuza members that practice  within the narrow corporate arena are called sokaiya. Annual meetings in Japan have become beauty contests in which paid performers were sprinkled into the audience to praise management’s accomplishments no matter how inept they may have performed. The yakuza filled this gap by being available to either side if they were needed to add spice to an annual meeting. Both sides often would get involved in a bidding war for yakuza with the side offering the highest fee becoming the ultimate winner of the beauty contest.

For a price they were available to put on a demonstration so fierce that it would literally close the meeting down, making mute any vote that was being taken. Strangely in Japan there was no law on the books regarding these histrionic demonstrations by yakuza and the whole rotten mess has become an integral part of corporate life in Japan.  However, as far as annual meetings are concerned, the Japanese Government is attempting to harness what it considers to be this type of harassment by asserting that all annual meetings be held on the same day, June 29. This they believe will dilute the number of sokaiya available for each meeting. However, the Government does not address the problem it creates for shareholders hold own stock in more than one company. They have literally thrown out the baby with the bath water and totally disenfranchised as substantial number of Japan’s shareholders. This is a typical Japanese under-analyzed solution for a minor problem. Killing the entire system to eliminate the cheering section is about as rationale as a frog. All that the Japanese would have had to do is pass a law against the actions of yakuza in this matter and the affair would be closed, but that would strain the relationship between the country’s lawyers and the country’s criminals.

In addition, the corporate annual meetings were just about the only place that shareholders had to get real information on the companies that they held stock in. Believe it or not, Japan’s major companies only had, until very recently an obligation to give out material information such as earnings and business operations and that was only at the Tokyo Stock Exchange’s request. While a change was made in 1997, compliance is still nominal because if the companies chose not to disclose any information at all they are allowed to file a “plan for improvement.” These plans would tell the shareholders and the exchange what they were going to do in the future about being more open. However, there was no regulation that stated exactly when they had to get around to doing it and in Japan they often say that “even eternity is not a long time.”. Shareholders believe that they only find out about big problems in companies they own shares in when the bankruptcy administrators are already occupying the company’s offices. However, with current GAAP principals being loosely interpreted by American accounting firms, you might be able to same the same about them as well. 

In the matter of landlord / tenant relationships, the yakuza would act for either side that had the money to pay them. If the tenant was not paying rent, forget about spending months in housing court, he would find his belongings out on the street and a new resident occupying his flat. Should the landlord not supply the agreed upon amenities, they too could become disenfranchised by the yakuza who in this case would be hired by the tenants.  These criminals would collect lawful debts from deadbeats for a price and they would loan the deadbeats the money to pay off the loan if they believed that he had the required fear-quotient or lacking that collateral that would insure its repayment.

The yakuza’s  client in their money lending endeavors was  more often than not, small companies which had been shunned by the banks. In Japan, banks are seemingly only to be used for money borrowing by the rich and they are ill-equipped to monitor and enforce collection for small loans. The yakuza would settle arguments that elsewhere would be heard by the courts with each side usually represented by a lawyer, but not here in Japan where the Mafia is literally the judge and the jury. The winner in these disputes would often be the one paying the most to the yakuza. Once in a great while you could even find one yakuza gang on one side of the equation and another on the other side. These matters usually ended in a draw.  

The bottom line is simply the fact that the people of Japan have by their own inactions allowed this group of criminals to operate openly on the fringes of the law. They permeate everyday life and they usually can not be prosecuted because they are usually not breaking any law. However, even if they were, the relationship between these gangs and the police is one of symbiosis and that is not about to disappear overnight. The legal fraternity literally encourages the yakuza because to eliminate them would require a substantial increase in the number of lawyers turned out by the system every year and they certainly don’t want that. The people put up with them because they can represent them when the chips are down and if they have enough money. It balances the system of justice in Japan which is highly complex to say the least.  It may well be that if the United States were to legalize yakuza, it would cut down on the number of lawsuits, lawyers, judges and courts. Maybe it is not such a bad idea after all.

Sex

However, the yakuza is not the only group that represents a growth industry in recession driven Japan. Sex, while big all over the world is particularly prospering in Japan like never before as a commercial enterprise. While prostitution is not legal here, it is not particularly illegal either. In reality, prostitution was deemed to be illegal in the early 1950s but as many in Japan say, “it is a little less a crime than crossing in the middle of the street.” Legal prostitution dates back hundreds of years and was always considered an important part of the culture.  Unless some crime is committed along with pay-for-play sexual favors, the government posture has been to look the other way. The industry is so entrenched in the culture and because of the fact that it produces so much revenue to the participants; there are never any cries from the population to curtail it in any way. For a Japanese politician to even suggest that this industry is illicit would be suicidal to his career. This is a way of life in Japan just as baseball and hotdogs are in the United States.

Women that work in this industry are usually very young and before they have reached marriageable age in Japan they have usually become old before their time. But this is not a dissuading factor at all, as many Japanese women are already in debt when they are approached by sexploitation workers and the bonuses they are offered by these folks just for coming to work in this industry are usually large enough to pay their bills and get them some decent clothes.

The Kabukicho district or as it is referred to in polite circles, the “entertainment zone”, in Tokyo is both the largest and wealthiest sexual factory in the planet encompassing one-half a square mile within some of the priciest land in the world. It is located literally next door to the world’s busiest train depot and probably not by accident. It is in this train station where arriving women are examined by the sexual-scouts and if they meet their criteria are propositioned on the spot. A surprisingly substantial number of these women accept the front money and go onto successful careers servicing Tokyo’s  tourists and businessmen. Many are eventually able to live a more legitimate life after having put away enough money settle down to a more normal life with friends, relatives and often husbands being none the wiser.

However, all women are not recruited in the train station or on Tokyo’s streets. Commercial sex is highly glorified in Japan and the women that engage in this profession are not shunned because of it. There have been numerous hit movies that use a women’s enrollment into this occupation as a theme and there are numerous articles in magazines and newspapers that often talk about what an exciting alternative occupation that this could be. These same publications carry numerous ads run by the sexual shops offering jobs that on the surface at least, sound extremely enticing.  

There is little that money can’t buy in Kabukicho and many of the clubs specialize in particular sexual attractions. Young girls dressed up in school clothes (imekura) is big in Japan while lap dancing, bondage and sexual massages are also in considerable demand. The sexual parlors in Kabukicho are mostly located in large buildings so that a short elevator ride in any of them can allow the window shopper to see what offerings are available in all three dimensions.  This is a convenience probably unavailable in any other red-light district in the world. The industry is self-policing and for the most part there is usually very little trouble.

However, because government inspectors make themselves particularly scarce in the Kabukicho district, some building codes are not always addressed. This lack of supervision occasionally creates the environment for a disaster such as the fate that befell the patrons of Super Loose, a lap dancing club on a high floor. A small fire started in a backroom and because of there being no fireproof materials making up the core of the building and no firefighting equipment readily available, over forty people lost their lives. Another inhibiting factor was that egress to the firefighters was poor to say the least from an industry that does not cotton to unpaid visitors potentially rummaging through their files.

While the rest of the country is in a recession, none of the businesses of Kabukicho are complaining. And the enormous red-light district in Tokyo is only an example of what is going on in the rest of the country. No large city is without its own Kabukicho and they are all prospering. Many in Japan have said that because of the poor economic conditions, while in other countries people would more often than not turn to hard-liquor, in Japan they have turned to sex where their wildest fantasies can be enacted if you have the price. This type of actively is so engrained in the culture that corporate funds are often used for this type of entertainment and company charge accounts are readily available in almost all of the larger establishments. Credit cards are also an acceptable median of exchange in so that the little women at home does not become suspicious of where here husband was; the charges are recorded to phony office equipment companies, health clubs, restaurants and employment agencies.  

Pay to play sex in Japan has become an intimate part of the culture and there is nothing to make us believe that it will not stay that way for a long time to come. If the economists are right and Japan continues to stay caught in what appears to be an elongated downdraft, you can never tell, sex may become even bigger in Japan than it is today. We certainly seem to be headed in that direction. However, enter the Pacific Rim wildcard, the Chinese. They were more than able to see that the Kabukicho offered them monetary rewards greater than almost anything that could be found in one small location on this planet and they wanted their piece as well. While historically, the area had been run by the indigenous yakuza gangs, when compared to the immediate justice imparted by the Chinese hoodlums, their Japanese counterparts are like schoolgirls taking a walk in the park.  Everything of value in the Kabukicho district is now being gradually taken over by the Chinese. The prostitution, the fencing of stolen goods, the gambling as well as the real estate itself are now rapidly becoming Chinatized.

However, the Chinese Gangs operate under a totally different scenario than do the yakuza. The yakuza operated within the Japanese social system and virtually are part and parcel of the system itself. The Chinese are hardly interested in the niceties of Japanese life and its social customs. They are there pure and simply put, for the money, and they do not want it somewhere down the line, they want it now. Even the prostitutes are now being imported from the Chinese Provinces instead of from the Tokyo train station. This is the ultimate turnabout. During World War II, Chinese and Korean women were forcibly made to become “comfort women” to service the Japanese troops against their will today they are lining up on the Mainland for chance to strut their stuff in downtown Tokyo. Perhaps, this in itself is a form of revenge.

Today they are lining up for the high wages and pushing aside the Japanese Girls from the countryside that arrive in Tokyo with stars in their eyes looking for a better life. Official statistics show that in spite of the fact that they have strict immigration quotes the number of Chinese living in Japan has more than tripled during just the last decade and multiples of that number are admittedly illegally living in Japan. There are so many loopholes in the emigration regulations that they are made to look like a piece of Swiss cheese and the Chinese have found most of them. The women often enter the country as university students or the wives of nave Japanese citizens or some who are willing to accept a few-thousand dollars for their trouble. The men on the other hand illegally enter the country on phony passports or those stolen by the Chinese Gangs already operating in this country. Most have found their way into the “entertainment industry” and are pushing aside the Japanese in every facet of the business.

However, the sexploitation by the Chinese of the Japanese Kabukicho did not start on the mainland; it began in the 1980s when businessmen from Taiwan started buying into the establishments in the era. They in turn started bringing in women from mainland China to work in the sex parlors as “hostesses.” Turf wars evolved between the ethnic Japanese, the Taiwanese and those from the Mainland with the later seemingly coming out victorious. The Chinese and Taiwanese are particularly able to operate at much lower expenses than the Japanese and have also learned how to run an operation with some panache. If a girl gets three complaints from male customers, she is automatically out the door. The girls are not allowed to chew gum on the job and they most always wear a smile, forced or otherwise. They are even obligated to applaud when a customer grabs the karaoke microphone and finishes a dismal rendition of whatever he thinks he is singing.  

The Chinese Gangs have become so brazen that they have even taken to robbing the yakuza who probably because of that have given them a name, “dogs.” The dogs have entered other businesses unrelated to sex such as murder and counterfeiting. The pachinko parlors are a particularly interesting subject for the dogs who have invented a phony plastic card that short circuits the normal pachinko apparatus and allows the user to play literally for ever on one card. This has made a serious dent in those profits, which historically have been prodigious.

Women

And the reason that so many young ladies in Japan are interested in going into prostitution is the fact that it may offer them their only opportunity of staying independent and surviving. Japan in spite of their laws to the country is not the lest bit women friendly. As a matter of fact, the United Nations said that of the 70 countries that they rated, Japan ranked a dismal 41st and was headed lower. The criteria in making that judgment was based on the number of female administrators, managers, lawmakers, professionals and technical workers along with the amount of income they earned.

Japan has laws regarding equal employment but if no one wants to hire a woman there is little the government can do or will about it. There are literally no women in the country that have administration positions in large companies or even small companies for that matter. The law says that accommodations should be made for women to have their children in daycare centers so that they can work while raising them. The problem here is that there are few of these centers and waiting lists are so long that most women have given up trying to do both. This is also one of the reasons that Japans population growth has now gone substantially into negative territory and will probably remain there.

As we have pointed out, women’s salaries on average tend to be much lower than men occupying similar jobs and more often then not women do not take home enough even to care for themselves. However, the new Japanese Government has beaten the drums loudly for women’s rights. Moreover, as with just about everything else in the country, they have done little if anything about them. In a hollow gesture, officials in Japan have upped the number of women in the cabinet to five but they seemed to have become stultified when it comes to aiding rights, income, employment or day care. A rather sad state of affairs for what is supposed to be on of the most powerful and enlightened countries in the world.

Immigration

As you have seen from other issues, Japan’s ways do not change with any rapidity. In spite of the fact that Japan needs low cost workers to keep the wheels of their industry moving, they just can’t seem to find their way their own legislative morass to get it done. It would seem that the only foreigners that have found their way into Japan are those that have entered illegally and this is in spite of the fact the United Nations has recommended that Japan import 600,000 workers a year to keep the economy on track and its social security system from collapsing. In another 25 years, over a quarter of the population will be over 65 and most will have no economic support systems.  

Not many Japanese ever left their homeland in earlier times because the bonds were very close and there were more than adequate funds available to take care of everyone in their old age. This will not be the case in the future and a younger culture is deemed critical to support an aged system. If only there was a substantial population of ethnic Japanese somewhere in the world that could weaned back to from whence they came. But where on earth would a number of Japanese in a community that sizeable exist? Strangely enough it exists in Brazil which now has 1.3 million people that fit neatly into that category.

Having identified this intriguing target group, the Japanese Government started offering increasingly favorable packages to convince as many of these ethnically Japanese Brazilian’s to go back to the land of the rising run; however the small print read, but only on a temporary work visa. While the Brazilian economy was consistently vibrating in and out of the doldrums, Japan’s economy, while gradually losing steam, offered substantially higher wages and in this instance at least, solid working conditions. Numerous of these Brazilians grabbed at the golden ring offered by the Japanese and temporarily pulled up stakes for the Pacific Rim. Government oriented housing was constructed for these workers and schools were built for their children. Teachers were brought in and entire cities were created just to house those from Brazil, but as unforgiving as Japan is to foreigners in general, Japan was equally unforgiving to the ethnic Japanese that were no longer its citizens.

However, money has a way of palliating problems and many of the Brazilians in spite of the ostracism by the Japanese seem to be getting accustomed to what’s become the good life here. The number of Brazilian schools in Japan has increased 10-fold in the last five years along with the creation of two Brazilian television channels and a number of weekly newspapers written in Portuguese. Early on in this experiment, most of the money earned by the Japanese-Brazilians was squirreled away for delivery back to what they considered their home. After all, these were the people that had left Japan in very early part of the 20th Century for work on the coffee plantations in that country. However, most of the Japanese at that time that wanted to immigrate chose the United States as their prime destination, but the United States imposed anti-Asian immigration quotas and the flood into Brazil then became a torrent. The majority of those that did so emigrated more than 80-years ago so that Brazil has certainly become their home. They had become citizens in that ethnically diverse melting pot.

However, Brazil has suffered a series of economic collapses in which inflation has consistently reared up to destroy the people’s buying power. Well paying jobs are hard to come by in Brazil and opportunities no matter what the educational status of the individual are not substantive. Early on in this experiment the Brazilian’s started sending money back to their families at home, but soon found out that soon after the yen were converted into the Brazilian currency it soon ceased to have value. The expatriates made the horrible discovery of the fact that the more they sent home the less they had. This caused the entire scenario to change and they started to bring their families to Japan instead of looking to make the fast buck overseas and returning. The Brazilian population in Japan mushroomed and the money that had been feeding the Brazilian Central Bank started to dry up.

The Brazilians are now buying permanent possessions in Japan instead of temporary ones. Nice houses, expensive cars and all of the other good things in life. As the Brazilians settled in though, huge cultural gaps between the cultures became readily apparent. There became substantial crime that had been brought in from South America, the workers were not as loyal as were those of ethnic Japanese and absenteeism, something usually unheard of in Japan was becoming pervasive. The younger Japanese did not readily accept their blood cousins from South America and racially oriented clashes soon became a way of life.

Furthermore, the Brazilians really were not with the program as it is practiced in Japan. When the people are told by the Japanese Government to recycle, they rigidly take these instructions at face value and do at least what is expected. Those with a South American background have learned that you do not listen to politicians because they are filled primarily with hot air. When told to go up they go down and when told to inhale they would exhale. These people singularly were able to destroy Japan’s recycling effort in a number of major cities.

And that wasn’t all, the Brazilian children were not to keen on going to school and because of the fact that there were no laws in Japan governing what foreigners were obligated to do and not do, this became mute. The Brazilian’s were irreverent to say the least when it came to Japan’s traditions and made no effort to learn or abide by them. We can only wonder what will happen when the Japanese are forced to bring in non-ethnic foreign nationals to run their factories and move their economy so that their social security systems will not fall apart.  If they can’t make it with their own kind, who are they going to be able to live with?

Project Financing

In spite of tempting foreigners to work in Japan’s sweatshops replacing the home grown variety of workers in order to bring some form of balance to the budget, the Japanese Government is not so frugal when it comes to its pet projects. One of these favorites is Japan’s love affair with road building. Not only do government bureaucrats believe that the roads have to be built but they are convinced that they shouldn’t have any curves and they should be horizontal without hills or valleys. They should designed to allow the average motor car to run at speeds somewhere around 90 miles an hour and last but not least, these roads should under no conditions be self supporting in spite of the fact that Japan is in a recession and past efforts to construct their way out of economic trouble have turned into dismal failures and have left the Government mired in unpayable debt.  

An horrific example of Japans unreasonable romance with highways and cars is what is called the New Tomei Expressway, a road that when finished will make the fabled Autobahn in Germany look like a highway for tinker toys. The new Tomei Expressway will replace the old one, which according to most observes is still one of the finest highways in the world. However, according to Japanese engineers and lobbyists, the old road needed straightening, it needed new bridges, it needed leveling and it needed substantially more concrete along with new lanes. This is in spite of the fact that the number of automobiles sold in Japan has dropped nearly every year since 1990 and today, car sales are running at a rate only 25% of what they were a decade ago.

What then is the theory of adding billions to an already overburdened economic system? Probably it is a combination of various unreasonable facts. The first is ego, Japan wants the best infrastructure in the world and even if it causes a national bankruptcy which they seem to be approaching, it does not seem to matter. The fact that according to the New York Times, “Japan Slows Down, but Not Its Road Builders” by James Brooke, published on January 18, 2002, “So as construction advances at a cost of $1 million for every six yards, this six-lane luxury highway may stand as a monument of Japan’s late- 20th century addiction to concrete.” At least when the economy is carted away it will be traveling with  a great deal of panache.  

As if adding gasoline to the already roaring fire, in Tales from the Dark Side by Alex Kerr, he writes that “Japan will spend three to four times more than what the United States, with 20 times the land area and more than double the population, will spend on public construction in the same period.” He goes on to say that Japan lays 30 times as much concrete per square foot as the United States. While we find that number incomprehensible, the fact that the Japanese Government allows this to happen is even more mind boggling. Japan already has the largest debt of any government in the world and they are geometrically adding to this unpleasant statistic as we speak.

The next reason for this implausible ongoing hemorrhaging is the fact that so much of construction in Japan is directed by local governments either directly or indirectly. If a new project is started, every city along the proposed route wants to get in on the action. They want an entrance and an exit so that the city does not become a ghost town and rightly so. The City Fathers visit with the construction people who are usually political appointees and lobby them with a heart rending ferocity. Should the construction bigs become implacable, ultimately the niceties of the situation are forgotten and local politicians start dealing in votes that will be forcibly taken away from the party in power. This is the type of lobbying that politicians in Japan seem to respect and this course of action normally seems to have the desired effect. For this reason,  non-egress highways and high-speed railroad trains without stops soon become landlocked, over clover leafed and sluggish. It as though you putting a jet powered automobile on Madison Avenue and 57th Street in New York City during rush hour and telling the driver to go around the block as fast as he can. A nervous breakdown later you witness exactly what this kind of peripatetic actions have wrought.

Working the economy out a recession is another reason given by road builders for their insanity. However, this is not the first time Japan has sought to build their way out of trouble with massive projects, although this one seems by far the most ludicrous. The people are not stupid and have learned the hard way that the economy is going downhill because the banks are bankrupt and the country’s treasury is becoming rapidly emptier but the politicians are doing nothing but talking the talk instead of taking the measures that will straighten the economy out. The people have stopped spending and as car sales continue to flag and with it the projects logic becomes ever more senseless. An believe it or not, the pro-construction arm of the Japanese Government known as the “road tribe: are talking about increasing the Japanese expressway network by two-thirds over the next several years.

Some people say that the increased fiscal insanity practiced by Japanese politicians is like a gambler at the crap tables in Las Vegas. His sock is almost totally barren and in a last ditch effort to recoup everything with one last bet, he is pulling out all stops. The Japanese deficit has increased 500% in just the last 10-years. It would seem that we seen a seemingly never ending series of last ditch bets to pull off a miracle. With each new ploy they have to dig deeper and the odds against success having the desired effect are becoming increasingly greater. It would seem that a better bet would be to put the money into the infrastructure of people betterment, then maybe some of the money that is now hidden deeply in Japanese mattresses will have the confidence to come out and join the float. 

Seaweed

Whenever we thought we have come up with a Japanese infrastructure boondoggle that sets the all time stupidity record something even more bizarre seems regularly pops up to take its place. Sadly in Japan little thought is often given to the protection of natural resources such as wetlands. The feeling in Japan is generally that if these natural wonders can be rolled back to create additional farm land, there is a substantial value added involved and the end justifies the mean. Lets look at a particular case history and see what occurred.

Seaweed or “nori” is carefully grown in Japan to embellish and encompass the national food, sushi. The better that the nori tastes, the better the sushi will be and the best nori of all has historically come from the Ariake Sea section of Japan. The nori is grown in the wetlands that are part of this sea and it is a combination of the particular elements of the wetlands along with the tides and the minerals within the water that make up the nori’s unique flavor. The local government along with the national government in Tokyo determined that by creating a causeway across the Ariake Sea, substantial land could be reclaimed from wetlands and thus be redirected toward farming. The economists point out that 4,446 acres of land could be reclaimed at a cost of a tad more than $2 billion.

Locals were surprisingly in favor of the deal in which they would felt substantial monies would be spent around the area encompassing the Sea. They could not have been more right and businesses in the area prospered mightily during this period. However, when the job was finished the economists went back to work with their pens and pencils. Because of the fact that the government did not engage in agricultural the government would be forced to sell the land back to those that would till the newly created soil. Experts were brought in to determine at what price farmers could afford to till the earth and still make a profit on the transaction. Also taken into effect was the people’s  ability to borrow the money to complete the project. The economists came up with the figure of $40,000 per acre. However, when they divided the total price of the project by the number of acres that could be sold, they came up with a cost to the Japanese Government of $526,000 per acre, a loss of only $486,000 for every acre the government had created. “Well, its only money”, Government officials chimed in.

Not exactly Bunkie! No sooner had the tides been eradicated than the nori became amazingly bland. The land that produced the best seaweed in the world was now producing a nori of questionable quality that tasted like a cross between rope and axel grease. This created an almost forced migration of the people that had tenderly harvested the crop for centuries to other more promising areas. The price of nori dropped like a lead weight and sushi sales plummeted with it. However, the worse was yet to come. Seeing the quality of their nori crop going down in flames, the harvesters decided to form a protest in the midst of the still uncompleted reclamation effort. This belated activity has brought the final stages of the project to an abrupt halt. The money has been spent, the wetlands have been destroyed, the nori is almost no longer edible and they are now literally out of work. This entire project has turned in a lose – lose situation for everyone involved and in the meantime, the government has agreed to explore the situation in depth.

One would wonder about what possible way the government can salvage the mess that they have created. The wetlands have been ruined and even if the $2 billion edifice that plugged them up were removed, the restoration could take decades of work that could only be accomplished by nature herself. By coming to the conclusion that the nori farmers are wrong, the government will lose billions by taking substantial loss on the resale of the land and the upkeep on the four-mile long causeway. These are things that comedies are made from but in Japan they seem to be regular fare.   

Unemployment

The Irish Times published an article on August 28, 2001 made most notable by the statistics that it contained. The article labeled, “Japan sheds excess labor as hopes of upturn drain – Koizumi’s structural reforms may in fact help unemployment climb above an unprecedented 5 per cent (Would you believe that this was just the title?). The article after one had fully digested the title went on to say that; “Japan has lagged behind other industrialized countries in making this transition. (Structural adjustment of the Japanese economy that will require transferring capital and labor from inefficient sectors to those promising future growth) About 6.2 million people work in the construction sector – 10 percent of the workforce – and public works comprise 7 per cent of Japan’s gross domestic product, compared with 3 to 4 per cent in Europe and the United States. In contrast, 60 per cent of the Japanese workforce is employed in service industries, against 71 percent in the United States and 67 percent in the United Kingdom.”

“The problem is that measures to spur this structural adjustment, such as the government’s proposal to force banks to write off a significant portion of their bad loans, are expected to add to growing job losses. By the government’s own admission, bad debt write-off’s alone could destroy between 390,000 and 600,000 jobs. Private economists put the figures even higher.”

Any improvement must come with job mobility and in a society that offered jobs for life; this is a tough concept to come by. In other words, the majority of new jobs that Japan will be able to create will have to come from the service sector creating the need for massive dislocations, retraining and a new mindset, all of which are rather scarce commodities in the Japanese economy. As we have discussed earlier, the push from the bottom of cheap overseas labor and the simultaneous transferring of product manufacturing offshore are creating a havoc within the Japanese economy that has never before been witnessed within the job market. While new jobs for the most part are only arising from dinosaur industries such as make work infrastructure re-development, Japan has been painfully slow in creating the atmosphere allowing the shift to more enticing areas of employment which will allow employment expansion. The cabal that controls industry in Japan is composed of shallow people trying instill life to long dead industries. The infrastructure is extremely brittle and terribly fragile and is subject to cracking apart at the seems because of this. There is nothing to be optimistic about in Japan’s do nothing economy.

Interestingly enough the job for life trauma of the Japanese economy can be visually seen by the following strange statistics given to us by Toshihiro Kodama, a senior fellow of the Research Institute of Economy, Trade and Industry. He discuses the mismatch that is occurring between the skills that are required in the growth sectors and those of the workers who are laid off. “This is highlighted by the fact that unemployment did not fall even as the job vacancy rate rose from 1.9 per cent in April 1999 to 2.7 per cent in December 2000. Takahisa Dejima an economics professor at Waseda University takes this conundrum one step further. He points out the major portion by sector of those unemployed is the young people from the ages of 15-24. That rate is now hovering around 10-per cent, twice the national average. “The educational establishment has not been able to keep up with the changes in the job market”, he points out.

Interestingly enough, it may well be those from the ages of 19-24 that have many of the skills needed in today’s more service skewed economics. However, in spite of educational abilities, Japan’s industrial complex historically would rather retain an older worker than replace him with a more skilled younger person because of the immediate hit to them caused by both pension benefits and a very generous unemployment insurance. Because there was never any unemployed in Japan, no one ever stopped to evaluate its cost to both industry and government. Now they find that they are ill-equipped to deal with it in spite of the fact that the time period for these social severance payments, approximately one-year in Japan is a third of the three-years allowed in Germany and the five-years offered in France.

As we have pointed out, the country is now totally enmeshed in an unprecedented fourth recession in less than a decade, something unheard of globally even in what we call banana republics. With Japan going in and out of recessions by bringing in expensive but nonsensical knee jerk public projects whenever faced with economy problems, it is no wonder that they people have had enough and have lost what little confidence they have had in the government’s ability to right the ship. In the meantime, if the money for these projects did not end up as payoffs and was redistributed, the problem would be far less severe.

The Stock Market

Japan's stock market is a cross between the fixed roulette wheel of an early Western Mining Town in the United States and a P. T .Barnum exposition. A sucker is not going to get an even break playing the market in Japan for any number of reasons, none of which are obvious. The regulators are understaffed and employs only about 10% of their equivalent numbers in the United States. The Japanese Mafia has made serious inroads into the securities markets in Japan and the Government is afraid to step in and do anything about it because it could bring the system itself to its knees. Worse yet, transparency is on a perpetual holiday here because no one really wants to admit that a serious number of exchange listings representing many large companies just aren't worth the paper they are written, on but the banks just can't afford to write off any more bankruptcies.

Japan has numerous so-called Zombie Companies meaning companies that appear vital to the casual speculator but in reality are dead in the water. They are part of the process in Japan which is a "hear no evil, see no evil, speak no evil" philosophy. Japan doesn't delist companies relative to price and fully 10% of the stocks listed on the Tokyo Stock Exchange sell for prices under a dollar a share. However, from a public relations point of view, enormous success is always just around the corner.

A recent Wall Street Journal Story talks about Sumikura which was founded over 88 years ago. For awhile it prospered but in more recent times it could not compete with foreign labor and was sinking fast. It was sold by its parent and went into the hands of a number of buyers none of whom were able to turn it around. Eventually it came to rest in the hands of a Kuwaiti business man, Mr. Kumaoka who a company by the name of GranSpec who bought it. He was billed in the Japanese press as some kind of a Kuwaiti royalty but nobody in Tokyo seemed to no what kind. In order to fund his purchase of the company he used the same shares that he was buying to collateralize he transaction, a minor glitch.

                "Mr. Kumaoka says he expected Mr. Toyama and his partners to hold the shares until GranSpec could repay the loan. Instead, the lenders quickly sold the shares, mostly to their clients. Through this sale, ownership of nearly half of Sumikura passed to a nether world of speculators, loan sharks and gangsters, say Tokyo prosecutors and Sumikura executives. These new owners manipulated the stock, "making Sumikura famous as a speculators' stock and destroying the company's credibility," according to the prosecutors' opening statement in a March 2002 criminal suit in Tokyo District Court which accused Sumikura executives of paying off gangsters." (WSJ)

Well, one thing turned into another and Mr. Kumaoka was escorted from the playing field. After some fits and starts, enter stage left, Hajime Oshima. He used the old Kumaoka ploy and pledged the shares he was purchasing to the wrong kind of people, may of whom had appeared in the previous scenario. Admittedly a list comprising a sorted list of  "gangsters, speculators and corrupt ex-policemen."

Moreover, Oshima buoyed by his victory immediately broke most of the stock-exchange rules by going into a new business, but in Japan although there is a rule against it; strangely, there wasn't really a punishment for doing it. As long as he wasn't being punished, Oshima once again started to feel his oats and started issuing debt like it was going out of style. Soon the company owed so much money that there was literally no way it could ever be repaid. 

           "Hajime Oshima, before becoming involved with Sumikura was a purveyor of Zen-inspired exercises to improve intelligence. In addition,  Mr. Oshima ran a small credit-card service company and wanted money to expand into account settlements. Buying Sumikura, he says, seemed like a cheap way to gain a public company's access to capital markets. In April 2000, Sumikura agreed to sell one-third of itself to Mr. Oshima and his adviser by issuing 10 million new shares. The company, desperate for money, sold the shares for less than half the market price. Workers greeted Mr. Oshima as rescuer of the company. But prosecutors say he had to contend with gangsters and speculators who by now owned the bulk of the company's shares, and were harassing its executives. Mr. Oshima and Sumikura handled this in a way that, while not legal, is traditional in Japan: They paid the gangster off. "  (WSJ, Phred Dvorak 8/28/02)

However, this only sufficed for a short time. It seems that the gangster had been paid in stock in the company and had became very unhappy when his investment plummeted. A "gruff man" was sent to a special meeting of the company by a new shareholder, Akio Miyazawa. The gruff man indicated that he wasn't leaving until Oshima resigned. Most everyone at the meeting agreed that the the "gruff man" was very serious about what he was saying.

              "Mr. Oshima says the gruff man was a member of a Kyoto crime syndicate called Aizu Kotetsu. Mr. Miyazawa says he says he doesn't know whether that is true. A spokesman for Aizu Kotetsu -- which police confirm is a crime syndicate -- says it isn't involved with Sumikura. The gruff man acknowledged in an interview that he had been at the meeting and had made the comments on behalf of Mr. Miyazawa, but wouldn't confirm or deny being a member of Aizu Kotetsu. The meeting droned on,  but near midnight, Mr. Oshima realizing that the man was not going to leave without accomplishing his mission,  resigned. Mr. Miyazawa was quickly named to succeed him and the other executives rubber stamped Mr. Miyazawa;s plan to sell more convertible bonds. Sumikura then sold its biggest issue yet, totaling $19.3 million. "

At this point the story becomes difficult to fathom and we can only conjecture as to what really occurred next. As best as we can gather, it would seem that Mr. Miyazawa's victory was short lived. Oshima apparently went out and hired a more important gang and it soon came down to which gang had the most muscle. That was a foregone conclusion and Mr. Miyazawa immediately went into hiding and Mr. Oshima triumphantly returned as Sumikura' s president.

However, this too became a short lived victory when, because of a glitch in the debt's indenture terms, the bonds became immediately convertible into common stock at far below the current market price. Once converted, the stock was dumped by the holders as though it was made of hot coals. Worse yet, only about 10% of the money ever found its way into the company's coiffures as the gangsters, Mr. Oshima and PSI Securities dividend then lion's share.

Eventually, even the police in Tokyo couldn't take any more of this hackneyed plot of cops and robbers. They arrested Mr. Oshima for paying of gangsters and he immediately pleaded guilty. But is probably going to beat the rap because that really isn't a crime in Japan. Most importantly,  Mr. Oshima was never charged with any securities laws violations. Could it be that everything he did relative to the stock was legal in Japan? Maybe so. Hey, just another day on the floor of the exchange in the big city. The stock continued to trade actively there well after the company had announced that it was going into liquidation.  It doesn't make it so hard to understand why the Japanese investing public would rather keep their money under their mattresses. This is the country in which their own finance minister called Japan's stock markets "gambling dens."

Like everything else in Japan, the stock market has come down almost seventy-five percent from its highs of a decade ago, while exchanges throughout the rest of the world have for the most part increased in value geometrically. The Tokyo Stock Exchange has operated under decadent regulations and is still one of the great “old boy” clubs still left on earth. Regulations here are written to protect the members against the public as well as insuring them from corporate abuse. Membership was historical restricted with the associated mandatory nepotism leaving the odor badly burned beans. The Exchange has been indeed an accident waiting to happen and on November 30, 2001 it occurred in spades.

UBS Warburg, a new kid in the Japanese underwriting game was lucky enough to snare one of the top underwriting slots in a hot stock market deal called Dentsu, Japan’s largest advertising agency. And when we say it was the largest, we are really not telling the whole story, Dentsu held fully 25% of the Japanese market, the second largest in the world. People were literally standing in line at the brokerage firms around the country in order to get a few shares in the deal. I think the story is best told the way it was reported by Bayan Rahman of the Financial Times on December 10, 2001. “As the market opened on November 30, a UBS Warburg trader punched in a sell order on 610,000 Dentsu shares at 16 yen each, instead of 16 shares at 610,000 yen each, and executed the order despite a query from the computer. The order, which caused surprise across trading floors in Tokyo, was greeted by a flurry of shouting as horrified UBS Warburg Staff rushed to cancel it. Within the two minutes it took to cancel the order more than 60,000 shares were sold – nearly half the available shares in Dentsu – causing Dentsu’s share price to fall initially and leaving UBS Warburg nursing a dented reputation and a large loss.”

While this could have happened almost anywhere in the world that had automated markets, this could not have happened in a market utilizing a public outcry system. The poor Tokyo Stock Exchange just happened to be in the wrong place at the wrong time. Both Warburg and the exchange suffered public humiliation throughout the world and once again, what once had been Imperial Japan looked like a bunch of second raters to everyone on the outside that counted.

As though this didn’t cause enough public relations harm to Japanese market places, shortly thereafter in what seemed to be a bad dream come true, some one at Deutsche Securities pulled the wrong switch and sent an order to sell a full 7 percent of all of the available shares in Isuzu Motors at any available price. This caused a stampede by the public to get out because it was felt that only General Motors, Isuzu’s largest stockholder had this many shares and was abandoning a complex bailout of the company.

The stock slumped to its low for the year before a public conference could be arranged with senior General Motors Officials where they denied any thoughts of jumping ship. The public by this time though had become so discussed with the weird gyrations of the Tokyo Stock Exchange that many gave up trading their stocks altogether and loaded a few more dollars into their bedroom mattress. And can you blame anyone for that reasoning. This all occurred with Japanese share prices at their lowest levels since 1984.

Interestingly enough, the Japanese Stock Market hit its all time high in 1989 hitting the stratosphere while approaching the 40,000 yen mark in its averages. (38915.87) At that point in time, the Nikkei was almost 1500 percent higher than the Dow Jones which tooling around at 2753.20. The Dow Jones never approached even one-third of that heady number and since August of 1957, the yen denominated Nikkei Stock Average of 225 Tokyo stocks stayed substantially above its American Dollar denominated counterpart consistently and without interruption. However, in February of 2002, the Nikkei Stock Index fell below the Dow Jones. This event was 45 years in the making and could not have been accomplished without a substantial amount of indecision, corrupt thinking  and dedication to the oblique on the part of the Japanese bureaucrats. Snatching defeat from the arms of victory has become the Japanese war cry. 

Because of the system of marking stocks to market in Japan, each stock market decline brings lower evaluations to their holders, especially the banks and insurance companies. These are exactly the folks that could be counted on to pitch in when the market was weak and the finance ministry needed a shot in the arm. However, that well has literally run dry recently and it is now the government itself that has to help rig the market. "The banks face new "mark-to-market" accounting rules, which reflect the current value of shareholdings rather than their book value. Banks are also being forced to unwind their cross-shareholdings to reduce their exposure to market volatility, adding to the selling pressure." (FT.Com, Ken Hijino and Bayan Raham, 2/22/02) The Ministry has a fund of over $15 billion to prop up the market and can call on both the national pension funds and the Postal Savings funds when they need help. This is akin to throwing good money after bad, but then again this is the way it is done here, however, the government may not have any choice, any further erosion of stock market prices could start a chain reaction sending the Island Nation sliding into the Pacific Ocean.

 

JAPAN, The Whole Story For Whatever It is Worth

JAPAN

Debtor Japan

Japan today is in debt in excess of 500 trillion Yen, which is in excess of the Country’s gross domestic product.  Thus, Japan is by far the biggest debtor nation in the world ([1]) and owes 114% of its annual gross domestic product, surpassing the United States, which owes only 60% of its GDP. ([2]) Japan’s debt service eats up approximately 22% of their budget while, thanks to a booming economy the United States on occasion has been able to pay its budget down a tad and has very optimistic expectations on this score for the future. Standard and Poor's chief credit officer for Asia-Pacific described their banking system as "technically insolvent;" a remark that hardly brought a raised eyebrow.

Moody's has lowered the credit rating of Japan country to that of Botswana and closed out 2001 with a government debt equal to 157% of gross domestic product. Not only is the by far the highest in the industrialized world but it is triple that of the United States. "The agencies have been fairly open about their criteria. In January (2002) Moody's published a report that describes 39 indicators it uses in sizing up countries. In many, Japan is tops -- a high current-account balance, high GDP per capital and low foreign-currency debt. but by key criteria, Japan is growing weaker -- the economy is contracting, its debt burden soaring and its population will soon start shrinking, leaving fewer taxpayers to foot the bill." (The Wall Street Journal, Michael Williams and Phred Dvorak, 5/13/2002)

However, the Japanese have always shown an inner toughness that is best exemplified by their craving for Fugu. “Fugu is a blowfish, having an organ containing a toxin so deadly that only specially licensed chefs are allowed to prepare it” ([3]). Supposedly, it is the delicious flavor, not the macho thrill that draws consumers. Three hundred people a year are killed by this concoction and it is not a very pleasant way to go. The Fugu, paralyses the muscles while the victim is totally conscious, and gradually suffocates the epicurean by stopping all movement in the lungs. Imagine going to a trendy New York restaurant for fish and not knowing whether you are going to get out alive or not. It has been said that if you can handle Fugu, you can handle anything and we would certainly be the first to agree.

 This is the same country, which discovered that Ginko Seeds are edible. This takes took an awful lot of courage because at best because the ripe fruit of the Ginko smell somewhat akin to that a drunk who has had too much to drink and has just thrown up all over himself. However, if you can get by the horrible stench, Ginko tastes great and is especially good roasted. Another tasty dish is mountain potato, “a root that is eaten raw and grated, often with raw tuna and a raw quail egg. When a mountain potato is grated, it secretes a translucent slime that is the exact consistency of mucus, yet is totally without flavor.” ([4]) Then there is the ever in demand, natto, which in reality means nothing more than fermented beans.

  Strangely, even the Japanese think that natto is disgusting and in better company it has been described as vile. However, seaweed, which is regularly served up in Japan, has substantial nutritional value and is quite tasty. And the Japanese have a tendency of eating their food raw, there is nothing worse than Shiokara, probably squid which many have said tastes even worse than natto. In addition, special from Shimpei Yamashita of Stanford University is the diet of the first Japanese Women Astronaut. She is going to take along, “fish, newts, jellyfish, frog eggs, sea urchins, fruit flies and worms.” You can certainly see why she is so anxious to be lifted off for part unknown. Other great Japanese delicacies are Ungai, a fresh-water eel, Uni, urchin roe that are small eggs, which are said to taste like low tide if they are not fresh ([5]).

  The global economic environment has grown more volatile in nearly every respect, including exchange rates, interest rates, and private capital flows.  While banks have gained economic importance in many developing countries, they haven’t expanded their capital base to reflect their increased size and the changed nature of the game.  Sadly, most lack expertise in evaluating credit risk, and state-run or state-influenced banks, often disregard it and are more interested in the political implications than sound banking practices.

  ‘The new finance is like a highway’, says Deputy U. S. Treasury Secretary Lawrence Summers.  ‘It’s more efficient, It gets you to where you are going better, but the accidents are worse.’" as quoted in the Wall Street Journal (5/7/97). The Japanese and Thai debacles demonstrate that the accidents are particularly devastating when there is an insufficient separation among economic sectors and a lack of transparency within those sectors.  The Japanese system is built on symbiotic relationships among insurance, banking, service and manufacturing companies.  Interlocking directorates and credit arrangements make this system highly effective in good times and vulnerable at the infrastructure level in bad times.[6]

 

After World War II had ended, the then dominant Japanese industrial groups became commonly known as "keiretsu,” which translates as exactly that, "industrial groups.”  These were offshoots of the conglomerates known as "zaibatsu" (financial cliques) that predated the war and were composed of the likes of Mitsubishi, Sumitomo and Mitsui.  Each keiretsu-zaibatsu had as an integral element of its makeup, a trading company (sogo shosha) that was in reality, an intelligence-gathering network for the group. 

 

Until recently, competitors found it impossible to penetrate the defenses of the keiretsu.  Japanese post war success stories that emerged independently of the keiretsu-zaibatsu, such as Cannon, Honda and Sony that have emerged without being part of a keiretsu-zaibatsu have primarily succeeded overseas.  The keiretsu, successfully lobbied for protective legislation, and when that turned out not to be enough to keep local and foreign interlopers at bay they added collusion among members of their group to their arsenal of methods of keeping foreign interlopers off the playing field. The government, which had its own intimate relationship with the conglomerates, rarely raised an eyebrow.  

Moreover, for many reasons, the Japanese Government would not be foolish enough to oppose the keiretsu simply because of the fact that they keep the taxes flowing into government coffers, and they have made Japan’s balance of payments the largest in the world.  Although this is changing dramatically, until recently, Japan also had the world's lowest unemployment rates (literally zero) and an enviable social benefits system.  Japanese interest rates have been negligible for years, and literally, the only way they can now decrease it is by having the lender pay instead of the borrower.[7]   

However, because of the lack of flexibility within the Japanese Central Banking System, although it did not work the way that it was intended, it was not only the regulations that related to the conglomerates that had became written in stone. There was no fiscal flexibility to reposition within the system. Social patterns such as education, extreme immobility, fanatical chauvinism, religious homogeneity and almost paranoid distrust also fell into an indelible social blueprint:  strong work ethic, massive savings rates, along with strong distrust of foreigners.  

With both the business side of Japan’s equation and its social sector varying little over time, there was certainly no reason to change the government, and Japan remained virtually a one party system almost until the last decade.  Thus, it was expected that these three components would continue to work arm and arm to perpetuate national economic success.  Ultimately, however, Japan's complacency and inflexibly was its ruination.  

When one of the members of a Japanese keiretsu has financial problems, the remainder of the consortium has historically been expected to come to its assistance.  Thus, if the problem became too substantial, the result could be catastrophic.  Japanese banks and insurance companies, however, are large holders for their own account of substantial amounts of real estate and all have massive securities portfolios.  Each in turn lends to others in both of these spheres.  A massive bank or insurance failure that results in the liquidation of these assets could jeopardize other consortia, thereby affecting the entire system.  Japan has indeed created the venue for the ultimate "domino effect.”  

In another allied development which graphically illustrates how dramatic the economic transformations in Japan have been recently, the Tokyo Mutual Life Insurance Company which recently went down the tube, paid its usual visit to their friendly banker for supplementary funding, Daiwa Bank Ltd, who had been misguidedly keeping this sinking monolith alive for decades. Daiwa Bank determined that literally, the time had come where it was either them or us and intelligently came to the conclusion that it had enough and turned them down. This in turn led to the demise the highly regarded disaster, Tokyo Mutual.  

This monolith with incomparably poor management was surviving in the usual fashion; do things the old fashion which we know doesn’t work, and when we run out of funds, go down the block and see our friendly banker to have him bail us out. While everyone knew that this was the way the system worked, nobody did anything about it because it had become part of an “old boy” network, which made everyone at the top comfortable. What happened in the insurance industry in Japan is probably a test case for disaster anywhere. As any normal insurance company will doing in adequately policing its portfolio is to invest the money it receives from policy holders into various activities that it believes will cause it to get a satisfactory return. The yardstick would be to have enough total income coming in to pay for the company’s overhead, to pay claims, and to show a profit.

  However in spite of totally incompetent management, Tokyo Mutual Life Insurance didn’t do anything particularly different than any other company of its kind in Japan. Life was rather simple; Tokyo Mutual took in insurance premiums from its customers and used the funds to purchase stocks and bonds. In addition, it lent money for mortgages and dabbled in real estate for its portfolio account. This would have been an excellent scenario anywhere else in the world with the exception of Japan. Stocks, bonds and real estate have subsequently collapsed.

The Japanese stock market is currently at a 17 year low and if it was adjusted for inflation, it would be even more of a disaster. Bonds, which at one time, were paying satisfactory returns are now returning literally nothing as Japan is straining to get its economy humming again by dropping interest rates to near zero. The collapse in their real estate holdings has been even worse, because of the fact that many of the properties were mortgaged, most may be worth less than Tokyo’s equity, thanks to a moribund real estate market all over Japan. Thus, with stocks, bonds and real estate all in the tank, it is not at all surprising to see Tokyo Mutual go under. However, in spite of this awful scenario, at another point in time, Daiwa Bank still would have gone along with renewing and increasing the loan; not wanting to write their loans down to nothing. In Japan, this is no longer that time and there are no funds left for frivolous loans .  

Tokyo Mutual is not at all an isolated case and all banks in Japan are facing similar problems with many of their clients. All major corporations in Japan, because of their interlocking relationships own stocks, bonds and real estate.  However, although this has created substantial blood letting, the fact is, that for the most part, these corporations are investing their own money in these varying instruments. In the case of the insurance companies, they are investing policyholder funds. Thus, as the value of the portfolio goes down, they are less able to pay claims creating a situation where the insurer is left with nothing but red ink on his balance sheet. While corporate Japan is an accident waiting to happen, a hit-and-run driver who has left the scene without leaving his name has already hit insurance Japan.  

The problems of Japan’s companies and those of its banks are indeed intertwined. The banks have lent 353 trillion yen, or $2.79 trillion at current exchange rates, to Japanese companies according to data from the nation’s central bank. They have extended a further 8.4 trillion yen, or $66 billion, to local governments, most of which are effectively bankrupt. Of course, not all those loans are troubled, but the number of bad loans is increasing. And many are collateralized by assets whose values are now shrinking. Research by David Atkinson, a banking analyst at Goldman Sachs Japan, found 85 percent of problem loans are in the construction, retail, real estate and financial services sectors, which accounted for 62 percent of Japanese companies and 56.1 percent of all domestic loans, as of last September. At current earnings levels, Mr. Atkinson estimates that it would take those businesses 150 years to repay their loans.” ([8])  

Japan is already virtually insolvent, in spite of their highly touted "balance of payments" surplus.  Its trade balance is not the great panacea that it is trumpeted to be, due to a highly bloated bureaucracy that has caused general and administrative expenses to escalate out of sight.  While the Japanese balance of payments runs substantially on the plus side, the margins that it generates are hopelessly thin.  Were the profits generated from exports to be subtracted from capital losses incurred in foreign investments in the last several years, the balance sheet would bleed blood red ink.  

By contrast, the United States runs a significant deficit balance of payments, a substantial part of which is derived from inter-company transactions.  Were we to subtract these transactions from the deficit, the figure would amount to a fraction of a percent of Gross Domestic Product.  The profits that have resulted from these trades have been substantially in the black for recent memory.  Therefore, while we shudder each month when the trade figures are released, we must comprehend two things: first, the trade deficit in relation to the GDP is lower now than it has been for many years; second, the so-called deficit is a function of our purchases of low margin imported items and the our sale of exported high margin items.  (For example, let us say that pre-tax margins in the United States were 30% and in Japan 5%.  Let us say that we send Japan $5 billion in goods and they in turn send us $25 billion in goods.  In this example, the United States would show, in theory at least, a profit of $250,000 on the transaction). While this example was not meant to be statistically accurate, it is certainly more right than wrong.  

When bank loans go sour in the United States, packages of similar assets are securitized and resold to the highest bidder.  The lending institution receives at least something for its non-performing assets and knowledgeable people who may be better equipped than the seller to make the package perform have the opportunity to earn money on it.  This, in fact, is how the U.S. Government solved the Savings and Loan crisis.  Uncle Sam sold enormous packages of savings and loan assets to developers, who frequently made the assets perform by investing more money in them.  

 The same method of operation keeps the entire credit card industry churning along.  Every day, banks put their non-performing credit card debt out for bid.  Professional collection firms take on the bad accounts and historically have been able to generate a tidy profit for themselves.  Most importantly, the inventory moves.  Stale goods are not sitting on shelves waiting for some obscure buyer to walk in and say, “that is exactly what I have been looking for.”  Goods are sold not purchased in the real world, but in Japan, they lay in inventory getting moldy because the system is more interested in its own preservation than being fiscally responsible.   Here, seller holds a fire sale if need be, and the proceeds are used to buy more better inventory.  

Not so in Japan.  When Goldman Sachs stepped up to the plate to buy non-performing Japanese debt, they got a nasty surprise in the form of the yakuza, (gangsters) which believe they have a vested interest in all Japanese property.  Unimaginably, there are some 81,000 Yakuza operating in Japan.  They are involved in "running drug-trafficking, gun-smuggling, prostitution and illegal real estate dealings.” [9] Even the United Nations is concerned about the yakuza, and Pino Arlacchi, executive director for drug control and crime prevention, indicated that "Japan has one of the most powerful criminal organizations in the world and an absolutely inadequate judicial structure to fight it."  

Goldman Sachs had entered Japan when the country let down some of its barriers to foreign companies doing business in that country. With a movement  toward financial transparency gaining ground, Goldman felt that the opportunities in Japan could be substantial because the term, restructuring was not even part of the Japanese language and Goldman had cut their teeth on its execution. Goldman's instincts were both right and wrong. They were correct in anticipating that the market was ripe for their wares but they were wrong in that the yakuza wasn't the only thing relative to the territory that they knew nothing about. In the United States as in most other countries, if something isn't against the law, it is OK. 

Goldman had always prided themselves in the United States for being very careful to both test the limits of the system and at the same time not bend the country's legal statutes. Their success in walking this tightrope has set them apart from most of their competitors. However, the rules of the game are vastly different in Japan. The attitude is here is that unless something is specifically allowed by the law it is illegal. Thus, Goldman's ability of finding gold lying unnoticed between the cracks nearly got them into a peck of trouble in Japan. When something has never been done that way before more often then not, there are no laws addressing the subject one way or the other. Thus, causing an aggressive firm, with new ideas would have substantial difficulty in assessing this virgin terrain. 

However, it is obvious that Goldman was just doing too well at its game and for the new kid on the block to show up the regulars was not considered in good taste in socially conscious Japan. On numerous occasions the firm has been investigated by the country's parliament for a number of matters such as slow response time to government inquiries, questionable short sales and conflicts of interest.  Many of these fishing expeditions were initiated at the behest of their competition or the political party out of office. Nevertheless, Goldman has gotten more than their fair share of business and has succeeded reasonably well against a stacked deck. But enough about Goldman Sachs and , back to our friends, the yakuza.  

The yakuza deeply resent attempts to collect "their" loans.  This resentment expresses itself as, for example, acts of arson against the home of the head of the collection company.  Many feel that the Japanese banks have already dumped substantially all of their non-yakuza under-performing loans.  They are stuck with Mafia partners on a large part of what remains.  This makes a dreadful situation substantially worse and bodes ill for any short-term solution.  

In fact, the situation is likely to get worse.  Under normal circumstances, higher interest rates will cause a currency to rise and lower interest rates will cause it to fall.  If Japan's currency were not freely trading, this would not have such an enormous effect.  However, the Yen is internationally re-evaluated every minute of the day in relation to all other currencies.  At any given time it is selling at approximately what people around the world believe that it is worth.  The Japanese Government cannot influence the Yen's movement unless it intervenes, that is, trades the Yen using central bank funds.  Assuming that intervention is only a temporary panacea, the only way to make a currency fall is lower interest rates and is a very difficult job when the rates in Japan are effectively already at zero.   

This rigidity is a major chink in Japan's ability to counter intense competition from the Pacific Rim in currencies that several years ago were devalued as much as fifty percent.  Japans more stable currency has permitted them to pay relatively reasonable prices for raw materials, which they import at a higher volume than any other country on earth (with the possible exception of China).  As an example, petroleum and construction products must all be imported, so this minor advantage evaporates when held up to the light of day.  The more that is produced the more that must be imported.  

Because of the fact that Japanese companies work on historically narrow profit margins, enormous positive imbalances within the import export figures are totally misleading. The tighter the margins, the less competitive that the country becomes and even worse, the easy it is for country’s with depressed currencies to compete with the Japanese. Thus, additional disruptions such as what many see as the inevitable devaluation of the Chinese currency could well  cause a run on the Yen unless the system’s excesses, that have gone un-addressed for years within the Japanese Banking System are addressed.  Synthetically glossing over these serious problems as Japan has done in the past would be a blueprint for a national and potentially global monetary disaster.[10]  

One day after an announcement by bank regulators that the country’s banking problems were fading, the Financial Times reported that Tokai Kogyo had become Japan’s first listed construction company to collapse after its banks refused to make it more loans.  This was not just an ordinary failure; it was the eighth largest bankruptcy filing in history of the country and the second largest in the construction industry. 

Tokai Kogyo’s failure sent the stock market into retreat because it was a harbinger of billions of dollars in additional unreported non-performing loans.  Moreover, this case, more than others, reveals the frightening consequences of a continued cover-up by bank regulators.  The amount of money involved is staggering; other construction companies are in the same or worse financial situation[11], and Tokai Kogyo’s prime bank, Hokkaido Takushoku, already has one of the worst loan records in the country and may well be pushed over the brink.  Talk about transparency, inconceivably, after the failure was announced and the investigation begun, it turned out that this loan was not listed as in default at any of the many banks with which the company did business.  Japan has a controllable problem; yet, their banks do not even write off the massive bad debts of large defunct companies.   

“The heart of the mess, which developed nine years ago after real-estate prices collapsed, is the huge amount of bad debt that remains on lenders books.  Although banks have taken write-offs of $592 billion since 1992, new bum loans pop up as fast as they write off old ones because weak borrowers are going broke at a record pace.  And banks may have to pony up another $458 billion to cover shaky loans they haven’t provided for, estimates credit analyst Koyo Ozeki of Merrill Lynch & Company.  The result is that lenders still have more bad loans on their books than they did five years ago.  And when the banking czars go home next month, Japan will still have a bad-loan problem larger in scale than the old U.S. Savings and Loan crisis was.  Failing to fix it means the World’s second-largest economy is vulnerable to a destabilizing crisis, like a wave of financial-institution collapses here that had U.S. leaders sweating bullets two years ago.  But even without a collapse, the undercapitalized banks are cutting back on credit to promising young businesses, while keeping their weakest borrowers alive with new loans to avoid taking even-deeper write-offs.  This avoids short-term pain, but cripples Japan as a whole by allocating capital where it is least productive.”[12]   

One can only wonder how the Japanese Government will ever solve their other economic problems if they can’t get over the simple hurdle of letting businesses that are unprofitable close their doors.  The government of Japan has sent a loud, clear message that the system will remain in chaos and is totally averse to transparency.  A series of financial scandals and corporate bankruptcies have left a mark on both the economy and on the economic expectations of the Japanese.  Since World War II, a benevolent government employed and cared for its citizens.  Despite its glaring inconsistencies, the system appeared to be viable and trustworthy.  

Eventually, however, inflated markets and bloated bureaucracies brought the Japanese economy down.  Interest rates on Japanese Government Securities hit record lows with the benchmark 10-year bond selling to yield 1.435%.  According the Wall Street Journal on May 4, 1998, new records were set all over the place.  "The new yield, which compares with 1.560% in early January, is by some estimates the lowest recorded globally in about 400 years, exceeded only by long-term government-bond yields in Europe during the early 17th century."  Fear promulgated increased savings and the excess of savings promulgated a very stagnant economy bordering on recession.  

The International Institute for Management Development holds itself out as the global expert relative to national competitiveness.  In its 1998 survey, Japan almost dropped of the chart.  This was the bottom of a five-year slide from 2nd to 9th to 18th place.  The United States maintained the top slot along with Singapore and Hong Kong.  Parenthetically, Russia came in last out of the 46 countries analyzed, contested in its incompetence only by India and Brazil.  Corruption, bureaucracy and lack of reforms were the key drags on success, according to the World Competitiveness Yearbook. 

As Japanese companies began failing, the entire scenario began to receive larger than life publicity because the prosecutor's office began to make arrests of high-ranking Japanese officials.  As the number of arrests increased, the populace began to realize just how listless and corrupt the system had become.  Reality soon took a harsher tone.  There were layoffs, not only of temporary workers, but also of permanent workers, an economic sacrilege in the Japanese culture.  Not knowing whether they would continue to be employed, people began saving even more of their money, and Japanese domestic goods went un-purchased sending the economy into a recession.  As this vicious cycle spiraled out of control, The Japanese Government presented an economic package that, they believed would restore much of the former optimism.  The program, which was considered by many economists to be both too little and too late, was tinkered with and presented to Parliament repeatedly without becoming accepted. When the chips were down, Parliament found itself unable or unwilling to forge a compromise.

  The number of people employed in Japan plunged and the number of people unemployed increased.  The ratio of jobs to applicants fell to its lowest point in over a decade.  Unemployment hit an all time record in February of 1998 and has continued to rise ever since.  Even these grim statistics did not accurately reflect reality.  Like our own unemployment figures, the Japanese do not even count the workers who have given up looking for a job. However, as bad as things are, they could always get worse. In order for the country to avoid bankruptcy, save their banks and become economically competitive again, the jobs sector will have to take the big hit, but without national unemployment insurance, this will cause substantial dislocation. “Andrew Smithers, Chairman of Smithers & Company, a fund management advisory service, goes so far as to argue that the effect of fundamental corporate restructuring would be so devastating that it is not a practical solution to banking problems. He contends that to achieve internationally competitive rates of return on their capital, Japanese companies would have to reduce employment costs by 40 percent.

  Financial experts all over the globe began to worry about what was going to happen to Japan and what was the meaning of the dire statistics that were being produced. Whatever the data may be, the country’s unemployment is at its highest in measured history, raises are almost non-existent and overtime is a thing of the past.  Moreover, consumer confidence has been measured by pollsters to be at an all time low and as a result, Japanese capital spending is taking the proverbial gas pipe.  The incentive programs enacted by the government have only resulted in increased savings rates.  The people of Japan seem to believe that stormy seas are lying ahead and have battened down their financial hatches to better ride out the inevitable economic storm.  This year, as been the rule lately, Japan almost certainly faces another negative growth of its  GDP.  [13]  

“That has given to the single biggest culprit in the growing debt problem: falling tax revenue.  The Ministry of Finance anticipates about 50 trillion Yen in tax receipts this year, 16% less than the government collected in 1991, when the economy began slowing.  That has led to increasingly large spending deficits: This year’s should top 8.5% of annual output.  The shortfall has been funded with borrowing, and the result is a ballooning debt.”  

“In many ways it resembles the U.S. government’s during the 1980s – only far worse by many measures.  Evan at its peak, the U.S. debt never surpassed 100% of annual economic output.  Japan’s gross liabilities – what it owes without considering government assets, including local-government debt that the national government might have to honor – is 130% of annual output.”

  “David Asher, an economist with the American Enterprise Institute in Washington, figures that the U.S. debt was about four times annual tax revenues at its peak, around 1992.  This year, Japan’s debt will be 15 times revenues, “It’s off the charts,” says Mr. Asher.” [14]  

While Japan desperately attempts to buy time to heal the wounds caused by a sort of national hubris, it continues its global over-reaching, exporting economic chaos in the process.  Just as the schoolyard drug dealer "hooks" his victims with an inexpensive fix, certain Japanese elements of the global banking system create a dependency by making their product which is money, so inexpensive and so readily available that even though there may be no particular need for additional funds any particular point in time, this hyper-availability creates a borrower's euphoria that more is better than less and there will be no problem ultimately paying of the additional financing when the loan eventually comes due.  Japanese bankers, when they enter their lending frenzy stage, have created an almost Satanical environment where reason seems to fly in face of a potential "better-life" with almost no thought as to how this money will be repaid and the penalties for default.  However, this is the way success has been measured in Japan, by the gross number of loans made by lenders, not by the borrowers ability to repay.  The competitive bank feeding frenzy when egged on by domestic cutthroat competition, creates an environment where logic is thrown to the winds and the potential to make profits is ceded to sales, not profits. 

The Bank for International Settlements reports that Japanese banks account for 34.7% of the $763.5 billion total bank lending in the Pacific Rim, excluding loans made within Japan, but including loans to quasi-public institutions.  Japanese banking institutions extended $37.5 billion and 53.4 percent of all foreign loans to Thailand, $22 billion and 39.6 percent of all foreign loans to Indonesia, and $87.5 billion and 42.2% of all foreign money lent to Hong Kong.  The exposure that they have admitted to in the Pacific Rim is close to $400 billion in economies and currencies that have already collapsed.  Countries without the resources to repay the Japanese will have to make good their debts in currencies that have depreciated substantially against both the yen and dollar, the two currencies in which repayment is usually made.  The vast disparities in valuation between the Asian currencies and the yen and dollar have resulted in steep increases in the principal and interest of these loans, making repayment virtually impossible.



[1] “Japan’s government debt as a percentage of national economic output is now the world’s largest, surpassing that of Italy.” Bill Spindle  The Wall Street Journal, December 11, 2000.

[2] An interesting aside is the fact that while the United States has seen it ratio of debt to GDP decline every year for seven years, the exact opposite has happened in Japan.

[3] Ray’s List of Weird and Disgusting Foods.

[4] Lewis Tepper, Ray’s List of Weird and Disgusting Foods.

[5] Mike Khaw.

[6] Keiretsu: system in which individual Japanese companies are linked together through interlocking share holdings. They favor each other in business dealing. In South Korea, the same relationship would be called chaebol.

[7] Although it is not well known, this happened in the United States for a short period during the thirties when people were becoming so concerned about banks going out of business that they wanted to own government securities under any conditions. During that period, the United States Government had what could be called a reverse interest rate on their bonds.

[8]  Japan’s Corporate Woes Compound Bank Troubles, Stephanie Strom, The New York Times, April 3, 2001.

[9] Reuters, 2/4/99.

[10] If Japan spends so much money defending collapsing domestic industries that the central government and large corporations are forced to liquidate international holdings to shore up their balance sheets, the price of U.S. Government Securities could collapse under the pressure of these unrelenting sales. We will at that time , truly have a global catastrophe. However, the American economy has burgeoned substantially and the Treasury  is no longer running a deficit, thus, this may longer be the worst thing that could happen.

[11] Japan continues to cut back on the massive public works projects, which these companies had become so dependent. That was brought to an abrupt halt when the Japanese Government was strongly advised by International Agencies that spending themselves into the black was the way to go, and once again, public works projects became the order of the day. Whatever theory is right or wrong does not matter, for the way the Japanese grant projects and monitor them only tends to allow political friends to pocket endless amounts of money and does little for the economy itself.

[12] The Wall Street Journal, Japan’s Massive Debt Bomb Ticks Ever Louder, Bill Spindle, December 11, 2000.

[13] “ Japan’s economic growth has averaged only a little better than 1.5% in the past decade, with several periods of prolonged contraction.” The Wall Street Journal, Japan’s Massive Debt Bomb Ticks Ever Louder, Bill Spindle, December 11, 2000.

[14] Ibid.

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