The groundwork for the bubbling Japanese economy of the late 1980s was laid in 1987 by none other than the Bank of Japan, which lowered the prime rate to as low as 2.5% and kept it there for two years and three months until 1989. This made the economy chug along with steaming hot “bubbles.” You will learn the reasons, in Part 1, as former Prime Minister Miyazawa explains. After the economy zoomed upward, that guardian of financial sanity called the Bank o f Japan took a very anti-conservative step in raising the rate from 2.5% to 6% in a matter of 15 months. It was May 1990. This was like calling out the Forestry Department to douse a small campfire — it was overkill, and the “bubble” broke in 1992.
As if to give the coup de grace to a gasping patient, a measure called “Soryo Kisei” — the Total Amount Reduction — was introduced to squeeze the flow of money down to a trickle. It was also May 1990. This could have been a commendable action, had it been applied gradually over some extended period of time to cushion any sudden impact on the economy. But the Bank of Japan did it with the single-mindedness of a samurai. The flow of funds was nearly halted, economic activity hit a wall, and the recession set in. As the market turned feverish, then quickly cooled, Japanese banks and other financial institutions played a major role in creating the real estate bubble (the first alarm was issued by Prof. Y. Noguchi in the fall of 1987). They pushed their employees to get more deposits from their customers. The money thus collected was quickly turned over in real estate loans. As long as their customers had land, they were happy to provide loans on any piece of property put up as collateral, since land prices were soaring. They made money as the value of the collateral shot up. Many corporations and manufacturers climbed onto the band wagon for land buying before taxes bit into their huge profits.
In 1992, the “bubble” burst as stock prices went down and so did land prices. The United States experienced this sort of bubble in the 1970s when the savings and loan associations went belly up, one after another. But the US government took a hands-off policy.
On the other hand, the circumstances were quite different this side of the Pacific. Major commercial banks, trust banks, and regional banks, to say nothing of small credit unions and credit associations, were all involved in the land buying spree. Mega banks took active part in lending, and soon loans were going sour. Japan could not very well let these mega banks, saddled with enormous bad loans, go bankrupt. That would have caused worldwide repercussions.
The measures taken by the government were not successful; they were too little, too late. Most of the policy-makers thought that things would return to normal in a matter of a few years, since there was a belief in the ever-growing trend that had marked Japan’s economy since the end of the World War II.
By the year 2000, it was clear that the decade-old recession must be resolved by all means. The key was to force the banks to declare accurately the amount of uncollectible loans and to clear such loans (at taxpayers’ expense). Because the ruling party was quite in debt to the financial world, this was not earnestly undertaken until Prime Minister Jun-ichiro (meaning pure + first son) Koizumi took office in April of 2001. In critical situations, he does not mind twisting arms. Believe it or not, he is Japan’s savior.
Koizumi is a cut above his predecessors; he is doing a superb job of revamping Japanese politics and economy. He is not as good a talker as Margaret Thatcher, but he gets things done. Furthermore, he is clean, a quality that is rare among his peers.
He is not a reform-centered, righteous, raving samurai. He knows what he can and cannot do because of his years of experience in politics. He likes music, Kabuki, and art. He likes opera, too. On top of all that, he has a good sense of humor, probably acquired from his association with British students while attending the University of London in his 20s.
Koizumi flunked twice in the race for premiership but made it at the third try in 2001, despite a popular Japanese saying, “What happened twice will happen thrice.” Actually, there is another proverb, better known in the US: “The third time is the charm.”
Koizumi and the indefatigable Bank of Japan Governor T. Fukui and State Minister Heizo Takenaka worked to clear up the mess of bad loans. Takenaka is as hard-nosed as Harry S. Truman: “The buck stops here.” Thanks to Takenaka’s uncompromising techniques, and the Financial Services Agency backed by its team of veteran inspectors skillfully applied to prod powerful bankers, Japan’s economy began gearing up in the second half of 2003.
This was especially good news to the stockbrokers, foreign and domestic investors, as well as bankers....
