The Incredible Shrinking Japan Exposes Region To A New Meltdown
Sydney Morning Herald
Saturday March 17, 2001
The Herald today begins a series on the threat of a new Asian economic crisis. Hamish McDonald reports on the building pressures.
Shuichi Takase took a last look at the sweeping panorama from his 34th floor office above Chifley Square yesterday as he completed the quiet exit of Nippon Life Insurance from Australia.
The low-key shutdown of the Japanese insurance behemoth's Sydney office was in marked contrast to the arrival of Nippon Life and a host of other Japanese insurers and trust banks in the mid-1980s, hailed as evidence of Australia's graduation from raw material supplier to bluechip investment locale.
The departure, which leaves the smaller Meiji Insurance as the only Japanese insurer here, is seen not so much as a vote on Australia's prospects, but another sign of the implosion of Japan's once all-conquering financial system.
Fears that this might speed up to a quick meltdown were behind this week's worldwide flight to the US dollar, which saw the Australian dollar fall below US50 for the first time. That fear has receded temporarily with another bank bailout promised by the tottering Mori Government.
But deep gloom remains about both Japan's short and long-term prospects, and worries that Japan might trigger a second Asian economic crisis have not been dispelled.
``Pessimistic views about Japan have been coming in epidemic proportions in the last three weeks," says a leading business analyst of Japan, Macquarie Bank's James Fennessy.
Nippon Life, like other institutions in Tokyo, is wrestling with its deflating domestic economy, in which investments made in the 1980s bubble period are now worth one-third the price paid.
Most life insurance policies became unprofitable for the institutions once the Nikkei stockmarket index went below 16,000 points (from a high of nearly 39,000 in December 1989). It has been bumping down to this point since 1992, and has been below 15,000 since late last year, hitting a 17-year low of 11,433 this week.
The Japanese banks are in a similar position with assets bought before the 1989 collapse of the bubble. Jitters about new accounting rules forcing these paper losses to be booked two weeks from now, at the end of the Japanese financial year on March 31, were behind this week's worldwide rush totriple-A US dollar assets.
Japan's demographics are meanwhile speeding the life insurers and pension funds towards the collapse. Each 100 working-age Japanese now supports about 32 people over 65. In 20 years the same number will be supporting 61 aged people.
The same aging process, in a nation which fiercely resists immigration to its ``unique" society, will see Japan's population shrink from 126 million to about 100 million over the next 50 years.
When the United States President, Mr George Bush, meets the Prime Minister, Mr Yoshiro Mori, next week, as part of his strategic plan to boost Japan once more as strategic counterweight to China, he may grasp the reality. Japan is not like the Britain of which Rudyard Kipling boasted: ``We've got the men, we've got the guns, we've got the money too."
As Australian National University military specialist Alan Dupont noted in The International Herald-Tribune this week, ``Japan's economic problems seem to be systemic rather than cyclical. They may well presage the beginning of a long-term decline in Japanese power."
There are of course more apocalyptic scenarios than a genteel decline. Japan's youth is gripped by an anomie, shown in public disrespect for seniors and in bizarre fashion, that harks back to other eras preceding radical change like the 1920s or the Allied occupation.
Like many senior observers of Japan, Macquarie's Fennessy is intrigued by the 1995 sarin gas attack by the Aum Shinrikyo sect at a subway station in the heart of Tokyo's bureaucratic precinct, and its implications. ``In any other country it would have been reported as an attempted coup d'etat," he said.
Japan has sharply changed course in modern times after external shock, in both cases the arrival of foreign military might, either Commodore Perry's ``black ships" in 1858 or MacArthur's GIs in 1945. Some Japan-watchers wonder if a ``third opening" is on the horizon, this time in some financial or technological guise. ``Up until a year ago I was arguing not," Mr Fennessy said. ``Now I think I may have to change my mind."
Mr Mori's plan of a new Government-funded holding company to take bad stocks off bank books follows similar rescues by other Asian governments, in Hong Kong, Malaysia and Indonesia not particularly good company.
These have staved off immediate defaults and collapses, but by keeping failed businesses on life-support have put off the serious reform that would get economies positioned to resume high growth and resist serious pressure.
The pressures include not only simultaneous recession in Japan and the US, which together take about 50 per cent of the region's exports.
There is also China's export drive that will get a massive boost from imminent membership of the World Trade Organisation. Over the past year, for example, China has started to push into Indonesia with motorcycles, four-wheel vans and motor tyres at half the price of Japanese and Korean brands.
Across Asia, with the immediate threat staved off by more than $US100 billion ($201 billion) in rescue packages marshalled by the International Monetary Fund in the 1997 crisis, elites have used local political processes to stymie reforms.
Most of South Korea's chaebols (business conglomerates) survive with help from state-owned banks. A company trade union (part of the elite) stymied efforts to sell off troubled Daewoo Motor Corp.
``They [the company] were on the point of getting $US5 billion for it from Ford last year," one IMF official says. ``Now if someone offers $1.5 billion they should take it; it is still losing $100 million a month."
Thailand's reforms have slowed with the election of business tycoon Thaksin Shinawatra on a $3 billion giveaway to villages plus a three-year moratorium on debts owed by farmers. Indonesia is struggling with no less than $US262 billion in public and private sector debt, equal to 170 per cent of its GDP, as its politicians and corrupt judges fight asset sell-offs.
In Indonesia's case, political turmoil is now starting to impact on the still-performing oil and plantation export sector with the forced shutdown this week of the Arun LNG plant in Aceh, which earned about $US1.5 billion a year.
Malaysia, which resisted an IMF bailout by closing off its economy, has also diverted savings from its state pension funds and export earnings from the state oil firm Petronas into bailouts, in its case for troubled enterprises run by the Malay elite.
Its internal financial balances may be more precarious than admitted by Prime Minister Mahathir Mohammad, who is in deepening political strife. Malay voters have reacted against his persecution of former deputy prime minister Anwar Ibrahim. The recent clash between Malays and ethnic Indians near Kuala Lumpur, in which six people were killed, showed heightened racial tensions in the country. But should Japan spark another Asian crisis, Australia is well braced in the short term, largely due to the weakness of the dollar.
Coal and iron ore contracts with Japan are priced in US dollars and have recently been renewed with substantial price increases. Food exports are helped by the animal disease outbreaks in Europe, and the weak dollar makes luxury items like wine even more competitive, and as vigneron Adam Wynne notes: ``Japan's market for alcoholic drinks is bigger than the Malaysian economy."
``On the big ticket items, we won't see an impact," said Mr Fennessy. ``But on the intangibles side like tourism there may be an impact on the flow though we are incredibly cheap, aren't we?"
Nor is Australia dangerously exposed to a repatriation of Japanese capital to shore up balance sheets at home. ``There's not a great potential for capital flight because there's not a lot of Japanese capital down here," says Nicholas Fyffe, a senior bond market specialist with Westpac Bank.
China will grow as an economic counterbalance as well, despite its own internal imbalances, which include massive bad debt in its banks, a stockmarket that is a fraud to offload public sector white elephants on a gullible public, perhaps 200 million internal migrants, and a Stalinist political system.
However, the prospect of further systemic collapse in regional finances and stagnation in East Asia's other major economies is hardly a bright one for Australia, which only five years ago was striving to get itself ``locked in" with what seemed a looming century of East Asian dynamism.
© 2001 Sydney Morning Herald
