Harnessing Japan's Exporters
and "Liberating" Its Ailing Banks

Michael Hudson, Ph.D.

[August 1998]

Dr. Michael Hudson heads up the Institute for the Study of Long-Term Economic Trends (ISLET) in New York. He is also a research fellow at the Levy Economics Institute of Bard College, author of many books on international finance, and editor of 42 books on economic history. He is a former balance-of-payments economist for the Chase Manhattan Bank and Arthur Andersen & Co.; the chief economist of the Hudson Institute; and a consultant to UNITAR, US, Canadian and Mexican government agencies and corporate clients.

Foreigners Trying to Buy Control of Japan's Economy with Japan's Own Savings

As Japanese and foreign investors shift money out of the Nikkei stocks into U.S. and other foreign stocks and bonds, America and Japan are at loggerheads over whether the yen should continue to depreciate, or whether Japan should sell off its international reserves to support the yen (and thus to prevent Japanese exporters from benefiting from a falling yen).

To understand this economic fight, one needs to cut through the fog of euphemism being used by advocates of "open markets" and "quick solutions." One needs a "devil's dictionary" to provide translations of the euphemisms being thrown about. For instance, "dealing with Japan's banking mess" is becoming a euphemism for selling Japanese banks and their real estate assets to "vulture investors" at a few cents on the dollar, that is, a fraction of what the buyers expect the property to be worth upon economic recovery.

Wanting Japan to sell off its banks to foreign "white saviors," US officials attribute any and all Japanese economic problems to the nation's reluctance to hurry up and sell its banks. The Japanese and US media duly record the anguished cries of American officials that the declining yen is a terrible thing for Asia (meaning that Japanese producers may undersell other Asian exporters). They also complain that a poorer Japan means lower US exports. This conveniently blaming America's own declining living standards on Japan, rather than on the downsizing and "flexible employment" policies that are now troubling American labor.

"Expanding the economy" by borrowing more money is becoming a euphemism for buying more US exports. US officials have made it clear that this is the only kind of Japanese economic expansion they want to see, except for more Japanese loans to troubled East Asian countries to enable those debtors to pay US banks. Consumers and taxpayers, not banks, other financial institutions and real estate investors are to bear the cost of past mistakes.

As long as Japanese newspaper readers can be convinced that international financial spokesmen are well-trained technocrats who know what they are doing - rather than foreign vultures looking for a quick meal - there will be little questioning of the series of blunders that has depressed Japan's economy.

In sum, LDP (ruling party) politicians are trying to convince the public that everything can now be fixed by following policies designed in America. The Ministry of Finance (and the LDP behind it) have become conduits to enact US-sponsored policies.

It is not Japan that is being helped, but America's own financial industry. Japanese savers are to be squeezed more than ever to finance the US economy in this new scenario. That is the real meaning of "open markets" and the "Big Bang."

In analyzing the dynamics at work that determine the yen's international value, it is important to recognize that exchange rates in today's world are determined by capital flows, not by relative product prices, e.g., the price of McDonald hamburgers or other living costs. Most currency transactions are no longer associated with imports and exports of goods and services. Rather, as the world economy has become globalized, international investment by money managers buying foreign stocks and bonds has expanded to reach a much greater magnitude than foreign trade.

Since Japan's Big Bang, savings have been flowing out, mainly to the US stock and bond markets. These capital outflows lead to falling currency values. This typically helps the nation's exporters, as it does those of Japan today.

America wants this money. Merrill Lynch and other money managers report that they are getting rich off the commissions being earned from Japanese savers who are taking their money out of the banks and postal savings system and turning them over to America's global stock market firms. Stock prices for these companies are booming, carrying up other US stock market prices. International bond markets also are booming.

The problem is, what will the Americans buy in return? Certainly not more Japanese electronic and automotive products, for this would eat into the markets already targeted by US industrial firms. American industrialists do not want to see Japanese companies benefit from the falling yen (which makes Japanese labor priced lower in US-dollar terms. Raw materials prices, machinery prices and other basic costs are "dollarized," and hence their dollar prices are unaffected by shifts in national currency values). America may threaten to raise tariffs against Japan's "depreciating currency," and US trade negotiators have let the government know that they may insist on more "voluntary export controls." They also may demand that Japan guarantee US exporters a larger stipulated share of its domestic market.

Most of all, however, US officials are now insisting that Japan create an extraordinary investment opportunity to attract the Big Bang savings outflows back to Japan. The US solution is for Japan to sell its capital assets - its distressed banks, its distressed real estate, and its distressed companies, all at fire-sale prices.

In other words, the US financial sector will turn around and recycle the savings its institutions are collecting from Japanese consumers by lending it out to sophisticated "vulture investors" to buy Japanese assets. In this way, foreigners will be able to buy control over Japan's economy by using Japan's own consumer savings! This is the basic meaning of the diplomatic war now being waged over the exchange rate of Japan's yen vis- a-vis the dollar.

Until this alternative can be implemented, American officials are demanding that the Bank of Japan begin selling off its dollar reserves - that is, its holdings of US Treasury bills - month by month to offset ("finance") the outflow of Japanese savings to the United States. This means that as Japanese private-sector holdings of US stocks and bonds increases, official Japanese dollar holdings of US Treasury securities will be sold off so as to maintain "balance" in the foreign exchange market, thereby holding the yen steady. This is the new meaning of "equilibrium" in today's diplomatic discussions.

At the end of this process, Japan's foreign reserves - the measure of its international power and economic autonomy - will be stripped away. Japan will have been reduced to the status of a third world country. That is now called "being a good global citizen."

The United States also is demanding that Japan's government cut taxes so as to put more money into the hands of Japanese, knowing full well that they will save rather than spend most of it. In effect, Japan's government is to run deeper into debt so that Japan may finance more U.S. debt. In this way, debt in both countries can grow at a rate able to absorb the exponential growth in savings by the world's financial institutions -- pension funds, insurance companies, banks and private investment funds.

As in most third world countries, a well-to-do class of "cosmopolitan" investors may benefit from having placed their savings outside the country, safely in the United States. But Japan's own official reserves will be emptied out. At that point, further outflows ("flight capital") will push the currency down, wrecking the economy and creating a chronic decline in living standards, Latin American style.

This is elementary international economic theory. Why is it not being taught in Japanese schools and reported in the Japanese press? Is a prerequisite for Japanese foreign service or Ministry of Finance position that one is ignorant of these basic truths?

The above facts do not bode well for Japan's immediate future. They suggest that each month will bring a new "crisis," which will be used to panic the Japanese public into pressing for action.

In sum, the "crisis" over the yen's fall over the past six weeks is NOT the result of Japan's inability to solve the problem of bad bank balance sheets. The Big Bang resulted from a change in Japanese investment laws and practices, not from any sudden worsening in the bank situation. The Big Bang will continue - indeed, the US yelling and screaming over the "crisis" will catalyze Japanese fears, and consequently their desire to shift yet more savings into dollar-denominated assets.

So what is the Bank of Japan to do next month, and the month after that - $25 billion after 25 billion, month after month? It has a choice. To do NOTHING will simply let the yen decline, as yen savings are exchanged for "dollarized" bonds and stocks.

This decline in the yen will help Japanese exporters somewhat. It will increase the yen-value of US and other foreign assets of Japanese companies and savers. It also will infuriate the United States, and may prompt other Asian countries to devalue THEIR currencies, so as to offset any competitive advantage achieved by Japanese exporters as a result of the fact that the yen's value is determined NOT by commodity prices, but by capital flows.

The Big Bang has the makings of a chronic POLITICAL crisis. That is what the Japanese public has not been told.

For decades, Americans have used "opportunity" as a synonym for crisis. US diplomats are hoping that the yen's decline may convince Japan that they have to save matters by selling their bank assets at distress prices to foreign investors.

Will this solve the problem? Indeed! Capital outflows by Japanese savers into US bonds and stocks will be offset by capital inflows by US vulture investors to buy undervalued Japanese assets.

Japanese savings will help push up US stock and bond prices (while reducing Japanese securities prices accordingly). And the Americans will get capital gains on distressed Japanese bank assets - while pushing for an asset reflation that will make homes and office space even MORE expensive for most Japanese.

What this kind of "recovery" means for the average Japanese under these conditions is rising housing prices. For Japanese industry, it means rising land prices for office space and factories - not exactly the way to increase Japan's competitive power in the world economy.

The American "cure" thus promises to erupt into a full-scale new disease, a re-inflated bubble economy. What is remarkable is that nobody seems to be suggesting any alternative policies. Perhaps Japan needs not only a new banking system, but a new educational system, above all a re-designed economics curriculum.

Can anyone explain how Japan benefits from this?