Asian crisis threatens to engulf Japan

By Doug Lorimer, Green Left Weekly, 21 July 1998

Just three years after Mexico's financial disaster, the second great financial crisis of the 1990s exploded in south-east Asia and South Korea. The same imperialist institutions that only a year ago held up the Asian dragons and South Korea as models for the rest of the Third World to follow, because of their openness to foreign investment, are today criticising these countries for having allowed private businesses to accumulate excessive levels of foreign debt. But it was precisely the enormous flow of foreign capital into these countries that fuelled their high levels of economic growth over the last decade.

The decline in the export earnings of these countries was a product of the very investment boom that had fuelled the so-called Asian miracle. It created overcapacity in the production of a range of the goods they produced for export.

In long waves of depressed capital accumulation such as the present one, which began in the early 1970s, money capital moves toward trade in currencies and commercial paper, due to a lack of sufficient profitability in the expansion of commodity production. It happened during the last third of the 19th century and in years between the two world wars. However, the scale of speculation in financial assets has reached a level never before seen.

Underlying this unprecedented explosion of speculation is an equally unprecedented rise in public debt. Over the last 16 years, the public debt of the imperialist states has risen from 41.7% to 70.7% of GDP. The total public debt issued by the imperialist states has reached more than US$10 trillion.

To the imperialist bankers, the swollen public debts of the imperialist states appear on their balance sheets as assets—a claim on future state revenues—which can be traded on the financial markets.

Similarly, the debts on which Third-World capitalists and governments are required to pay massively compounded interest are resold on the international bond market at prices as low as five cents on the dollar. As the interest on these debts mounts, the finance capitalists bring their enormous economic and political power to bear on the governments of the semi-colonial countries, pressing them to squeeze out funds for payments by imposing more and more severe austerity measures on the workers and peasants.

The total debt owed by the capitalists and governments of the non-imperialist countries to the major imperialist banks had reached the unimaginable figure of US$2 trillion by 1995, more than 20 times its level in 1973.

‘Emerging markets’

Foreign private capital flows to the Third World more than quadrupled between 1988 and 1996. These flows were highly concentrated in a small number of countries. Excluding China, the countries that the World Bank classifies as low income and which are inhabited by 42% of the Third World's population, got just 6% of the flow.

That capital flow ultimately had its origin in the vast surplus profits made by imperialist corporations in North America, Japan and Western Europe. Each of the imperialist Triad economies have huge financial reserves, huge accumulated stocks of money capital that cannot find sufficiently high rates of return on investment in expanding production at home.

The IMF bailouts of Mexico, South Korea and the Asian dragons were justified as necessary to prevent their financial crises leading to a collapse of the international financial system like that of 1929-32. This may or may not be true. With every financial crisis, you never know if it's the one that, unchecked, could lead to ruin.

Freer international capital flows have failed to deliver the promised boost to economic growth, especially in the semi-colonial world; growth rates over the last 20 years are a lot slower than in the previous 20 years. They've contributed to two massive economic disasters in three years: Mexico in 1994-95 and east Asia today. If foreign investors are made whole by the latest IMF lifeboat operation, then it's a pretty safe bet that they'll do it again.

US capital

The US imperialists have strengthened their position vis-a-vis their Japanese and European imperialist competitors as a result of the Asian crisis.

With the exception of Britain, the capitalists in Western Europe and Japan are still many years behind the US rulers in downsizing, cost cutting and imposing what the employing class calls labour flexibility. They are behind their US rivals in slashing wage rates, in extending working hours, in gutting the social wage.

It has been this relative success of US capitalists that accounts for the explosion of stock prices in the United States during the 1990s, not the supposedly better growth performance of the US—the so-called US boom.

Between 1989 and 1997, the US economy grew an average of 2.3% a year, less than Germany's average—2.6%—and even Japan's—2.4%. Even for the 1994 to 1997 period, US GDP growth—3% a year—was not much greater than the 2.6% clocked up by the supposedly moribund European Union.

Despite the hype about the US economic boom of the 1990s being driven by investment and productivity growth, it is the second-most consumption-intensive of the last eight expansions of the US economy, and its dependence upon credit is well above average.

Debt continues to break record levels every quarter—as does the rate of filing for personal bankruptcy. Average US household debt was just over 50% of after-tax income in 1987. At the end of the 1989-93 slump it had risen to 70% of after-tax income.

Since then, i.e., during the 1994-97 boom, it has climbed to 99% of after-tax income. US households devote an average of 17% of their after-tax income to debt servicing. Any rise in interest rates or fall in incomes would quickly push it to record levels and cause a collapse in consumption expenditure.

Japanese recession

Japan's economy is into deep recession. In the single month of April, 910,000 Japanese workers lost their jobs, mainly in construction and manufacturing. The number of people out of work rose 25% from a year earlier to 2.9 million.

Also in April, housing starts fell by 16%—the 16th straight month of decline. In the three months to February, industrial production fell by an annualised 6% compared with the previous three months.

Since the collapse of stock and land prices at the beginning of this decade, Japan's banking system has been weighed down with US$600 billion of bad debts. Now with south-east Asia in crisis, Japanese financial institutions hold $US270 billion of the total US$750 billion in loans to the region.

Japan's economic problems are structural, not cyclical. There is massive overcapacity in all branches of industry. Large numbers of companies are technically insolvent. They have been able to survive only thanks to the government's willingness to spend to stoke demand and by the Bank of Japan's loose monetary policy.

That the economy has failed to respond to these measures shows how deep-seated the problems are.

The construction industry is in the worst shape. The leading companies are declaring losses as they write off overdue payments, sell their land and fire workers.

Much of manufacturing industry is struggling too. Of the big car companies, only Toyota and Honda are doing well. Mitsubishi, Nissan and Mazda are losing money, and their debts are huge.

Weak sales of computers and domestic appliances at home and tumbling prices for computer memory chips abroad have clobbered Japan's big electrical companies. Hitachi, Toshiba and Mitsubishi Electric have experienced mounting losses in the brutally competitive computer chip market. Mitsubishi Electric posted a loss of US$570 million last year.

Two of Japan's big steel companies—Kobe Steel and NKK—may fail to survive.

Norio Ohga, the of Sony, has warned that the Japanese economy is on the verge of a collapse that could cause a worldwide recession.

Japan's economy accounts for 13% of global GDP. Japan is a major source of exports for the US, accounting for 10% of all US exports and 20% of US agricultural exports.

Fears

According to the London Economist, though, the biggest impact of a Japanese recession could be on Wall Street. An editorial in the April 11 issue noted: America's trade deficit is likely to widen sharply as a result of problems in Japan and the rest of Asia. If this encourages America to raise trade barriers and others to retaliate, a global recession may follow.

The biggest risk, according to the Economist, is that Japan might be the trigger for a collapse in investor confidence on Wall Street, leading to a stock market crash. According to an article in the April 18 Economist, Near-insolvency is forcing Japanese banks to sell off even healthy assets abroad in order to whisk badly needed capital back home.

At the moment, the sell-off is in billions of dollars of syndicated loans to Hong Kong companies and mainland Chinese state-backed entities. This has led to a 40% collapse in real estate prices in Hong Kong over the last six months and a 50% collapse in prices of stocks on the Hong Kong stock exchange.

But the sell-off of overseas financial assets by Japanese banks is only just beginning. Their losses from East Asia's meltdown are still mounting. Large domestic losses from failing manufacturing, construction and retail companies have yet to be booked, and much more capital will have to be found to absorb them.