Currency Storm Rocks Japanese Economy

By Maurice Williams, The Militant, Vol.61, no.41, 24 November 1997

The currency typhoon rocking Southeast Asia threatens to push a teetering Japanese economy over the brink into an economic recession. The country is still recovering from its worst economic slowdown since the end of World War II and has the highest budget deficit among the so-called Group of Seven major capitalist countries.

Tokyo's gross domestic product shrank 2.9 percent in the April-June quarter, and industrial production continued to decline in July, falling 2.2 percent. In September construction orders declined for the eighth time in 11 months, and total orders in September were 31.7 percent lower than a year earlier. The official unemployment rate is now close to its record high of 3.5 percent.

A financial collapse in Japan, whose economy totals $5 trillion, would have a sharp impact in the United States and the rest of the world. Japanese capitalists, who own some $291 billion in U.S. Treasury bonds, could start selling them to generate cash if one or more of Japan's largest banks faced bankruptcy.

Robert Hormats, vice president of the investment firm Goldman Sachs International, voiced anxieties held by the U.S. rulers that such a sell-off could trigger a recession in the United States. Currency devaluations have already set off a regional slowdown in Southeast Asia that could deepen into a recession. Some 40 percent of Japanese exports are sold in that region.

Many commentaries in the bourgeois press express concerns that this development will exacerbate deflationary pressures, intensify price competition, and increase excess industrial capacity—that is the capitalists' ability to produce more commodities than they can sell at a high enough profit to justify further expansion of their production facilities and equipment.

Severe banking crisis stalks Japan

Japanese bankers are jittery about the $265 billion in loans and bank deposits they have extended to various countries in the region and the $250 billion in problem domestic loans. Bad loans have soared 18 percent since March as bankruptcies increased.

The fear is that since bankruptcies are on the rise, and banks have to foot the bill, one day it'll be too much for them to bear, explained Ken Tsubouchi, general manager of the Nomura Asset Management Company.

Sanyo Securities, Japan's seventh largest brokerage house in Japan, went belly up November 3 with a $3 billion debt. Nine of its main creditors had refused to roll over loans totaling $160 million due for payment on October 31, 1998. Sanyo was the first brokerage house in Japan to file for bankruptcy since World War II.

On November 6 Yamaichi, the fourth largest broker, was warned by the U.S. credit rating agency Moody's that its status could be downgraded to junk bond. The move would make Yamaichi the first Japanese brokerage firm demoted to this category. This follows a wave of financial failures and corruption scandals across the country.

Meanwhile, the Nikkei-225, Tokyo's stock market index, dropped to 15,836 November 7, the lowest in more than two years. According to Business Week, if the Nikkei fell to 14,000 Japan's 20 largest lending institutions would face a combined $96 billion loss.

The banks invested hundreds of billions of dollars in speculative loans to build golf resorts, high-rise office towers, and other real estate ventures dating back to the 1980s, which remain on the books as assets. Vastly inflated commercial real estate prices plummeted in the late 1980s and early 1990s, sending the economy into a decline. The recent currency crisis has worsened an already stagnating economy.

The Japanese capitalists could face defaults on the loans they extended throughout Southeast Asia due to the string of currency devaluations that was triggered when the government of Thailand released the baht's peg to the U.S. dollar on July 2. The Thai baht has dropped 40 percent against the dollar since then, and currencies in Indonesia, Malaysia, and the Philippines suffered similar declines. Now currencies in the stronger so-called tiger countries, such as south Korea and Singapore, are under growing pressure for devaluation.

The currency devaluations will make it more difficult for these regimes to pay back loans and the compounded interest. On November 7, CMIC Finance and Securities, one of Thailand's 58 suspended finance companies, announced that it would not be able pay the $400,000 annual interest on its $50 million in Eurobonds (bonds denominated in European currencies) that was due the next day.

Another company, Bangkok Land, was expected to miss a scheduled payment of $2.43 million. Somprasong Land, a Thai real estate company, missed a $3.1 million payment on Eurobonds in February.

Through the International Monetary Fund (IMF), the U.S. capitalist rulers are attempting to impose bailout schemes that include stepped-up austerity measures on the regimes in the region, similar to the $50 billion loan package foisted on the Mexican government in 1995, as a way to guarantee their investments.

There is working-class resistance to the effects of this, however. The austerity program pushed on working people in the Philippines received a blow when the country's Supreme court declared November 5 that a law deregulating the oil industry was unconstitutional. Mass protests had earlier forced the court to impose a 30-day freeze on oil prices. Bosses in the oil industry had pushed for the deregulation law, which would allow them to raise prices.

Tokyo is probing to counter Washington as the dominant imperialist power in the region, while it presses to guarantee investments for the wealthy class in Japan. The Japanese regime is pushing to set up a regional fund to rival the IMF. This scheme is similar to the proposed $100 billion Asian Monetary Fund squelched by Washington at a September conference in Hong Kong. An inaugural meeting of banking officials from the Association of South East Asian Nations (Asean) led by the Japanese government established a central bank forum in early November.

Devaluations hit auto industry

Mitusbishi Motors said it anticipates losses this year of $328 million instead of an expected net profit, partly because of the higher cost of having to service a dollar- denominated debt of some $500 million in devalued currency at a joint venture in Thailand. The auto factory was reported to be clogged with inventory as early as July.

Toyota announced November 5 a shutdown at its two plants in Thailand from mid-November until the end of the year, citing poor sales. The company had announced a week earlier that it was raising production from 4.67 million vehicles last year to more than 6 million by 2000.

I'm very worried. There are lots of rumors and the news keeps changing every day, said Tinakorn, one of the 2,000 workers at the company's flagship plant in Samrong, Thailand.

Four Japanese car companies have dominated the market in Thailand, with over 80 percent of sales. Toyota alone has 30 percent of the market.

According to London's Financial Times, the impact of the devaluations caught the industry by surprise. Japanese auto manufacturers stuck with unsold vehicles had to chop production in August by 10.4 percent. Total car sales in Thailand are forecast to drop by 39 percent to 360,000 units from 589,000 last year.

In mid-September, the Swedish Volvo Car Co. announced a 10-week shutdown of its assembly plant in Thailand because of the currency instability in the region. The plant will be shut for 10 weeks and then we will have to evaluate the situation again, declared Volvo spokesman Ingemar Hesslefors.

With the falling demand for automobiles and other commodities, numerous articles have appeared in the big- business media over the past several months noting a growing concern about excess capacity, especially in the auto industry. The May 10 Economist pointed to the Global pile- up of cars and an article in the September 10 Wall Street Journal reported that a recent study by the Coopers f Lybrand Consulting firm estimated a global excess capacity of 19.8 million vehicles in 2001.

In Japan and other parts of the world, goods prices have been falling combined with a worldwide overcapacity in industries. The wealthy class is worried that the deflationary pressures, which result from the long-term tendency of capitalist profit rates to fall, will intensify price competition among rival capitalists.

At the annual meeting of the World Bank and IMF in Hong Kong on September 20, U.S. treasury secretary Robert Rubin chided Japan's finance minister Hiroshi Mitsuzuka, demanding that Tokyo not attempt to pull out of its economic stagnation by driving down the yen to boost its exports to the United States.

In a reference to these developments, the October 27 issue of the big-business weekly Barrons warned that if the Asian currency turmoil continues to spread, it could lead to the triad of conditions—deflation, competitive devaluations and rising protectionism—that characterized the global Depression of the 1930s.