Chapter 4: 

The Burst of Bubble and Political Economy of the 1990s Depression
 
Makotoh Itoh
 
 
The Japanese economy changed its features in the 1990's, compared with
the 1980's. It shifted down to an extremely lowered growth trend. Its
continuous depression with economic difficulties has gathered
international concern among the advanced countries.  Among the major
causes for such difficulties were clearly the swell of huge bubbles in
speculative trading of shares and real estate in the late 1980's and
the in subsequent collapse.  They brought an enormous amount of bad
loans to the Japanese financial institutions generating credit crunch,
deteriorated assets of firms and households, caused continuous
business failures, and a vicious circle of asset deflation.
 
We saw the swell of bubbles by mobilizing the expansive flexibility of
the credit system and the resultant destructive burst of them not
seldom in the history of capitalist economies. There were for example,
the burst of bubbles in the tulip crisis of 1637 in Netherlands and
the South Sea bubbles incident in 1720 in the UK already in the
nascent period of capitalism, the cyclical crises in the 19th century,
or the great crisis beginning from 1929. In the capitalist world
economy since the late 1980's, the possibility in capitalist economy
to cause speculative bubbles and their burst strongly reappeared. The
Japanese economy could not escape it. Such a process of burst of
speculative bubble may be understood at a certain abstract level by H.
Minsky's post-Keynesian financial instability
hypothesis.\footnote{Minsky, H.P., `The Financial Instability
Hypothesis; A Restatement' (1978) among other essays in Minsky,
H.P.(1982).}  According to this hypothesis, most of firms and
individuals in the Japanese economy in the late 1980's must have
started from the position of hedge finance, in which the cash flows
from assets in position are expected to exceed the cash flow
commitments on liabilities for every period. Then more and more of
them moved to speculative finance, in which the cash flows from assets
in the near future term fall short of the near term contracted
payments, but the expected cash receipts in the longer term are
expected to exceed cash payments that are outstanding. Further at the
last phase of speculative development, increasing number of them came
to Ponzi finance, in which the net income from receipts falls short of
interest payments in both the short run and the long run, so as to
increase outstanding debt, expecting a future bonanza as a solution.
 
However, the general possibility for a capitalist economy to cause
bubbles and their burst, or the hypothetical logic of process of
events is obviously insufficient fully to explain the characteristic
process and the size of destructive damage of financial instability in
the Japanese economy in this period. We have to reconsider also the
roles and functions both of the government and the Bank of Japan in
their fiscal and monetary policies, and of the deepening fiscal crisis
of the State, as well as the possible directions of reconstruction
from the crisis.
 
4.1 The Swell of Bubbles
 
We have to examine first why and how the huge bubbles swelled in the
late 1980's Japan. The bubbles were concentrated into the speculative
trading with rising prices of shares and real estate much faster than
the real economic growth. Their features are shown in charts 4-1 and
4-2. While Japanese nominal GDP grew by 1.35 times in 1985-90, the
average share price in Tokyo stock exchange rose by 3 times, and the
average land prices in Tokyo area and three major urban areas rose by
2.5 times. What are the main factors to cause the bubbles?
 
missing{(Chart 4-1 and 4-2 enter around here)}
 
4.1.1 Initiating Roles of Monetary and Fiscal Policies

The most direct initiating factor for the bubbles in this period of
Japan was given by the fiscal and monetary policies to expand the
domestic demand after the G5 Plaza meeting accord internationally to
cooperate for revising the excessively high exchange rate of dollar
and the trade imbalance.

The preceding Japanese economic recovery since 1983 largely depended
on the expansion of exports to the US market among others. This was
promoted much by appreciation of dollar, which was caused by massive
international capital flow into the US economy being attracted by a
high rate of interest due to Reaganomics (with the crowding out
effect). After the Plaza accord, the appreciated dollar, which had
been a result of speculative capital flow against the basic balance of
trade, began to fall rapidly. In just 8 months until March 1986, yen
appreciated from 240 yen a dollar to 150 yen as dollar declined. This
gave a serious shock to the Japanese exporting industries, and
generated depression.

However, in this 1986 the Nikkei Dow average of 225 share prices began
to rise from 13,137 yen at the beginning of the year to 18,701 yen at
the end of the year by 42 per cent, though it is seemingly
inconsistent with the depressive real economy. This was the start of
the bubble in share prices as shown in Chart 4-1. A most important
factor to cause this was reduction of interest rate. Following the
Plaza accord, the prime rate of the US Federal Reserve Bank was pulled
down from 7.5 per cent at the beginning of 1986 to 5.5 per cent in
August of that year. Correspondingly, the official rate of the Bank of
Japan was reduced from 5 per cent at the end of 1985 gradually to 3
per cent in November, and further to the unprecedented low rate of 2.5
per cent in February 1997 to be kept there until the Spring 1989. The
requested expansion of domestic demand to mitigate the trade friction
with the USA had to be pushed forward mainly by such a monetary
policy, as operation of fiscal policy was restricted by the government
priority task to solve the cumulative budget crisis of the State. At
the same time, monetary policy to lower the rate of interest was much
facilitated by the floating exchange rate system combined with the
increasing foreign exchange reserve in Japan.  Ceteris paribus a fall
in the interest rate elevate the prices of shares and land or the
value of fictitious capitals in inverse proportion through comparison
of efficiency of investment.\footnote{See more in detail in Chapter 5
  of Itoh, M. and Lapavitsas, C.(1999).} In fact, share prices began
to rise in New York Stock Exchange, and then also in Tokyo market in
1986.  Simultaneously land prices in Japan began also to rise sharply
from Tokyo area as we see in Chart 4-2.

In addition, Japanese government deviated from the tightening fiscal
policy to solve the fiscal crisis from the beginning of the 1980's,
and implemented a large-scaled emergency spending policy in a
supplementary budget of 6 trillion yens and added in main to public
investment in the spring 1987. This was to boost domestic demand in
order to mitigate both the depression after appreciation of yen and
the trade friction with the USA. Local governments were also advised
by the central government to extend the regional re-development
projects such as a plan to construct a littoral sub-center in Tokyo
among others. These policies stimulated developers, real estate
agents, constructing companies, and promoted the rise in prices of
land and other real estate.

The Bank of Japan, like many other central banks, was traditionally
much concerned about keeping the value or purchasing power of its bank
note by avoiding general inflation. The general price level happened
to remain stable in the late 1980's, as import prices of energy and
other materials were rather deflationary due to both the effect of
appreciation of yen and the balance between demand supply in the world
market. Therefore, the Bank of Japan easily continued to supply money
funds to enable banks and other financial institutions to expand loans
for speculative trading of shares and real estate, and did not pay
much attention to the danger of swelling bubbles in prices of shares
and real estate. Resultantly, money supply in Japan, which is composed
from total (M2) of cash, deposit payable on demand, time deposit and
negotiable certificate of deposit (CD), continued double digit annual
growth rates from the second quarter of 1987 until the third quarter
of 1990, much faster than the real economic growth.
     
4.1.2 The Economic Recovery with Expanding Domestic Demand

Monetary and fiscal policies would not always work to initiate
economic recovery. In the Japanese economy at this phase they managed
to generate expansion of effective demand, beginning from that of the
wealthier persons and business firms, by increasing capital gains with
rising prices of shares and land.

Consumer demand began to expand initially for luxurious expensive
commodities such as sophisticated residential units, big passenger
cars, fur coats and jewels for wealthy persons. Department stores and
other fashionable shops expanded their corners for high-grade
expensive goods with world famous brands. As Japanese firms were
largely restricted to maintain exports by appreciated yen, they
attempted anew to dig up domestic demand for their products by
multiplying models in accord with market trends.  It used to be said
that they discovered and were digging up the second largest consumer
market in the world. Expansion of consumer credit with lower rates of
interest often combined with card-system of payment was positively
promoted as a part of such an endeavour.

When prices of houses and land began to be noticed as rising, the
demand for residential units in condominiums, and houses began to
expand rather than to decrease in these years. As there was continuous
shortage of housing units in the Japanese economy in the post World
War II period, especially in urban areas with rapidly growing number
of families, prices of housing units and residential land continuously
rose and did never fall.  People believed that residential units and
land are most secure assets to have. For a great number of working
people, it seemed one of greatest tasks in their life to obtain a
housing unit for their family sometime in their career before
retirement. Against these background, once prices of housing units and
residential land began to rise conspicuously, an expectation easily
spread that the earlier the purchase, the bigger the capital gain from
rising asset prices obtainable. Such an expectation moved people more
and more generally beginning from wealthier persons.

More and more the rising prices of residential units and land fostered
the expansion of their demand to gain earlier and more widely. As we
shall see in the next section, banks positively promoted housing loan
since the late 1970's, and swelled it in these years in late
1980's.\footnote{The total amount of Japanese housing loan given in a
  year increased from about 17 trillion yens in 1986 to about 28
  trillion yens in 1990 (Imura, S. (1997), p.161.). Though it included
  both public and private loans, the part of private loans mainly by
  banks occupied an overwhelming proportion both in the absolute
  amount and in its increment. When Japanese banks began to expand
  housing loans in the late 1970's, they initially set up specialized
  housing loan companies as non-banks to channel their loans. However,
  soon they began to extend housing loan directly so that the
  specialized housing loan companies were forced to go on expanding
  more risky loans on real estate for business firms.} Beginning from
the third quarter of 1986 until the first quarter of 1988, private
investment in houses continued to surpass its level at the same period
of the previous year. Many people were advised by real estate agencies
and banks to realize capital gains by selling their housing units, and
repurchase new larger units by means of easy housing finance with a
lowered interest rate. Many of them followed the advice and
repurchased also cars, furniture, electric appliances, and apparels
often by means of consumer credit.

At the same time, demand for office rooms also swelled especially in
the metropolitan area.  As international activities of firms rapidly
expand, the headquarters of firms seemed better and convenient to
locate at the metropolitan area nearer to the international financial
and business center. Therefore, many companies, which traditionally
had based out of the metropolitan area, especially in Kansai (around
Osaka) area, shifted their headquarters to Tokyo area. As
globalization proceeded, many of foreign companies moved into Tokyo
area and opened their branches or offices.  Corresponding to such
movements, construction of office buildings became a boom in these
years, and promoted the rise of land prices beginning from Tokyo area.

The feeling of economic recovery and prosperity thus spread from
constructing industry more generally to manufacturing industries
following the expanded domestic demand. So far as the Japanese firms
relied upon expansion of domestic demand, they could utilize both the
lowered rate of interest and the lowered yen prices of imported raw
materials and oil as favourable conditions for their profitability. As
many of them mutually had shares of companies in the same keiretsu
(groups of business companies) as well as land at book values
purchased, a rise of prices of shares and land formed latent asset
value and strengthened their financial position.  Many of Japanese
firm also accumulated idle money fund not just by retained profit but
also by means of equity finance or issuing new shares, convertible
bonds (CB) and warrant bonds (WB) both domestically and
internationally so as to utilize the low rate of interest and
appreciation of yen. They used a part of such money fund to expand
plants and equipment or offices, but spent largely for zaitech
(financial technique) or speculative financial operation to obtain
capital gains by rising prices of shares and real estate.  Bubbles of
prices of shares and land were very much accelerated by such zaitech
among capitalist firms.

As the domestic demand expanded, Japanese investment in plants and
equipment was activated after many years of depression, and increased
for three years from the beginning of 1987 by double digit per cent
when compared with the same quarter of the previous year. The Japanese
economy seemed to enjoy recovery and boom throughout almost all
industries including raw material suppliers. The great depression
appeared solving by the domestic market oriented economic growth for
the first time after 1973. The panicky fall of share prices following
the black Monday in October 1987, did not much prevent this expansive
trend in real economy, and passed away as an tentative episode for the
economic recovery. The average annual rate of real economic growth in
the fiscal years during 1987 and 1990 recorded 5.2 per cent.

However, the economic recovery in these years contained fragility and
distortion in its character, as it was led and fostered by the bubbly
swell in asset prices. Certainly the rise in prices of shares and real
estate was not just empty illusion. It caused and reflected the
recovery and growth of real economy to a certain degree. Nevertheless,
so far as it went up far more than the growth of real economy, it
included more and more the fictitious nature sooner or later to
collapse. The expansion of domestic demand led by capital gains from
such fictitious swelling of asset values was also largely fictitious.
Its nature was different from the more steady and substantial growth
of domestic demand based upon the continuous rise of real wages almost
in line with a rise in labour productivity in the period of high
economic growth. Investment in plants and equipment in manufacturing
industries like in the automobile industry was promoted also much by
the bubble economy, and easily increased large production lines to
produce more sophisticated and multiple models by expensive
facilities. This was actually preparing a great difficulty for firms
to cope with the massive and expensive excess capacity in the
subsequent long depression through the 1990's.  In the meanwhile,
unlike the speculative boom at the beginning of the 1970's, there was
not much inflation or general rise in prices in this boom in the late
1980's despite of increasing supply of money and credit.  This would
make a good counter-example to the quantity theory of money.  The
reasons were found in declining yen prices of imported raw materials
and oil, as well as stagnant slowness of the rise in wages, basically
reflecting the balance between demand supply in the global and
domestic market plus the effect of appreciation of yen. Actually the
whole price index continuously fell than the previous year in
1985-88. Against these background the speculative bubbly trading was
more conspicuously concentrated into the stock exchange and the real
estate markets as an outlet for ample and cheap supply of money and
credit.
   
4.1.3 The Roles of Financial System

In comparison with other advanced countries, the Japanese saving rate
of households has been high. This is an important factual basis to
examine the functions of financial system in Japan. The Japanese
average household saving rate at GNP basis was about 15 per cent in
the period of high economic growth. It rose to 23 per cent in the
middle of the 1990's, and then fell slowly so as to maintain still
about 15 per cent.\footnote{There are two series of statistics on the
  rate of saving in the Japanese economy; one is based on the GNP
  statistics (S-GNP), and the other is based on the survey of working
  households (S-SWH). While these two roughly showed similar
  movements, they became rather widely different in the 1980's. We
  refer to the motion in S-GDP here, which is lower than S-SWH.  The
  factors to make the gap are analyzed by Adchi, M.(1993). For
  instance, the interest and principal return payment for debt by
  households are counted as saving in S-SWH. To certain extent, the
  relatively high rate of saving among Japanese households may be
  understood in a model as follows.  Assume that all the workers spend
  five times of their average annual income in order to obtain their
  own houses once in their 35 working years.  Assume also that their
  saving is to be used just for obtaining their own houses either by
  purchase or (re-)construction. Then in average they have to save one
  seventh or 14.3 per cent of their annual income so as to obtain a
  house by the year of retirement. This saving rate roughly matches
  the actual number in the text.} There is no definite theory to
explain why it has relatively been high. Historical and institutional
factors such as follows must have worked together.

Namely, as Japanese working people have been worried for the life
after retirement reflecting the insufficient social welfare,
especially with extending average span of life in the nuclear family.
They have been facilitated to save by continuous increase in
disposable household income, the bonus system to receive about 4-6
times of monthly wages twice or three times a year, and the custom of
retirement pay for regular workers often 2-4 times of yearly wages.
They also needed to save to purchase a relatively expensive
residential unit each for their family by the time of their retirement
to settle the housing problem for the rest of their life.  In the
period of high economic growth, banks and other financial institutions
could easily collect such household savings with nearly zero real rate
of interest. Main banks for each keiretsu group in cooperation with
other financial institutions poured the collected fund into loans for
investment in plants and equipment of big businesses. This function of
financial institutions pumping the household saving into investment in
plants and equipment formed the so-called over-loan tendency of the
Japanese big businesses, and served as an important basis of high
economic growth in this period.

In the process of economic crisis and restructuring since 1973,
however, such a close relation between banks and big businesses
changed greatly. Along with both transition to the low economic growth
trend and spread of ME information technologies, big businesses
reduced down the scale of investment in plants and equipment.
Correspondingly, they attempted to reduce debt by returning borrowed
fund more and more in order to cut down interest payment as a part of
economizing the costs of operation. Further, in the 1980's the
increasing number of big firms accumulated their own financial assets
more than their financial debt, and thus went through the 'golden
cross' so as to earn net revenue from their financial operation.  Such
net financial asset was formed by retained earnings as well as by
equity finance. More and more big firms utilized direct finance,
instead of indirect finance through banks, to obtain monetary fund
directly at capital market by issuing new shares, CB, WB, and SB
(straight bonds) with cheaper costs.  Especially in the late 1980's,
with appreciation of yen, international direct finance in terms dollar
often enabled Japanese big firms to obtain monetary fund often with
negative rate of interest or negative costs in terms of yen. When
share prices began continuously rose, direct finance in the form of
equity finance by issuing new shares or some bonds with right to
obtain shares in certain conditions (like CB, and WB) became easier to
use. Thus the amount of money funds obtained by equity finance for the
listed big companies in Tokyo Stock Exchange widely increased from 4
trillion yen in 1983 to 28 trillion yens in
1989.\footnote{Haga,K.(1993),(1994),(1995) present fine analyses of
  the Japanese bubble economy in this period with useful statistical
  data, to which I owe much in the following related paragraphs.}

In the late 1980's investment in plant and equipment recovered and
increased after many years, but it was around 5 trillion yen in 1987,
and 9.7 trillion yen in 1989 at most. Many of firms could self-finance
such a size of real investment by retained earnings and just a part of
equity finance. Therefore they utilized a large part of huge amount of
monetary fund obtained by equity finance in zaitech speculative
trading of financial asset or real estate beside foreign investment
with speculative trading of foreign currencies. This was a major
source of speculative swell of bubbles.  Let us examine some
statistical evidence.

In 1985-89, the total market price of shares of listed companies
swelled from 196 trillion yens to 630 trillion yens (1.6 times of GDP)
by more than three times. In 1985-90, the units of shares listed
increased by 21 per cent or 66.6 million units in real number. Of
these increased shares, business firms obtained 34 per cent, financial
institutions 36 per cent, while individual persons got only 17 per
cent, and investment trusts 17 per cent. Of total existing listed
shares in 1989, financial institutions held 42.3 per cent, business
firms 24.8 per cent, while individual persons occupied only 22.6 per
cent. This shows a characteristic of the Japanese economy as corporate
capitalism, in contrast with the US economy, where individual persons
own almost 60 per cent of existing listed shares. So long as
corporations mutually own continuously a large part of existing
shares, the floating shares in the market are relatively scanty, and
are more easily subject to speculative rise of prices. Into such a
share market, business firms and life insurance companies injected a
large quantity of monetary fund directly or indirectly often in the
form of designated fund trust through trust banks and security
companies. The estimated outstanding amount of such designated fund
trust increased from 5 trillion yens at the end of 1985 to the huge
amount of 37.6 trillion yens at the end of 1989.  Apparently the
bubbly swell of share prices in these years in Japan was led by
zaitech speculative trading among big business firms and financial
institutions, though individual persons were also involved.  In the
meanwhile Japanese banks tended to loose more and more of big
businesses as borrowing customers. They began to be threatened also by
increasing competition with postal offices and insurance companies to
sell new models of financial commodities to individual households by
means of information technologies.

Therefore, Japanese banks positively expanded their business
activities abroad, especially in the latter half of the 1980's by
utilizing the appreciation of yen. Between the end of 1985 and the end
of 1989, for example, the outstanding amount of Japanese international
banking asset increased widely by 30 per cent at annual average, to
reach 1967 billion dollars. Its share in total international banking
asset sharply increased from 26 per cent to 38 per cent in the same
period. Such rapid expansion of Japanese international banking
operations gathered international financiers' concern and worry if it
include reckless and imprudent loans.  Therefore, Bank of
International Settlement (BIS) made up an agreement on capital
adequacy requirements (Basel agreement) in 1988. This agreement
required banks doing international business to maintain own capital
more than 8 per cent of asset (after adjustment according to the
different kinds of asset groups) after the end of 1992. Japanese banks
asked and obtained allowance in the agreement to include 45 per cent
of their latent asset of holding share prices, or the latent capital
gain between current prices and booked old prices of shares they hold,
into own capital. So long as share prices continued to rise, the Basel
agreement seemed easy to clear with such an allowance. Thus Japanese
banks assumed that they can go on to expand loans in accord with the
international common rule in the process of swelling bubble economy.

However, main domestic borrowers for Japanese banks greatly changed
from the big businesses in the previous period of high economic growth
to medium and small businesses, especially in the field of real estate
agencies or constructing companies, non-banks such as specialized
housing finance companies without receiving deposit, and individual
persons. Though there was such substantial change in contents, the
annual average rate of increase of total asset (mainly the remaining
loans) of 151 Japanese major banks (including city banks, regional
banks, and trust banks) rose from 9.6 per cent in 1980-84, to 16.6
per cent in 1985-89. Especially it reached 28.9 per cent in 1989.
While the annual average rate of increase of total loans of those
banks was 12.2 per cent in 1985-89, and 16.1 in 1989, that of loans
to real estate business was 14.1 per cent in 1985-89, and 24.3 per
cent in 1989. The annual rate of increase of loans to non-bank and
other financial business was 30.4 per cent in 1985-89 and 21 per cent
in 1989. According to a survey by the Ministry of Finance, the total
inflow of loans to real estate market at the end of 1991 reached 120
trillion yens. Of those total loans, major banks owned 59 trillion
yens, and non-banks owned 50-55 trillion yens. As the source of the
large part of non-banks' loans was borrowing from the banks, it is
clear that the huge bubble in the form of swelling prices of land and
other real estate was substantially facilitated by the inflow of money
fund or loans directly or indirectly from banks.

The resultant capital gain just by land prices in 1988 amounted to 416
trillion yens, or 1.21 times of GNP of that
year.\footnote{Tsuru, S. (1990) p.5. By the way, so far as the great
  part of land was not transacted, the large part of such an amount of
  capital gain was just in calculation and in a sense imaginary. As
  for the realized part of capital gain, its source may not be
  confined within the annual flow of income or surplus value produced
  by surplus labour of the society.  A significant part of it must
  rather be in redistribution of monetary asset as a stock. This can
  be applied to the source of capital gain obtained by a rise in share
  prices. Conversely, capital loss occurs as destruction of fictitious
  asset values, and may not directly mean a minus of income flow or
  reduction of surplus value. Marxist theory of surplus value should
  not too directly be applied to such gains and losses.} Although the
similar bubbly rise of land prices occurred also in the USA, the
capital gain by land prices remained there just about 3 per cent of
GNP in the same year.  In comparison, the Japanese bubble of land
prices was enormous. In about 1989, the total land price in Japan was
estimated as 4 times more than the total land price of the USA. Since
total area of Japan is one twenty-fifth of that of the USA, the
average price of Japanese land would be 100 time more than that of the
USA. The land prices in Tokyo area and other large cities were much
more expensive than the national average.

Including such a rise in already expensive land prices, the average
price of residential units also rose. For instance, the average price
of a condominium unit in the metropolitan area increased from 35.8
million yen in 1987 to 61.2 million yen in 1990 by 71 per cent in just
three years.\footnote{Fudosan Kenkyusho [Research Institute of Real
  Estate] (1997).}  In comparison with the average annual income of
workers' households in the same metropolitan area, it increased from
5.5 times of annual income to 8 times in these years. Obviously unfair
and uneven redistribution of wealth, which was not at all related to
individual personal industry or diligence, took place in a great scale
between old owners and new purchasers of land and housing units. As
the real estate prices rose rapidly, the average amount of loans of
those, who purchased their houses and lot separately or built houses
on owned lot, also widely increased from 16.7 million yen in 1987 to
23.4 million yen in 1990 and further to 27.4 million yen in 1992. As
it became too hard to set up a necessary amount of loan to purchase a
residential unit on a shoulder of a single person, banks and other
financial institutions not seldom promoted housing loan projects with
contracts of return payment over two generations.

Along with the increasing speculative demand for real estate, banks
and other financial institutions' easy expansion of loans positively
promoted speculative purchase and trade of office buildings, houses,
condominium units, empty land, and further vendible memberships of
golf clubs. Soaring prices of shares and real estate were regarded as
secure mortgages for banks and other financial institutions to set up,
expand or renew loans to business firms and individual persons.
           
4.2 The Burst of Bubbles and the Depressive Pressure

4.2.1 The Process of Collapse of Bubbles

The bubbly elevated prices of shares and land, which went up by
speculative transactions far beyond the trend of real economic growth,
were destined to setback. It was, however, hard to predict when, and
how the setback would cause reciprocal reactions with real economy.

Turning points came in 1989. Internationally, the appreciation of yen
peaked out in 1988, and yen began to slide down. At the same time, the
dollar price of oil turned upward. The Japanese wholesale price index
thus had to go up beginning from import prices. Domestically, as a
result of continuous broad economic recovery, the rate of unemployment
declined to 2.2 per cent and the active vacancies ratio (i.e. the
ratio of vacancies over applicants) went up beyond 1.3 in 1989,
reflecting the actual shortage of labour-power. Consequently the wages
in manufacturing rose fairly widely by 6.5 per cent in that year.

In the meanwhile, the US Federal Reserve Bank raised the official rate
from 5.5 per cent in 1986 gradually to 7 per cent in 1989. The widened
gap in the rates of interest between the USA and Japan induced more of
international capital flow and thus served as a cause of tendentious
fall of yen against dollar. Under these circumstances, the Bank of
Japan pulled up the official discount rate from 2.5 per cent in the
middle of 1989 three times to 4.25 per cent at the end of that year so
as to prevent inflation.  It was anticipated that the Bank of Japan
would raise the official rate soon again in the early 1990. Actually
the official rate was elevated to 5.25 per cent in February 1990, and
further to 6 per cent from the summer 1990 until the autumn 1991.

As we have seen, the Nikkei Dow average of 225 shares in Tokyo Stock
exchange began to rise from 13,137 yens at the beginning of 1986 to
38,915 yens at the end of 1989 almost by three times. As the lowered
interest rate promoted the speculative zaitech mainly among business
firms and financial institutions to swell such bubble in prices of
shares besides land prices, the elevated interest rate served as a
decisive factor to setback the bubbly share prices. The Japanese share
prices actually turned to a falling process from the very beginning of
1990. The Nikkei Dow average fell by about 10,000 yens or by 25 per
cent already by March 1990. The capital loss in the financial asset
was estimated to reach 160 trillion yens by that time. The fall in
share prices did not easily stop in the following years. The Nikkei
Dow average declined to around 150,000 yens, or to the level of 38 per
cent of its peak in the latter half of 1992. The estimated capital
loss just in the share market by that time amounted to 430 trillion
yens. The Nikkei Dow average slid further down below 130,000 yens in
the autumn 1998.  The Japanese bubble economy entered into the process
of collapse from 1990 with such a fall in share prices. However, the
prices of land did not instantly synchronize with share prices. As we
see in Chart 4-2, the peak in land prices was shown in 1990. The land
prices in three major urban areas did not fall much below that peak
even in 1991, and remained higher than the level in 1989. The decline
in land prices came in more slowly than that in share prices, became
conspicuous from 1992, and proceeded persistently in the following
years. The real economic growth rate also maintain a relatively high
level of 5.1 percent in 1990 despite of the fall of share prices, and
entered into depression from the spring 1991.

What did signify the difference in timing of the processes of collapse
of bubbles? There worked several factors.

Initially the business firms and financial institutions still had a
lot of latent capital gain in mutually owing shares of companies in
the same keiretsu group, and sufficient money funds obtained by equity
finance in the bubble economy. Therefore, most of firms need not yet
to sell out their idle land or to abandon the projects to acquire the
real estate or investment in plants or in area development. Banks also
could assume that they could maintain the loans relating the land and
other real estate upon the basis of their latent capital gain of share
prices even under the BIS regulation to keep at least 8 per cent of
own capital against total asset.  Various real estate developing
projects such as the plan to construct Tokyo littoral sub-center took
long time to complete, and were difficult to stop in the middle of
construction. Business firms and individual persons tended to believe
in the myth on tendentious rise of land prices and often continued the
speculative trading of land and other real estate, by expecting to
offset the capital loss in share prices by the capital gain in land
prices.  Similarly, investment in plants and equipment continued to
maintain a fairly high level until about the spring 1991, despite of
collapse in share prices. Projects to construct plants and equipment
also often take long time to complete. Many firms already had obtained
sufficient money fund by equity finance among others to continue the
construction projects.  Investment demand seemed still considerably
strong.

However, the land prices, which had been swollen by speculative
trading using flexible credit expansion, could not continue to
maintain the widening gap with the falling share prices, and the
bubbly distance from the real economic basis. The government, the Bank
of Japan, banks and other financial institutions became worried about
the worsening loans relating the real estate market, seeing the
contemporary wave of bank failures in the US economy. For example, the
Ministry of Finance advised banks to regulate total quantity of loans
to real estate in April 1990, and thus concretely expressed such a
worry. Nevertheless, banks initially continued to roll over, and even
to expand loans relating with real estate, often through the tunnel of
non-banks. They believed together with many business firms and
individual persons that the land prices would sooner or later come
back to the upward trend again to solve the current worsening loans in
relation to real estate, and tended to postpone the sharp collapse of
bubble of prices of land.

In such a process, however, banks had to see a fall in the ratio of
own capital against the total asset, as their loans to real estate
even through non-banks one-sidedly increased with less return payment.
This situation proceeded, because the stockpiling of real estate at
highly speculative prices became more and more difficult to realize.
The reduction of banks' latent capital gains in prices of holding
shares also worked to the fall in their ratio of own capitals. Since
Japanese banks were positively expanding the international banking
activities, they had to follow BIS Basel agreement to keep the ratio
of own capital against total asset more than 8 per cent from April
1993. To meet this regulation, banks had to restraint loans, and had
to strengthen credit crunch resultantly.\footnote{Lapavitsas, C. (1999)
  presents a detailed analysis on the financial instability in current
  Japanese economy, by underlining the central position of banks in
  the whole economy.}

Accordingly, an increasing number of firms among medium and small
firms, especially in the field of real estate business, were enforced
to restrict and further reduce their business, as they had depended
much on borrowing from banks and non-banks to expand their activities.
Such like Toyota which constructed a huge new plant in Kyushu island,
big firms also had to reduce investment in plants and equipment, when
their newly built capacity to produce began to work with much
increased supply effect after the gestation period for construction.
The intensified competition worsened their profitability, and the
reduced investment demand spread the depressive feeling broadly.

Thus when the Japanese economy entered into the actual depression
clearly from the spring 1991, the effective demand for office rooms,
vacant land, residential units, and membership of golf clubs began
largely to contract, enforcing a decline in their prices. An obvious
decline in land prices in Tokyo area and in three major urban areas in
1992 shown in Chart 4-2 exemplifies such a general movement. As we see
in the same chart, the decline in land prices persistently continues,
though more slowly than share prices. Resultantly, the land price fell
to one half of the peak in Osaka area, and to about 60 per cent of the
peak in Tokyo and three major urban areas. The fall in asset prices in
such a scale has destructively worked and continuously depressed the
Japanese economy in the 1990's.
 
4.2.2 The Complex Linkage of Depressive Spiral

It is estimated that the total meltdown in Japanese asset values
mainly by the fall in prices of shares and land amounts to 1,000
trillion yens (about one half comes from financial asset and the other
half from real estate). This caused an important basic tone for the
complex depression in the 1990's, which is composed from depression
both in stock and flow of the economy.\footnote{Miyazaki, G. (1992)
  presented a pioneering analysis to characterize the 1990s depression
  as a complex depression of stock and flow, as the adjustment process
  of financial stock induced a minus growth in flow of DNP. His
  analysis was, however, insufficient in identifying the depression
  factor of flow just with a short-run inventory adjustment.  The
  actual depression of flow economy was more serious, going deeper to
  the increasing pressures of excess capacity and unemployment with
  depressed consumer demand and investment. Takumi, M. (1998) then
  defined the 1990s Japanese depression as of a `Great Crisis (from
  1929) type' with the deflationary spiral, not having a cyclical
  nature. In my view, this definition is dubious, as the monopolistic
  behavior of big businesses is not so crucial to the difficulties of
  the contemporary Japanese economy unlike in the 1930's. The workings
  of monetary and financial system under the floating exchange rates
  system with managed currencies are also different from those at that
  time. Historically, comparison with the great depression in 1873-96
  must also be attractive, as it was non-explosive but more persistent
  than the Great Crisis.}

As latent capital gains in prices of shares and land as stock melt
down, many of business firms can hardly expand their activities either
by self-finance or by borrowing on mortgage. They tend to lose the
flexible power to resist against the repressive pressure by the credit
crunch.

Thus, as business firms had to restrict and reduce their activities,
the employment conditions became severer, and the real wages
stagnated.  In 1993 the real wages actually declined. Wage income for
overtime work was also cut down. Resultantly the real disposable
household income (i.e.  real household income minus taxes and social
security payments) began to fall from 1993. Therefore the consumer
domestic demand had to cool down, and the depression deepened in the
aspect of flow of household income.

Correspondingly, the capacity utilization rate in Japanese
manufacturing firms widely declined in the 1990's as it was shown in
Chart 1-1. With huge excessive capacity to produce, Japanese firms
sharpened mutual competitive pressure in the market. Thus a vicious
circle for depressive spiral was set in the Japanese economy among
falling pressures in prices of shares and land, in workers' household
income, as well as in the markets for products and services.

As a reaction to the depressed domestic market, Japanese firms
intensified attempt to export again. However, as the trade surplus
resultantly increase, yen appreciated widely and gave a severe
difficulty to Japanese exporting industries. The yen exchange rate
with a dollar in yearly average appreciated from 145 yen in 1990 to
127 yen in 1992, and more to around 100 yen in the late 1994. Further
in 1995, as credibility of dollar was shaken with the monetary and
financial crisis of NAFTA (North American Free Trade Agreement)
beginning form the Mexican crisis, yen appreciated against a dollar to
79.75 yen in April. As we noted in the previous chapter, such an
appreciation of yen in these years gave a serious difficulty to
Japanese exporting industries, and promoted them to transfer their
factories abroad with a tendency for industrial hollowing out.

Thus, the Japanese economy continuously deepened depression both
domestically and from international relations, and failed to join the
economic recovery in the USA and other advanced economies since 1993.
Hansin-Awaji great earthquake in January 1995 gave an additional shock
especially to Kansai region, the second largest business center in
Japan.  The rapid decline of birthrate and transition to an aged
society is another important basic factor to repress the Japanese
economic growth rate. All in all the Japanese economy has come into an
extremely lower growth trend compared with the growth trend until the
1980's, not to say with the trend in the period of high economic
growth.

In reciprocal reaction with such a continuous difficulty in real
economic growth, the destructive pressure from the asset deflation to
generate bad loans in banks and other financial institutions also
continues and repeatedly intensifies. When Financial Times reported in
May 1992 an estimation of total bad loans in Japanese banks as about
42-56 trillion yens, or around 10 per cent of their total loans of
450 trillion yens, the Bank of Japan instantly announced an objection
that it was too exaggerating.  In March 1994, an official estimation
defined that the total amount of bad loans (those impossible to
collect, and those payment deferred more than 6 months) in city banks,
long-term credit banks, and trust banks was 13 trillion and 570
billion yens. This number was clearly underestimation in order to
avoid financial unrest, by neglecting a large portion of practical bad
loans whose interest payment was enabled by new additional loans
through the tunnel of non-banks. Such an operation to cover up the
substantial bad loans was regarded as necessary and reasonable not to
reckon up the decisive loss by such loans as a whole, in so far as the
asset prices in mortgage were still expected to recover. The operation
could not continue, however, as the expectation for asset prices to
recover failed to realize. Actually, after several years of attempt to
reduce bad loans, in January 1998 a survey of the Ministry of Finance
revealed that the total of bad loans still amounts to 12 per cent of
total loans of various banks, or 76 trillion yens. (The definition of
bad loans in the survey refers to loans impossible or seriously
worried of the possibility to collect, and those require appropriate
risk control). Even this amount can easily increase more, if the asset
deflation goes on.

The Bank of Japan reduced the official rate of discount from 6 per
cent in 1990 step by step to 1.75 per cent in 1993, further to 0.5 per
cent in September 1995, and maintained that unprecedented low interest
rate for four years by now.  This monetary policy clearly intends to
mitigate the huge difficulties of banks and other financial
institutions with a huge amount of bad loans. With such a monetary
policy, disposal and liquidation of Japanese bubble especially
relating speculative trading of land and other real estate has taken
much longer time than otherwise. For instance, it is often commented
in comparison that in case of the USA liquidation of bubbles in the
same late 1980's was taken place in shorter time through a wave of
failures of financial institutions. However, in case of Japan, the
size of bubble in relation to real estate was huge when compared with
the USA, as we have noted. The scale of many banks and other financial
institutions are also much bigger, not easily to be allowed to fail in
a wave from the view of the government and monetary authority. Thus
liquidation of difficulties in Japanese banks and other financial
institutions had to go gradually with official support including
almost zero official rate of interest.

As we shall see soon in the next section (4.3.2), a huge amount of
public money was also injected for rescue operation of banks and other
financial institutions besides additional public investment. These
monetary and fiscal policies were enabled by a large amount of foreign
exchange reserves with continuous trade surplus. Though they brought
serious distortions in income redistribution and prolonged the
depression in the Japanese economy, they were still of some effect not
to cause an acute total crisis of deflation spiral unlike in the case
of the US Great Crisis from 1929.

Despite of some effect of supportive monetary policy, however, the
latent capital gains in prices of shares held by banks continued to
melt down. Then, the BIS 8 per cent regulation, which allowed to count
45 per cent of the latent capital gains in share prices into own
capital of banks, turned to torture Japanese banks more and more
severely. In order to keep own capital more than 8 per cent of total
asset as international banks, they had to press down total asset by
reducing loans. This worked to worsen the real estate market through
credit crunch, affecting not only directly the real estate business
but also broadly business activities especially of medium and small
firms. The worsened real estate market deteriorated the mortgages and
expanded bad loans by a fall in prices of land and other real estate.
Thus the financial positions of banks and other financial institutions
were further worsened to complete a vicious circle.

As the complex depression continued including such successive
difficulties in financial institutions, scandalous illegal financial
operations which expected a recovery in prices of shares and land
failed to be covered and were revealed one after the other. The
general belief that banks and other financial institutions in Japan
would not fail any more in the post World War II period was broken
down. Actually failures have occurred intermittently among banks and
other financial institutions including the biggest class of them. For
example, Hokkaido Takushoku Bank (the leading bank in Hokkaido
region), Yamaichi Security Company (one of top four security
companies), Sanyo Security Company, and Tokuyo City Bank failed in
November 1997. These failures together with the Asian monetary and
financial crises in process gave a serious impact to the Japanese real
economy including the employment situations.

In retrospect, the Japanese economy intensified its characteristics as
a company-centered society through its whole process of continuous
economic crisis and restructuring. By spreading ME automation systems,
the proportion of female irregular workers was increased. While real
wages was stagnated, international competitive power of big businesses
was strengthened. The financial structure of big businesses was
improved, forming a large quantity of idle money fund and the latent
capital gains through zaitech with equity finance. The swell of huge
bubbles in prices of shares and land in the late 1980's was in a sense
a result of such a success of Japanese capitalism to strengthen a
company-centered character of the society. Dialectically the
consequent results of such a success brought a series of setbacks to
the Japanese economy in the 1990's. As the huge bubbles collapsed, a
vicious circle between asset deflation and financial instability with
bad loans continued to proceed. The appreciation of yen accelerated
industrial hollowing out. The fall in birth rate and depopulation
especially of young productive generation is causing a rapid trend for
aged society. All of these setbacks were the results of formation of
excessively company-centered society in one way or the other as we
have seen. Since all of them are not yet solved and over, the Japanese
economy will have to grope its way probably still along the trend for
an extremely low rate of growth, though a tentative short recovery may
always occur.

Moreover, after almost a decade from the end of the bubbly economy,
there still remains a serious concern on the possibility to see a
sharp financial crisis in relation with cumulative bad loans and asset
deflation, besides these setbacks in the Japanese economy. In
addition, there is a larger fear of global crisis possibly due to the
burst of recent bubble in New York Stock Exchange. Though it is in a
sense remarkable that the Japanese economy with so serious setbacks
managed not to have seen so far an explosive total crisis unlike the
great crisis after 1929, we are not at all live in a reliable and
stable economic order.

What roles then did economic policies play in such a process and
setbacks in the Japanese economy?
 
4.3 The Failure and Confusion in Economic Policies
 
4.3.1 The Failure of Neo-liberalism

The fact that the Japanese economy has been suffering from the endless
vicious circle of setbacks and instability is a clear evidence to show
a failure of neo-liberalism. As neo-liberalism has become a dominant
tone for Japanese economic policies since the beginning of the 1980's
following the UK and the USA.

Although Keynesianism dominated the capitalist world in the post World
War II period until the 1970's, it could not prevent or solve the
inflationary crisis at the beginning of 1970's, rather worsened the
situations by promoting inflation, and lost its prestige. Thereafter
neo-liberalism became the basic trend for economic policies in major
capitalist countries for economic recovery. Against Keynesianism, it
demands to reduce the economic roles of the State, and believes in a
competitive market order to achieve a rational and efficient economic
order.  As we have noted in Chapter 3 (section 3), it is not just a
simple reaction to Keynesianism, but has a character suitably reflect
in economic policies the direction of restructuring among capitalist
firms. By introducing ME information technologies, capitalist firms
has re-intensified flexible competition in a market, through
multiplying models of products, relocating factories and offices both
domestically and internationally, and developing labour management to
increase non-regular part-time workers.

The neo-liberal economic policies in Japan was initiated and promoted
by five reports of the second blue-ribbon commission on the
administrative reform in 1981-83. These reports recommended a series
of administrative reform for reconstruction of a balanced national
budget without tax increase.  Following the recommendations in the
reports, financial support to health and medical service expense, as
well as subsidies to private universities and colleges, was cut down.
Three State-owned enterprises---the Japan National Railways (JNR), the
Nippon Telegraph and Telephone Public Corporation (NTT), and the Japan
Tobacco and Salt Public Corporation---were privatized in 1985. It
became generally believed that the basic strategy for economic
recovery must be in the vitality of private firms to pursuit profit
upon the competitive market principles. Militant trade unions had
better be dismantled in such a neo-liberal spirit. Actually the JNR
trade union active members were discriminately discharged in the
process of privatization. Among others this gave a serious damage to
the Japanese left wing of trade union movements. As a result, the
General Council of Trade Unions in Japan (Sohyo), which had been the
national center of left trade unions, had to dissolve itself in 1989,
and was unified into the Confederation of All Private-Sector Trade
Unions (Rengo), which is more cooperative with firms. Thus Japanese
firms have been facilitated to implement managerial strategies to
economize labour costs in various ways flexibly by means of
information technologies. The labour laws and regulations in labour
relations have been also altered so as to enable firms to use various
types of workers flexibly in combination.

Under the neo-liberal policy trend to believe in free competitive
market principles, Japanese big firms introduced broadly ME
information technologies, 'rationalized' labour management, suppressed
real wages, and re-intensified international competitive power.
Company-centered endeavour to improve profitability obtained workers'
cooperation, managed to increase trade surplus, appreciated yen.
Japanese model of management attracted global attention as a
successful model to overcome the economic crisis. Indeed, Japanese big
firms improved their financial positions, accumulated a large amount
of money fund both by retained profit and by equity finance in
domestic and international capital market. They expanded foreign
investment, rapidly increased Japanese external asset, and swelled
foreign exchange reserve. With appreciated yen, national income per
capita in Japan surpassed that in the USA, and Japanese
company-centered restructuring under neo-liberalism seemed really a
miraculous success story.

However, neo-liberal belief in competitive market principles did not
actually realize a rational, efficient and fair economic order. Wide
fluctuations in foreign exchange rates along with an enormous amount
of international flow of speculative fund have anarchically caused
unduly economic loss and damages to a broad range of firms and workers
in the affected industries. At the same time, the whole process of
swelling the huge bubbles and the subsequent damage of their burst as
a result of company-centered profit making within free market
principles clearly revealed the fundamental instability of speculative
development, intrinsic in free competitive capitalist market economy.
Neo-liberal economic policies could not do anything to this irrational
and unfair economic disaster. They rather promoted a political and
social atmosphere to admit company-centered speculative profit making
in the name of market principles, and in fact worked also to ferment
and to encourage private moneymaking even among politicians and
bureaucrats as if it were a natural right in economic activities.
Scandalous corruption and unfair grafts have continuously been
exposed. Though Japanese bureaucrats had been regarded as an excellent
contributor to the success of the Japanese economy together with the
Japanese model of company management, their credibility, prestige,
real functions and confidence were largely discounted in the 1990's.

Neo-liberalism could not only achieve its promises, but it also could
not make a consistent policy system in the contemporary societies.
Political intervention to the market economy by means of operation of
fiscal and monetary policies can not be eliminated. For instance, the
Japanese government and monetary authority positively operated
economic policies to lower the rate of interest from the end of 1986,
and to add a large quantity of public expenditure in spring 1987.
These policies were a result of international politics to answer to
the US government's strong request to expand Japanese domestic demand
in order to mitigate the trade friction.  As we noted, the resultant
monetary and fiscal policies at that time obviously worked to initiate
and promote the bubble economy. It was then an inevitable policy
option to cause a setback of excessive speculative bubbles by
tightening monetary policies in 1989-90. Against the neo-liberal
creed, economic policies thus intervened in the working of market
order in this period of Japan. However, they could not effectively
control the destructive volatility of the market economy, but rather
initiated and amplified its bubbly instability.

In the subsequent process of the 1990's depression, neo-liberal
policies have been pushed forward. For example, labour laws and
controls of employment relations are being deregulated so as to enable
firms to use various types of workers more flexibly in a competitive
labour market.  Restrictions of large-scaled retail shops to protect
small family businesses in local regions were deregulated.
Liberalization of financial businesses to correspond with the global
financial big bang has been promoted. However, being inconsistent with
such neo-liberal policy stance with a belief in smaller government,
the Japanese government has still strongly intervened in and affected
the working of market economy. It actually expanded public
expenditure, and injected an enormous amount of public money into
rescue operation of banks and other financial institutions suffering
from bad loans.  The Bank of Japan cooperated with the government and
reduced the official rate of interest from 6 per cent in 1990 step by
step to an extremely low level of 0.5 per cent in 1995 to maintain
this until now.

It must be clear that these intervenient policies have had a large
scaled income redistribution effect as well as unfair distortion of
the economic order against the assertion of neo-liberalism. Economic
policies under neo-liberalism thus could not reduce the roles of the
State one-sidedly. Especially Japanese economic policies lack
consistency with the neo-liberal theories, and tend to give priority
to mitigating the burden of economic crisis of big businesses in the
fields of construction, banks and other financial institutions among
others. In contrast, they tend to neglect the increasing economic
difficulties and sacrifices among majority of workers and weaker
people by emphasizing self-responsibility of individual persons in
market principles. Such tendencies are observable also in the
treatment of issues of fiscal crisis of the State.

4.3.2 Political Economy of the Fiscal Crisis of the State

Through the period of high economic growth until 1973, Japanese
government used to maintain practically balanced budget. Although the
influence of Keynesianism grew among bureaucrats and leading
politicians, the government did not need to operate deficit finance.
While a large scale of public expenditure to construct infrastructure
for industrial growth and urbanization were continuously necessary, it
was sufficiently financed by the 'natural increase of tax' along with
the high economic growth.  After 1973, however, when the continuous
economic crisis began to persist, the outstanding government bonds
began to increase rapidly.  Initially public expenditure was expanded
for economic recovery in accord with Keynesianism, but it was
unsuccessful to restore both economic growth and tax revenue. As a
result, the outstanding government bonds largely increased from 7.6
trillion yens (6.5 per cent against GDP) in 1973 to 70.5 trillion yens
(28.7 per cent) in 1980, as we see in Table 4-1. In the 1980's, as the
basic tone of economic policies turned to neo-liberalism, government
expenditures for social security and education were severely curbed,
and State-owned enterprises were privatized so as to cut down
subsidies.  Nevertheless, the attempt to restrain the government
expenditure could not meet the tendentious stagnation and fall in tax
revenue. Therefore the deficit of government continued at a high level
(Table 1-2). Resultantly, the outstanding government bonds further
increased to 166.3 trillion yens (37.9 per cent against GDP) in 1990
and more to about 254 trillion yens (49 per cent against GDP) in 1997.
The last number is about five times of annual tax revenue of the
State.

missing{(Table 4-1)}
  
If we add to it other public debt of the central and the local
governments, total public debt amounts to 476 trillion yens by the end
of 1997. Its ratio against GDP is 92.6 per cent, and much higher than
the similar ratio in other major capitalist countries in the same
year. The comparable ratio is 64.1 per cent in the USA, 60.7 per cent
in the UK, and 64.4 per cent in Germany. 476 trillion yens public debt
means that the public debt of 3.78 million yens per capita or 15.12
million yens per household with four members are on the shoulders of
Japanese people for the future. Its burden is still growing. Here is
an additional difficulty like a black hole for the Japanese economy to
recover its real growth.
 
The increase in the quantity of interest payment for public debt is
relatively restrained by the monetary policy to keep the interest rate
extremely low. Still the interest payment just for the government
bonds amounts to 11.7 trillion yens in 1996, and spends more than 60
per cent of income tax. This works as a powerful means of income
redistribution from the great number of tax-paying workers to the
owners of State bonds. In 1996, banks and other financial institutions
own 27.5 per cent of the outstanding government bonds, and if we add
to them the Bank of Japan, financial institutions own more than 41 per
cent of government bonds. In comparison, little if any of State bonds
are owned by the majority of workers' households. So far as banks
borrow from the Bank of Japan by 0.5 per cent of interest payment just
to invest in public debt, the large portion of interest payment for
public debt works practically as subsidy to banks.  In 1966, the part
of the compensation of employees in the national income statistics is
283 trillion yens. It is not at all a small problem to see 4.1 per
cent of this workers income is redistributed as interest on government
bonds, or nearly 8 per cent for interest on total public debt.
Interest payment just for the government bonds already amounts to
nearly twice as much as the total government expenditure on education
and culture, and approaching the size of that on social security.

The worry of a further increase in necessary expenditure for interest
on public debt must be a reason to make the Japanese government and
the monetary authority reluctant to revise the extremely lowered
official rate of interest. Together with the depressed demand for
loans among depressed private firms and consumers, the Japanese
deposit rate of interest has been kept very low, almost near to zero
following the official rate. This gives a great difficulty for pension
funds to keep the promised pension payment, as well as for retired
older persons who expected to gain some interest on their savings.

Notwithstanding such a lowered rate of interest, the burden of
interest payment on cumulative government bonds became in itself a
source of fiscal crisis of the State, by making the total amount of
government expenditure so hard to reduce. In this regard, the Japanese
State budget resembles the reckless business firms, which have to
increase their debt in order to meet the need for interest payment in
the form of Ponzi finance.  It is indeed curious to see that the State
budget in Japan is falling into such a deep crisis just like in many
Third world countries. Because the Japanese economy has simultaneously
realized a position as a great economic power by strong business firms
with the largest foreign exchange reserve and the largest net foreign
asset in the world. There must be something wrong and unsound in the
Japanese economic order and the ways of policy operations.

Among others, the failure of the government to recognize the much
lowered growth trend must be a source of deepening fiscal crisis.
Japanese government has continuously tended to expect a higher
economic growth and therefore a greater amount of State revenue
annually, and was actually betrayed by the lowered real growth trend
with a wide shortage of tax revenue.  Especially in the 1990's,
excepting 1995-96 the economic outlook by the Japanese government has
been actually betrayed by the real achievement of the economy with the
lowered trend, as we see in Table 4-2. The government used to assume
that the growth rate around 3 per cent is easily achievable in the
Japanese economy, and could not lower its outlook nearer to the actual
new trend. After several years, it finally shifted down the growth
rate in the outlook closer to the lowered trend in 1997. Even this
lowered outlook was betrayed rather fairly widely by the negative rate
of growth.

missing{(Table 4-2)}

There were reasons for the Japanese government to make the shift down
of the economic outlook difficult. While the annual size of budget is
directly constrained by the economic outlook, the reduction of
expenditures in the budget has been not easy. The government had to
expect a higher economic growth in order to draw up budget plans with
certain levels of expenditures. On the other side, under
neo-liberalism, the government publicly promised to reconstruct
balanced budget without tax increase, kept various special tax
exemptions for corporations, and actually reduced inheritance tax and
land price tax rates for wealthier persons. Thus, while the State
revenue tended to stagnate and severely restricted in the real process
of depression, the budget expenditure for social security was hard to
cut down in transition to an aged society, and the burden of interest
payment on public debt continuously increased. Besides, there is an
important aspect in the Japanese fiscal crisis originating from a
series of State policies to mitigate the difficulties of big
businesses.

For example, despite of the government promise to reconstruct balanced
budget, national defense and official development aid (ODA) have
continued to increase as sacred precincts in the expenditure budget
since the 1980's. Even after the end of the Cold War, against the
common trend to reduce the military expenditure among advanced
countries, the Japanese budget for national defense continued to
increase. The Japanese government has taken over more and more shares
of costs to keep the US military base in Japan, and purchased more of
sophisticated military aircraft and other weapons mainly from the USA.
This must be regarded as necessary costs for Japanese politicians and
business circle to keep the largest exporting market open in the USA
by mitigating the trade friction. Corresponding to the international
request, the Japanese ODA rapidly increased to 14.5 billion dollars in
1995, almost twice as much as that of the USA and of Germany. This
serves in many cases practically also as a sort of subsidy for the
Japanese business firms to expand their multinational activities in
the surrounding Asian countries, besides serving as another device to
reduce the trade friction with the USA and other countries.

At the same time, the amount of public expenditure has been rather
increased and kept at a high level mostly in favour of civil
engineering and construction industrial firms, although this is very
inconsistent with the neo-liberal policy stance against Keynesianism.
The size of public investment in terms of the government fixed capital
formation (total investment to public utilities including attached
facilities and equipment of the central and local governments minus
the costs of purchasing necessary land) against GDP used to be 4 per
cent level before 1970. The ratio increased widely to 6 Per cent level
after 1972, and reached 6.6 per cent in 1978-79 when the economic
crisis began and deepened under Keynesianism. With the turn to
neo-liberalism in the 1980's, it declined to 4.9 per cent in 1985 by
the request to curb expenditure budget aiming at balanced budget.
However, it upsurged again with the policies to expand domestic demand
in the late 1980's, and rose also additional emergency economic
policies against the persistent deepening depression in the 1990's.
Thus the ratio increased to 6.9 per cent in 1996, more than 30
trillion yens in real number. Its relative size against GDP is almost
4 times of the similar ratio in the USA, and more than 3 times of that
in Germany.\footnote{Okonogi, K. (1998), p.139-40.} If we add with it
the purchasing costs of necessary land and highway construction costs
by the public corporation, the total amount of investment in public
utilities reaches 50 trillion yens.  This occupies 10 per cent of GDP,
and is close to total tax revenue of 55 trillion yens in that year. It
can not be an exaggeration to characterize Japan as a civil
engineering and construction nation State with the enormously
disproportionate spending for public utilities.

This enormous amount of expenditure for public utilities directly
serves for politicians and bureaucrats to secure their vested
interest.  Politicians in the government parties can impress their
service to their regional voters by its effect to construct utilities
and to maintain employment for construction, and can expect political
donation from the construction companies. Bureaucrats would expect to
secure the descending appointment positions in the related private
companies. At the same time, its effect to mitigate the deterioration
of prices of land and real estate and to stimulate the land market is
also expected. In this regard, the increased public investment
contains political intention to help financial institutions with a
heavy burden of bad loans relating to the lowered prices of land and
real estate.

However, the increased public investment have not worked as an
effective pump priming policy in the context of the linkage of
depressive pressures in the Japanese economy in the 1990's. The
pressure of asset deflation has bee so heavy. Besides, the consumption
demand, which occupies about 60 per cent of total demand, has been
cooled down by uneasy worries for the future economic life among
people, and thus makes the economic recovery harder. Construction and
repair of roads and highways would no longer much effect in expansion
of domestic sale of cars. Employment effect of public investment
became less and less as the civil engineering and construction
industry introduced more of heavy machinery to economize direct labour
costs. Thus the multiplier effect of public investment in civil
engineering and construction has been substantially
reduced.\footnote{On this issue, Jichitai-mondai Kenkyusho [Research
  Institute of Local Communities' Problems] (1998) presents an
  input-output analysis to show a much reduced multiplier effect of
  public investment.}

Since the monetary policy to set and maintain the extremely low rate
of interest, and fiscal policy to add to public investment did not
work sufficiently for economic recovery, the threat of asset deflation
kept on and spread a possible fear for a chain reaction of failures in
financial institutions. Therefore a new type of public spending
started. The first case was injection of 685 billion yens of public
money into the related financial institutions, when seven specialized
housing loan companies failed in 1996. Then under the name to maintain
the financial market order, the maximum amount of 60 trillion yens of
public money was allowed to be injected into banks and other financial
institutions so as to save their failures or to work as saucer banks
for depositors of failed banks.  This type of new policy works clearly
to counter the destructive effect of asset deflation and to protect
economic interest of the asset holders among big firms, wealthier
persons as well as of financial institutions with bad loans. Sometimes
the policy is legitimated as a means to protect general depositors.
But as a means to protect smaller amounts of depositors, there must be
more economical means such as to strengthen the savings insurance
organizations. Anyway direct injection of big amount of public money
directly in order to save banks and other financial institutions is
totally inconsistent with neo-liberalism. It can not easily
legitimated also by the Keynesian theories, and would not signify a
return to Keynesian policy stance. From the view of economic theories,
it can not be logically explained. It thus shows theoretical
confusions in economic policies, though it still basically follows the
spirit of company-centered socio-economic order.

Correspondingly, the burden of fiscal crisis of the State has been
transmitted broadly to working people. The consumer tax, which is a
typical mass taxation, was introduced at a rate of 3 per cent in 1989,
and the rate was raised to 5 per cent in 1997. The government
misunderstood the increased consumer demand in 1996 due to consumers'
behavior to purchase in advance to avoid the announced rise of
consumer tax, and believed it as a strong sign for a real economic
recovery. The government thus assumed it timely and possible to come
back to reconstructing the budget. Therefore it increased the private
burden for medical services from 10 per cent to 20 per cent of actual
costs, and abolished the special reduction of income tax, besides
raising the consumer tax to 5 per cent from April 1997. The total
amount of increased burden on the mass of people reached annually 9
trillion yens. The government's optimistic projection, that the effect
of such increased burden would be short and light, was widely
betrayed.  As the consumer demand cooled down again, the Japanese
business activity re-strengthened depression. The Asian monetary and
financial crises also reciprocally intensified the Japanese economic
difficulties. As a result four financial institutions including
Yamaichi Security and Hokkaido Takushoku Bank failed in November of
the same year 1997, and further deepened the economic difficulty and
worry for the future among working people for the following two years
by now with rapidly increasing unemployment.

Thus, while neo-liberalism became a basic policy stance to meet and
restructure the fiscal crisis of the State, a series of fiscal and
monetary policies were implemented in favor of big businesses,
especially in the civil engineering and construction industry and the
financial business area.  The swell and burst of huge bubbles was
initiated and promoted by such operations of economic policies. In the
1990's depression, the scale of monetary and fiscal policies was
rather extended as we have seen. Those concrete policy operations
served to mitigate the crises of financial institutions, big
businesses and wealthier persons in the process of asset deflation.
However, they are clearly inconsistent with neo-liberalism,
theoretically confusing as in the case of injecting huge public money
into financial institutions, exasperated the fiscal crisis of the
State, and still have not work well for macro economic recovery. In
the meanwhile, the burden of fiscal crisis of the State has been
sifted more and more to households of living and working people in the
form of increase in consumer tax and personal payment of medical
services among others.

The whole operation of recent Japanese economic policies is in these
regards thoroughly capitalistic despite of its theoretical confusion
and inconsistency. It pays little attention to the economic
difficulties with increasing worries for the future among living and
working people. It does not present proper social policies to solve
the problems concerning a rapid fall in birthrate, a transition to an
aged society, and the worsening employment conditions with increasing
unemployment. The depressed consumer demand by worrying working people
tends to counter the economic recovery and consequently the reduction
of bad loans. The failure of economic policies in 1997 as we noted
typically exemplifies such a problem in the Japanese economy.

Can we not hope to convert such a basic direction of Japanese economic
policies? It must be surely desirable from the view of economic
democracy to change the excessively capitalistic policies, putting
priority to big business with huge amount of public investment. The
potentiality of the Japanese economy can and need to be redirected so
as to form a strong economy for living and working people with stable
social policies easier to grow children. Such a conversion of basic
policy stance may not instantly enable to overcome the lowered trend
of economic growth. However, the current vicious circle between the
worsening employment situations with increasing unemployment and the
deflationary pressure in the economy can be solved and stabilized by
restoring an easy and more guaranteed feeling for the future among
people so as to revitalize consumer demand from below. Anyway,
neo-liberalism as well as the inconsistent emergency economic policies
in favor of big business and financial institutions need not be
believed as inevitable policy options for the Japanese economy. It is
rather counter-progressive and destabilizing.
 
It is unfortunately difficult to find effective political parties in
the contemporary Japan to present such critical policy options for
working people, excepting still relatively small Japanese Communist
Party. As The Japanese Socialist Party changed its character, became a
government party once in cooperation with the conservative Liberal
Democratic Party, and altered its name into Japanese Social Democratic
Party in the 1990's, following the dissolution of Sohyo with weakened
left-winged labour movements. However, this unfortunate political
situation would not discount but in a sense elevate the importance of
critical analyses of the roots of degeneration and confusions in
Japanese economic policies for the future of economic democracy and
socialism.


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