MY SPEECH TO THE MINISTRY OF FINANCE
PART TWO: THE IMPROVED VERSION
(Originally sent to Fukuzawa, ISSHO, HIBA, and Friends Fri, 20 Mar 1998)
Since my rather half-baked post to you a couple of weeks ago, I have gotten a lot of lowdowns from a number of people (including the immensely helpful Ms Sano at the new Hokkaido American Library). Thanks, y'all. I should credit them responsibly and also show you the revisions, so read on if interested.
It's quite a different speech from before. The first thing you will notice is that I took out all the "gaijin" and "gaijin employment" issues. Most people pointed out these are pretty small potatoes in the financial world, alas. Some other time. Fortunately, I found plenty more to talk about, and I subject it once more to your vetting.
MOF SPEECH OUTLINE:
OPENING: (Disclaimers and apologies to the audience: I am not an economist, I'm unfamiliar with many terms and concepts, especially in Japanese, etc. Please bear with me)
I) THE PUBLIC LACK OF CONFIDENCE (fushinkan) AND THE NEED FOR REFORM
Japan and Hokkaido in particular have had a difficult decade. With the stumbling of the "Asian Tigers" kicked off by last November's HK stock market crash, the bankrupting and IMF bailout of South Korea, and the lingering currency troubles of Indonesia, Malaysia, Thailand, and the Phillippines, it was only a matter of time before people started worrying about the financial condition of Japan proper, the richest country in Asia and the second richest in the world.
The Signs of the Times are troubling: (NB: I won't be translating all of this to the MOFers--this should be common knowledge--but FWIW it's here to sew my thoughts together.)
Although Japan's GDP growth has been in the positive numbers, they are nowhere near the high figures of the bubble years (of course), and moreover are forecast to shrink or even go negative. Although GDP growth bounced back from a precipitous minus 10% (!) between April and June 1997, to a positive four percent, the most recent numbers show the last quarter of 1997 finishing with GDP growth dropping to a minus 0.7% (Asahi Shinbun Mar 14 '98 lead story). Moreover, other leading indicators are showing the same sinking feeling: Business Confidence (Economist Mar 14, pp 120-1) is way down--Japan being the only country measured where "expectations of rising sales" in 1998 is actually NEGATIVE (meaning the pessimists outnumber the optimists).
Fluffy stuff aside, industrial production (the averages of latest 3 months compared with average of previous 3 months) is near double-digit negatives, at -9.6%, and at -3.3% for the year to date. Annual wage rises, a meagre 1.5%, are going to be wiped out by the rise in consumer prices (a deflationary -1.7% for the past 3 months, but a rise of 1.8% annual rate). With corporate bankruptcies at record levels, the already suss unemployment rate is at a record 3.5 percent and is scheduled to rise further. (all stats ibid)
It's not just the workers; the average saver is suffering too. People are facing zero or LESS returns on their money. A leading indicator of growth as reflected in the financial market is 10-year Japanese government bonds (whose yields theoretically should be equal to growth in GDP plus inflation plus alpha for risk). In 1990, JGBs gave returns at a healthy 8.2%. (Economist Feb 21, pp 75-6). In 1998, GDP growth is forecast to linger near or below one percent, so adding the one or so percent inflation in consumer prices means an equitable price on the JGBs should be near 2 or 3 percent. Nope. Ten-year-bond yields are at record lows at 1.79% (and speculated to drop further), and regular banks have window ads screaming for your money at interest rates of 0.342 percent or so (yes, rounded off to the nearest thousandth).
The point is that people actually lose money in real terms nowadays by putting it in the bank. This is already true in the 3-month money markets, where short-term real interest rates are around minus one percent (ibid pg 117)--the only developed country in the world with negative borrowing costs.
On to red ink. Debt in both the public center and private sectors is mounting. Fiscal stimulus packages have been ineffectual, increasing government debt from near balance a decade ago to 100% of GDP. Former DFSer Peter Tasker is quoted in The Economist as saying that the private sector's debt is around 200% of GDP (ibid pg 76). To get rid of that debt, you have three options: 1) pay it back, 2) inflate it away though growth, 3) declare bankruptcy and liquidate, or 4) resort to refinance.
The option that seems to have held sway up to now is 5) do nothing--"duck and cover", if you will. That is to say, commit to a holding pattern (refinancing if necessary), cover up the enormity of your debts through accounting magic (counting them as unrealized assets), and wait for growth. Feasible? Refinancing has not been a costly problem as long as somebody was willing to lend--the Japanese economy has been able to borrow "more cheaply than any govenment in recorded history" (ibid pg 76). And the history of Japan's growth has spawned a culture of faith, particularly in growth through exporting.
However, times do change, and, despite the expanding trade surplus, simply waiting for growth shows little promise of getting the red out. This is mainly thanks to the overvalued yen, which makes exports a harder sell. Meanwhile, the purported savior in this equation, "the Japanese consumer", who should be spending the country out of recession, is stifled by regulations on the things that would increase his or her spending power--cheap imports. Import restrictions keep the goods that matter (housing, cars, fuel, food, technological products, services) prohibitively expensive (or just plain unavailable), while an incredibly inefficient distribution system--which structural xenophobia helps to keep intact and unreformed--ratchets up everything else. The good news is that Japanese producers don't get damaged by foreigners, hooray. The bad news is that lacklustre consumer spending means growth though domestic demand is also equally unlikely. At this point in time, waiting for growth is like waiting for Godot.
This leaves the other options. 2) Inflating the debt away will cause the yen's value to drop, politically unacceptible because it beggars Japan's buying power abroad. 3) Writing off the debt, through allowing bankruptcies of big businesses and financial institutions (Takugin, Yamaichi to name but two--more appear in the news every single day), has indeed been happening, but only fitfully, and has been recently nixed as an option by the new Finance Minister, Matsunaga Hikaru (ibid pg 29). Paying back the debt is another option also being taken, but payback without real growth is going to be painful, with black holes in the balance sheets soaking up money that could have been used for more productive investments. The other option taken--4) cheap refinancing--has two snags: a) it increases the debt itself, and b) people have become less willing to lend to those emerging black holes.
Gloom-naysayers could point to trade: Japan is still making nearly US 2 billion dollars a week on its exports, and that does matter. But let's not get too sunny, as it is possible to look at a different series of numbers and find some good news (which is why Economics is such a soft science). The point is this: Japan is still making money, but it is unclear that it is causing any real growth. I say it is getting soaked up by debt and graft.
We've looked at the debt. Let's look at the graft. Since the beginning of this year alone, there have been very high-profile arrests of bureaucrats in previously "incorruptible ministries" (this isn't the backburner Ministry of Construction either--we're all used to that), on charges of bribery for inside information. Bank of Japan Securities Kachou Yoshizawa Yasuyuki has been arrested, as well as several lower-level Securities Commission inspectors. The crackdowns have caused several high-profile suicides (including Diet member Arai Shokei, after allegations of kickbacks from banks), as well as high-level resignations of Finance Minister Mitsuzuka Hiroshi, Federation of Bankers Associations of Japan Chairman Saiki Naoyuki, and BOJ Governor Matsushita Yasuo. The public eye is focussed on just how endemic the practice of spending tax and corporate money and workhours on wining and dining (kankan/kanmin settai), is. Yet this morning's paper (Asahi Shinbun 3/20) has probably the most powerful man in Japan, MITI's Administrative Vice-Minister Watanabe Osamu, defending the practice--as "necessary for good administration" (ii gyousei o shite iku tame ni hitsuyou).
The bottom line is that people have lost confidence in Japan's government, both abroad and overseas. Japanese loans face a "Japan Premium" on world markets, watchdogs have been hitting places like Sanwa for unreported trading, and Moodys have downgraded most Japanese banks. Japanese themselves, watching financial institutions like Cosmo collapse, worry about entrusting their cash to banks--instead opening postal savings or buying home safes (whose sales are at record highs). The biggest investment action in the Japanese stock market these days is not the raiders but the government, building share ramps with our tax money. The public knows about all this, and everybody, including the politicians, have been mentioning that it's time for reforms. Since the real power in Japan lies with the bureaucrats, with MOF financially the most powerful, are the bureaucrats ready to show some real leadership and get Japan out of its financial messes?
Okay, admittedly this post has been very top-heavy on the details, but most likely I'll be skipping them in the speech. On to the suggestions:
II) SUGGESTIONS TO MOF IN GENERAL:
1) WEED OUT CORRUPTION First, I will show a 20-minute video of that TV show I appeared in (thanks Randal) a few weeks back on "Kan-min Settai", to give some background. Deal with the problem by opening things up to public inspection. Publish all contributions/transactions of any sort (money/non-money/gifts) with a value of over 2000 yen, in an annual report for each ministry. Names, places, organizations, dates all included. Watchdog organization should also be created independent of the bureaucracy, with rights of sting operations (like the MARUSA tax authorities have). Must do it if bureaucrats are going to stop acting as a drag on the economy. (Thanks FU)
2) STRENGHEN JAPAN'S FREEDOM OF INFORMATION ACT (jouhou koukai hou) FOR ALL MINISTERIAL MATTERS This does not just include finances. All topics should be released to the public (modelled on US FOIA) and not subject to bureaucratic fiat. Give clear timetable for release, and clear punishments for coverups. Watchdog organization independent of bureaucracy, again. Inhumanity of wanton government suppressing information "in the public interest", cf. HIV Hemophiliac scandals, obviates that. (Thanks DB)
3) EMPLOY MIDDLE-AGED PEOPLE FROM PRIVATE SECTOR (tochuu saiyou) I call it "Ama-nobori". Employ people from private sector even if middle-aged and give them managerial positions. Will bring influx of new ideas and feedback from private sector, and give bureaucrats exposure to outside world forces (such as tighter budgets due to threat of bankruptcy--a factor that affects few tax-and-spend bureaucrats). Also will alleviate some of the unemployment problem.
4) STOP MEDDLING IN MARKET FORCES (not kisei kanwa, but "kisei teppai") There are many questions about whether Western economics is correct when it assumes that markets are the most just and fair allocator of resources and talent. I share those concerns, but I must also say that meddling in markets does produce bad results, and if bureaucrats do meddle badly, they should take responsibility. Bad market meddling examples:
a) rigging the TSE with share ramps so that a few people profit and the market artificially finishes the fiscal year above 18,000. This fools no-one, and it makes the TSE a financial alcoholic, seasonally waiting for the next influx of our tax money to fuel speculation. (Economist Mar 7 pg 18)
b) allowing accounting rules which cover up bad debts by counting them as assets.
c) not treating Euroyen ("free yen") the same as domestic yen--meaning not subjecting it to foreign exchange rules. (Thanks JE Phillips. Is this covered by the Big Bang, anyone?) This mechanism has been part of the way MOF has controlled the money supply by keeping all money under tight control, and by keeping it overvalued through intergovernmental and intragovernmental negotiations. A high yen may seem to make Japan rich by increasing its buying power, but it's an artificial wealth--an inflation of value for political means that doesn't allow markets to correct. And creates aberrations, such as:
TANGENT ABERRATION: As Murray Sayle compellingly maintains (JPRI March 1998, pg 4), Japan actually *exported* its investment bubble, and through domestic cheap loans (over a third of all of Indonesia's and most of South Korea's unrepayable debt is Japanese) fueled a great deal of overseas speculation that has recently come crashing down. He writes:
"Altogether Japanese banks--themselves hiding huge bad domestic loans--lent 265 billion dollars to the rest of Asia, well after Japan's own bubble burst.... Seeing Asia's bubbles rising, other gullible bankers followed Japan's lead. "The Japanese banks hoped to reap the profits abroad they could no longer make in Japan's depressed economy, and recover some of their own bad debts. Despite the high yen, Japanese export industries hoped to stay competitive by using components produced abroad at sweat-shop wages; Asia, in its bubble era, was also a big market for Japan's own exports. Confident that any mistakes would be covered by their wined-and-dined friends in the bureaucracy, the Japanese banks lent in their usual reckless, market-share-grabbing style. But this time they were on their own. Just as Tokyo's wartime government had little control over its armies abroad, its finance bureaucrats had even less over the Japanese money that poured into Asia. The result was to duplicate in these countries Japan's own bloated export industries, all competing for the same markets in the US, Australia, and Europe. But Japan's new Co-Prosperity Sphere had, like the original one, fatal weaknesses. Japan had mainly used its own money to industrialize; all the others have borrowed it, mostly from Japan. Thus, when China, in 1994, devalued its currency 33 percent, none of them could compete with the motherland of all sweatshops, or keep up interest payments on their loans. No wonder Japan has eagerly joined the IMF's $120 billion "Asian Bailout" scheme; it will bail out not so much the borrowers as the lenders, and Japan was by far the biggest and wildest lender of them all."
As a result, the yen is too expensive for Japan to loan, and the bubble it created in the Asian Tigers has caught Japan in a Catch-22. Allow the yen to float properly for a start, and hopefully, if you have faith in markets, things will begin to correct themselves.
5) POINTS IN PASSING (meaning these are rotten teeth which should be diagnosed as such, but I'm not sure how they should be filled or pulled) :
a) Tougher penalties for corrupt bureaucrats, even if quitting under suspicion of corruption. Keep threat credible or else the corruption won't stop. (RT exposed a lot of the loopholes in my proposal, which is why it gets demoted to "passing". Thanks.)
b) Make Japan's Securities and Exchange Commission (shouken torihiki iinkai) stronger. And prosecute inspectors (again, no retirement pay even if you ungracefully resign) who get corrupted by their position. (Thanks HO)
c) Tougher reporting requirements for banks, securities houses, and insurance companies. Sounds good, but I'm not sure how to hammer that into policy. (Thanks DB)
III) SUGGESTIONS TO HOKKAIDO MOF IN SPECIFIC
Hokkaido has felt the pain and been the bottom feeder for the rest of Japan for too long. Although Japan's annual GDP growth in the 80's averaged around 4 percent, Hokkaido has only been half that. Hokkaido's average incomes are the second lowest in all of Japan (after Okinawa), and a whopping FORTY percent under Tokyo's. Bankruptcies have hit Hokkaido harder, with Honshu hotel speculation producing white-elephant resorts (the most recent being APEX in Touyako, and Sapporo Terume). Even venerable Marui Imai Department Store is foundering. The death of Hokkaido's oldest bank has made Hokkaido the region with the fewest financial institutions in all of Japan. The unemployment rate is double that of the Japan average, and the percentage of those who are on government welfare support is nearly treble--by far the highest in Japan. Even in my neighborhood unemployment is visible (two of my neighbors--one from Yamaichi Securities--are on the dole); my hometown has just seen the government agency (Juutaku Kin'yuu Koukou) that was going to sell land to yuppies like me, pull out, claiming lackluster performance. Any business which becomes big (even Sapporo Beer!) relocates its corporate headquarters down south.
Hokkaido has long been a resource colony for the rest of Japan. Very few of the goods produced get exported, and if they do, they often go through ports down south where Honshu absorbs the value added. "Dosanko" (Hokkaidoites) have to pay high airfares, despite recent reductions, while Tokyoites can come up for a weekend ski trip (hotel, meals, and discount purchase tickets included) for the price of our round-trip ticket. Dosanko have to go through southern airports to get anywhere (even Qantas is terminating Chitose's direct flights to Oz), adding 30% onto any airfare. The Self Defense Forces, with prime pieces of land all over Sapporo and Chitose, impose airspace restrictions (such as a ban on Aeroflot landings) upon Chitose and Okadama Airports. Tokyo gets our best graduates (until recently over a net 10,000 a year were leaving) while southern people treat a post in Sapporo as an exile to Siberia. Get the picture?
We can change that. MOF, as the powerful force in Japan's economics, has the ability to lobby for Hokkaido's interests within the bureaucracy. I understand that you are understaffed, with only 500 of all all the 14,000 Hokkaido National bureaucrats. But even 500 people can do a lot. Here's what I suggest you do:
PUSH FOR MORE REGIONAL AUTONOMY
The Regional Autonomy Law (Jichihou) has been on the books for quite a while. Under that guise, ask to:
a) lower port costs and introduce competition by allowing more foreign shippers and stevedores in. Aeroflot too.
b) increase the number of ports with Customs Clearance licence. Currently the only ports open to customs clearance for nonfishing goods are Hakodate, Otaru, and Tomakomai. Push for Kushiro, Wakkanai, Hiroo, and especially Ishikari New Port. Japan proper got rich through good foreign trade. Let Hokkaido do the same. Hokkaido is the closest part of Japan to any foreign country. So what if it's not your bureaucratic turf? Lobby MITI for it. If the Hokkaido Prefectural Government (under political eunuch Yokomichi) has been so gormless as to not get it for themselves, it's time for a national-level push. Lead the way.
MORAL AND TAKE-HOME MESSAGE:
Hokkaido is a place that is used to taking orders from Tokyo. If you, as the emissaries from Tokyo, don't show leadership and push for what is best for Hokkaido, the current trends--Hokkaido GDP stagnation or shrinking, population drops and centralization, resource colonization, and a labor force living more and more on welfare and not striving for better--will not reverse.
Bureaucrats, be ambitious!
Alright, that's about all she wrote. I still feel I've bitten off more than I can chew, and of course would welcome any feedback, clarifications, what have you. I've got the weekend to hone this into something meaningful. Thanks very much to everyone for making this a much better presentation.
Now, how did the speech finally go? It was a disaster.
Click here to go on to the final essay in this series.
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Copyright 1998, Dave Aldwinckle, Sapporo, Japan