Japan's economic nightmare deepens

This article, written in 1998, looked at the severe crisis that was affecting Japan, with big falls in investment and thus in productivity, rising unemployment and falls in the real level of wages. The Liberal Democratic Party started losing support; the Democratic Party emerged in an attempt to prepare a bourgeois “alternative” to the fall of the LDP, while on the left the Communist Party was doubling its forces.

"Innovation and competitiveness are inseparable partners ‑ witness Japan's progress through western markets for everything from cars to copiers. But bright new ideas do not by themselves bring this kind of success; it also needs good marketing and good management." (The Economist, 16th March 1985).

"Once, Japan invited admiration, if at times exaggerated. Now, however, it invites despair, as it fails to escape from the economic stagnation of this lost decade, fails to reform its shaky politics and corrupt bureaucracy, and fails as a result to be able to lead East Asia out of its troubles." (The Economist, 21st March 1998)

Japan used to be considered the "locomotive" of the capitalist world. Its economic growth seemed unstoppable. Now it is seen as one of the weak points of capitalism that could well drag down the rest of the world into a serious recession if not a full-blown slump. Japan represents 17% of world GDP. It represents 70% of Asia's GDP and is the second economic power in the world after the United States. So any serious economic crisis in Japan would have devastating effects on a world level.

For the best part of a decade Japan has been stagnating. What is even more striking is that after a decade of stagnation its economy is not giving any signs of recovery. What we are witnessing is not the normal cycle of capitalism of boom-recession-boom. What we are seeing is Japan slipping from stagnation to recession and to slump. The Financial Times (19.8.98) explained that, "Seven out of Japan's 10 regions are in a slump..."

Japan in the past was renowned for its high level of investment in productive industry. This in fact was the key to its success. High levels of investment in new technology meant a much higher level of productivity of Japanese labour. This gave it an enormous competitive edge over its rivals. The high level of investment created jobs and also laid the basis for high wage levels. This in turn provided a market for consumer goods in an upwardly moving spiral of growth. Japan was able to achieve annual rates of growth of 8-10-12% and in one year even achieved the amazing figure of 17%.

As recently as 1991 Japan's investment rate was 20% of GDP. This has now fallen to 14.4% and is expected to fall to about 10% in the coming period. The fall in the rate of investment is leading to a fall in the level of productivity when compared to its main rivals.

The fall in the rate of investment in productive industry in Japan is the key to understanding the present malaise afflicting its economy. In the past Japan had invested heavily not only at home but also abroad, particularly in the emerging economies of South East Asia. But over-investment has produced overcapacity. This has meant that investment in industry no longer gives the same returns as in the past.


According to figures published by the OECD Economic Planning Agency, in 1965 "Capital productivity" in Japan was about twice the level in the USA. By 1979 it had fallen to the same level as the USA and in 1996 it had fallen below that of the USA and was on a par with Germany and the UK. If this trend continues it would actually fall below that of the UK. This is not due to any major improvement in the USA, Germany and the UK. It is all due to a long-term decline of Japanese productivity.

Japanese industry has also been losing ground to its South East Asian rivals. For example a tonne of steel produced in Japan now costs $156, compared with $67 in India, $27 in China and $17 in South Korea.

Now this is all exploding in the form of the most serious crisis of the Japanese economy since the Second World War. This crisis has been long overdue. It would have emerged earlier if it had not been for the fact that since 1992 the state has been bolstering up the economy through the injection of large sums of public money. What it amounts to basically is Keynesian economic policies.

The government has been throwing huge amounts of money into the economy in an attempt to stimulate demand. Between 1992 and 1995 the government introduced a series of "stimulus" packages, including tax cuts and public spending, to the tune of around $600billion. This barely kept Japan out of recession and yet it is greater than the United States spent on the "New deal" of the 1930s and is more than was spent on the Vietnam War.

However, the price they paid for this level of spending was the accumulation of a massive public debt, which has now reached about 92% of GDP, almost as big as that of chronically indebted states such as Italy, Belgium and Greece.

Alarmed by this huge level of indebtedness the government, in April of last year, attempted to cut the budget deficit. One of the measures taken was to raise VAT from 3% to 5%. The only effect this had was to put a further brake on demand. Ever since then retail sales have been falling.

This worried the USA in particular which, together with the other G7 powers, the IMF and the World Bank, put enormous pressure on Japan to reflate its economy.

This forced the government to reluctantly carry out another U-turn and launch a new series of state spending packages. At the end of last year in three consecutive packages the government injected about $80billion into the economy. In April of this year they announced a further $75billion expansion package. And still it has no effect.

They have also attempted to stimulate demand by lowering interest rates. Since the autumn of 1995 they have been at the incredibly low level of 0.5%, and recently they cut them further to 0.25%. Any further cuts would mean literally giving money away to people.

Keynesian policy

The fact is that the Japanese government has used these Keynesian policies, i.e. huge state spending combined with low interest rates, to stop the economy from going into recession, but it has entered recession anyway. Unemployment, which was almost an unknown phenomenon in Japan for close on forty years, is now rapidly rising. In April the number of unemployed had reached 2.9 million, 4.1% of the working population. This may seem low compared to standards in Europe, but for Japan it comes as a shock. It is the highest level since records began in 1953. What makes it worse is that the population as a whole feels that the worst is yet to come. By the spring of next year a further 500,000 jobs are expected to go in the building industry alone. Youth unemployment is rapidly growing; in the 15-24 year age group it is already 8.5%.

And those with a job are facing a fall in real wages. In April wages fell by 0.5% year on year. Added to this is the reduction of 9.9% overtime work due to falling demand, and an 8.2% drop in overtime pay.

Again, at the end of May, the Japanese parliament passed a bill bringing in a further $30billion of tax cuts over the next two years. But as the Financial Times (30.5.98) commented, "most consumers planned to save rather than spend the windfall cash."

This underlying crisis of the Japanese economy is being felt on the Stock Exchange, in the banking system and in the property markets. The Nikkei 225 index has fallen from over 38,000 points in 1990 to about 14,000 in 1998! This has added to the problems of the banks, some of whom actually lent money to investors to play on the stock exchange. With the collapse of share values these investors do not have the capital to repay their debts to the banks.

A recent report from Standard and Poor's, the US ratings agency, revealed that problem loans in the Japanese banking system could be the equivalent to as much as 30% of GDP.

In the 1980s Japanese banks gave out enormous amounts in loans basing their perspectives on the boom that was taking place. Now their creditors are facing serious problems of cash flow. This financial year it is estimated that there will be 17,300 corporate bankruptcies owing $107billion. The Japanese banks are facing the prospect of having to cancel these and other bad debts or even to go bankrupt. Again it is the government that has to step in and foot the bill with taxpayers' money, adding further to the state deficit.

Home prices are falling by about 10% a year. That explains why, in spite of 2.5% rate mortgages, no one is buying.

In this context it is curious to note how so-called "outdated" policies such as nationalisation and reflation are coming back into fashion among some layers of the bourgeoisie. Both The Economist and the Financial Times have started to take into consideration the possibility of the nationalisation of the banks in Japan. The editorial of the Financial Times of 18th September stated that this "would be a radical move; but it may be the only way for Japan to extricate itself from a desperate situation."

All this shows that monetarist policies cannot solve the present crisis. But Keynesian economic policies do not work either. The only effect these policies are going to have in Japan is an enormous explosion of inflation. With such an amount of fictitious capital floating around the Yen is already beginning to slide.

A devaluation of the Yen means making Japanese goods temporarily more competitive on the world market. It would also make imports more expensive. That however would only further exacerbate the problems of its South East Asian neighbours and trading partners who desperately need to export to earn strong currencies to pay off their debts.


For over twenty years monetarism, i.e. a strict control of money supply, has been the dominant policy worldwide. Now that the world is teetering on the edge of a slump some of the strategists of capital are rediscovering "reflation". The idea is that they could have some form of controlled inflation in order to stimulate the economy. The Japanese scenario is proving that it doesn't work, and yet they are considering the possibility of further loosening up on money supply. This can only work for a short period, because the rise in prices which inevitably flows from it would cancel out the initial effects and bring the economy crashing down even harder once inflation takes off seriously.

All this is having profound effects on the political scenery of Japan. In the 12th July elections to the Upper House the Liberal Democratic Party, which has governed the country almost uninterruptedly since the end of the Second World War, lost over a quarter of its seats, ending up with its lowest ever number of members. The Democratic Party, only formed three months before the elections, emerged as the second party after the LDP. This is an attempt on the part of the bourgeoisie to build a capitalist alternative to the LDP and stem the shift to the left. However on the left the Japanese Communist Party managed to double its seats in the Upper House, a clear indication that the workers of Japan are beginning to be stirred into action by the crisis facing Japanese capitalism.

October 1998

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