Making Cents

A wonderful print depicting life in the old days. From the Edo Museum.

When a stupid man is doing something he is ashamed of he always declares it as his duty.
George Bernard Shaw
Caesar and Cleopatra Act 3

At last. At long last. I was gifted enough to meet a former big-wig banker. These days 'Japan' has pretty well become internationally synonymous with 'bad loans'. The USA, for reasons all too obvious would like the practise cut. And soon. But, I digress. Let's first examine how such a small country could have and continue to accumulate so many large bad loans.

In a way quite unlike the West, it seems to start around kindergarden. Basically Japanese children have a very strictly regimented school system. I will discuss the school system in more depth later on. Basically there is an incredible amount of planning that must go into the child's future. In order to get a good job, you need to graduate from the right university. In order to get into the right university, you need to have graduated (with sufficiently high marks) from the right high school. In order to get into the right high school.....I think the gentle reader can understand that there is a definite pattern forming. Basically, to be able to follow the right path, you even have to choose what kindergarden to start in. Then the child must compete at each and every stage of his education with this peers. School uniforms are commonplace until university. Any deviation from the dress code, will result in some sort of punishment. Normally an accumulation of de-merit points. After jumping through all the figurative hoops properly, you will get a university graduate. From there, ideally, you will get a job in either big business or some bureaucratic position. Let's focus on the bureaucrat position. Playing the game well, you might find yourself at near the top of the bureaucratic pecking order by age 40 (likely earliest) to 60. At that point, barring ill health or accidents, your life is set. For the system is not through rewarding you. Normally bureaucrat(s) specialising in certain areas, will be offered seats on the board of some relevant company. This is normally done to coincide with the bureaucrat's retirement. The bureaucrat will still receive a full pension and a handsome severance package. Then they will go from company to company serving on the board for a period of about 4 years or so. Leave and get a handsome severage package. For those who have enquiring minds, this figure is thought to be in the neighbourhood of 1 000 000 USD (0.1 Billion Yen). They may do this basically as long as they like. But, I am sure there are limits --like natural life span. This system is basically rather clever. With these well-connected bureaucrats at the helm of some big business, it is inevitable that the business will prosper. They will prosper primarily through the awarding of big contracts. And the elimination of, what would otherwise be, annoying 'red-tape'. The chain continues, as the business continues to grow, more incumbents can be hired, and the business can expand, and the employment is quite secure. This has been going on pretty much ever since the war ended. So, it is fairly well entrenched. Now one problem with this is, obviously 'innovative spirit'. Why? Well, because if you are a former police bureaucrat sitting on the board of a light-bulb manufacturer, you will be likely to pull strings to keep the decision makers from purchasing new LED (Light Emitting Diode) traffic lights that save many (millions of) tax-payers yen in electricity bills. [Note to non-techies: The technology for making lamp-bulbs (a wire that glows white-hot in a vacuum or gas) is very different from LED (a carefully cleaved semiconductor junction which emits photons when current passes through it) technology]. So, what is the matter here? Well, the problem starts with a bad loan. I am sure it is only human to make them. And here in Japan, there is another element: Pride. We are, for the moment, only referring to really BIG loans that are bad. But the same principles, appropriately tweaked, likely are used for smaller loans. The key to understanding the problem is the key to job security: The salary-man. It would be unusual to see one get sacked. But, they are very sensitive to maintain their pride and reputations. So, if there is a bad loan, regardless of how it came about, then it is best not to notice it. If one were to notice it, it might be a cause for concern. This concern might even lead one to action. And this action, might lead to one's reputation being tarnished. Can't have that! As we mentioned before, the guys at the top tend to change every four years or so. The fact that they left the house in exactly the same way as they found it is of the utmost importance to them. Now, you may ask, why has no one bothered to bring these issues poignantly to the front? Well, the answer lies in a well-known Japanese proverb: "Terukui wa utareru" ('The protruding nail will be hammered'). Basically this is an omnipotent warning not to get out of line. So, the board-members want everything to look fine and dandy; while those of lower stature dare not reveal the sordid state of affairs. Because the Japanese banks, following the suit of other countries' banks, have also engaged in mergers, these are being noticed --if only out of petty political rivalry between the same divisions of once-different banks. All right! So now, someone finally noticed. What is being done? Nothing. Why? Not only because of what happens to the 'protruding nail', but also because of another little cycle: Construction companies employ over 6 million people. And, if they were suddenly out of work, there would be political Hell to pay. Both the companies and the trade unions (typically the local organised crime syndicate ['yakuza'] acting as a trade union) have a close relationship with the politicians and the 'Nikkeiren' (big business' cartel) that effectively keep the system going the way it has.

While Japan has been playing these games and enjoying the good life. It's neighbours have been gaining on them. The Peoples Republic of China, and Korea are now almost up to the high quality standards of Taiwan and Japan. On several fronts Japan has lost it's world leadership.

Now loans tor brilliant start-ups and new ventures? Likely not these post-bubble-economy-burst days. This is because nobody wants to make a mistake and damage their reputation. Not only that, but the typical way of Japanese thinking is to analyse the situation by looking at everything in a rather negative light. It is always a 'what will go wrong' attitude. Combine these two, and anyone can see that there is not much in the way to encourage innovation in Japan. This is not to say that any attempts will result in a 'declined' result. Just that the time that it will take --even if all the fears of the lending institution are put to rest-- is immense.

I am not sure, but suspect that, if a business has an outstanding loan, it will likely be allowed to further extend itself. And the banking system will likely 'encourage' this. After all it means more business one way or another. And, again, the cycle is perpetuated.

On the television now, there is talk of spiralling deflation, economic woes, and other stuff. But, when I go to the stores, it is still a shopping frenzy. I can deny that it might be a case of denial. Or it could be that the Japanese whose spending habits are unabated, know that the system they depend on (and depends on them) is so hopelessly inert that nothing short of divine intervention will change the status quo.

Because the problem is centred within the bureaucracy of government, likely little less than a revolution will change that. (And, even then, one wonders...). Many people thought that Prime Minister Junichiro Koizumi would be able to change that. With his savvy attitude, distinct hairstyle, and pension for karaoke, he did promise to 'make things better'. Even hinting that' short-term pain would bring long-term gain'. These were his election platform. Luckily for him, some suicidal sociopaths made a big mess in New York and gave America that crucial excuse to once again go to war.

Wars are just awesome things. At least from an economic point. Everyone seems to agree they cost a lot. But few come forward and say 'Let's not because it is too expensive in terms of the destruction of life'. To their credit, though, wars have been instrumental in extricating whole countries mired in economic hardships. As both Germany and America can attest to historically. Some say my profession (engineering) was even born from war. In the case of Japan, the LDP (Liberal Democratic Party) politicians had almost painted themselves into a corner and simply had to deal with all the ugly financial issues. With the advent of the Yanks' latest war ("The War on Terror"), Koizumi very skillfully used the situation: Moral support was pledged to the USA, Japan would become the procurement division for the war, peace meetings were held in Japan, and even effected some changes to the constitution (the sort of changes that can make nationalists ecstatic). Economic problems vanished in a poof of war-time logic.

Getting back to PM Koizumi, though, recently there occurred a situation that seemed, to me to indicate just how bereft of power politicians are here. Mrs. Maikiko Tanaka, the daughter of one of Japans most revered politicans, got the post of MOFA (Ministry of Foreign Affairs). MOFA is an interesting government agency because the overwhelming majority of Japanese feel that it only wastes money. One justification for this view likely stems from the fact that so little Japanese emigrate and immigration is virtually unheard of. It did not take long for Maikiko to start to seek out and attempt eradicate the abusers of the ministry. As expected many of the big bureaucrats got scrutinised --even nailed. But, as expected, there was no real punishment meted out to those who, if they were in private industry, would have criminal charges pressed. One chap, apparently hardly worked at all; preferring to use government funds gamble on horse-races. And many poor bureaucrats had to reduce their lunch-hour from 1000-1600h to 1200-1300h. Must have been a terrible strain to have to work all of a sudden. Maikiko was getting results. The ministry was even improving it's image (as Maikiko struggled to trim fat at an amazing rate). Somewhere along the line, Maikiko hit a 'nerve', someone pulled the right strings and she was replaced. All that time, the media was careful to point out in amazing detail every single gaffe she made. Even now, they carefully follow her origami (paper folding art) exercises during the Japanese commons sessions. Backbenching her cost Junichiro dearly in ratings. I don't think he will recover. Certainly the MOFA won't. It will return to it's well established ways of creative spending. Just like in the old times, you seldom see the one who wields the power. Junichiro, likely needing the co-operation of someone hidden in the background, bowed to their request to have Maikiko sacked from the MOFA position. Although, it seemed as if she was sacked in relationship to a row with a subordinate in a polital spat, I think it was more plausible she hit a nerve or someone who knew someone big. Poor protruding nail. She will be most missed by the television stations who have a boring replacement who says very little that they can really make news with.

Another interesting thing about the economy is that was never truly set up for the current situation. Long ago, after the second world war ended, it was time to rebuild the country and get on with life. The one thing needed at this point was co-operation, and lots of it. So, big business and big bureaucrats got together and meticulously carved out policies and procedures that would ensure a very rapid growth. This was deemed necessary at all costs in order to catch up with the West. In doing so, one might reason further, they would become the major power-broker in the far East. As expected, with everything streamlined for expansion and growth, that is exactly what took place. Of course there was the occasional cock-up (Minamata Bay in Kyushu scandal for example), but for most progress was something that seemed inevitable. Now, bubble-economy issues aside, there was one 'lizard in the ointment' that has recently grown to Godzilla proportions. There was no provision or planning on what to do after expansion. It was like expansionism and grown were expected to continue ad infinitum. This is the Godzilla the policy makers now face: An inert system which is entirely growth-centric (run by surprisingly timid people). If they cannot (or will not) change it's course it will simply run rampant throughout their economy and culture.

There have been some well-written and researched scholarly papers about how the 'West' could learn from Japanese economics (ie that the Japanese are doing something rather clever). But, these may be moot points due to the fact that most economic systems (and economists, bankers, etc.) are not renowned for their ability to embrace new ideas. That is why the economy is not likely to change. And unless something radical is done, before long (say, within a decade) Japan might find itself back to a third-world country.