May 2, 1998
Since the Asian crisis broke out last fall, hardly a week has gone by that a high U.S. official hasn't publicly warned the Japanese government that it must take much more drastic measures to help pull its economy out of its seven- year economic crisis.
Of course, these warnings have come in different forms. Last November, as the Asian economic crisis was spreading and deepening, this warning came in a letter leaked to the press from U.S. Secretary of the Treasury Robert Rubin to his counterpart in Japan, stating that Japan cannot simply export its way out of the current crisis.
In early April it came from President Clinton, who during a press conference stated, "We need to be both respectful and firm in urging the Japanese to take a bold course. The people within the permanent government there, who have always enjoyed great power, have to realize that the strategies that worked in the past are not appropriate to the present. They have to make a break now."
It seems that U.S. officials always find a reason to complain, warn and cajole Japan. A little over seven years ago, they were warning that the Japanese economy was taking over the world. They complained that its industries were conquering market after market. They marveled at its stock market, which had grown to be the biggest in the world. And they blustered about the seemingly inexorable conquering march of Japanese investments.
Now that Japan has been mired in crisis, U.S. commentators and politicians are accusing the Japanese government of paralysis and timidity in dealing with this crisis. They say the Japanese government has not been doing enough to stimulate the economy and to clean up the massive bad debts held by the nation's financial institutions.
Of course, this is what the Japanese government has been trying to do for the last five years. It has spent over half a trillion dollars on its various schemes to pump up the economy, including massive public works projects, tax cuts, as well as to support the financial system with all its debts. These measures have just added to the burgeoning public debt alongside the hundreds of billions and even trillions of dollars in private debt.
Nonetheless, the U.S. government has been goading the Japanese government for more of the same. In December, the Japanese government announced a bank bailout of 78 billion dollars. By January, it upped the bailout to 257 billion dollars. It has also instituted new public works programs that will come to another 150 billion dollars. In mid- April the government announced a brand-new set of stimulus packages.
Obviously, it is easy for the U.S. to blame the Japanese for problems that are not limited to Japan. But the problems the Japanese economy faces are produced by the functioning of the capitalist system over the world. And they have been exacerbated by policies carried out by the U.S. to defend its particular interests.
In any case, U.S. officials are again resurrecting the specter of a rising trade deficit with Japan, with Japanese demand for U.S. products shrinking as a result of the crisis there. According to this scenario, the unwillingness of Japan to buy U.S. products may once again crowd out U.S. businesses and jobs.
But even if U.S. exports to Japan dropped by tens of billions of dollars annually, this would not have much of an impact on jobs or on the U.S. economy, whose GDP is running at over eight trillion dollars.
Of course, if the trade deficit with Japan persists at relatively high levels, this will aggravate tensions in the ongoing competition between the U.S. and Japan. And the U.S., by far the stronger of the two powers, may find a way, just as it has in the past, either to retaliate or to impose new restrictions on the wounded and weakened Japanese economy, in order to aid U.S. business interests.
But whatever happens in the relations between the U.S. and Japan, we can be sure that U.S. capitalists will make use of the supposed Japanese invasion to justify further sacrifices, layoffs, lower compensation and fewer rights for U.S. workers. Blaming not just Japan, but Mexico and just about every other country, has been a favorite tactic which U.S. bosses have used against American workers during these last two decades of crisis. All the while it was the U.S. bosses who eliminated jobs through speed-up, runaway plants, "restructuring," etc.
Japan began running a trade surplus with the U.S. starting in 1975, when the U.S. began to allow its dollar to rise in relation to the yen. Thanks to the strong dollar and the weak yen, Japanese exports were more price- competitive. That trade surplus grew steadily and exponentially, interrupted only by the oil price shocks of 1970- 80. It went from five billion dollars in 1976 to 10 billion dollars in the 1980s, and then to a postwar high of 57 billion dollars during 1987. After that date, these surpluses declined modestly, at least for awhile.
The U.S., of course, paid in dollars for all those imports. But those dollars paid out to Japanese companies to cover all those imports over the last 25 years were hardly lost to the U.S. economy, because they were recycled right back into the U.S. market. The Japanese companies, with so many dollars in their coffers, began to look for places which would produce a bigger return than they were getting at home. Starting in 1982-83, the Japanese investors began to buy U.S. Treasury bonds. This was the period of the burgeoning Reagan budget deficits and the big U.S. military build-up. By the mid-1980s, Japanese entities were buying up to 40% of the bonds issued to finance that deficit. Japan could legitimately be described as the chief financier of America's federal budget deficit and, above all, of the big U.S. military build-up and the profits of the major U.S. military contractors.
Capital from the U.S. as well as from other countries was freed to flow into other forms of speculation. It was in the early 1980s that the U.S. stock markets and real estate markets began their steep and profitable ascents, as this money flooded in. These markets turned out to be much more lucrative than the plain vanilla treasury bond market that Japanese capital had managed to corner.
At the same time, the U.S. government was putting up barriers to Japanese imports to protect targeted U.S. markets. These barriers took the form of either formal and informal quotas or tariffs. And they came on autos, trucks, textiles, steel, certain electronic components, etc.
By the mid-1980s, the U.S. government had shifted to a more aggressive policy to address the trade deficit. It began pushing the value of the dollar lower in relation to other currencies, especially to the yen and the German mark. In September 1985, the U.S. government imposed its monetary policy on the finance ministers of its main competitors – Japan, West Germany, France and Britain – at a conference held at the Plaza Hotel in New York. Somewhat unwillingly, the other imperialisms nonetheless agreed to try concerted action to further push the dollar down.
As it became much more costly to produce goods in Japan for export, the Japanese trusts wrenched their course around. To try to keep market share in the U.S., Japanese companies decided to invest in other countries for export to the U.S. and in the U.S. itself, where they built factories, opened offices and recruited workers.
Nonetheless, the stronger yen threatened to slow the Japanese economy. Faced with this threat, the Bank of Japan eventually began to push interest rates back down again. These low Japanese interest rates sparked a vast increase in loans and through these loans a vast speculative boom on Tokyo's stock and property markets. This boom, in turn, increased the prices of holdings which were being used as collateral for still more loans which Japanese firms were taking out.
For the Japanese capitalists this appeared like a windfall. These loans were transformed into free floating capital, looking for a place to roost. Japan emerged as the biggest exporter of capital. Most of this went into the U.S. (Although it should be added that U.S. companies still have by far the largest amount of overseas investments.)
But at the same time, enormous imbalances grew in Japan's financial system, leading to a huge speculative bubble in both the stock market and the real estate markets. Concerned over the threat of this bubble to the stability of the international financial markets, the U.S. Federal Reserve pushed the Bank of Japan to increase its interest rates. As the Bank of Japan began to hike up these rates in January 1990, there was a fall in speculative markets, real estate, stocks, bonds.
With the reduction of the prices on their collateral and higher interest rates, capital was no longer cheap for Japanese firms. Bankruptcies rose to record levels, quadrupling in a year's time. These bankruptcies meant that the more marginal and speculative overseas investors were either forced to retrench or were wiped out all together. Banks withdrew from their own overseas market activity. And many Japanese manufacturers suffered from "investment overreach."
In the following years, as the recession hit not only Japan, but markets in the U.S. and Europe, Japanese direct investment in the U.S. fell. In early 1995, with the worsening financial crisis in Japan, the U.S. agreed to allow the Bank of Japan to push the yen down in relation to the dollar. Within two years, the yen lost 60% of its value in relation to the dollar. As the yen dropped, Japanese exports increased. But economic stagnation continued. So, the low interest rates did not stimulate new lending to finance either investment or consumption in Japan.
But the low interest rates did stimulate a new wave of the export of Japanese capital all over the world. One important destination for this new capital was Asia, where Japanese banks literally dumped hundreds of billions in short term, highly speculative loans. In this way, Japanese finance spread its bubble economy over the entire continent. But besides that, much of the rest of this capital found its way to U.S. financial markets. Once again, the Japanese government, financial companies and individual investors bought up a major proportion of U.S. Treasury bonds. As of the end of 1997, they held 320 billion dollars worth, 10% of the total. Increasingly, their money also went into the U.S. stock market.
In fact, the Japanese capitalists were not doing anything different than what those from all the other major economic powers were doing. By the late 1980s, all the major financial powers were exporting their capital into each other's markets. These placements of capital grew many times faster than did either GDP or trade. This was simply one aspect of the exponential growth of finance capital around the world.
Nor were the Japanese investors alone in placing a lion's share of their money inside the United States. European and Canadian investors, also, preferred to send their capital to the U.S.
In the 1980s and '90s, the U.S. had become the most important importer of foreign capital in the world. Obviously, capital from all over the world flocked here because this was not only by far the biggest market, but also because it was the most profitable. And it was more economically and politically stable, at least relatively speaking.
When Japanese companies increasingly began to produce in the U.S., starting in the last half of the 1980s, propaganda against Japan shifted. The Japanese were no longer pictured taking U.S. jobs. They were accused simply of buying up the entire country!
However, this argument was just as false as the one about imports. In fact, Japanese investments in the U.S. are less than those of Great Britain. They equal only 20% of all direct foreign investment. Of course, this is enormous, but it is less than one percent of U.S. GDO. And there is no comparison between Japanese holdings in the U.S. and what is owned by U.S. capital. That is what they called "buying" up the whole country.
In the late 1980s, only a small portion of Japanese capital sent into the U.S. went into building new factories and businesses, perhaps most importantly in the auto industry, where Toyota, Nissan, Mazda and Honda did make some large investments. But other than that, the Japanese trusts, like those from other countries, spent most of their money acquiring existing U.S. businesses. And they often paid a premium for them. Japanese investors paid top dollar for Hollywood movie studios, "7-11" chain stores, tire companies, some of the most expensive real estate in the country, banks, hotels and resorts, etc.
Of course, as these businesses were sold, the U.S. capitalists shed some crocodile tears for the news cameras. They bemoaned the supposed eclipse of American power by the Rising Sun of Japan. But the fact that the U.S. capitalists made spectacular profits on the sales managed to ease their trauma.
With the burst of the Japanese speculative bubble in the early 1990s, the weakened condition of Japanese capital made it more vulnerable to the steep drop in U.S. real estate prices which accompanied the U.S. recession. Some Japanese investors were not able to hold on. They were forced to dump properties cheaply that they had bought high. Beginning around 1994, this sell-off of U.S. real estate by Japanese companies has continued at a rate of about three to five billion dollars per year (according to the New York Times of March 3, 1998).
Losses sustained in the crash of the Asian financial markets only added pressure on Japanese capital to sell more of its outside interests. Sumitomo Bank sold Sumitomo Bank of California, the seventh largest bank in the state, in March, to a U.S. bank based in Salt Lake City. Some speculate that Union Bank Cal Corp, 85% owned by Bank of Tokyo-Mitsubishi and the fifth largest bank in the state, is also up for sale. Besides that, the Inter- Continental Hotel chain, which includes U.S. properties like San Francisco's Mark Hopkins Hotel, is being sold by Saison Group to Bass PLC of Britain. Taisei, a construction company, is said to be selling the Sheraton Grande Torrey Pines in San Diego.
These fire sales of some assets in the U.S. have most often resulted in enormous losses for Japanese investors – and large gains for U.S. or other investors. In the turnover of Rockefeller Center, for example, not only did the Rockefellers make a killing by selling to Mitsubishi at the height of the real estate boom of the 1980s. But the capitalists behind the real estate investment trust (REIT) that bought Rockefeller Center back from Mitsubishi at the bottom of the real estate market, then went on to make another fortune, as the real estate market recovered.
This is nothing but the weeding out process by which the bigger and stronger capitalists, in this case the Americans, are able to take advantage of their weaker competitors, the Japanese, by devouring them in pieces or whole. And this process is being speeded up by the crisis in Japan.
No doubt, the flow of money from Japan and other countries makes U.S. markets somewhat more dependent on foreign money. This concern was voiced by Kenneth S. Courtis, chief economist at Deutsche Bank Group Asia- Pacific (New York Times, December 17, 1997), "The U.S. needs to borrow a billion dollars per day in the open market. And Japan is the principal supplier of that capital. If Japan gets knocked out of that equation, and instead of exporting capital it imports it, who could replace Japan? What would happen to Wall Street?"
In November and December, as the crisis in Asia rebounded back into Japan, the economic press in the U.S. was raising the warning about potential dangers if this flow of money began to be withdrawn in precipitous fashion. Up until now, however, there has been no indication that Japanese interests were selling off U.S. Treasury bills and bonds, nor that they had increased their sales of companies or real estate. Apparently, the Japanese government stepped in with a heavy injection of capital, containing the damage not only to the Japanese financial structure, but preventing a sell-off on international markets, including the U.S.
But even if the crisis in Japan did deepen in a manner that the Japanese government could not control, it is not at all clear what the consequences would be to the U.S. How many U.S. Treasury bonds, for example, would be dumped? Most likely, only if they had no other choice, would the holders of the bonds – the Japanese government, corporations and individuals – sell them. After all, in many respects these bonds are a better investment than government bonds in Japan. The U.S. government and economy are more stable, interest rates are several times higher, and the appreciation of the value of the dollar to the yen increases the value of these bonds that much more. Up until now, the U.S. has been able to suck in capital from all over the world.
It is certainly difficult to predict what could result from the frantic moves of enormous sums of capital around the world. Perhaps money could come from elsewhere, Europe, for example, or the United States, itself, which is what we have seen so far, in this world awash in money. However, the very fact that the withdrawal of all or part of Japanese holdings of U.S. Treasury bonds, which only make up 10% of the total, could be such a concern, is an indication of the fragility of the whole capitalist system, including the U.S. economy.
Of course, under this dog-eat-dog system, where the stronger competitors are always out for blood, both the Japanese and U.S. governments are ready to resort to the threat of the mass dumping of assets, bringing on the financial ruin of everyone, as a means to extort an advantage for their respective capitalists. Countless trade and financial disputes have taken this form of brinkmanship. And while on the surface, the two governments appear to be cooperating, one can assume that behind the scenes there is always this ongoing battle, this low intensity warfare, between the U.S. and Japanese governments. But all this means is that the U.S., the strongest economic power in the world, has more weapons to use against its rival, Japan.
The grave financial and economic crisis in Japan is not an isolated phenomenon. It is merely one aspect of a world- wide crisis that has, to one degree or another, lasted for more than 25 years. And despite all the talk about the "unprecedented" strength of the U.S. recovery, the U.S. is exhibiting many of the same symptoms of the crisis as Japan.
Corporate profits are at record highs in the U.S. In 1997 they rose for the fifth consecutive year at double-digit rates. But this has not translated into an equivalent economic growth. The average rate of growth of the GDP from 1992 to 1997 was just 2.9%, slower than in any recovery since World War II. (Of course, GDP because it includes so many things is a very imperfect measure of real growth, but it is the closest approximation we have.)
The reason for this relative stagnation is simple. The capitalists are taking their profits from the increased exploitation of the working class – cutting wages and benefits and increasing productivity through greater speed- up. As a result, demand for the goods that workers produce is not expanding, despite the growth of the population. U.S. capitalists recognize this stagnation, by the fact that they are not reinvesting their record profits in production. Why invest for a market that is not growing? Investment rates are running at about the same level as they were in the 1980s. No, record profits do not necessarily mean higher rates of investment.
The only major factor that has kept the GDP from sinking back into a recession has been the big build-up in debt, both individual and corporate. Revolving credit (including credit cards), mortgage debt and other loans have pushed household debt to over 90% of disposable income. Corporate debt is also running at record high levels.
As it is, the rates of consumer defaults and bankruptcies, already running at record levels, increased every quarter of 1997. And as banks began to be more cautious in their consumer loans, they began to compete for corporate business. But this only led to a decline in the quality of corporate debt. The comptroller of the currency, whose office regulates nationally chartered banks, has observed that credit standards slipped steadily throughout 1997.
The problem for the banks is that they are awash in money, with not enough places to put it. They are literally foisting it on corporations that are using it in an ever more risky fashion.
Without avenues of profitable investment in production, there has been a bubble of speculation in the U.S., perhaps best symbolized by the skyrocketing stock markets. Back in November 1996, Alan Greenspan declared the stock market overvalued when the Dow Jones Industrial Average was at 6500. Since then, the Dow hit records over 9000.
The bubble is growing. And as it grows, the system becomes more parasitical. More of the wealth produced by the working class is funnelled into simply feeding that bubble. Entire sectors of the working class are being downsized and pauperized just in order to keep feeding that bubble.
This is a system in crisis and advanced decay. Perhaps, as the politicians bemoan, Japan is the "weak link in the chain." But then, the U.S., the dominant imperialist power, is at the heart of that crisis.
In any case, the problem for the working class is not which set of capitalists is on top. This competition which pits capitalists against each other rages not only between capitalist groups from different countries, but also between capitalists inside a country. If this competition were restricted just to the capitalists themselves, it would be of no concern to the working class. But the problem is that the capitalists, all of them, seek to make the workers pay for the competition and the economic crisis it engenders. All the capitalists of all the countries – and those from the U.S. first of all – have been making the workers pay for their crisis. As the crisis has gone on, the more virulent these attacks have become.