Harnessing Japan's Exporters
and "Liberating" Its Ailing Banks
Michael Hudson, Ph.D.
Dr. Michael Hudson heads up the Institute for
the Study of Long-Term Economic Trends (ISLET) in New York. He
is also a research fellow at the Levy Economics Institute of
Bard College, author of many books on international finance, and
editor of 42 books on economic history. He is a former
balance-of-payments economist for the Chase Manhattan Bank and
Arthur Andersen & Co.; the chief economist of the Hudson
Institute; and a consultant to UNITAR, US, Canadian and Mexican
government agencies and corporate clients.
Foreigners Trying to Buy Control of Japan's Economy with Japan's
As Japanese and foreign investors shift money out of the Nikkei
stocks into U.S. and other foreign stocks and bonds, America and
Japan are at loggerheads over whether the yen should continue to
depreciate, or whether Japan should sell off its international
reserves to support the yen (and thus to prevent Japanese exporters
from benefiting from a falling yen).
To understand this economic fight, one needs to cut through the
fog of euphemism being used by advocates of "open markets"
and "quick solutions." One needs a "devil's
dictionary" to provide translations of the euphemisms being
thrown about. For instance, "dealing with Japan's banking mess"
is becoming a euphemism for selling Japanese banks and their real
estate assets to "vulture investors" at a few cents on the
dollar, that is, a fraction of what the buyers expect the property
to be worth upon economic recovery.
Wanting Japan to sell off its banks to foreign "white
saviors," US officials attribute any and all Japanese economic
problems to the nation's reluctance to hurry up and sell its banks.
The Japanese and US media duly record the anguished cries of
American officials that the declining yen is a terrible thing for
Asia (meaning that Japanese producers may undersell other Asian
exporters). They also complain that a poorer Japan means lower US
exports. This conveniently blaming America's own declining living
standards on Japan, rather than on the downsizing and "flexible
employment" policies that are now troubling American labor.
"Expanding the economy" by borrowing more money is
becoming a euphemism for buying more US exports. US officials have
made it clear that this is the only kind of Japanese economic
expansion they want to see, except for more Japanese loans to
troubled East Asian countries to enable those debtors to pay US
banks. Consumers and taxpayers, not banks, other financial
institutions and real estate investors are to bear the cost of past
As long as Japanese newspaper readers can be convinced that
international financial spokesmen are well-trained technocrats who
know what they are doing - rather than foreign vultures looking for
a quick meal - there will be little questioning of the series of
blunders that has depressed Japan's economy.
In sum, LDP (ruling party) politicians are trying to convince the
public that everything can now be fixed by following policies
designed in America. The Ministry of Finance (and the LDP behind it)
have become conduits to enact US-sponsored policies.
It is not Japan that is being helped, but America's own financial
industry. Japanese savers are to be squeezed more than ever to
finance the US economy in this new scenario. That is the real
meaning of "open markets" and the "Big Bang."
In analyzing the dynamics at work that determine the yen's
international value, it is important to recognize that exchange
rates in today's world are determined by capital flows, not by
relative product prices, e.g., the price of McDonald hamburgers or
other living costs. Most currency transactions are no longer
associated with imports and exports of goods and services. Rather,
as the world economy has become globalized, international investment
by money managers buying foreign stocks and bonds has expanded to
reach a much greater magnitude than foreign trade.
Since Japan's Big Bang, savings have been flowing out, mainly to
the US stock and bond markets. These capital outflows lead to
falling currency values. This typically helps the nation's
exporters, as it does those of Japan today.
America wants this money. Merrill Lynch and other money managers
report that they are getting rich off the commissions being earned
from Japanese savers who are taking their money out of the banks and
postal savings system and turning them over to America's global
stock market firms. Stock prices for these companies are booming,
carrying up other US stock market prices. International bond markets
also are booming.
The problem is, what will the Americans buy in return? Certainly
not more Japanese electronic and automotive products, for this would
eat into the markets already targeted by US industrial firms.
American industrialists do not want to see Japanese companies
benefit from the falling yen (which makes Japanese labor priced
lower in US-dollar terms. Raw materials prices, machinery prices and
other basic costs are "dollarized," and hence their dollar
prices are unaffected by shifts in national currency values).
America may threaten to raise tariffs against Japan's "depreciating
currency," and US trade negotiators have let the government
know that they may insist on more "voluntary export controls."
They also may demand that Japan guarantee US exporters a larger
stipulated share of its domestic market.
Most of all, however, US officials are now insisting that Japan
create an extraordinary investment opportunity to attract the Big
Bang savings outflows back to Japan. The US solution is for Japan to
sell its capital assets - its distressed banks, its distressed real
estate, and its distressed companies, all at fire-sale prices.
In other words, the US financial sector will turn around and
recycle the savings its institutions are collecting from Japanese
consumers by lending it out to sophisticated "vulture investors"
to buy Japanese assets. In this way, foreigners will be able to buy
control over Japan's economy by using Japan's own consumer savings!
This is the basic meaning of the diplomatic war now being waged over
the exchange rate of Japan's yen vis- a-vis the dollar.
Until this alternative can be implemented, American officials are
demanding that the Bank of Japan begin selling off its dollar
reserves - that is, its holdings of US Treasury bills - month by
month to offset ("finance") the outflow of Japanese
savings to the United States. This means that as Japanese
private-sector holdings of US stocks and bonds increases, official
Japanese dollar holdings of US Treasury securities will be sold off
so as to maintain "balance" in the foreign exchange
market, thereby holding the yen steady. This is the new meaning of "equilibrium"
in today's diplomatic discussions.
At the end of this process, Japan's foreign reserves - the
measure of its international power and economic autonomy - will be
stripped away. Japan will have been reduced to the status of a third
world country. That is now called "being a good global citizen."
The United States also is demanding that Japan's government cut
taxes so as to put more money into the hands of Japanese, knowing
full well that they will save rather than spend most of it. In
effect, Japan's government is to run deeper into debt so that Japan
may finance more U.S. debt. In this way, debt in both countries can
grow at a rate able to absorb the exponential growth in savings by
the world's financial institutions -- pension funds, insurance
companies, banks and private investment funds.
As in most third world countries, a well-to-do class of "cosmopolitan"
investors may benefit from having placed their savings outside the
country, safely in the United States. But Japan's own official
reserves will be emptied out. At that point, further outflows ("flight
capital") will push the currency down, wrecking the economy and
creating a chronic decline in living standards, Latin American
This is elementary international economic theory. Why is it not
being taught in Japanese schools and reported in the Japanese press?
Is a prerequisite for Japanese foreign service or Ministry of
Finance position that one is ignorant of these basic truths?
The above facts do not bode well for Japan's immediate future.
They suggest that each month will bring a new "crisis,"
which will be used to panic the Japanese public into pressing for
In sum, the "crisis" over the yen's fall over the past
six weeks is NOT the result of Japan's inability to solve the
problem of bad bank balance sheets. The Big Bang resulted from a
change in Japanese investment laws and practices, not from any
sudden worsening in the bank situation. The Big Bang will continue -
indeed, the US yelling and screaming over the "crisis"
will catalyze Japanese fears, and consequently their desire to shift
yet more savings into dollar-denominated assets.
So what is the Bank of Japan to do next month, and the month after
that - $25 billion after 25 billion, month after month? It has a
choice. To do NOTHING will simply let the yen decline, as yen
savings are exchanged for "dollarized" bonds and stocks.
This decline in the yen will help Japanese exporters somewhat. It
will increase the yen-value of US and other foreign assets of
Japanese companies and savers. It also will infuriate the United
States, and may prompt other Asian countries to devalue THEIR
currencies, so as to offset any competitive advantage achieved by
Japanese exporters as a result of the fact that the yen's value is
determined NOT by commodity prices, but by capital flows.
The Big Bang has the makings of a chronic POLITICAL crisis. That
is what the Japanese public has not been told.
For decades, Americans have used "opportunity" as a
synonym for crisis. US diplomats are hoping that the yen's decline
may convince Japan that they have to save matters by selling their
bank assets at distress prices to foreign investors.
Will this solve the problem? Indeed! Capital outflows by Japanese
savers into US bonds and stocks will be offset by capital inflows by
US vulture investors to buy undervalued Japanese assets.
Japanese savings will help push up US stock and bond prices
(while reducing Japanese securities prices accordingly). And the
Americans will get capital gains on distressed Japanese bank assets
- while pushing for an asset reflation that will make homes and
office space even MORE expensive for most Japanese.
What this kind of "recovery" means for the average
Japanese under these conditions is rising housing prices. For
Japanese industry, it means rising land prices for office space and
factories - not exactly the way to increase Japan's competitive
power in the world economy.
The American "cure" thus promises to erupt into a
full-scale new disease, a re-inflated bubble economy. What is
remarkable is that nobody seems to be suggesting any alternative
policies. Perhaps Japan needs not only a new banking system, but a
new educational system, above all a re-designed economics
Can anyone explain how Japan benefits from this?