THE TIMES, London
January 7, 2000

ANALYSIS

Ten years ago the economic bubble burst in Japan. Jon Ashworth recalls events

Tokyo saw rampant economic growth before the bubble burst. A downturn on the stock exchange signalled the end.

Dark time for land of rising sun.

There is a television show in Japan called From Heaven to Hell in which businessmen who lost everything in the recession of the 1990s are paraded before a studio panel. The aim is to guess how much money they lost. The hosts gape in disbelief as the victims, grinning inanely, cheerfully recount how they were wiped out overnight. It is the sort of ritualistic humiliation at which the Japanese excel. But while they may pretend to find it funny, few Japanese have much to laugh about. Ten years ago this month, a downturn on the Tokyo stock exchange signalled the end of the rampant - yet illusory - economic growth that had powered Japan through the 1980s. Soon, property prices had collapsed and debt-laden companies were dropping like flies. Japan's economic bubble had burst.

Japan's travails are documented in a new three-part series, Bubble Trouble, which starts on BBC2 on Sunday. It recalls an era in which a night out in Tokyo for five businessmen, with a meal, drinks and tips, could easily cost ten million yen (#76,000). Golf club memberships, which cost #800 during the 1950s, were changing hands in the late 1980s for as much as #1.5 million. The Japanese swooped on foreign real estate and outbid Westerners for famous art collections.

But the growth was nothing more than a flimsy bubble blown up by cheap money and loose lending. In the early 1980s, the surge in Japanese exports to America led to a sharp backlash against Japan and threatened an all-out trade war between the two nations. Officials meeting at the Plaza Hotel in New York in 1985 agreed to handicap Japan's exporters by engineering a stronger yen. But the so-called Plaza accord worked too well, and, fearing recession, Japan's bureaucrats acted again.

The Ministry of Finance eased credit restrictions and cut interest rates - progressively - from 5 per cent to 2.5 per cent; the lowest interest rates in the world. The idea was to help manufacturers and to encourage spending in the high street. But it backfired. Cheap cash was instead piled into the property market and land prices started to soar. Values were driven higher still by a report saying Tokyo would need even more office space as it strove to become a world financial centre.

One Tokyo real estate broker, Manabu Miyazaki, recalls: "We worked it out in the bubble years that, as a piece of real estate, Japan was worth the whole of the United States seven times over." [If only Japan had hung on, and then turned itself into Japan.com :)]

For that matter, large tracts of America did indeed fall prey to Japan's land-hungry developers. At one point, almost every skyscraper in Los Angeles was Japanese-owned. Another property investor says: "I felt great about it. I thought it was the East's revenge on Western capitalism. If it comes to it, I thought, we should buy all of the US. We really should have bought more of America."

In Japan, the appetite for land proved insatiable. Land, for the Japanese, was the safest of all investments; better even than gold. Land prices had never gone down and could never go down. As prices rippled out from Tokyo, farmers and smallholders, too, became millionaires. About 50 per cent of Japanese owned their own land and felt richer than ever before.

With money easy to borrow, land prices kept rising. Soaring property values went back into the stock market and distorted that too. On the Nikkei, the value of Japan's companies rose threefold between 1985 and 1989. In London and New York, share prices rose 60 per cent in the same period.

Japan's underlying economic growth was negligible - manufacturers saw operating profits grow just 2 per cent a year between 1980 and 1989 - but the rise in land values masked the real picture. As one Tokyo banker says: "Money raised was being used to purchase shares in companies who were also raising money in the market. It was a vast circle of money. There was no real basis, no economic reality, to the boom that Japan had."

By 1989, rising land prices were creating divisions in Japanese society. Those on the housing ladder grew rich. For families left behind, buying a house or a flat was further and further out of reach or might require a 100-year mortgage. In December 1989, the Nikkei index peaked at nearly 39,000.

Then things began to go wrong. On the first trading day of 1990, share prices began to fall. They dropped 63 per cent in the next two and a half years. The Ministry of Finance made things worse when it ordered banks to limit lending to property developers.

One real estate broker sums up the impact: "It was as though lots of cars were racing at 90 mph, several hundred of them, all bunched up. Leading them was the Ministry of Finance car. It suddenly braked hard and all the cars went into it. A major pile-up. That was the burst of the bubble."

Much of Japan's cheap loans had been advanced using land as collateral. As property prices fell, the banks swiftly realised that the loans could never be recovered. But the crisis was made worse by the way the Japanese establishment closed ranks. For five years, the Ministry of Finance conspired with the banks to hide the level of bad debt.

The big Japanese firms tried to conceal their bad debts with ingenious accounting. They paid people off and employed corporate racketeers known as sokaiya, who prevented anyone asking hostile questions at annual meetings by clapping loudly and shouting "let the proceedings continue".

The close-knit hierarchical system that had been Japan's strength in the postwar years stopped businesses admitting the damage they had sustained or learning from mistakes. For five years, Japan Inc tried to gloss over the differences, but the economic crisis in Asia made things worse. The sleazy practices that had flourished under the bubble - greed, corruption and fraud - began to seep out.

In 1997, investigators were sent into a number of Japan's biggest stockbrokers. It was alleged that officials had been bribed, prices manipulated and debts concealed. Sanyo Securities declared itself bankrupt. Directors of Yamaichi Securities concealed off-balance sheet debts of more than #1 billion.

The same story of financial disaster was repeated all over Japan. Businesses discovered that the land against which they had been encouraged to borrow so heavily was suddenly worth, perhaps, a third of its former value. By the late 1990s, property values had fallen 70 per cent. In one year, 17,000 small businesses went bankrupt.

Ten years on, the bursting of the bubble has forced the Japanese to question every aspect of the system that once served them so well. There is talk of need for reform in every area, from industry to politics and education. But the Japanese find it hard to admit guilt.

Robert Zielinsky of Lehman Brothers in Tokyo says: "In Japan, you can't just say you're sorry. Normally you have to commit suicide or at least quit your job if you're a director of a company. That's why they're so reluctant to let the world know they made a mistake."

On the slopes of Mount Fuji, there is an area of forest where Japanese traditionally go when they want to kill themselves. Each autumn, the police search for the season's victims. The national suicide rate, already one of the highest in the world, went up 35 per cent in 1998. The police reckon that as many as 3,500 people committed suicide for what they call "economic reasons".

For those who really want to punish themselves, there is always Japanese television.

[ENDS]

-- John Whitley (jwhitley@inforamp.net), January 07, 2000