Dogs and Demons_ Tales From the Dark Side of Japan - Kerr [35]
Onoe Nui was riding the success of the so-called Bubble, when Japanese investors drove stocks and real estate to incredible heights in the late 1980s. In 1989, the capitalization of the Tokyo Stock Exchange (TSE) stood slightly higher than that of the New York Stock Exchange; real-estate assessors reckoned that the grounds of the Imperial Palace in Tokyo were worth more than all of California; the Nikkei index of the TSE rose to 39,000 points in the winter of 1989, after almost a decade of continuous climb. At that level, the average price-to-earnings ratios for stock (about 20 to 30 in the United States, the United Kingdom, and Hong Kong) reached 80 in Japan. Yet brokers were predicting that the stock market would soon rise to 60,000 or even 80,000. Euphoria was in the air. Japan's unique financial system-which is based on asset valuation, rather than on cash flow, as is the norm in the rest of the world-had triumphed.
When the crash came, it hit hard. In the first days of January 1990, the stock market began falling, and it lost 60 percent of its value over the next two years. Ten years later, the Nikkei has still not recovered, meandering in a range between 14,000 and 24,000. When the stock market collapsed, so did real-estate prices, which fell every year after 1991 and are now about one-fifth of Bubble-еrа values or lower. Many other types of speculative assets also evaporated. Golf-club memberships, which during their heyday could cost $1 million or more, today sell for 10 percent or less of their Bubble price, and bankruptcy looms over many golf-club developers, who must return tens of billions of dollars taken in as refundable deposits from members.
Despite the best efforts of Madame Nui's bankers and the toad, her empire crumbled. In August 1991 the police arrested her, and investigators found that she had based her first borrowings on fraudulent deposit vouchers forged by friendly bank managers. Nui's bankruptcy resulted in losses to lenders of almost ¥270 billion, the resignation of the chairman of the Industrial Bank of Japan, and the collapse of two banks. The «Bubble Lady,» as the press called her, spent years in jail, along with her bank-manager patrons.
Banks, which lent heavily to speculators like Madame Nui to buy stock and land, found themselves saddled with an enormous weight of nonperforming loans. For years the Ministry of Finance claimed that bad loans amounted to ¥35 trillion, only grudgingly admitting, in 1999, that they surpass ¥77 trillion. Even so, most analysts believe the figure is much higher-perhaps twice that. Taking the more conservative figure favored by many analysts, ¥120 trillion, Japan's bank fiasco dwarfs the savings-and-loan crisis of the 1980s in the United States. The S amp;L bailout, at $160 billion, came to about 2.7 percent of GNP at the time, but the cost of rescuing Japan's banks could reach as much as 23 percent of GNP, a crushing burden. By the end of the century, despite a decade of rock-bottom interest rates maintained by the government to support banks, and despite a massive ¥7.45 trillion bailout in 1999, Japan's financial institutions had written off only a fraction – perhaps 20 percent – of the loan overhang.
What were the policies that caused a supposedly mature financial market to fall prey to a mania completely askew with economic realities? The answer is simple. It applies not only to this question of finance but to questions in almost every area in which Japan is presently suffering: Japan's financial system rests on bureaucratic fiat, not on something that has intrinsic value. What occurred in Japan is an elegant test case, better even than that of the U.S.S.R., of what happens when controlled markets defy reality. For fifty years, the Ministry of Finance (MOF), the