Dogs and Demons_ Tales From the Dark Side of Japan - Kerr [38]
Lack of profits sapped the energy of Japanese banks, so that in time foreign banks outstripped them through profitable growth and mega-mergers. By July 1999, only two Japanese banks had made it into the world's top ten. One had a negative return on assets, the other nearly zero – at a time when Citigroup and BankAmerica, the top two on the list, were making more than 1.3 percent returns on much larger asset bases.
In Japan's asset-based system, size meant everything; in time, therefore, MOF mandated a wave of mergers so that Japan's banks could reclaim their position as the world's largest. Moriaki Osamu, the director of the Restructuring Agency, is reported to have said, «In order to preserve the financial system we have to shut our eyes [to unprofitable banks]. But, since they can't survive on their own, we've ordered them to merge.» In other words, Japan's bank mergers simply combined small hills of losses into larger mountains of losses. In August 1999, three banks – DKB, IBJ, and Fuji Bank – merged to create the world's largest bank by assets, yet the merger did nothing to make the resulting behemoth profitable. The well-known consultant Ohmae Ken'ichi compares the bank to the Yamato, Japan's giant warship in World War II that sank before it had a chance to fire its guns. By mid-2000, Japan once again had four of the five largest world banks – all of them huge money – losers.
This did not disturb MOF, however, because in Japan's credit system losses and debt have no consequences. Banks rarely make unfriendly recalls of debt within their keiretsu (industrial groupings), allowing companies within their grouping to borrow safely far more than their counterparts in the rest of the world. It has been in a company's best interest to borrow as much as it can so as to acquire more and more capital assets and never to sell them. A company would borrow against assets such as land, and then reinvest that money in the stock market. The market would rise, and the company would then have «latent profits» against which to borrow more money, with which to buy land. And on to the next round.
This cycle of assets-debt-assets is the background for the madness that seized Japan during the Bubble. It explains why IBJ lent Madame Nui money to buy IBJ's own bonds in a deal that cost her $30 million the moment she signed the contract. IBJ knew well why she wanted those bonds. She took her bondholdings to other banks, which were glad to lend her more billions because she had such blue-chip collateral.
This system flies in the face of Western economic theory, but it worked brilliantly in Japan for the first years after World War II, allowing Japan to pull itself up by its own bootstraps. Karel van Wolferen calls the system «credit ordering,» and it is important to remember that it really did achieve great success, turning Japan in a few decades into the world's second-largest industrial power. Since then the South Koreans have copied Japan's credit ordering and so to a greater or lesser extent have most of the so-called Asian Tigers.
This new paradigm of capitalism once appeared to have triumphed over old-fashioned Western values such as the law of supply and demand. There was just one little flaw. As Nigel Holloway and Robert Zielinski wrote back in 1991, «The competitive advantages that Japanese companies gain from their stock market depend on a single factor: share prices must go up.» The Ministry of Finance patched together an intricate machine to support this market: stocks that yielded no dividends, real estate that produced no cash flow, debts that companies never needed to repay, and balance sheets that legally hid losses and liabilities. In this market, no Japanese company could ever go wrong. It was the envy of the developed world.
It was a powerhouse, but it also was a Ponzi scheme. Ponzi schemes work well as long as money keeps flowing