Dogs and Demons_ Tales From the Dark Side of Japan - Kerr [42]
The concept of «latent profits» has come home to roost in the form of «latent losses.» Banks lent heavily to real-estate companies that own land now valued at a fifth or a tenth of the price they paid for it a decade or two ago. As the real-estate companies go under, these properties become the problem of their lenders, but rather than write down the losses year by year on a present-value basis, the banks have kept these properties on their books at purchase value; the moment they sell, they must suddenly report huge losses. So the market came to a near-complete stop in the 1990s: banks didn't sell because of «latent losses,» and few bought because not enough transactions occurred to lower the prices to profitable levels.
Paralysis also rules in the stock market. The amount of money raised by new stock offerings in 1989 was ¥5.8 trillion; by 1992, it had fallen to ¥4 billion, a shocking 0.07 percent of what it had been three years earlier. By 1998 this figure had crawled back up to ¥284 billion, still a tiny fraction of its earlier height. Another telling statistic is the number of companies listed on the exchange. In Tokyo, that number remained almost flat during the 1990s, while that of the New York Stock Exchange rose by 45 percent.
Overall, the Tokyo and Osaka stock exchanges raised about ¥1.5 trillion (about $13 billion) in initial and secondary public offerings in 1995-1999; the equivalent for the same period on the combined New York and NASDAQ exchanges was considerably more than $600 billion, a truly staggering difference. To get a sense of the scales of magnitude involved, consider that in the first three months of 2000 alone the NYSE and NASDAQ raised $92 billion through public offerings, far more than the total raised in Tokyo and Osaka over the entire past decade. The original purpose of a stock market is to provide a forum for companies to sell equity to the public, but the TSE abandoned this role for ten years; for most intents and purposes, it was shut down.
Remarkably, in spite of all this, very little has changed in Tokyo. It is important to realize that as Japan enters the new millennium its financial system remains essentially intact, with only a nod to what Americans and Britons would consider universal reality. Banks and real-estate companies continue to keep properties on their books at exorbitant values; the stock market remains high when measured by P/E ratios, and the big players stay obedient to the system and never blow the whistle. It might seem that Japan has gotten away with it. Western theorists, convinced of certain invariant laws of money – like the laws of physics – find themselves baffled.
The paradox lies in the fact that money is to a great degree determined by society and its belief systems. If everyone agrees that Japan's failed banks are still functioning, then they function. If everyone agrees that unrealistic land and stock values are acceptable, then this is indeed so. And this explains the paralysis, because all these artificial values are linked, each propping up the other.
One must also remember that the collapse of the Bubble was slow, not fast. When it began to deflate, MOF officials took the situation in hand and did their best to manage events, and so controlled was the deflation that some have even speculated that MOF itself initiated and directed the entire crisis. While the theory of MOF invincibility is unrealistic – during most of the 1990s the ministry was fighting one long rearguard action – the fact remains that Japan escaped with remarkably little apparent pain.
Or did it? Japan's success over several decades shows that the laws of money are not immutable; they can be altered to a great degree by such systems as Japanese-style credit ordering. However, post-Bubble paralysis shows that the laws will reassert themselves if such systems are carried to an extreme. Most interestingly,