Xu Xiaonian: Scholars should not open their mouths and close their mouths to policy regulation, and the government should be cautious in using policy tools

Xu Xiaonian China Real Estate Fund 100 2024-01-26

Macroeconomic policy is a stimulant with extremely severe sequelae, and scholars must not open their mouths and close their mouths to policy regulation, and the government should be cautious in using policy tools. An important psychosocial factor in the popularity of Keynesian economics today is its promise of pain-free treatment options, which provide theoretical support for opportunistic behavior in government and the public. ——Xu Xiaonian Xu Xiaonian: Famous economist

Scholars should not open their mouths and close their mouths to policy regulation, and the government should be cautious in using policy tools

Xu Xiaonian | wen

It is believed that the end of Japan's "economic miracle" began with the Plaza Accord in 1985. Under intense pressure from the United States, the Japanese government loosened its grip on the exchange rate, and the yen rose from 240 yen to 1 dollar to 120 yen to one dollar in a short period of time. A strong yen hit exports, creating a "lost decade".

If this is true, the Japanese economy should have entered a recession after the agreement was signed, but in 1986 there was a boom, asset prices soared, and the bubble economy swelled rapidly. Why is that?

Concerned about the adverse effects of the yen's appreciation, the Japanese government lowered interest rates five times in a row from January 1986 to February 1987, injecting a large amount of money and increasing its fiscal deficit. Strong policy stimulus has kept economic growth going, but it has also spawned asset bubbles, with the Tokyo Stock Exchange index jumping from 1,000 to 2,500 and real estate prices in major cities doubling. Japanese businessmen have taken cheap money to buy overseas assets – from golf courses in California to Rockefeller Center in New York – so much so that the American media have exclaimed that Japan is achieving what it failed to achieve in its attack on Pearl Harbor. As evidenced by expansionary monetary and fiscal policies, rather than exchange rates, which were the main culprits in the bubbles, West Germany, which also signed the Plaza Accords, experienced a sharp appreciation of its currency against the dollar, and avoided a bubble economy like Japan's by implementing a relatively prudent monetary policy.

On the surface, the Japanese government's policy mistake in dealing with the appreciation of the yen caused an asset bubble, and after the fact, it was reflected on at a deeper level, and the perception of policymakers went terribly wrong. Long before the Plaza Accord, the Japanese economy showed signs of sluggish growth, with GDP growth averaging around 4% throughout the 80s, significantly lower than the 10% growth rate in the 60s. Under the domination of inertial thinking, the Japanese government has adopted a loose monetary policy to stimulate investment demand in an attempt to continue its former glory, while private enterprises and banks are actively following suit and making easy money. As the post-war reconstruction of productive capacities has been completed, there are fewer investment opportunities in the real economy, investment returns are getting lower, and capital is pouring into land and capital markets that appear to be producing quick results and high returns. The nationwide wealth carnival lasted for more than three years, and it was not until the bubble inflated to the point that "selling Tokyo could buy the whole of America" that the government sensed that something was wrong and felt the need to put on the brakes and cool down the capital markets.

Since May 1989, the Bank of Japan has raised interest rates five times in a row, and in March 1990, the Ministry of Finance imposed total control on real estate financing. In July 1991, the central bank hastily turned around the ship's bow and lowered interest rates, but the benchmark interest rate fell from 6% to zero and was unable to recover, and the stock index fell year after year until this year, when it returned to the high level of 1990.

There were so many dramatic events during the bursting of Japan's bubble that space will not be covered here, but we will only reveal below how the balance sheets of companies and banks festered each other through the life and death of a company and a bank, and why it took nearly a decade for Japan to begin to clean up its banks' bad debts in earnest. These two cases represent a common phenomenon in that period, which is quite different from Mr. Koo's description, and they also show that expansionary fiscal policy cannot replace structural reform.

The first case was Daiei, once Japan's largest retailer. Daiei took advantage of the bubble economy to borrow heavily to buy land and build stores to expand, and as land prices rose, the company borrowed more money and opened more stores as collateral for land, forming a vast retail network spread throughout Japan, expanding its business to almost all goods except women and opium. Underpinning this "business legend" is the accumulation of up to $20 billion in debt and the expectation that the real estate market will always be bullish. After the collapse of the real estate market, the value of land collateral has shrunk significantly, banks can no longer lend to Daiei as they did in the past, and the company is unable to repay its debts due from retail sales alone(*10). Since 2000, with the participation of the government, Daiei and its three main banks have repeatedly negotiated debt restructuring, using various methods such as debt write-offs, debt-to-equity swaps, special loans, and write-offs of public funds, in an attempt to avoid bankruptcy, but in the end it did not escape, and in 2005 it was taken over by the government's Industrial Revitalization Corp. (IRC).

In the process of bailing out Daiei, the regulatory authorities found that the reserves of its largest creditor, UFJ (United Financials of Japan) (United Financials of Japan) were insufficient, and UFJ had to increase the reserves, and the resulting large losses were difficult to digest. UFJ's predecessor was the bankrupt banks of Sanwa, Tokai and Toyo Trust, which were formed in 2002 after writing off bad debts, closing branches, and laying off personnel, and then underwent a secondary reorganization due to the bankruptcy of Daiei. Bankruptcy and restructuring were the main themes of that period, and the liquidation of the balance sheets of financial institutions and the restructuring of enterprises in the real economy were closely intertwined, and it was by no means as easy as "one or two years" as Mr. Koo Chaoming said.

The second case is the Japan Long-Term Credit Bank ("Nagabank"). Founded in 1952, the bank played a significant role in post-war reconstruction by issuing financial bonds to local banks and providing large-scale equipment loans to industries such as steel, electric power, machinery, and chemicals. After the end of the rapid economic growth, the return on equipment investment declined, and Changyin did not realize the need to change its business model, and wanted to continue to make easy profits, and entered the real estate and tourism and vacation industries. After the collapse of the real estate market, investments became non-performing loans. Changyin did not deal with these non-performing assets in a timely manner, but covered up the truth through "internal restructuring". The specific method is to let the subsidiary borrow money from Changyin, and the subsidiary will use part of the borrowed funds to purchase the debtor's land collateral at book value, and invest the rest in the purchased land to develop the apartment project, with the illusion of using the rental income generated by the apartment to repay the loan of Changyin. This operation seems to have cleaned up the non-performing assets perfectly, but in fact it only transferred the non-performing assets from the headquarters to the accounting books of the subsidiaries, and the low rents after the bursting of the bubble simply could not pay the high land prices during the bubble, and the self-deception only delayed the exposure of losses, and the executives may have used this to evade responsibility, but they could not save Changyin from bankruptcy.

From these two and many other similar cases, we can see why the 90s of the last century were a "lost decade" for Japan, covering up and denying the existence of problems and resisting reform. None of the parties involved wanted to lift the lid, because once the truth was revealed, the executives of the enterprises would have to bear the responsibility for their operations, resign, and the financial institutions would check and write off the bad debts, which would inevitably cause losses and losses of capital, and a group of current presidents and chairmen would bow down and step down, and the executives would continue to make up stories about the possibility of repaying debts in the future.

The government also does not want to see the knock-on effect of the closure of companies, and how many of Daei's suppliers and wholesalers will be in a desperate situation? How many people will lose their jobs? The dissatisfaction of the people is the loss of votes, which are the most important lifeline for politicians. Rather than painful fiscal and monetary policies, governments have always favored painless fiscal and monetary policies, throwing money at them to tide over the storm, and taking care of their own tax interests, such as the outnumbered agricultural associations and the construction industry everywhere. All parties are hoping that the economic situation will improve and everyone can go about their lives as usual. An important psychosocial factor in the popularity of Keynesian economics today is its promise of pain-free treatment options, which provide theoretical support for opportunistic behavior in government and the public.

The 1997 run on Takushoku Bank in Hokkaido and the collapse of Sany Securities triggered a crisis of confidence and, in the words of former BOJ Governor Yoshiaki Shirakawa, "the financial system was on the verge of collapse." The crisis forced the government to take emergency relief efforts, repeatedly recapitalizing banks on the verge of failure, and conducting a comprehensive assessment of the scale of non-performing loans in the banking system. In 1999, the regulator announced that non-performing loans totaled 34 trillion yen, equivalent to 4.5 percent of nominal GDP in the same year. Citing data from the second verification by the Financial Services Agency in 2001, Japanese researchers put the total amount of non-performing loans at 43 trillion yen, 25% higher than the previous round of self-reports, while the international media widely reported more than 140 trillion yen (about 1 trillion US dollars), about 25% of GDP that year!

Minor illnesses become major illnesses, and the cost of treatment index increases.

Whatever the true figures on distressed assets, the undeniable reality is that the balance sheet has been corrupted to such an extent that confidence is so weak that the banking system cannot carry out normal savings-credit business. In March 2002, the non-performing loan ratio (NPL/total assets) of major banks was at least 8.4% (*15), while the capital adequacy ratio required by the Bank for International Settlements (BIS) at that time was 8%, which means that after the cancellation of bad debts, the net assets of banks are not negative and well below international regulatory requirements. In 2001, Junichiro Koizumi, who did not have a strong factional background in the party, was elected prime minister with popular support and campaigned for reform with the slogan of reform. Koizumi appointed Heizo Takenaka, a scholar from the private sector, as Minister of Economy, Finance, and Finance, and Takenaka did not follow the usual rules of officialdom and initiated reforms at the risk of offending vested interests, in an effort to repair the balance sheet of Japan's financial system as soon as possible.

In 2002, the Japanese government promulgated the Financial Revitalization Plan, which was formulated under the auspices of Heizou Takenaka, in an effort to restore the people's confidence in the financial system and financial institutions, and to restore the normal functioning of the financial and economic sectors. The cornerstone of the modern financial system is confidence, and the financial system is paralyzed by the lack of confidence in the future, in which individual and institutional savers dare not save money, banks do not dare to lend, and banks do not dare to lend and finance funds from each other. The balance sheet is a barometer of the bank's health, and the first priority in rebuilding confidence is to clean up the bad loans.

The Financial Revitalization Plan has three main points: (1) strict assessment of non-performing loans, (2) capital replenishment, and (3) strengthening corporate governance of financial institutions. The Financial Services Agency (FSA) has promulgated a new asset quality classification method, which is based on the Discounted Cash Flow (DCF) assessment standard, which is audited by a third-party certified public accountant (CPA) and requires banks to rectify and rectify the standards within a time limit. DCF estimates the value of assets using expected future cash flows and more accurately reflects the quality of a bank's assets than the acquisition cost method. The DCF valuation method is not only instrumental, but more importantly, it is fundamental, returning to the source of value, which we will introduce in more detail in the next section.

The Japanese government has established the Industrial Recycling Corporation (IRC), the Resolution & Collection Corp (RCC), and the Banks' Shareholding Purchase (BSPC). Corp) and other institutions, which are essentially companies that dispose of non-performing loans, similar to the four major asset management companies set up in mainland China in 1999 for state-owned banks, whose main task is to acquire banks' non-performing loans and take over and restructure bankrupt enterprises. Another mission of the BSPC is to transform Japan's financial-industrial structure by buying shares held by banks and selling them to investors in the market, weakening or severing the equity ties between banks and corporate debtors, and targeting the traditional master banking system. The central bank cooperated with the government to buy company shares to support stock prices, implemented quantitative easing monetary policy, and issued emergency loans to distressed financial institutions, easing market panic and preventing the chain reaction of bankruptcy.

The main banking system, cross-holding, and lifetime employment are considered the three pillars of Japanese-style capitalism, which contributed greatly to the post-war "economic miracle". Big business is often close to politics, supporting and lobbying politicians for policies that protect vested interests, and as a tool for governments to achieve their policy goals. Researchers call this collectivist political-financial-industrial structure "crony capitalism," which became popular in Japan, South Korea, and some Southeast Asian countries after the war. In the author's opinion, a more accurate expression would be "relational capitalism", in contrast to the contractual capitalism of the United States and Europe. Although Japan's legal system is relatively clean and effective, the cooperation between companies that belong to the same consortium, even if they are independent legal entities, is more important than a contract.

Masahiko Aoki, a well-known economist, believes that the main banking system has reduced information asymmetry in the financial market, reduced transaction costs, and implemented effective monitoring of enterprises. These advantages of the main banking system seem to have been manifested only in the boom times, when the businesses of banks and corporations were mutually reinforcing. However, when the market and the economy fluctuate violently, especially when asset prices plummet, they lose all of them, and enterprises become insolvent, resulting in a large number of bad debts of banks, and banks are too busy to take care of themselves, unable to meet the financing needs of enterprises, and enterprises are more difficult to operate, falling into a vicious circle. The collapse of the main bank not only deprived companies of a stable source of financing, but also destroyed existing supply chains, which Takenaka called "the destruction of industrial organization" (*18) (disorganization). In the past, small and medium-sized enterprise suppliers were willing to invest in R&D parts and components for Party A's large enterprises, because they expected that Party A, which had the support of the main bank, would pay on time afterwards, but now Party A's ability to pay has become a problem, trust no longer exists, suppliers dare not undertake the research and development of parts, and the production and sales of Party A's enterprises have fallen into chaos, which in turn has further weakened the confidence of suppliers. After staying in the comfort zone of the consortium for a long time, the member companies could not find a completely market-oriented alternative for a while, the big family disintegrated, the members were at a loss, and the operating difficulties of a main bank or leading enterprise dragged down a large area, just like the Cao army in the Battle of Chibi, the warship was locked with iron, a ship caught fire, and the whole army was destroyed. It wasn't until the banks were unable to protect themselves that companies had to bite the bullet and save themselves.

The restructuring of the enterprise is far from being as simple as Mr. Koo Chaoming said. In December 2001, Marubeni, a large Japanese trading company, lost money on its investment, and its huge debts caused cash flow difficulties, and Marubeni's main bank was unable to help because of the deterioration of its own operations, so the board of directors met all night to discuss a self-help plan, and finally made a difficult decision: sell assets at a discount to repay loans, lay off 25% of employees, take early retirement for employees over 50 years old, reduce salaries across the board, reduce the president by half, and reduce employees by 10%. After the contraction, Marubeni avoided bankruptcy and entered the path of normal development, and the stock price recovered from a low of 58 yen to more than 600 yen in 2005. In the spring of 2002, Panasonic reported a record loss in its semi-annual report, and the crisis initiated reforms, in response to the company's bloated and slow market response, Panasonic closed the repetitive construction of the factory, delisted five of its subsidiaries and privatized them, merged and reorganized them into Panasonic, and reduced the 14 overlapping areas to 4, compressed the management level, laid off redundant personnel, and laid off more than 20,000 employees in Japan alone.

After a series of operations such as asset inventory, bankruptcy merger, write-off of bad debts, government capital injection, and enterprise restructuring, the NPL of banks fell to 2.9% in 2005 and further to 1.5% in 2007, and the economy returned to a steady growth rate of more than 2 percent, and large banks also achieved the largest profit growth in history. Interestingly, Heizo Takenaka, the leader of the financial consolidation, did not speak highly of this achievement, saying that the banks' "profits were only due to the disappearance of the cost of dealing with non-performing loans, not because the Bank of Japan itself became able to compete with the United Kingdom and the United States." Contrary to Mr. Koo's view, economist Noboru Kiuchi bluntly said that the role of the government is mainly to "leave it alone" and force private enterprises to implement reforms, "In the past, the Japanese government used a lot of money to expand public investment to support the economy, which delayed the restructuring of enterprises. The discontinuation of this policy since 2001 has led to a reduction in GDP but a change in the mindset of the business community to the need to take matters into their own hands. In this sense, government policies contribute a lot. Heizo Takenaka said that the financial expenditure without reform was "prescribing nutritional drugs to cancer patients", and Mr. Koo Chaoming was obviously a doctor who only prescribed nutritional drugs.

It is widely accepted that Japan's financial system has stabilized and the economy has emerged from recession as a result of the Koizumi administration's reforms, even though GDP growth has been at the bottom of the developed world for a long time.

Mr. Koo estimates that "the bursting of the bubble economy destroyed 1,500 trillion yen of wealth" (*20) (p. 13 of The Great Recession), which is equivalent to three years of GDP, and the cost of rebuilding the balance sheet is enormous, and it is still unclear how much public finances, that is, taxpayers, have paid for it. In the first 20 years of the loss, the government debt-to-GDP ratio rose sharply, and once it went up, it never came down again (Figure 3). If the first decade was a cover-up of the truth by the government and the private sector, the second decade was the transfer of non-performing assets from the private sector to the government, repairing the balance sheets of enterprises and financial institutions, destroying the balance sheets of the government, and failing to fundamentally solve the problem of excessive debt of the entire country. Some people may say: What does it matter? The government will never go bankrupt, but the consequences of high debt cannot be ignored, and in the long run it will inevitably affect the normal operation and normal functioning of the fiscal system. In recent years, 22 percent of the government's annual budget has been spent on debt servicing, severely squeezing public works, education and defense spending, which together account for only 15 percent of the budget, according to Reuters. The Japanese government estimates that debt repayment will account for 25% of the budget by 2025 (*21).

(Source: International Monetary Fund; in the early '90s, when the bubble economy burst and the Japanese government moved its debt from the private sector to the public sector, the country's balance sheet did not improve, except that sovereign credit was higher than that of the private sector.) It is obviously unlikely that the government's debt ratio will fall on servicing the debt with fiscal surpluses, and the only thing left is to "dilute" government debt by hoping for the growth of the denominator GDP. If GDP growth lags debt growth, a Greek-style sovereign debt crisis is not inconceivable. ）

The market has warned of the continued deterioration of the government's balance sheet, and the shock in the Japanese government bond market in late 2022 and early 2023 forced the Bank of Japan to intervene with huge sums of money, and although the market returned to calm, it cast a shadow on the government's future borrowing ability (*22).

Coincidentally, in June 2023, when U.S. Treasury Secretary Janet Yellen forced Congress to raise the federal government's debt ceiling by threatening to default on its national debt, the private rating agency Fitch downgraded the U.S. government's credit rating, and bond yields, the government's borrowing costs, rose, and the stock market fell. Humanity is remembered for a short time, and the 2009-2010 sovereign debt crisis in the EU-5 was also caused by the Greek government's raising of the fiscal deficit ceiling.

Is it really as Hegel said: The only lesson that mankind has learned from history is that it has not learned any lesson?

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Source: Zhongguancun Industrial Upgrading Research Institute