[OPE-L:1277] Re: RE: Re: Prof. Itoh's paper

From: Fred B. Moseley (fmoseley@mtholyoke.edu)
Date: Fri Sep 17 1999 - 22:35:42 EDT

There have been some very interesting recent posts on this stream, which I
appreciate very much. Unfortunately, I am leaving town tomorrow for a
week and so will not have time to respond to most of these recent posts
(from Rakesh and Paul and Allin and Jerry) until after I get back. (By
the way, I hope you all have been watching the decline of the dollar this
week, precipitated in part by the release last week of another
record-breaking US current account deficit for the second quarter of 1999
- $80 billion in the quarter, a 16% increase over the first quarter
deficit, which was itself a record.)

But I want to try to quickly respond to Makoto's latest post.

Makoto, thank you very much for your analysis of the Japanese banking
crisis, which I found very illuminating and though-provoking. I have a
few more comments and questions in response below.


> On Fred's inquirries [OPE-L;1227]; a survey of the Mistry of Finace
> estimated the total bad loan in the Japanese banks amounts to 76 trillion
> yens or 12 per cent of their total loan in January 1998, as I quoted in the
> chapter in the file. Where did you pick up the estimation of 1 trillion
> dollars?

I have seen this estimate a number of times, especially in the Financial
Times. It is usually acknowledged that this estimate is higher than the
offical government estimate and that this estimate may be on the high
side, but it is argued that the government estimate is too low and misses
a lot of the bad loans. In any case, even the government estimate ($633
billion at 120 yen to the dollar) is 15% of GDP. So the range seems to be
between 15 and 25% of GDP. And I don't think this includes the financial
problems of the insurance companies, which appear to be of increasing


> As the share prices rose, though moderately, its burden would be
> reduced after the injection of public money. The amount of bad loan is
> highly related to the prices of shares and real estate.

Could you please explain this relation in more detail? How does an
increase of share prices reduce the bad loans? How does an increase in
real estate prices reduce the bad loans? (Are real estate prices actually
increasing now in Japan?)3.


I was very interested in your comments about the reasons why the bad loan
problem has not lead to a larger financial crisis in Japan. Your comments
and my responses are interspresed below:

> As you say, it is remarkable that the burst of huge bubble to cause bad loan
> did not ignite the full sized monetary and financial crisis. The reasons are
> worth reconsideration. The largest foreign exchange reserave in the world,
> made by the trade surplus,

I don't see how large foreign reserves solves the fundamental problems of
low profitability, high debt, and excess capacity. Could you please
explain this further?

> the financial positions of big businesses to endure the damage of the
> collapsed bubbles,

Is it really true that "big business" in Japan does not have a severe
profitability-debt crisis? A column in the Financial Times last May by
Paul Abrahams (one of their feature columnists who writes regularly about
Japan) mentioned a Japanese government study that concluded that in June
of 1998, only 35% of Japanese firms made a profit. In other words, 65%
percent of japanese firms DID NOT MAKE A PROFIT. Do you know anything
about this report? Is it not accurate? Or maybe it was accurate, but no
longer is?

> the extremely lowered interest rate,

Low interest rates should certainly reduce the debt burden. Are most of
the "bad loans" at these very low rates of interest or at higher rates of

In general, have banks started lend again to business?
Have businesses starting to borrow again for purposes of investment?
The latest reports seem to indicate no. But without more bank lending
and business investment, I don't see how there can be a recovery.
In other words, it doesn't seem like the Japanese banking crisis is over.


> It is highly unpredictable also what happens when the
> huge bubble in New York collapses.

When do you think the bubble will burst?

What do you think will be the precipitating cause?
What was the precipitating cause of the bursting of the bubble in Japan?

Makoto, I was able to download your chapter and will take it with me on my
trip and hope to have time to read it. I look forward very much to
further discussion.


> Though Japanese government and business circles tend to follow and try to
> support the US debt economy including the bubble, the China with the second
> largest amount of foreign exchange reserve mostly in dollars would move more
> independently and even against the US national interest.
> Jerry; I am almost persuaded, though I am still not sure if I can work for
> some part of cooperative work for the electoric journal at the moment.
> All the best,
> Makoto

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