A slow-motion disaster

Focus on Japan: the country that wounded itself may not be willing to heal itself; Why won't the Japanese stop the rot? asks Michael Lewis

IN THE early part of this decade, looking for an excuse to visit Tokyo, I stumbled upon the phenomenon of the Great Tokyo Earthquake. About every 70 years, for the past five centuries, a major earthquake had levelled the city.

The last great quake had occurred in 1923. So, by 1991, Tokyo's obliteration was about due. And, as Tokyo had become perhaps the world's leading supplier of capital, the next great earthquake would have major global effects. Or so I told the magazine editor.

The Great Tokyo Earthquake scenario was one of those stories that almost never pans out. But once I arrived in Tokyo, I found all sorts of otherwise sane Japanese obsessing over what I had assumed was my question alone: what would happen in the world if Tokyo was destroyed by a great quake?

Both the Japanese government and the Tokai Bank had spent several years studying various scenarios. Both studies assumed that the damage would come to about $1 trillion, that Japan would be thrown into severe recession, and that the Japanese would sell off their many US investments to pay for repairs. The Japanese government and Tokai Bank both forecast cataclysmic effects on global interest rates, exchange rates, trade, and so on. The punchline of both reports was that foreigners, and not the Japanese, would suffer most of the economic consequences. The supply of Japanese capital to the outside world would dry up as Japan turned inward and licked its wounds. The government report predicted global real interest rates would climb by 4 per cent. The rest of the world would follow Japan into a deep recession, and remain there much longer. God knows if there was any sense to any of it. It made for a good enough story at the time.

The point here is that the Japanese government and a leading Japanese bank had persuaded themselves that the Japanese economy could tolerate the next great Tokyo earthquake. It was the rest of the world that might have a problem.

This sort of stoicism is now suddenly more interesting because the Tokyo earthquake has struck, albeit in slow motion. In screwing up their financial system, the Japanese have more or less simulated the economic consequences of a great quake.

On the surface, of course, the financial earthquake is very different from a real one. It is self-inflicted and, aside from a few high-level suicides, it causes no death and destruction. But in one important way, Tokyo might just as well have been flattened. The more than $500bn (pounds 299bn) in bad loans on the books of Japanese banks are the equivalent of the $1 trillion in damages estimated for the great quake.

The Japanese government, along with a lot of corporate Japan, is now toying with the idea of selling off its many hundreds of billions of dollars in US Treasury securities to cover the costs of repair. The effect of these massive transactions is identical to the scenario of the great quake. But the financial earthquake, unlike a real one, was largely avoidable. Any decent macro-economist could have explained how to prevent the current recession in Japan. And yet, even now the Japanese seem incapable of taking the simple steps required to reignite their economy. Every few weeks we seem to be reading a recycled story: Robert Rubin, or Larry Summers, or the G-8, or some IMF official, explains why Japan must inflate. Various Japanese government officials agree. They promise to do whatever is necessary. And then ... nothing happens. Why would any nation do this to itself? Why would a nation on which many other nations depend abdicate its economic responsibilities? That's the mystery of the moment.

Not long before I visited Tokyo in 1991, a book was published called The Enigma of Japanese Power by an astute Dutchman named Karel Van Wolferen. He said the truly frightening aspect of the core of corporate and government bureaucrats that appears to control Japan was its hollow centre. In essence, no one was in charge; the web was spiderless, the control booth was empty. Absolute power may corrupt absolutely, but the absence of any power at all terrifies. The absence of real power in Japan, Mr Van Wolferen argued, created in the Japanese culture a perverse tendency to irrational and self-destructive acts.

Perhaps the reason Japan is refusing to heal itself today is that it has no one with the authority to heal. Or perhaps the spiderless web has determined that Japan has little to fear. Compared, that is, with everyone else.

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