Yamaichi collapse will end the Japanese culture of concealment

Hamish Mcrae On the end of asian confidence
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The Independent Online
Just over 10 years ago, at the end of October 1987, I found myself in Tokyo in the offices of Yasuda Fire and Marine, one of Japan's largest insurance groups. It was a week after the Wall Street crash and everyone, unsurprisingly, was talking of the threat to the world economy from financial market instability. The Japanese view, however, was much more bullish than in London or New York: the crash was just a dip, a slit in the graph of upward movements.

During the meeting, the most senior of the Yasuda people was called out to take a phone call. When he returned a few minutes later he was very excited. It had been the Ministry of Finance on the line, and the message to Japan's institutional investors was that they should buy US securities in a co-ordinated way. "Japan," he said proudly, "will save America."

This week, with the collapse of Yamaichi Securities and the visit to the IMF of Korea, the boot seems to be on the other foot. It is not just that Asian triumphalism is out. To judge by the assurances of President Bill Clinton at the Asia-Pacific Economic Co-operation summit in Vancouver, it is America (or at least the US and its allies at the IMF) that will save Asia. But there are other, more important, lessons to be gleaned from this 10-year perspective than the ease with which the balance of power in the world economy seems to flip around. We are in the middle of quite a complex turning point in the world economy and it is quite difficult even to identify which of the various current concerns really matters and which will seem unimportant a decade hence. Here are some suggestions.

Korea first. The strong probability is that this is the turning point for Korea, just as the IMF visit to Britain in 1976 proved the turning point here. The IMF is not perfect, as its many critics around the world would testify. But it has an enormous amount of experience in establishing macro-economic stability: it knows how to turn the finances of a country round. Putting a new economic programme in place in Korea is bog standard stuff. Korea is not an inherently unstable developing country so the criticism that IMF programmes do not take into account developing country problems does not apply. Korea just needs a pause to sort out its problems.

So with one possible cloud, the strong probability is that in three or four years' time Korea will have its balance of payments back under control, its banks refinanced, and its large companies refocused or, in the case of two or three of the weaker groups, broken up. The success story will resume, though in a more measured and cautious way. The cloud, the thing which might cause the Korean recovery to abort, is of course the security situation in North Korea - but that is beyond the realms of economics. A decade hence we will still be deeply concerned about North Korea, whatever happens. But the IMF rescue of the south will be a distant memory.

Japan is more complex. The fact that Tokyo was on holiday yesterday means that we have no immediate reaction to Yamaichi Securities' demise, but we should not trust it even if we had, for first reactions are frequently misleading. It will be several weeks before it is sensible to make a real judgement. That said, there are several reasons to believe that the shutdown will be very positive for the Japanese financial system, and for the economy, in the long run.

For a start, Yamaichi, though the oldest of the big four securities houses, has long been the weakest. Further, the securities houses, despite their size and importance, have always had a slightly flash image in Japan compared with the banks - rather in the way stockbrokers had in Britain before the First World War. So this is not like a big bank folding.

Besides, financial systems need to be seen to punish failure to keep themselves sweet. The great problem of the Japanese financial system has been its lack of transparency: problems are swept under the carpet. Admitting that a firm which is bust really is bust is a vital step towards establishing a transparent accounting system in Japanese finance. When any large financial institution fails, there will be collateral damage: other institutions not connected will be hurt. So expect a rise in the "Japan premium", the extra amount Japanese financial institutions have to pay for funds on the market. The ratings agencies will now doubtless downgrade other Japanese borrowers. But, assuming that the subsequent fall-out is managed competently by the Japanese authorities, this failure could well mark the turning point in the fortunes of Japan Inc.

There is a risk that the crisis will be mismanaged, but that is not large. If you are going to have a big firm go bust, Yamaichi is about the right size: big enough to shake people up, but not large enough to devastate the economy. It may be the biggest bankruptcy since the Second World War but it only employs 7,500 people, tiny by the standards of Japanese business. The giants of Japanese industry are as healthy as ever.

That does not mean, however, that financial markets will recover suddenly or immediately, for two reasons. The first is that Japanese markets have been kicked around quite hard and will take time to rebuild their confidence. That is a two or three-year pull.

The second and more important reason is that Japan still has large structural reforms to push through. Letting financial institutions go under (while quite properly protecting customers) is the right policy in the long term: indeed it is part of the process of reform. But in the short run, the pain of visible failure may make structural reform harder to push through.

It is interesting to see the response in the Japanese press: many reports about individuals who were losing their jobs blaming the reforms of the bureaucrats, rather than the weaknesses that resulted in failure to reform earlier. Japan has no option but to press on; but maintaining support for that will be difficult. In Britain in the 1970s there was an attitude that if a company went bust it was the duty of the government to rescue it. Getting into people's minds that if a company goes bust it is the fault of the managers, not the government, is a great sea-change. While that change is taking place, governments have to step ahead of public opinion.

Nevertheless, Japan's biggest post-war bankruptcy feels like a turning point, and end to the culture of concealment, the culture that required bad news to be kept secret and regarded markets as things to be managed by guidance from the authorities. It also marks an end to the self-confidence of 10 years ago when Japanese investors felt they could save America.

Ten years on, then, this whole East Asian turmoil will doubtless seem a bump in the progress of what will still be a very successful region of the world. What then will seem the equivalent of the Japanese overconfidence of 1987? For me, the big news of the past couple of weeks was the shift in opinion in the US about European monetary union. At last the US opinion- formers have focused on the dangers that Europe is running in its politically driven rush to a single currency, and are voicing that concern.

Is the overconfidence of European politicians the parallel to the overconfidence of the Japanese 10 years ago? I think the answer is yes - but that is a story for another day.

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