APEC and Asian Contagion
[Sorry, the video for this story has expired, but you can still read the transcript below. ]
MARGARET WARNER: And here with more is Arthur Alexander, president of the Japan Economic Institute, a Washington think tank. The institute receives some support from the Japanese foreign ministry. Mr. Alexander, what’s your view on how serious this securities bankruptcy is for the Japanese economy?
ARTHUR ALEXANDER: Well, I agree with the speaker that it has great symbolic importance. It’s not so important as a company going bankrupt, but it does have a lot of symbolic importance. It has psychological importance. Psychology is that–as the young woman said there–that the Japanese consumers are now seriously worried about lifetime employment, about their jobs; 7500 people will be out on the street from this one company. We had another security company go bankrupt last week, a major bank going bankrupt. This has taken the employees by shock and surprise. Symbolically, it means that the Japanese government may finally be on the step to–on the path to resolving some of these financial difficulties that they’ve been suffering for seven years now. And they have held off from doing serious restructuring, allowing companies to go under, revaluing property values, asset values, allowing employees to go look for jobs elsewhere. And there are jobs elsewhere, but this may be the beginning of the end. I certainly hope so.
MARGARET WARNER: And why do you think the Japanese government did not step in for either the bank last week or this securities firm?
ARTHUR ALEXANDER: That’s interesting because I think they did try to step in. They tried to step in last week and arrange deals earlier on with the Hokido Bank. They were unsuccessful in doing that. It’s not as though the Japanese haven’t tried, the government has tried. They’ve been unable.
MARGARET WARNER: They’ve gone to other banks and said, won’t you help bail this company out and it’s these other institutions that are saying no?
ARTHUR ALEXANDER: That’s right. After seven years of controlling, of engineering, of pressuring other banks, other companies to take over failing organizations, finally the other companies, the banks have said we don’t have the cash anymore, we don’t have the liquidity; we’ve dealt with our own losses; we’ve used up a lot of our capital; and we don’t want to put more money into these billion dollar–multi-billion dollar losing companies. So actually the Japanese government has been a little ambivalent here. They’ve had a rhetorical policy of letting the market take care of things. But they’re like a recovering alcoholic. You put the bottle in from of them, and it’s very hard for them to keep their hands off it. And the ministry of finance has said this; that companies are on their own; that when they see failing companies, they can’t keep their hands off it. This time they haven’t been able to. They’ve just simply failed.
MARGARET WARNER: So how extensive do you think this vulnerability is to a lot of the same factors that brought Hokido Bank and Yamaichi down in the last two weeks, how widespread is that through the financial services industry in Japan?
ARTHUR ALEXANDER: It looks like it’s fairly widespread. Just before coming over here I counted the top 20 security companies. And nine of them have not made a profit for five years. They’ve had five years of losses. We know that the banking system on the average is close to its capital limits of how much lending it could give the amount of capital it had. Some of these banks are really quite healthy, but a lot of them we know just by statistics are–can’t do it. We know that a number of banks are probably insolvent, but as we saw with Yamaichi, we don’t get good visibility into the books. We don’t know how bad things are. In the last two or three days publicly Yamaichi declared that they had $2 billion of undeclared losses. They were hiding form everybody, including the ministry of finance, so these are the things that we don’t know what is going on underneath the surface.
MARGARET WARNER: Now the prime minister, Hashimoto, said today Japan’s problems were totally separate from this collapse going on in Asia, and, furthermore, that they were going to be able to take care of the problems internally; they certainly wouldn’t need any kind of international intervention. Your view on both those statements.
ARTHUR ALEXANDER: That’s partly correct. Japan–we don’t have a domino effect going on here. Japan’s problems have been there for years, as have the other countries also. And it is not just speculators who have been doing it. There have been severe problems of central control, insufficient amount of deregulation, unbalances in the economy, bad loans, cronyism, corruption. This is–the company alluded to the Berlin Wall. There was rottenness in the Soviet system. The wall coming down was the symbolic end to that. And what we are seeing now I think is the symbolic end to many of these problems. Japan shared in that–not as bad as in some of the other countries, but they had over-regulation; they had bad loans; they had insufficient transparency into what was going–outright lying, some fraud that was going on; and many of the other countries in Asia copied Japan’s system. Japan is much more mature and more developed. I think the prime minister is absolutely right. They could handle it. The other countries cannot.
MARGARET WARNER: But then are you saying really to get better, it has to get worse because more of these institutions have to be able to fail?
ARTHUR ALEXANDER: That’s where I think if things are going well, they’re going to go badly. We will see more collapses, more banks, life insurance companies, who won’t be able to pay off their clients, security companies, who don’t have enough money to carry on. We have to get through that. I think the market last week jumped when big banks failed because they thought this was the beginning of the end.
MARGARET WARNER: And that’s when the Japanese stock market plunged–
ARTHUR ALEXANDER: When it went up, it looked like the government was getting serious about dealing with it. Until we see that seriousness actually implemented, many things are going to get worse. I think to get worse, it’s going to be necessary to get better.
MARGARET WARNER: Or vice versa.
ARTHUR ALEXANDER: Or vice versa.
MARGARET WARNER: And the impact on the United States as we go through this period of getting worse to get better.
ARTHUR ALEXANDER: The impact on the U.S. is relatively mild. We will have some loss of exports to Japan and to Asia, but exports are about 12 percent of total Gross National Product in this country. Exports to those areas are less. They’ll go down by a certain small percentage. We’re not talking about large chunks of the economy here.
MARGARET WARNER: But don’t Japanese banks hold, what, over $300 billion in U.S. Treasury Securities? I mean, at what point–what would it take to trigger a sell-off of those?
ARTHUR ALEXANDER: Well, certainly Yamaichi is going to be selling off its securities just to pay off its liabilities. Some other Japanese banks will too, but I think, in fact, the flow will be just in the opposite direction; there’s a flight to safety. Both Japanese companies and individuals want to put their money into something that pays a high return and that’s relatively safe. American funds–the Treasury bills are the best buy in the world these days. And we are seeing billions of dollars flying into the country, which is pushing up the value of the dollar. It’s actually good for America. It keeps interest rates low. We buy cheap, sell high. This is good for America.
MARGARET WARNER: All right. Well thanks, Mr. Alexander.
ARTHUR ALEXANDER: Thank you.