Whatever Happened to Japan!?

During the 1980s, Japan was seen as a veritable economic miracle. Many Americans were convinced that our economy had been permanently overtaken by Japan -- and they sought to emulate Japanese success by instituting MITI-style government-business collusion. Fortunately, most of these efforts were rebuffed, and America has done fairly well with comparatively free trade, despite unexciting "Clinton-growth rates." But there is no denying that the US Dollar has become the pre-eminent currency of the global economy, and the US stock market the safe-house of global capital. Meanwhile, Japan has fallen on hard times.

As it turns out, Japan was the "front domino" of the Asian economies; the first to fall. While other Asian nations continued to grow at double-digit rates well into the 1990s, Japan suffered a stock market collapse, zero growth, and a prolonged recession which has even resisted the stimulus of lending rates pegged at very close to 0%! Imagine! Free money -- and still no capital-spending boom!

Rather than being pulled out of this recession by its local trading partners, the Japanese plague has spread outward. It has spread to free-wheeling Thailand, which was the most "laissez faire" of the group. It has spread to Indonesia, which was the most corrupt and centrally-planned. It has spread to South Korea, which was somewhere in between. What do these nations have in common?

The Japanese Plague is not a function of central-planning vs. laissez faire government. It is a function of a real- estate bubble -- blown up, mostly, by government-supported banks eager to lend billions of yen, bhat and dollars to real estate speculators.

When the Japanese economy was at its peak, the value of land in Tokyo alone exceeded that of the entire United States. This is an impressive statistic, but consider the consequences. Since land is needed by the productive economy, stratospheric land prices make local economic expansion impossible to afford -- not to mention what it does to the average working person, whose family is crammed into living quarters not much larger than the space allotted for convicts. (And, in the 1980s boom years, families were signing on to 100-year mortgages to get those spaces!)

Japan's banking system created the greatest real estate boom of the 20th Century, probably acting on the advice of influential western economists who equate high land prices to "capital accumulation." Japan's banks are now holding trillions of yen of bad loans on land-value which has simply disappeared. Yet Japanese land is still overvalued, relative to its productive use-value, threatening to undermine even more loans.

Hence, the Japanese Government has done everything in its power to stabilize land prices, even at high levels -- and in spite of the cost of ongoing economic malaise. I'm sure they figure that malaise is better than collapse. That is the Hobson's Choice they face. But it was not always so.

During the 1970s, the Japanese invested heavily in plant and equipment, and perfected production processes using the Statistical Quality Control taught by Deming. This success- formula was used in many industries, from automobiles to semiconductors, and it forced the rest of the world to follow suit -- while making Japan an economic powerhouse. But this hard- earned prosperity and economic power was not enough for some, who were jealous of the entrepreneurial fortunes of Sony, Honda and Fujitsu.

Within the ranks of the financiers and government officials there was a push for financial deregulation which would allow high- priced real estate to serve as collateral for loans. World-class manufacturing -- which requires a lot of hard work amidst brutal competition, and which is a true engine of wealth -- was taken for granted, or even mocked. Many sought a get-rich-quicker scheme which, it was said, would spin-off even more money for "investment," taking Japan to the "next level" of financial success.

Once these loans started flowing, very little went into the productive economy. Instead, it went into creating a real estate bubble, borrowing and re-borrowing on inflated values. But the only way you can drive real estate to the sky is to pour your wealth into the ground -- and that is just what Japanese investors did. This created the illusion of phenomenal wealth, as Japanese real estate magnates rapidly became the wealthiest individuals in the world -- on paper. But this kind of "wealth" does not trickle down. It dries up.

Location is a passive element; it does not produce anything without some expenditure of labor and capital. Driving up the price of Japanese locations meant that there was less and less money left over for investment in jobs and equipment. And when the real estate bubble burst, and the banks began to implode, there was no money for any kind of new investment. Accordingly, the latest predictions are that the Japanese economy will actually shrink during 1998.

Some Asian Tigers Follow Japan

Parts of Asia have followed in Japan's footsteps, except that their real estate bubbles have been primarily financed by foreign money -- they lacked Japan's high savings rate.

Throughout Asia, foreign money has been pouring in over the last decade to take advantage of high growth rates. The press dubbed these nations the "Asian Tigers," and billions of investment dollars poured in. Some of this money was invested in plant and equipment, which created many real jobs, a rising middle class, and prosperity in Eastern Asia. But eventually, it became more difficult to invest the money wisely, and money managers began "pouring it in the ground," financing speculative real estate ventures. Thus, their fate was sealed.

Thailand was the first to collapse, triggered by currency speculators. Now, if currency speculators can cause a 50% decline in a currency and touch off a depression, the fundamentals must have been pretty weak. At the time (Summer of 1997) some western pundits blamed it on Thailand's "laissez faire" investment policies, and pointed with some pride to the "continued stability" of Indonesia and South Korea, which were more "centrally-planned" by their governments. But, within months, South Korea and Indonesia went down the same rat-hole as Thailand.

The press called it the spread of "bhat-ulism," but it is simply the consequence of an implosion of excessive land values, destabilizing the banks and hence the currency -- repeating the catastrophic avalanche of Japan. (This was, actually, reported in many of the press accounts of the ongoing debacle -- but in a shadowy way. If you listened closely, you almost always heard "overvalued assets" and "real estate" in the same sentence.)

As this goes to press, the debate revolves around the conditions that the IMF should impose on a nation such as Indonesia -- a nation which will undoubtedly squander any western money by bailing out the Suharto family members who were worst-burned by their speculations. It is a long-shot that IMF funds will actually turn these economies around. Most will probably emulate Japan, and fail to take the radical actions necessary, preferring instead to subsidize failure by Big Players.

But Hong Kong and Taiwan have survived this crisis relatively unscathed.

Why are Hong Kong and Taiwan Exempt?

Hong Kong and Taiwan have endured assaults on their currencies, and panics in their stock markets, but their economies are intact, even showing good growth in the first quarter of 1998. How can this be?

The answer is quite simple. Taiwan and Hong Kong both tax land values fairly strongly, thus discouraging investment in real estate that is not warranted by actual economic conditions, conservatively measured. As a result, they have a very stable source of public revenue, plenty of reserves to defend their currencies or to provide infrastructure -- and the ongoing production-incentives of low taxation on labor and capital. Their banks are stable, because their loans are not based on over-valuation of land.

And, of course, they have free trade working for them -- but so do all the Asian Kittens, in greater or lesser degrees.

The Lesson

Rising land prices (commonly thought of as "home appreciation" in the USA) are seen as a sign of prosperity, but they gradually sow the seeds of economic reversal. Every recession in the USA has been preceded by a "land-boom," and accompanied by a "land- bust," as documented by Prof. Mason Gaffney.

This bone-crunching volatility is not a necessary part of the free market! The way to achieve stable growth is to keep land available to the productive market economy, by keeping it from being witheld for private speculative purposes.

Land value taxation, or the community collection of land rent, has the effect of removing the speculative premiums from land- locations. Land simply "rents" for its current use-value, as determined by market forces. This allows the un-taxing of the rest of the economy, such as wages, sales and income, which has the effect of incentivizing everyone to make money by working and investing in plant and equipment.

The solution to the Asian Crisis is not the funneling of billions of IMF dollars to support the sagging fortunes of corrupt officials which are tied up in speculative real estate deals. What is needed is a permanent tax-shift off of the Asian workers and capitalists, and onto the politically-connected Asian land-holders. Once this tax shift strips away the speculative premiums from land, the land-holders will be forced to swim in the new economically competitive environment -- or sell out to someone who can.

-- Al Date, April 2, 1998

Here's what folks have been saying:

Land, land, land, all you people ever talk about. I read that there was a bubble in asset values, these include stocks and securities too. Maybe the Asian crisis is just about emerging markets that don't have the bugs worked out yet. And Japan will be back, you watch.
Max Schmoo <[email protected]>
Brooklyn, - Thursday, April 09, 1998 at 09:16:11 (EDT)


how about god bless america and the rest of creation schmoo land that we love
it
- Monday, April 13, 1998 at 17:33:28 (EDT)
Interesting.
The Agrarian
- Friday, April 17, 1998 at 00:48:12 (EDT)
This is my first exposure to Henry George, can you recommend some reading material and where to get it?
Ken Adams <[email protected]>
Sacramento, CA USA - Sunday, April 19, 1998 at 12:48:48 (EDT)
I'm intrigued by your taxation of land argument. It appears that this theory is based on private ownership of land. But, on what is the taxation based? The value of the land correct? Would not increasing the taxation of land increase the value? Or would the price eventually drop due to a resulting drop in demand? I developing a keen interest in Libertarianism. However, private property is a cornerstone, as is reduced government and more individual freedom. I don't here much of this theory in any of the Libertarian articles I read. Can you elaborate?
TJ Scott <[email protected]>
Lawrenceville, GA USA - Sunday, April 19, 1998 at 22:30:57 (EDT)
Private property is a cornerstone of the Georgist philosophy. For George, the moral basis of property stems from our rights to our selves, and thence to the products of our own labor. Natural resources, of course, are not made by people -- and since people need them to survive, to withold the needed resource (and demand payment for it) is to put a tax on one's right to live. However, people have an absolute right (George argues) to all the improvements that they place on the land. So, the right of secure tenure must be inviolate. But people have no right to collect income that comes from the mere fact of "owning" a natural resouces, because they did nothing to produce that income.
Lindy Davies <[email protected]>
- Thursday, April 23, 1998 at 12:05:07 (EDT)
I've read Henry George years ago, but I never realized the how the truth of his assumptions until recently. I'm a property manager in the Seattle area, and with the sudden rise in housing prices, my company can't raise our rents fast enough! We're simply absorbing wealth without offering anything in exchange; and contrary to laws classical economics, we're benefitting from the speculative bubble of Microsoft stock (which at it's current value gives a return of about 1.5%) and taking for ourselves the rise in wages and investments which rightfully belongs to our tenants. Just as Henry George insisted one hundred years ago, landlords do not compete against one another for tenants. Landlords siphon off whatever surplus is available in good times, and protect themsleves through favorable rulings of the legal/governmental institutions thry control in lean times. Until recently, I would have to say we earned the money we got through rent. Now we're asking too much. Within a couple months we've raise rents more than two hundred dollars studio units, and still we get forty calls. Like Henry George pointed out, because of our special position in the marketplace, the rising wages in the Seattle area are quickly finding their way into our pockets.
Lester <[email protected]>
Seattle, WA USA - Saturday, April 25, 1998 at 12:34:08 (EDT)
Dear Sir i read your article on Japanese economy.it's really very much interesting i'll be thankful to you if you'll give your views on Indian economy. please inform me if you do the same. pritesh
pritesh chokhadia <[email protected]>
ahmedabad, guj India - Thursday, April 30, 1998 at 06:11:47 (EDT)
That's telling 'em, Al. I said something quite similar, although, I fear, with less polish, in a discussion on a libertarian e-mail list.
Nicholas Rosen <[email protected]>
Wellesley, MA U.S.A. - Friday, May 01, 1998 at 18:20:46 (EDT)
Certainly Japan has faild to repair the financial system,because of huge amount of loan about the land.But it is true that the financial system is injured by the BIS reguration(8% reguration.).So Japanese bank have to think about the quit of international banking sales themselves.Now so many bank has branch on abroad.
Hironobu <[email protected]>
tokyo, tokyo japan - Tuesday, May 05, 1998 at 05:12:47 (EDT)
The whole export boom is a bubble, and when it collaspe its going to send the world in to a depression.
Craig <[email protected]>
- Tuesday, May 05, 1998 at 10:10:55 (EDT)
On the contrary, Hong Kong does not 'tax land value strongly'. It has no capital gain tax as that of Japan which has one of the heaviest in the world. Its heavy capital gain tax discouages speculators from taking profit, instead speculators would keep on rolling over their deals. That explains the escalating appreciation of land value.
Tay Joo Teck <[email protected]>
Singapore, Singapore - Thursday, May 07, 1998 at 10:25:29 (EDT)
Hong Kong does not collect rent from capital gains, but from leasing the land. When it was a British colony, most of the land consisted of New Territories leased by the UK from China, and in turn rented to individual leaseholders. The rents were about 50% of the HK government revenue.
Japan's gain tax does discourage speculators from selling. This can be remedied by taxing the annual rent, and or a gains tax that is applied annually to the increase in value whether realized or unrealized. So the gains tax would be paid even if the landholder did not sell it.

Fred Foldvary
- Thursday, May 07, 1998 at 16:28:45 (EDT)
Aloha, From the middle of the Pacific, I read your article on the Japanese land bubble with great amusement. These sorts of bubbles are constantly occurring around us at varying scales. I would like to highly recommend to anyone reading this the following publications: "Extraordinary Popular Delusions and the Madness of Crowds" by Charles MacKay originally published circa 1835 still in wide circulation and easy to find. "Reminiscences of a Stock Operator" by Edwin Lefevre originally published circa 1920 still in wide circulation and easy to find. "The Economist" A weekly magazine from London. Your hindsight is quite excellent. I recommend the "Economist" because of its great foresight. They accurately predicted the bursting of the Japanese bubble and the downfall of the Thai baht years ahead of their actual occurrence. Curiously, 6 weeks ago or so they ran an article on Henry George and his effects on an Eastern European economy. I speaketh from experience. 7 years of inflating and bursting bubbles at the Chicago Board of Trade and the Chicago Mercantile Exchange. 5 years as the son-in-law of Japanese golf course developer, inflating and bursting the secondary real estate bubble that occurred in Hawaii with help from the overflowing Japanese froth. I have spoken loudly and clearly warning anyone who would listen of the impending pop. The masses never want to listen. My suggestion to you dear reader, is to learn to recognize a nascent bubble and profit from it handsomely. Best regards from paradise, Ed
Ed <[email protected]>
Honolulu, HI USA - Friday, May 08, 1998 at 15:44:48 (EDT)
Salam sejahtera, The crisis which started in Thailand, had caused a great effect to the hole region. What I want to say here is i do not agree with the statement above that "weak fundementals" is the main caused of this crisis.It is not entirely true. Compare to Malaysia, I admit we do have some weakneses in the fundementals. However, if we see it "overall", our country have strong fundementals factor. The only reason why the ringgit is devalued just because Malaysia is in the same area, and forgain investor thought that Malaysia will face the same problem and thanks to that assumption, we have the same problem even-though it is not as bad as Indonesia, Thailand and South Korea. Thank god it is better now. Hope the economy will bounce back and create a new miracle. The artical above are not true for Malaysia. I dont need to give any evidence to support this statement because the country and the people itself are a living proof. For all Asians. Lets united, and build up a new miracle. It is not a myth, It is a reality. Lets bullish on bouncing back. Lets beat those who crush down our economy once more. Keep your faith on your own region. Because your faith is a key for the miracle to show up again. Jumpa lagi/ see you/ Sayonara.
Ahmad Nasim Sidek <[email protected]>
Jerantut, pahang malaysia - Saturday, May 09, 1998 at 03:23:17 (EDT)

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