Wall Street spokesmen led by the American
Enterprise Institute (AEI) have begun a new "sell Japan'' drive,
demanding the "Korean model'' of shock therapy in Japan, under which
the International Monetary Fund (IMF) deregulated South Korea, shut down
chunks of its industry, and sold it off to Western banks.
Japan's banks must immediately take $1.2 trillion in bad loans and "let
them go into the market,'' U.S. deregulation "expert'' Robert Dugger
told Washington audiences on March 16 and 18--let the assets collapse,
and be bought up at a nickel on the dollar. If Japan balks, foreigners
and Japanese depositors will dump the yen, he threatened, causing a 50%
devaluation, and credit agencies like Moody's will bust Japan's government
bond rating "lower than Botswana.''
Dugger and State Department Japan adviser David Asher, former head of
the AEI Japan program, told a Johns Hopkins University forum on March
16 that the "real problem'' is Japan's industrial sector, which has
been "overprotected'' by the banks. The top 290 "spoiled corporations''
have almost $2 trillion in bad assets, and "all of these assets must
be sold off, '' Asher said. "The Japanese public knows that 35% of
GDP consists of bad assets, so even if money is dropped from a helicopter,
no one will borrow. The only way to proceed is: Let the stock market determine
what the assets are worth. Just sell them on the free market. The Nikkei
Index will fall, but it will bottom out--eventually. If assets are sold
off, they will start performing again. That is the magic of the market!''
Dugger, now with the "vulture fund'' Tudor Investments, which buys
such paper cheaply, agreed:
"Unless Japanese banks do as David says, the large depositors will
begin moving their assets en masse into dollar accounts at Citibank Tokyo.
This outflow from the yen has already begun,'' he threatened.
Meanwhile, broad layers of the Tokyo elite, from ousted Foreign Minister
Makiko Tanaka, to former Vice Finance Minister Eisuke Sakakibara, dubbed
Prime Minister
Junichiro Koizumi a failure, and came close to demanding that he step
down. Tanaka, who is now ahead of Koizumi in the polls for Prime Minister,
told the British press on March 18 that Koizumi had sold out to the "old
boys,'' and "it's the end'' for his ruling Liberal Democratic Party
(LDP). Sakakibara, who may have his own ambitions, said on March 16, that
Koizumi has "deceived'' everyone
and "has neither the vision nor the expertise for reform.''
Koizumi's "do nothing'' policy is a disaster, but so far, his critics
act as though there are only two choices: Do nothing, or use IMF shock
therapy to shut down half Japan's industrial base. The IMF model was demanded
in January by AEI Senior Fellow John Makin of Wall Street's Caxton Associates
hedge fund. Unless shock therapy is implemented, he wrote, there will
be a $1 trillion bank panic in Japan. Makin is now featured by the Adam
Smith and John Locke Societies as a
"new guru,'' forecasting a global financial blowout to start in Tokyo.
The IMF itself, in its new Global Financial Stability Report, said on
March 14 that ``the
situation in Japan could worsen considerably.... If Japan's reforms falter,''
Japan's banking system, ``crippled under a mountain of bad loans, may
fall into a critical situation.''
In Tokyo, Glenn Hubbard, chairman of the White House Council of Economic
Advisers (CEA), came out verbatim on March 19 with the identical IMF shock-therapy
line, after months of Bush Administration pretense that it would not lecture
Japan. Bad assets at banks and industrial companies "should be released
into in the marketplace in a way that will let them be used efficiently,''
he told Financial Services Minister Hakuo Yanagisawa. "Capital is
not being efficiently allocated in the Japanese economy.''
Hubbard complained that Japan could not fulfill its role as military
supporter of the Bush Administration in Asia otherwise. "It is difficult
to project power, to be a major player on the world stage without a rigorous
economy,'' he said. Shifting bad loans to the state Resolution and Collection
Corporation was useless, he said. ``The question is how to get the ...
underlying collateral into the private sector,'' he said, urging Tokyo
to accept large bankruptcies: ``You can't fix non-performing assets if
companies can't fail.''
Speaking at the Hopkins forum on Japan, former Japanese Vice Minister
Sakakibara shocked some observers when he appeared to endorse the Wall
Street proposals, the same ones he has called "free market fundamentalism''
in the past. Japan so overprotects its markets that "in many ways
Japan is a socialist country. I said this at a conference in Beijing recently,''
said Sakakibara, "and the governor of the Bank of China replied:
"At least the Communist Party of China has a political leadership,
which Japan does not."
Sakakibara called for the radical IMF shock therapy, as forced on South
Korea in the depths of the 1997 "Asia crisis.'' Look what South Korea
has done!'' he said.
"They have implemented radical reform. They really used the Asia
crisis effectively to change their economy under the IMF program during
1997-99. Japan should do what Korea has done.... As Korea has shown, bank
restructuring has to be accompanied by industrial and corporate borrower
restructuring, because the banks' borrowers have a structure which is
not generating a profit. Korea has done it, we could learn a lesson from
them.'' Stephen Bosworth, U.S. Ambassador to Seoul in 1997, first proposed
this "Korea model'' in a Tokyo interview last November. The horrible
reality of this "Korean model'' wasdescribed to EIR in detail by
Korean officials who huddled in the cold with the IMF when the oil ran
out in Seoul in December 1997. Entire industries were shut down or bought
up by Citibank and Morgan, and Seoul markets now depend on foreign money
for over 50% of financing, forcing the rule of "shareholder values.''
Foreign "vulture funds'' such as Dugger's Tudor Investments have
bought almost $10 billion in such distressed Japanese assets dumped at
"market'' prices, Nikkei reported on March 19. Since 1998, over 160
Japanese firms have been dumped that way, and over 100 are due to be dumped
this year.
The CEA's Hubbard even criticized Japan's recent re-regulation against
short selling in Tokyo markets, which has caused half the asset collapse.
"It would not be wise to use regulatory measures to artificially
prop up asset markets,'' he said. "This can only distort the valuable
signals sent by the markets.''
Financial Services Minister Yanagisawa rebuffed Hubbard on March 21 in
the Tokyo Diet, saying, "There is no reason [for Japan] to be criticized,
because we imposed regulations similar to those in the U.S.'' He continuedthe
crackdown on illegal short selling that day, by censuring another five
brokerages--Merrill Lynch, Cre@aadit Suisse First Boston, KBC Financial,
Okasan Securities, and Nippon Global--following suspensions against Goldman
Sachs, Morgan Stanley, Citibank Nikko, and others.
But it's not clear that Japan's managers have a positive plan, and the postwar political system of party-ministry-industry cooperation, the so-called "Iron Triangle,'' is cracking under the pressure. Prime Minister Koizumi has fallen from 90% to 40% in the polls since Tanaka's Jan. 29 ouster and related scandals forced two top members of the LDP to resign. "Conservative'' LDP member Muneo Suzuki quit on March 16 after being accused of manipulating Foreign Ministry aid to Russia and other countries for the profit of his supporters' construction companies. "Liberal reformer'' Koichi Kato, one of Koizumi's closest chums, resigned on March 18 after an aide was convicted of tax illegalities.
Koizumi is "no darn good,'' but blasting Koizumi and the "Iron
Triangle,'' now the national sport, could cut in many directions. If the
AEI crowd gets their way, these scandals could paralyze the country. It
is reported that Ichiro Ozawa, who has said that Japan's finances should
be managed by "foreign investors,'' might head a new opposition power
bid. On the other side is Makiko Tanaka, known for
accompanying her father, Prime Minister Kakuei Tanaka, on breakthrough
diplomatic missions to China and Russia in the 1970s, and for trying to
reorient Japan away from U.S. domination. Tanaka and her husband visited
Beijing on March 21-25 to celebrate the 30th anniversary of her father's
re-establishment of relations, and met People's Congress Chairman Li Peng,
Foreign Minister Tang Jiaxuan, and other Chinese leaders who helped restore
Sino-Japanese ties. Li praised Kakuei Tanaka for his ``insightful political
decision.''
Makiko Tanaka, breaking with Koizumi, told AP and the London Guardian
March 18 that her relation with Koizumi had soured in particular when
she snubbed U.S.
Deputy Secretary of State Richard Armitage, and proposed a plan "to
make Japan more self-reliant in its relationship with the United States
through a reconsideration of bilateral security ties.'' When she presented
her plan, she said, he was bewildered, knowing nothing about foreign policy.
"He was embarrassed and at a loss.''
The question, however, is not "Who is the captain,'' but, "Where
should Japan's ship of state go?'' Part of the Japanese elite may believe
that Koizumi can't handle this crisis, that the Bush Administration is
a disaster, and that something new must be done, cooperating with Russia
and China. Makiko could be a help there. But if she doesn't have a third
alternative, to the twin evils of
"LDP do nothing'' or "IMF shock therapy,'' she might also fall
into a Wall Street trap and implement Korean-style IMF reforms for lack
of a better idea.
The first step to a completely new approach, which, as LaRouche has stressed,
would be to point out that this is not a "Japan crisis,'' but a global
crisis in which
the entire dollar-based, post-1971, IMF system is fundamentally broken;
that the IMF is morally and financially bankrupt; and that a New Bretton
Woods conference is urgently needed.