ON JAPAN: The Conspiracy That Isn’t

On two occasions last month, I was told of a conspiracy. It goes like this. Why are Americans pressing Japan so hard to deal vigorously with the non-performing loan problem? The answer is they know that a final resolution of non-performing loans will cause some banks and many borrowers to go bankrupt. When that happens, American investors will be able to buy these banks and firms at a low price. So the advice from Americans is part of a conspiracy to increase U.S. control over the Japanese economy.

I would have laughed. But on both occasions, I heard this story from a mid- to senior-level Japanese executive, one an official with a major Japanese business organization and the other a senior advisor (komon) to a large Japanese financial institution. Both appeared to firmly believe what they were saying. And since they seemed to believe it, then perhaps this foolish theory deserves discussion rather than just a laugh.

The Americans like myself who have advocated a much more vigorous effort to clean up the non-performing loan problem have absolutely no interest in who buys the assets of bankrupt firms in Japan. For the most part, these people work for government, universities, think tanks or the International Monetary Fund. Mostly they are either macroeconomists who have studied similar problems in other countries or former U.S. government officials who experienced the American banking problem of the 1980s. Japan is by no means the only country that has faced severe non-performing loan problems, and the solution is rather well understood. These people speak from the conviction of analysis and experience, and nothing more. As economists, they couldn’t care less who buys firms forced into bankruptcy in Japan.

Suppose Americans or other foreigners do buy bankrupt Japanese firms, as some have done already. What is wrong with that? If they believe that they can make a profit by buying a failed firm at a suitable price and restructuring it, then why not let them do so? This is what economics is all about. When Japanese firms began buying assets in the United States in the 1980s, a similar nationalistic alarm was raised, with some people fearful that Japan was “buying up America.” At that time, I made the same argument to other Americans: if Japanese firms felt that they could do a better job running a particular American firm, let them do it.

In the case of Japan, foreigners may actually be in a good position to revive some bankrupt firms because they have extensive experience doing so elsewhere. Real restructuring usually involves a brutal reconfiguration of the firm, including eliminating many employees, closing factories and exiting some lines of business. Often Japanese owners are reluctant to engage in such vigorous but necessary action. Renault, for example, has carried out a serious restructuring at Nissan that apparently the Nissan management had been unable to accomplish. Ripplewood bought the bankrupt Long-Term Credit Bank, transforming it into something resembling an efficient, prudent financial institution (which it was not before).

The final problem with this conspiracy theory is the presumption that only foreigners will be interested in buying the low-price assets of bankrupt firms. Where are the Japanese investors? Why are they so timid? A year or two ago Mita Corporation went bankrupt; today it is a division of Kyocera. Surely Kyocera is not the only Japanese firm that can see an opportunity in some of the coming bankruptcies. I indicated above that perhaps foreign firms have some advantage in restructuring bankrupt firms, but overall the conspiracy theory indicates an unrealistic lack of self-confidence.

The reality is that foreign investment in Japan is very low. Measured either by total assets or total sales, foreign-owned firms in Japan constitute by a wide margin a smaller share of the corporate sector than is the case in any other major industrial nation. Even a wave of foreign investments in the next several years would only begin to bring foreign-owned firms up to the level that is common in other countries.

The solution to the non-performing loan problem will no doubt be painful–far more painful than any government official has admitted so far, perhaps because they do not envision a truly vigorous effort to eliminate these loans and force borrowers into bankruptcy. Foreign investors are certainly interested in purchasing some of the financial institutions and firms that fail in the process. Let them do it. Welcome them as useful investors rather than fearing them as threatening outsiders. Despite the fears and complaints expressed by some in the 1980s, I believe that Americans are largely satisfied with Japanese investment in the United States; it turned around some acquired companies and created new jobs. Foreigners can play the same role in Japan. And even a wave of such investments would not leave foreigners in “control” of Japan in any meaningful sense.