Guest Post: T.S. Muffin Man

1995 was a watershed year in Japan. Before this, bureaucratic, political and business leaders continued to believe that the methods that had worked so well for decades would pull the country through a downturn which, though severe, would be temporary. Up to this point there was a notable lack of any sense of crisis. In the wake of the sarin gas attacks though, national self-confidence began to spiral downward. A country that five years previously had seemed united, safe, affluent, hugely successful – invincible even– suddenly woke to a world of danger, debt on an increasingly massive scale, and job insecurity. That same year, the currency exchange rate reached ¥90 to the dollar, an appreciation of 32% over 3 years, decimating profits of Japan’s export-driven companies.

1995 also marked the 50th anniversary of the end of the Pacific War, Japan’s last chance to properly atone and finally ameliorate relations with Southeast Asian neighbours. It was not to be. 

Foreign investments went sour on a huge scale, forcing Japanese investors to take losses on the sale of hotels, skyscrapers, golf courses and movie studios. The previous autumn, Sony, acknowledging that it had paid far more than true value for Columbia Studios, wrote off $3 billion, resulting in one of the biggest deficits in Japanese corporate history and the resignation of founder Akio Morita as company president. Matsushita sold 80% of its interests in MCA Inc, having squandered approximately $2 billion dollars. The golf course developer Minoru Isutani lost $340 million when obliged to sell the renowned Pebble Beach golf course. At home, Japan’s financial system was battered by the collapse of a regional bank and the nation’s largest credit union, together with three smaller Tōkyō credit unions. The sight of hundreds of panicked depositors attempting to retrieve their money, broadcast nationwide, caused widespread anxiety. The government reacted with discussion panels, procrastination, and the authorisation of even more construction projects.

1996 – 1997

It seemed, briefly, in early 1996 that a weak economic recovery had begun. This had been induced by extremely low-interest rates and by massive spending on public works projects. The government then decided to raise the consumption tax from 3% to 5%, to obtain additional revenue to finance health services for an aging population. While the measure itself was commendable, the implementation was ill-timed. It killed off whatever anaemic recovery there had been, and led to fiscal contraction. The downturn was exacerbated by the acceleration in the shift of manufacturing offshore, which led to kudoka, the hollowing out of manufacturing.

The Window Tribe

The Japanese production process is very lean, with widespread use of industrial robots. However, in offices and department stores there were far more staff on the payroll than was strictly necessary, particularly in middle management. The typical Japanese company profile looked like a pyramid with a pronounced lateral pot belly. 

There have always been a minority of workers in Japan who belonged to the madogiwa zoku – the window tribe – who sit exiled at desks by the window, employed but with little actual work to do. This treatment is traditionally given to those who have no talent, or to those who are unpopular or have made some grievous error at work. Though these employees can not by law be fired, their salary remains low and they receive no promotion or bonus payments. In essence, they are frozen out of the group, a deeply stressful scenario for a Japanese. During the 1990s, workers for whom the company had little work joined their ranks. Large companies were thought to be holding on to 2-4 million who were nominally in employment but had little real work to do. Other staff were transferred to subsidiary companies, effectively a form of semi-retirement.

Austerity at companies began to reach absurd proportions: employees were ordered not to use more than two perforated sections of toilet paper, others were told to call their customers during lunch time, the reasoning being that the customer would be forced to return the call later, thus keeping the company’s phone bill as low as possible. Staff were told to meet customers only during office hours, to avoid having to treat them to dinner. Some manufacturing companies began to give air conditioners and refrigerators in lieu of bonus payments. Customary twice-yearly bonuses were slashed to negligible amounts.

Nichei Finance went bankrupt in 1996, the biggest corporate collapse in Japan’s post-war history. That same year, a Sumitomo copper trader named Yasuo Hamanaka, the Nick Leeson of Japan, was arrested, charged in connection with $2.6 billion he had lost in unauthorised deals. The losses were equivalent to six years of Sumitomo earnings. Though Hamanaka’s actions did not bankrupt his company, the case was eerily similar to the Barings Bank debacle. In Tōkyō, where fully 20% of Japan’s economy is concentrated, the city faced an unprecedented shortfall in tax revenues. The city’s debt had risen to exceed revenue by 20%.

Deficits and Public works spending

Nationally, public finances moved from a surplus of 3% in 1991 to a deficit of about 5%, a shift 2.6 times larger than that experienced by Germany in the years after reunification. The deficit was to become much worse, as the economy stubbornly refused to reflate. The 1997 budget actually increased outlay for public spending works, and advocated constructing new shinkansen (bullet train) lines, a project that had previously been frozen due to the scant prospect of reclaiming the construction costs. There was a time when public works spending of ¥10 billion ($82 million) could create economic demand worth two or three times that amount, but by the 1990s it only generated the amount of the investment. In 1994, concrete production had already totalled 91 million tons, compared to 78 million in the United States, a country twenty-five times larger than Japan. Money was spent on building new harbours in dying fishing villages, and even concreting the beds of rivers, supposedly to improve their flow. The leader of an opposition party compared such actions to, “a dead drunk who says ‘from tomorrow I will abstain from drinking’”.

The economy moved from mere heisokukan – stagnation or sluggishness – to minus growth. By 2001, Japan had been in recession three times, and growth for the previous decade averaged only 1% a year. Repeated massive injections of taxpayer money succeeded only in saving the nokyo1 and construction companies- the LDP’s loyal support – from collapse. Amazingly, during the mid-90s, the number of construction companies actually increased by 50,000, and that of workers in the industry by 600,000. Pointless bridges, dams, coastal protection projects, and tunnels now transmogrify the landscape of the Japanese archipelago, monuments to wastefulness, profligacy, and rural political priorities. More than half of the entire Japanese coastline has in some way been concreted or altered. 

The Asian Economic Crisis

The Asian financial crisis of 1997/98 was the event that made the Japanese oligarchy finally begin to realise that they could not carry on as before. 40% of Japan’s exports were sent to the region prior to this time. As Japan Inc. has invested massively throughout South-east Asia, and relied on exports as the main engine to pull the economy out of recession, the Asian crisis became the straw that broke the camel’s back.

The era of guaranteed lifetime employment, which only had existed at large companies anyway, was over. The months of February and March became months of dread for employees, particularly part-timers, who were sometimes fired with as little as a week’s notice. Though the official unemployment rate climbed to 5% in 1997, actual unemployment, when madogiwa zoku were included, was probably 9% – 10%. Some were sent to the mountains to chop trees in an effort to force them to resign. By one calculation, Japanese manufacturers needed to cut more than 3 million white-collar jobs if they were to reach similar productivity levels to the United States.  By 1997 the Nikkei Stock Index had fallen in value to less than a third of its peak 1989 valuation. Excess office space in Tōkyō was equivalent to the entire office stock in Hong Kong.


Women part-timers, service industries and employees of small companies bore the brunt of the layoffs. As in other industrialised countries, smaller subcontractors tend to act as shock absorbers for the financial vicissitudes of the economy. This is especially true in Japan, where so many companies are small to medium-sized. Scenes of employees in their forties and fifties being laid off were especially heartrending, for it was obvious that they would be unable to find other employment. The unemployed receive state benefits for just six months. In addition, to be without work is considered extremely dishonourable. Some of the laid-off continued to pretend that they were still working, rather than admit to their families that they had been made redundant.

The Forest

Japanese enjoy the longest average lifespan in the world; however, in the late 90’s the average male lifespan began to decrease. Suicides increased in number throughout the recession years, reaching a peak of 34,427 in 2003. An average of almost 100 Japanese killed themselves each day. In 1997, the Japanese media reported the poignant tale of three men, friends since high school days, who had each started small auto parts businesses. All three enterprises failed, and so the three booked into a hotel, ate a meal and finished a bottle of whiskey together, and then went to their respective rooms and hanged themselves with lengths of rope they had bought in advance. Near Mount Fuji there is a forest, said to be haunted, where those in despair go to end their lives.

Minus growth

In 1997, $492 billion had to be set aside to stabilise the nation’s financial system, basically to increase the capitalisation rate of debt-ridden banks. Institutions that had been so willing to lend money in the 1980s became extremely cautious, with the result that smaller companies found it almost impossible to borrow to expand their businesses. The following year Japan Leasing, a jusen lender affiliated with the crisis-ridden Long Term Credit Bank of Japan (LTCB), collapsed. It had a number of subsidiaries of dubious character, many being dummy companies which had large amounts of undisclosed bad debts. In common with other firms in the banking community, Japan Leasing had shuffled problem loans among subsidiaries to avoid reporting losses, an illicit though common practice known as tobashi (hurling). The subsequent failure of LTCB threatened a domino-like effect across the banking industry. Taxpayers’ money was used lavishly to shore the dikes.

By May 1998, the Japanese Government had introduced six huge stimulus packages, each larger than the last, totalling $54.9 billion. The official discount rate had been lowered to just 0.5%, and still the economy failed to reflate. In less than a decade, Japan’s fiscal situation had deteriorated from being among the best in the world to being among the most troubled. In November, Yamaichi Securities, one of the nation’s four big brokerages, was forced to close in its centenary year. The image of its president weeping bitterly as he announced the shutdown was seen worldwide. Debts for the entire Yamaichi group were reported to have reached $5.5 billion.

A and B

Japan has, in effect, a dual economy: the highly successful firms whose names are known worldwide, the ‘A industries’ whose mass production techniques, quality of engineering and design skills are top notch. Unfortunately, much of the rest of the economy was inefficient, sometimes extremely so. The non-manufacturing sector was in a severely weakened state. Government protection kept many workers in employment in labour intensive industries. Capital and labour remained ensconced within big companies. Cartels, tariffs and dango price fixing practices ensured that the uncompetitive glass, construction, cement, ship building, oil, chemical, aluminium and steel industries limped on year after year, unthreatened by serious competition. Agriculture and utilities companies are other wards of the state. In 2002, at the end of the recession, about 70% of Japanese firms were operating at a loss. According to Katsuyuki Kumagai, head of information at Teikokou Databank Ltd and author of Dai Tosan (Rush of Bankruptcies), at this time more than 1 million ‘zombie’ firms were “just waiting for bankruptcy”.


In the depths of the recession, Japan’s banks were, on a scale of A to E, adjudged at E+ by Moody’s, the American rating agency. Saddled with massive and growing debts due to foolish lending practices during the bubble era, new problem loans appeared as quickly as the banks wrote off old ones. The scale of the losses during Japan’s long recession is staggering. Most analysts believed the true figure for total debts within the banking system amounted to $950 trillion, equivalent to 20% of GDP. Japan’s banks stood perilously close to disaster.

To be in Tōkyō at this time was in some ways like living in the eye of a cyclone. During this period, one read articles in foreign magazines and newspapers titled ‘Japan is headed for a meltdown’ and ‘If Japan should crash’ and thought, “My god, I know things are bad, but are they really this bad?”


Consumer spending had been declining since the early 1990s. After the consumption tax was raised to 5% many Japanese householders refused to spend money other than on essentials. Instead, households saved up to 30% of income. They did this despite interest rates that eventually declined almost to zero. In desperation, the government resorted to issuing merchandise coupons, but even this failed to stimulate personal consumption. It was more than a little ironic that, in a country where previous incentives had been aimed at increasing savings while constraining consumption, when the government tried to reverse this trend it failed. It was obvious to most outsiders that many companies and financial institutions should have been allowed to collapse, that major restructuring and a significant tax cut was necessary, but no; the government’s answer was to announce the biggest stimulus package to date, one worth a titanic $197 billion.

By 1999, the economy had finally managed to grow 0.5 %, but only after continuous pump-priming measures had sent the national debt soaring. In October that year, Japanese workers were shocked to learn that Nissan, the country’s second largest carmaker, was closing five plants and shedding 21,000 jobs. The French company Renault then bought a controlling stake in the company. The new president was to be -gasp- a foreigner. In June 2000, the Sogō Department store, whose roots went back to 1840, announced its insolvency after abandoning a controversial, and fiercely opposed, tax-payer-led bailout plan. It was Japan’s second largest corporate failure. By 2000, bankruptcies reached an unprecedented high, leaving debts of over $86 billion.

White elephants

The world’s most expensive airport, Ōsaka International, built on an artificial island in Ōsaka Bay, opened in 1994. As of spring 2011, it has amassed $20 billion in accumulated debt. Cracks appear in the runway due to land subsidence. Ōsaka’s other airport, Itami, operates at barely 50% capacity. Despite this, in 2005 the government went ahead and constructed another airport on an artificial island in Ise Bay near Nagoya, this despite the fact that Ōsaka is just 30 minutes away by shinkansen. To the west, the city of Kobe also received a new airport, despite it being only 18km from Ōsaka’s two airports. Four competing airports within a 100 mile radius, yet Kobe still hasn’t solved housing problems for those who lost their homes in the 1995 earthquake. There are ninety eight airports in Japan, ninety percent of which are failing to generate a profit.

Three enormous bridges, one the world’s longest suspension bridge, linking Honshu, the main island, with Shikoku do not generate enough revenue even to pay the interest on their debts. For the World Cup Soccer tournament of 2002, 8 new stadiums were built and 2 refurbished. Six would have been sufficient. Most of these stadiums are impossible to fill now that the tournament has finished. One is in Beppu, a town famous for its hot springs. One of the main politicians in charge of organising the competition just happened to represent the Beppu constituency. I want my town presented to the world because I’ll make a sizeable amount of money, gain status and be well thought of by my constituents. How will we fill the stadium after the tournament? H’mm… you have raised an interesting point. Debt? Oh that’s for the central government to take care of.

We’re on the Road to Nowhere

Japan Highway Corporation continues to build unprofitable toll roads, partly by using revenue collected from heavily trafficked urban roads. These toll roads are the most expensive in the world, and most operate at a loss. Road building costs are 10 to 30 times higher than in other countries. Although the expressway network stretches over 6,453 kilometres, the government authorised extending it to 9,342 by the year 2025, mostly to rural areas with declining populationsiv. The four principle road corporations are 40 trillion yen in debt, a debt that has to be met by the Government. Japan spends 5% of its GDP in funding maintenance projects nationwide – by comparison the United States spends just 2% on similar projects. These costs are disastrous in a country with debts now standing at 226% of GDP and a rapidly aging population. Many of these roads are unnecessary, being far more a reflection of LDP porkbarrel and Construction Ministry priorities than actual national need. Once again, the priorities of powerful groups have taken precedent over the needs of the country as whole.

Deflation and the Liquidity trap

During the 90s, Japan suffered from a bad case of deflation as its economy contracted, possibly as much as 1.5 – 2% a year, which worsened the already alarming land value/bad loan crisis. Land prices declined to roughly one sixth of their peak during the bubble. Households strove to repay mortgages on houses whose value has plummeted. Japan began to experience the liquidity trap described by John Maynard Keynes some 75 years ago, when rates of return get so low that people would rather hoard cash than hold debt or make investments of any kind. Fortunately, by mid-2005, due to massive intervention by the Bank of Japan, year-over-year nominal GDP grew to 3.5 percent, signalling a combination of firm real growth and modest core deflation. However, by the time Japan had emerged from its 12 year recession, its national debt had reached 140% of gross domestic product, a level of indebtedness without equal among the major industrialised countries. It has significantly worsened since then.

In 2009, the International Monetary Fund, in its World Economic Outlook, predicted Japan’s gross public debt would reach 246% of GDP in 2014. This was of course before Mar. 2011, when one the largest earthquakes and tsunami ever recorded destroyed hundreds of kilometres of town and coastline, and caused radiation fallout in eastern Japan: the world’s most expensive natural disaster. Yet there are still plans for new nuclear power stations and dams, more expressways, more airports, more tunnels, more concreted coastline….. Japan is already monstrously overdeveloped; it needs little further construction. Rather, there is an urgent need to preserve what’s left before it is too late.

A government advisory body has already warned that taxes, social security and government deficits would eat up more than 73% of Japan’s annual national income by fiscal 2025. By that year, Japan will also be the ‘greyest’ nation on the planet, with over 25% of its population aged 65 and over, requiring 2.5 workers to support each elderly person.

Japan’s export-led modest recovery after 2003 was undone by the Wall St. Crash of 2008. The country, once again, went into recession ……… yet still the village mentality prevails, and still the city subsidises the countryside, and still, despite public works spending cuts of 10%, concrete is poured lavishly, and still those in charge take token measures and procrastinate, none willing to let go of the benefits they can amass for themselves and their little fiefdoms. In Japan there is no central authority that can act in the best interests of the country as a whole.

“Tomorrow, definitely tomorrow…. from tomorrow I will abstain from drinking.”

Tony Smyth has been in Japan since 1980 and is an author and freelance writer. For more information see his website:


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