Book: Saving the sun
Author: Gillian Tett
I started reading this book to understand the reasons behind Japan’s “lost decade”, as the topic kept coming up in discussions about the ongoing recession in the United States. The answer that I take away is that the problems that US faces are different from what Japan faced, and the reasons for the preceding bubbles are even more different, though, of course, all bubbles are essentially manifestations of too much money chasing too little real growth.
Japan’s economy had seemingly been firing on all cylinders till it hit the year 1990. Japan had achieved truly amazing growth from 1953, and through the 60s and 70s, it seemed unstoppable. In 1986, the real estate and stock market bubble took hold, and lasted through 1991. Then on, a slow path to correction began, with the bear market lasting till 2003. The markets took a hit again during the 2008 financial crisis, finding a new low. This book is written in 2003, and follows the story of Long Term Credit Bank’s rise, fall, and takeover by an American PE firm, Ripplewood.
- Why the bubble?: There is one big reason, and another reason that simply fueled the fire. First, Japanese domestic investment was constrained–there were limited avenues in which the Japanese domestic investor could invest in, and with a savings rate like that of Japan, it meant that a lot of savings ended up chasing limited opportunities. The ideal situation would have allowed the domestic investor to take their money to foreign markets and provide liquidity and growth to places that needed it more, but that didn’t happen. Whether this was merely a policy decision, or also a product of a culture that was very invested in success of the country is debatable. This meant that the investors invested in real estate and equities, taking them higher. Banks loaded up real estate holding and equities themselves, and the unrecognized gains from these investments allowed the banks to lever up, and lend more, fanning the flame, and starting a self-fulfilling prophecy.
Second, the Plaza Accord of 1985 depreciated the USD against four key currencies, fueling a massive rise in Yen, further limiting the savings leaving the Japanese shores, as whatever foreign investments were available and allowed, were simply cheaper. On top of that, US Fed pushed BoJ to lower interest rates repeatedly to fuel domestic consumption, which meant cheap cash for everyone, which again ended up in real estate and equities.
- Banks soon had bad debt and were levered, but “no one knew”: Companies often created subsidiaries, and the companies were required to reveal what was happening in the subsidiaries only if they owned a significant stake. Often times, they did not, and these subsidiaries served as a place to hide bad debt. Falling stock and real estate markets made matters worse, as companies had used these holding as assets to lever up. So, the entire balance sheet were taking a knock. Regulators knew about it to some level but never asked for the real details so as to maintain ‘harmony’, as everyone thought that with enough time, the dirt will take care of itself. As if this wasn’t enough, banks came up with new ways of classifying bad debt, and everything looked rosy again.
- When bad debts became an open secret, the government didn’t act decisively: The erstwhile well-oiled capitalist machine of Japanese economy was based on simple set of almost “socialistic” rules- (1) banks exist to help corporations–the success of Sony, Toyota and such confirmed to everyone that this works. Banks were not supposed to press the corporations, and almost all corporations paid the same interest rate. (2) banks are supposed to support each other, and not put each other in trouble by pressing on liabilities. These rules existed because of a common sense of purpose post WWII–restoring Japan. This plan was almost a Meiji Restoration-II. BoJ had strong contacts with these banks on a personal and historical level, and forcing a bank to come good on its terms was considered un-Japanese. So, the problem festered, simmered, and festered more.
- Takeover of LTCB: I was mostly interested in how the banks got to this stage, hence I didn’t pay a lot of attention to the takeover mechanics used by Ripplewood. But, it is worth noting that highest level of political machinations were involved, Volcker included. It is also worth nothing that takeover by an American firm was considered insulting, and the press went extreme in its depictions of a takeover by a gaijin–politely translated, foreign, firm.
My closing thought: A great read, and helps a lot in understanding why it took more than a decade for the economic reality of Japan to come to the front.