However, there was to be one last mission for MOF's financial machine to accomplish, albeit a suicide mission. MOF decided that it should expand into Asia, which it considered Japan's natural sphere of influence. Land prices had been rising in Thailand, Malaysia, and Indonesia for decades-all the old Bubble rules still seemed to apply there. So Japan in effect exported its Bubble to Asia, lending heedlessly to build office towers, shopping centers, and hotels, as was done in Tokyo and Osaka years ago. «We are just asset eaters,» says Sanada Yukimitsu, an associate director at Tokyo Mitsubishi International in Hong Kong. «The Europeans and Americans consider profitability, they manage their assets. If there is no profit, those banks just withdraw. But Japanese banks lend even when the price isn't so good.»
And lend they did. Asian countries modeled their markets on Japan: under the leadership of strongmen such as Indonesia's Suharto and Malaysia's Mahathir, governments set values, and told large investors what to buy, and they obeyed. From MOF's point of view, Southeast Asia was one last blessed corner of Eden that was still free of dangerous wild animals like P/E ratios and cash-flow analysis. From the mid-1990s on, Japanese banks doubled and tripled their loans to Southeast Asia, providing the lion's share of loans to Korea, Malaysia, and Indonesia, and more than half of all foreign money lent to Thailand.
There is an old Yiddish joke that asks: Question: What does the saying mean, Though he slips and falls on the ice, the Avenging Angel will still catch up with you? Answer: He's not called the Avenging Angel for nothing! Alas for MOF. In the fall of 1997, the Avenging Angel arrived in Southeast Asia waving the flaming sword of «real value.» The Korean, Thai, Malaysian, and Indonesian currencies collapsed overnight. Suharto and Mahathir watched in helpless rage as the markets, long used to obedience, went their own way: down. The mistake of the Asian nations was to lower the walls around their credit systems, something Japan would never do – hence when the crash came they could not control it as MOF did in Japan.
A massive financial meltdown of the sort that had been taking place slowly in Japan over seven years happened within a few months. Japan's banks, whose loans to the region were four times those of U.S. banks, are writing off tens of billions of dollars of bad debt. The results for Japan, however, are not entirely negative, for while the banks lost heavily, Japan's manufacturers benefited from the Asian crisis to snap up businesses and properties at bargain prices. Much is at stake in MOF's new offensive in Asia. Japanese banks and stockbrokers are in such trouble at home, and have lost so much business in the United States and Europe, that if their Asian policy does not succeed they may languish permanently as second-class citizens in world finance. «What's left if this fails?» asks Alicia Ogawa, the head of research for Nikko Salomon Smith Barney. «That's a good question.»
Meanwhile, what about the size of the stock exchange? In 1989, the New York and Tokyo stock markets stood very nearly equal in market value (Tokyo's was slightly larger). Eleven years later, in August 2000, the New York exchange had reached a total capitalization of about $16.4 trillion; Tokyo's had $3.6 trillion, making it less than one-fourth the size of New York's. Even more sobering, while Japan's OTC market for emerging stocks fizzled, NASDAQ grew to be a giant in its own right. Indeed, NASDAQ, with a market cap of $2.9 trillion, came within striking reach of the Tokyo Stock Exchange; when the TSE dipped in June 1999, NASDAQ even surpassed it! Together, monthly turnover at NASDAQ and New York exceeded Tokyo by eleven times.
One of the more puzzling aspects of post-Bubble Japan has been the unwillingness to reform a market that has obviously failed. By 1996 it was clear that drastic changes would be necessary, and MOF came up with the idea of a Big Bang, a deregulation modeled on the market-opening of the 1980s in London, when the «Big Bang» sparked dramatic growth in the London financial world.
The problem is that Japan's banks and securities firms rely for their very life on unreal values. Like Japan's rural villages and their dependence on dam building, the banks are hooked on the narcotics of these unreal values, and kicking the habit will bring about severe withdrawal symptoms. Deregulation in Japan, scheduled to take place over several years starting in
1999, has turned out to be anything but a Big Bang. Speaking on the subject of Japan's reforms in 1996, Sakakibara Eisuke, the director of MOF's International Finance Bureau, announced, «We bureaucrats are giving up all of our power.» This was followed, according to The Wall Street Journal, by «a quick outline of how Mr. Hashimoto's Big Bang program would unleash market forces. But then Mr. Sakakibara made an important qualification. 'Of course,' he said, giggling, 'we can't allow any confusion in the markets' – a phrase bureaucrats often invoke to justify a go-slow approach to reform.»
The go-slow process began immediately The insurance industry, due to open to newcomers in 1998, won a reprieve until 2001 – or later. The Ministry of Finance announced that banks must set aside capital against bad loans under a system known as «prompt and corrective action» but quickly began to water down the standards, phasing in the rule piecemeal, applying it first to large banks and only later-if ever-to small banks, where most of the trouble lies. As Japan entered the twenty-first century, the hype about the Big Bang had died out, and it was consigned to dusty shelves as just another government report. It was business as usual in Tokyo.
This brings us to a striking feature of Japan's post-Bubble trauma: paralysis. Instituting a real Big Bang is simply out of the question, for the whole edifice of Japanese finance might crumble if MOF allowed economic rationalism to infiltrate. It has been said that the Bubble losses were not as severe as they seem because they were merely «paper losses» – but for Japan, paper losses are a serious issue because the very genius of MOF's system was its ability to inflate assets on paper: Japan's rapid postwar development depended on it. So when troubles began to appear, MOF trod very gently, afraid to make any sudden moves.
The concept of «latent profits» has come home to roost in the form of «latent losses.» Banks lent heavily to real-estate companies that own land now valued at a fifth or a tenth of the price they paid for it a decade or two ago. As the real-estate companies go under, these properties become the problem of their lenders, but rather than write down the losses year by year on a present-value basis, the banks have kept these properties on their books at purchase value; the moment they sell, they must suddenly report huge losses. So the market came to a near-complete stop in the 1990s: banks didn't sell because of «latent losses,» and few bought because not enough transactions occurred to lower the prices to profitable levels.
Paralysis also rules in the stock market. The amount of money raised by new stock offerings in 1989 was ¥5.8 trillion; by 1992, it had fallen to ¥4 billion, a shocking 0.07 percent of what it had been three years earlier. By 1998 this figure had crawled back up to ¥284 billion, still a tiny fraction of its earlier height. Another telling statistic is the number of companies listed on the exchange. In Tokyo, that number remained almost flat during the 1990s, while that of the New York Stock Exchange rose by 45 percent.
Overall, the Tokyo and Osaka stock exchanges raised about ¥1.5 trillion (about $13 billion) in initial and secondary public offerings in 1995-1999; the equivalent for the same period on the combined New York and NASDAQ exchanges was considerably more than $600 billion, a truly staggering difference. To get a sense of the scales of magnitude involved, consider that in the first three months of 2000 alone the NYSE and NASDAQ raised $92 billion through public offerings, far more than the total raised in Tokyo and Osaka over the entire past decade. The original purpose of a stock market is to provide a forum for companies to sell equity to the public, but the TSE abandoned this role for ten years; for most intents and purposes, it was shut down.