It might seem incongruous that while a great sword hangs over the world's head in the form of Japan's external dollars, its domestic markets are becoming irrelevant. The paradox, however, lies in the fact that each is the complement of the other: Japan's external reserves exist only because domestic markets, in order to preserve MOF's system, are cut off from the world.
The most vivid demonstration of the irrelevance of domestic markets to world finance is the collapse of the Tokyo Stock Exchange's foreign section, launched in the late 1970s in a bid to make Tokyo an international capital market. At its height in 1990, the TSE's foreign section boasted 125 companies. However, the rules hedging in foreign firms were so restrictive that fees far outweighed the anemic trading in foreign stocks. By the spring of 2000, the number of companies had dropped to 43. Average trading volume shrank nearly to the vanishing point: during the week of June 1-5, 1999, only 19 of the remaining companies traded at all on an average day. In an era of international finance, such a foreign section goes beyond failure to farce.
In the meantime, foreign listings on other stock markets skyrocketed. By April 2000, London listed 522 foreign firms, the three American stock exchanges featured 895 foreign firms, and even Australia (60 foreign listings) and Singapore (68) had surpassed Tokyo. Foreign stocks in New York accounted for just under 10 percent of all trading, while trading volume on the TSE's foreign section came to a fraction of 1 percent of the trading on NASDAQ's foreign section alone.
Embarrassed by the TSE's poor showing, MOF relaxed some of the restrictions and lowered costs in 1995, but this failed to stem the withdrawals. Starting in 1994, the listing department began sending delegations to Asian capitals beating the drum, and after almost two years of soliciting, it managed to persuade Malaysia's YTL Corporation to debut on the TSE's foreign section, which it did with great fanfare in February 1996. YTL's offering raised $44 million (versus the $700 million raised by Korean Mobile Telecom and more than $1 billion raised by Telkom Indonesia in New York around the same time). A year later, only one more Asian firm joined the Tokyo exchange, and in 1999 none did.
Once known as the «land of technology,» Japan is now out of touch with the times. While Merrill Lynch and Goldman Sachs were developing elaborate computer algorithms to predict the future of the market, brokers at Nomura were still using abacuses, on which they knew how to do only one operation: add. That is why Madame Nui's toad held such sway over the Industrial Bank of Japan. The toad's utterances were as good a predictor as any of which direction the market would go.
The lesson of the Bubble is not that Japan should be castigated for departing from Western norms. Credit ordering, Japanese style, was a huge success, and it has helped other Asian nations to expand their industrial bases with great speed. To some degree, the Japanese system is still providing benefits to the nation, just as America's «deficit without tears» aids its economy. Both these systems, however, stretch underlying laws of money and have the potential to become dangerous when carried to extremes. For the United States, the danger of surplus dollars abroad is a real one, but the threat is not totaclass="underline" market forces do rule large segments of the U.S. economy, thus lending stability to the structure. In Japan, on the other hand, inflated assets, «virtual yen,» and imaginary balance sheets rule all, making the structure much more fragile. The issue is one of balance. As in the case of the construction industry, Japan's financial world carried things to extremes, pushing credit ordering beyond reasonable limits. In the process, the Ministry of Finance, Nomura, bank executives, and pension-fund managers lost all idea of what a healthy financial position really consists.
Indeed, in following Madame Nui's toad, the IBJ deserves credit, for in the never-never land of late-twentieth-century Japanese finance, toad magic and spells from ancient China were the best available predictors of the market. The toad told Madame Nui sometimes to buy and sometimes to sell, and as a result she lost only $2.1 billion out of combined loans of $22 billion, fairly respectable damages of about 10 percent; MOF and Nomura, on the other hand, advised investors only to buy – and never, ever, to sell – and as a result those who stayed in the market squandered 50 to 60 percent of their investments between 1989 and 1999. The Ministry of Finance is still ordering pension funds and insurance companies to buy. Japan might be in better shape today if the banks had gone on listening to Madame Nui's toad.
4. Information
Men take their misfortunes to heart, and keep them there. A gambler does not talk about his losses; the frequenter of brothels, who finds his favorite engaged by another, pretends to be just as well off without her; the professional street-brawler is quiet about the fights he has lost; and a merchant who speculates on goods will conceal the losses he may suffer. All act as one who steps on dog dung in the dark.
A countryside of legendary beauty is ravaged, and what was once reputed to be the richest nation in the world runs out of money To understand how such things can happen, we must come to grips with an issue that disconcerts writers on Japan so badly that when faced with it they ordinarily set down their pens and look away. It is the quality of sheer fantasy.
We have entered a twilight zone where dams and roads carve their way through the landscape without reason and money comes from nowhere and goes nowhere. We cannot dismiss the air of unreality in Japan's public life lightly, as it is the very air that its officials breathe. The facts about much of Japan's social political, and financial life are hidden so well that the truth is nearly impossible to know. This is not just a matter of regret for academic researchers, for a lack of reliable data is the single most significant difference between Japan's democracy and the democracies of the West. Why have so many students of Japan and commentators by and large ignored the issue of how the nation handles information? I believe it is because our cultural biases run much more deeply than we think. While experts on Japan know all about the commonly encountered difference between tatemae (an official stated position) and honne (real intent), they tend to view the discrepancy as a negotiating ploy. It hasn't occurred to them that the fundamental Japanese attitude toward information might differ from what they take for granted in the West. But it does differ, and radically so.
Traditionally, in Japan «truth» has never been sacrosanct, nor do «facts» need to be real, and here we run up against one of the great cultural divides between East and West. We can see the two approaches clashing in the Daiwa Bank scandal of 1995, when the Federal Reserve ordered Daiwa's American branches closed after finding that Daiwa, in collaboration with the Ministry of Finance, had hidden more than a billion dollars of losses from U.S. investigators. MOF reacted angrily with the comment that the Fed had failed to appreciate «cultural differences» between American and Japanese banking. The cultural difference goes back a long way, to a belief that ideal forms are more «true» than actual objects or events that don't fit the ideal. When an Edo-period artist entitled his screen painting A True View of Mount Fuji, he did not mean that his painting closely resembled the real Mount Fuji. Rather, it was a «true view» because it captured the perfect shape that people thought Mount Fuji ought to have. This principle of valuing the ideal above the real is far-reaching, and one may see it at work in the play between tatemae and honne that dominates daily life in Japan. People will strive to uphold the tatemae in the face of blatant facts to the contrary, believing it is important to keep the honne hidden in order to maintain public harmony.