What China Can Learn From Japan About Burst Bubbles

Our bank did well from Japanese bad loans. The approach was based on using legal process. And you could do that in Japan. Court rulings are obeyed. If organized crime – the yakuza , who were often but not always involved in the bad loans – wanted to take on the judiciary and interfere with court orders they were free to do so.

They didn't make that choice when it came to foreign firms. Our bank also refused to pay off the yakuza or enlist their help as some other financial outfits reportedly did.

In the 2000s, one foreign bank tried to replicate its success in China.
It failed.
It couldn't enforce its rights, even when it had also enlisted someone with“connections.”

Invariably, the debtor would find somebody with better connections who would obstruct the resolution process.

Another major difference that made things easier in Japan was the basic confidence the average citizen had in the government and its competence – despite no shortage of scandals over the years.

Japan also has
elections
– fair ones, too. The citizenry could vote politicians out of office, and even an entire party. And the Japanese press – parts of it at least – did its job well enough exposing official wrongdoing.

This tended to serve as a pressure release valve of sorts that could absorb even a disaster like the“bubble” collapse.

One gauge of this confidence in their system is that Japanese people have never rushed to move their wealth out of the country. This is unlike the case in China, where the move is ideally made in the company of a relative with a residence permit – to the US or some other free nation.

One fairly notes another huge advantage for Japan in cleaning up the bad debt.

It's the Japanese expression
shoganai.
It means it can't be helped, or that's life.
With that utterance as justification, the Japanese put up with all sorts of things that no other people on earth would.

The bubble era hangover – and the official and financial class malfeasance that caused it – was just one of those things. Nobody liked it, but“shoganai.”

Another advantage for Japan was that they bit the bullet and allowed foreign financial firms to play a major role in the debt workout process.

This got a lot of bad press. The foreign firms were referred to as“vulture funds.” There was plenty of official resentment of outsiders taking advantage of Japan's misfortune. But they were allowed to operate – and supported.

One can't imagine Xi Jinping allowing foreign financial companies to“do the necessary” and subject the CCP-ruled People's Republic of China to another few years of“humiliation” at the hands of foreigners.

He might offer up a small project to lure in a few Western firms. Their arrival would be used to show the CCP is serious and applying“high quality” approaches. Beyond that, it's hard to imagine.

Arguably, without the foreigners, Japan would have had a much harder time. Besides distracting attention from who caused the bubble era excesses, there was the small problem of the Japanese underworld. They'd made their position clear early on: If Japanese banks collected on bad debts in which the yakuza stood to lose, that was an unhealthy proposition for those bankers.

Harming foreigners was a different matter.

If not for the foreigners' intervention, the authorities would have had to crack down on the yakuza, thus harming the groups' broader moneymaking interests.

It's debatable, but from my perch I'd estimate that a huge percentage (90% if I had to give a figure) of the first US$200-300 billion in loans that went bust had a serious yakuza taint.

Sign up for one of our free newsletters

• The Daily Report Start your day right with Asia Times' top stories
• AT Weekly Report A weekly roundup of Asia Times' most-read stories

The Japanese government held back. Beyond fear of bankers getting hurt, the deep involvement of politicians, bankers, and officials would have been exposed. This seized up the financial system and the economy. The ripple effect caused a lot of other bad debt – much of it without yakuza connections. But the damage was done.

Help from where?

Japan also benefitted from having actual and potential support from the United States and other Western nations that saw Tokyo as an integral part of the free-world system.

Exactly who will help China? Russia? Cuba? Iran?

As crazy as it sounds, the
Biden administration
might step in to prop up the country that refers to America as“the main enemy.” It's the same country that is building up a military to kill Americans.

One is properly skeptical of what's going on at the recent meetings between US and PRC financial officials.

Chinese Premier Li Qiang, right, shakes hands with Treasury Secretary Janet Yellen, left, during a meeting at the Great Hall of the People in Beijing, China, Friday, July 7, 2023. Photo: Mark Schiefelbein / Pool

Resolving China's huge bad loan problem just might be beyond the CCP and its officials. After all, they have no more special expertise than anyone else on earth when it comes to running an economy.

But if the US government, Wall Street, and the two-standing-ovations-for-Xi business class keep pouring money and technology into China, that just might keep Xi Jinping afloat for a good long while – bad debt or no bad debt.

On the other hand, if Washington steps back and says,“We love you, but it's your problem,” the entire CCP Ponzi scheme will be in all sorts of trouble.

And that would be a win-win.

Grant Newsham is a retired US Marine officer and a former US diplomat and business executive who lived in Japan for 20 years. He is the author of the book
When China Attacks: A Warning To America .

This article was first published by JAPAN Forwar . It is republished with permission.

Already have an account? Sign i Sign up here to comment on Asia Times stories OR

Thank you for registering!

An account was already registered with this email. Please check your inbox for an authentication link.