Dogs and Demons

companies, pension funds, the national health system, savings accounts, universities, and endowed foundations. The prognosis is for skyrocketing taxes and declining social services.

Besides the central government, local units across the nation, from heavily populated prefectures to tiny villages, are drowning in red ink. By 1998, thirty-one of Japan's forty-six prefectures were running deficits averaging 15 percent of their total budgets; six prefectures had reached the crisis level of 20 percent, at which point the central government had to step in and rescue them. Of these, Osaka Prefecture, reeling from a string of failed waterfront projects, is basically bankrupt, surviving on emergency cash infusions from the central government; its cumulative debt already topping ¥3.3 trillion, Osaka has been running annual losses of ¥200 billion per year since 1997. However, Osaka could still lose in the race to become the biggest prefectural bankruptcy, for the municipality of Tokyo also met disaster at the waterfront, and its shortfall for fiscal 2000 is three times larger than Osaka's, and growing.

Quantifying Japan's debt crisis is not easy, because its debts are so well disguised that nobody knows the exact figure. In a special pamphlet on the national debt, the Yomiuri Shimbun reported: «In addition to the general budget, there are 38 special accounts and the Zaito program, known as the 'second budget,' as well as debts of local governments. All of these are intertwined with one another, and have become a bloated monster.» Here is one estimate: In 1999, revenue shortfalls for the official «first budget» came to ¥31 trillion, an astonishing 37.9 percent of expenditures. Measured as a percentage of national product, Japan's deficit came to 10 percent of GDP, jumping right off the scale when compared with the OECD average of 1.2 percent; the nearest competitor for big-deficit spending among advanced industrial nations was France, at 2.4 percent of GDP Adding long-term bonds, by 1999 Japan's cumulative debt had risen to ¥395 trillion, amounting to 72 percent of GDP (the United States' gross federal debt, in contrast, comes to 64 percent of GDP). But this is not all. We need to take into account the shortfalls of municipal and prefectural governments, which come to ¥160 trillion. Add this to the national debt and the total jumps to ¥555 trillion, approximately 97 percent of GDP.

There is more. «Hidden debt» from the JNR Resolution Trust and Ministry of Finance budget manipulations; Zaito loans to bankrupt agencies such as the Forestry Agency, the Highway Public Corporation, and the Housing Public Agency; and additional trillions of yen in off-budget short-term «financing bills» brought the grand total to 118 percent of GDP, surpassing even the notoriously spendthrift Italy, and making Japan the most heavily indebted of the twenty OECD nations. And that was 1999. By 2002, cumulative debt will have reached possibly 150 percent of GDP. David L. Asher, of Oxford University, claims that Japan's real debt could be as high as $11 trillion, or 250 percent of GDP, after Zaito loans and unfunded pension liabilities are added.

Bad as they are, these figures do not take into account dubious reporting, such as the numbers game the Housing Public Agency plays with apartment sales, showing unsold units as sold in its official statistics. Turn over a stone among government agencies and strange things come crawling out. The Housing Public Agency's subsidiary, Japan Unified Housing Life (JUH), developed a large office tower in Shinjuku that opened in 1995. Given that this was a stagnant real-estate market, everyone was surprised to learn that the building was 95 percent leased-the tenants turned to be JUH itself and related companies, which occupied the building at nearly four times market rents. Nobody knows the degree to which the cooked books of tokushu hojin and koeki hojin could drive up Japan's true indebtedness.

Japan may have a high deficit but not to worry, economists advise us, because the Japanese are such high savers that they have stored away in the banks more than enough money to pay their debt. Japan's high savings rate is the glory of its economy. For decades, American households consistently saved at only about one-third of the Japanese rate, leading the economist Daniel Burstein to label the two nations «grasshoppers and bees.»

What the experts overlooked in the «Large GNP, Large Savings» formula was that capital in Japan earns consistently low returns. For the past decade, Japanese government bonds have yielded between 0.2 and 3 percent, far below the United States' 5 to 8 percent. No feature of the Ministry of Finance's magic system charmed financial experts as much as this, for the sacrifice by the public for the good of the national economy seemed unbeatable. After the Bubble deflated, the Ministry of Finance, in an effort to prop up the stock market and the banks, lowered interest rates as far as they could go-the lowest levels in world banking since the early seventeenth century – which is to say, close to zero: in the latter half of the 1990s, interest rates on ordinary deposits earned their owners less than a quarter of 1 percent.

To get some idea of how such rates affect the lives of ordinary Japanese, consider the case of an average salaried employee. He retires with a lump-sum pension equal to about ¥20 million, half of which he will use to pay off his mortgage, leaving ¥10 million in the bank. At 0.25 percent, his deposit brings him about ¥25,000 in interest income; that's $200 a year. «It's not worth the effort of taking your money to a bank,» says Senba Osamu of Daiwa Securities. «In a year, you'll have earned just enough interest to buy yourself lunch.»

Large segments of the public have agreed with Senba, and banks report unprecedented use of safety-deposit boxes to store cash, while piggy-bank sales have risen at department stores. By 1996, the Seibu Ikebukuro Department Store stocked sixty-eight kinds of money boxes – for example, Рака Рака Kan, a container that clacks its lid when you pass, demanding to be fed ¥500,000 in 500-yen coins. A Seibu spokeswoman said, «There has been an increasing number of people who would rather use a Piggy bank at home than a bank after interest rates declined with the end of the Bubble economy boom.»

They knew much better uses for their money during the mercantile heyday of the seventeenth century, when Saikaku wrote his novels of city life in Kyoto and Osaka, lovingly counting out each kamme and momme (weights of gold and silver) that his protagonists made from lending at interest. A clever young man

was able to loan out his one kamme at twelve percent annual interest, and by redepositing his earnings for thirty years, he found himself in possession of a tidy fortune of twenty-nine kamme nine hundred and fifty-nine momme eight fun four tin and one mo. He then withdrew the money from the bank, put it into a chest, and eventually managed to loan it out himself. Before long he had one thousand kamme. From then on he made money more and more rapidly until by the time he died he had accumulated the grand sum of seven thousand kamme, and his name was even entered into the social registry of the thirty-six richest men in the Capital. The way this man took one shingle and two one-mon coins from his father and turned them into a millionaire's fortune should serve as an example, just like a mirror, of what a merchant can do in this world.

That was a charming fairy tale of the past. Today, nobody can dream of retiring and living on interest in Japan. «I look at my bank account,» says Ishigaki Hisashi, a retired auto engineer interviewed in The NewYork Times, «and you know, we get interest about twice a year – and I say, 'What on earth is this?' You can't say it's just interest, that it's just a small bit of money. We need it to live on. It's a matter of life and death.»

Until recently, many economists saw the sacrifice made by Ishigaki as admirable because low returns for savers meant «free money for industry.» The assumption was that an impoverished lifestyle for the people was somehow morally superior, and payouts to the public a waste of national resources. As we have seen, the idea derives from the poor people, strong state policy, a relic of military-style thinking that dates to the days of the samurai.

Oscar Wilde said that the mind of an antiquarian is similar to a junk shop in that «it is filled with dust and bric-a-brac, with everything priced above its proper value.» Japan is just such a shop. When everything is priced above its proper value, it takes more money to accomplish less; in other words, capital has lower productivity. Low capital productivity has surprising results, and one of them is that the Japanese, saving for fifty years at far higher rates than the Americans, now find themselves with proportionately lower savings.

Simple mathematics shows that it takes a very short time for interest gains to equalize the totals achieved by a high savings rate. Assuming an interest differential of 10 percent, Americans saving a third of what the Japanese save end up, after about two decades, with exactly the same amount in the bank! Another ten years, and the Americans now have double the amount of the Japanese. While this calculation is very simplistic – the interest gap is narrower for savings accounts and wider for pension funds-one can see how it was possible for Americans to go on guzzling champagne in the Jacuzzi and still come out ahead. There is nothing strange about this. It's merely the principle of compounded interest, an iron law of capital, but one the Ministry of Finance overlooked.

While bureaucrats borrow against the future to build more monuments, something more serious is taking place behind the scenes, which threatens the system more than all the combined waste and losses to date. The national debt, Zaito, and tokushu hojin are mere lizards compared with the real Godzillas: massive underfunded insurance, health, pension, and welfare bills.

The problem arises from simple demographics: Japan is rapidly becoming the world's oldest country. With a birthrate that has fallen to 1.4 (the lowest in the world and possibly headed to 1.1 by 2007), the number of young people is shrinking, while the number of old people is burgeoning. In 1997, Japan surpassed Sweden in having the largest percentage of people aged over sixty-five among advanced economies-more than 17 percent. By 2020, this percentage will have soared to 25 percent. (By comparison, the numbers for the United States, China, and Korea will be 15 percent, 9 percent, and 10 percent, respectively.)

An aging population translates into trouble for Japan's pension funds and health-insurance plans, which must rely on a shrinking pond of productive workers to support an expanding lake of old and sick retirees. The figures point to an ever-increasing burden for the working population: in 1960, there were eleven younger workers supporting each retired person; in 1996, there were four; in 2025, there will be only two.

Nowhere is the problem so severe as the national health-insurance plan, where, on top of the demographic undertow, a tide of rising medical costs is dragging funds underwater. By 1999, 85 percent of Japan's 1,800 health-insurance societies had fallen into arrears, forcing them to take the radical step of halting payments for elderly policyholders because they simply could not afford to pay them.

In 1996, when the national health program reached the point where collapse was imminent, the Ministry of Health and Welfare began raising contributions and lowering benefits. Holders of employee health-insurance plans now pay 20 percent of their medical costs (versus 10 percent before), and health premiums have risen from 8.2 to 8.6 percent. In addition, the ministry is levying a ¥15 surcharge on each daily dosage of medicine, which translates into approximately a 30 percent tax on medicine.

Even this isn't enough to save the system. In raising premiums by a few tenths of a percentile, the Ministry of Health and Welfare has taken its first baby step. As one popular daily newspaper has observed, these measures amount to no more than «throwing water on a red-hot stone.» During the coming decades, the share of the health bill that a salaried worker will have to bear is projected to rise to 2.5 times the present level. Even so, to fund the health costs forecast for the next decades, premiums will have to increase three times, to about 24 percent of salary by the year 2025.

An aging population is nobody's fault. If anything, it is the result of one of Japan's great modern successes – the lowering of the birthrate. In less extreme forms, an aging population is a fate that lies in store for all industrialized nations. Japan's real problem is its failure to plan for this inevitable fate. With a high GNP and a household savings rate of 13 to 14 percent (two and a half times the American rate), Japan has the wherewithal to amass pools of capital with which to support its aging population. Or so everyone believed.

Nothing comes for free – everything has its price, as the collapse of the Japanese insurance industry illustrates. Japanese households have turned to life insurance as