Dogs and Demons

a way of avoiding steep inheritance taxes, among the highest in the world. Indeed, the tax system essentially forces people to buy life insurance, which accounts for about 20 percent of household savings. And, as we have seen, MOF requires insurance companies to buy low-interest government bonds and invest in the stock market whenever the exchange begins to drop. After years of investing in stocks and bonds that produce no yield, insurance companies are showing zero, or even negative, returns.

Even this would not be so serious – just a case of running in place – but, in addition, life insurers are exposed to trillions of yen of bad loans extended during the Bubble. In the latter part of the 1990s, the eight biggest insurers wrote off trillions of yen in bad loans, but this is only a fraction of the real exposure, since tobashi techniques obscure most of the bad debt. The Ministry of Finance did its best to hide the damage (no insurance company had gone bankrupt since the war), but in April 1997, MOF could no longer cover for Nissan Mutual Life Insurance, which went belly-up with losses of ¥252 billion. Others followed. By October 2000, Chiyoda Mutual Life Insurance and Kyoei Life Insurance, Japan's eleventh and twelfth largest life insurers, had both collapsed, with combined liabilities of a whopping ¥7.4 trillion, in Japan's biggest corporate bankruptcies ever, with further bankruptcies and consolidations in sight. Reliable information about pension funds and insurance is sparse-so far, only a vague silhouette of the Godzillas looming over Japan in the coming twenty-five years is visible in the mist. At Nissan Mutual Life, for example, MOF knew that Nissan was bankrupt in 1995 but allowed the company to continue in business without publishing any report of its losses for two more years.

Extremely low interest rates have also heavily affected the nation's pension funds. In 1991, pension funds in the United States made a whopping 28 percent return on their investments; Japanese pension funds gained only 1 percent. By 1998, Japanese pension funds had made the lowest returns of pension funds worldwide, declining at a rate of minus 3.2 percent, while U.S. funds garnered 14.6 percent. The year before, the rate for the United States was a hefty 18 percent. Rates of return like these, compounded annually on immense pools of money, make a difference of literally trillions of dollars to public savings.

When Japan founded its national pension-fund system in 1952, planners set 6 percent as the minimum annual rate of return for employee savings plans. Pensions have not met this goal since 1991. One survey, in September 1996, showed that only 4 percent of corporate pension funds had sufficient reserves to make payments to pensioners, and since then the situation has deteriorated further. Dozens of pension funds are outright bankrupt, with assets worth less than the cumulative money paid in by participating workers. The number of pension funds in arrears has become such an embarrassment that the Labor Ministry lowered the minimum rate of return to 3 percent in 1995, and then to only 1 percent in 1997. Meanwhile, since 1998 a record number of companies have resigned from the national pension system – more than 800,000 companies simply don't pay premiums for their employees, even though they are legally required to do so.

As in the case of health insurance, the pension system cannot survive without lowering benefits and raising taxes. Pension premiums are rising rapidly, growing from 14.5 percent of salary in 1994 to 17.4 percent in 1997, and reports say they may even reach 30 percent by 2020. In addition, in 1994 the government raised the minimum age for beneficiaries from sixty to sixty-five. As many Japanese firms and government agencies mandate retirement at age fifty-five, this leaves workers with a ten-year gap after retirement before they can receive their pensions.

Private industry faces an exposure to unfunded pensions that could develop into one huge flat tire for Japan's manufacturing businesses; for some companies, the cost of funding pension shortfalls is approaching half of their net profits. According to a survey carried out at the end of 1999, 70 percent of Japanese companies did not have enough money set aside to cover their pension obligations. In fiscal 2000, MOF changed its accounting rules to better reflect pension liabilities (previously completely unreported), but the new rules left plenty of «cosmetic accounting» techniques in place to veil the true extent of the danger. Only a handful of large companies have divulged their pension shortfalls, but the numbers for the few that have are sobering: in spring 2000, Mitsubishi Electric announced that it owed ¥540 billion; Honda Motors and Toyota Motors were short ¥510 billion and ¥600 billion, respectively; Sony needed to make up ¥225 billion. While nobody knows the true number, the aggregate shortfall for companies on a national basis is estimated to reach tens or even hundreds of trillions of yen. Given corporate unwillingness to admit embarrassing facts and the worsening economic situation in the late 1990s, the true situation is probably much worse. To get a sense of scale, the World Monetary Fund estimated Japan's pension liabilities in 1997 at roughly 100 percent of GNR As Jane Austen said, «An annuity is a very serious business.» Life will not be easy for Japan's future pensioners.

A favorite mantra of economics experts is to say that Japan's debt is of less concern than that of other countries because it owes this debt mostly to its own people. While this is true, the fact remains that the Japanese people must repay the debt through taxes, and the burden will be crushing. By 2005, according to Gavan McCormack, government debt will run about «¥1,400 trillion, ¥11 million per head (say, two years' salary for an average worker). To repay such a sum with interest would call for a tax of ¥1.7 million per year every year for sixty years from every working citizen.»

As McCormack points out, Japan can dispose of its debt in three possible ways: increase GNP (rapidly), tax, or inflate. An explosive growth in GNP is unlikely. So the next alternative is taxes, and over the next twenty-five years taxes could skyrocket to the point where they surpass notorious situations such as Sweden's. Withholdings that in 1997 took a bite of about 36 percent out of the average taxpayer's income are estimated to soar to more than 63 percent by the year 2020 – and these tax increases do not take into account the burgeoning national debt.

The consumption (sales) tax rose from 3 to 5 percent in 1997 – and there is strong pressure to raise it to 10 percent or more once the economy recovers. Indirect taxes, such as road tolls, surcharges such as the Ministry of Health and Welfares tax on medicine, and a myriad of fees levied by other distressed agencies will also double and triple. Meanwhile, the level of services will decline, pension payouts will drop, and patients will be called upon to bear a larger share of medical costs. Add the rising consumption tax, and by 2025 the average Japanese citizen could end up paying up to 80 percent of his income to the government.

Obviously, this isn't going to happen – such high taxes would strain taxpayers to the breaking point. Hence it would seem that «printing money» (having the government buy bonds or deposit money in banks), thereby causing inflation, would be the obvious next step. But this, too. Taggart Murphy points out, may not work, since it would undermine the value of government bonds; at the same time, banks, grown cautious after the Bubble, might not turn around and lend the money to the public. We're back to the Mole Game: Cut down on government spending, and millions of people (including politicians) will be out of work. Raise taxes too high, and even the long-suffering Japanese public will rise up in anger. Print money, and government bonds lose their value. So what to do? Nobody knows.

All this comes of supporting an artificial regime so long that everyone's livelihood depends on it. So elaborate is this structure that to change any part of it threatens the whole; hence it is nearly impossible to make serious reforms. Facing a similar situation, Abraham Lincoln recounted the following story:

Two boys out in Illinois took a short cut across an orchard. When they were in the middle of the field they saw a vicious dog bounding toward them. One of the boys was sly enough to climb a tree, but the other ran around the tree, with the dog following. He kept running until, by making smaller circles than it was possible for his pursuer to make, he gained upon the dog sufficiently to grasp his tail. He held on to the tail with a desperate grip until nearly exhausted, when he called to the boy up the tree to come down and help.

«What for?» said the boy.

«I want you to help me let this dog go.»

Some believe that the Japanese save according to «Confucian ethics.» Others point to the fact that high land prices force people to save, since they have no alternative if they wish to own a home. In any case, Japan's stock of savings is not nearly as secure as it looks, for mice have gotten into the storehouse. Behind the scenes, personal and corporate debt is gnawing away at Japan's savings.

Surprisingly, and this runs contrary to the common wisdom about Japan, the Japanese people have an avid aptitude for debt. Credit-card use quadrupled from the mid-1980s to the mid-1990s. Of course, expanded use of credit cards is not what it seems on the surface, for the anti-consumer nature of credit in Japan means that most cards are highly restricted and do not provide much credit as we usually understand it: most people must pay their cards monthly in full. Even so, the public has developed its own form of tobashi, whereby borrowers withdraw money on one card to pay for another. «Buy now, pay later,» with installment purchases and long-term lease arrangements, have led to the growth of giant leasing and consumer-credit companies. Installment buying is so popular in Japan that by the mid- 1990s the Japanese were carrying more consumer debt per capita than Americans.

While the public pays for its debt with usurious interest rates, industry has access to free money. Stocks and bonds pay negligible returns, and banks would never foreclose on businesses in their keiretsu grouping. In a world where banks hand out money for free, it would be easy to predict that companies might begin to pile up debt. That they did. Today (and for most of the postwar era), corporate debt in Japan has exceeded equity by an average of 4 to 1 (compared with 1.5 times to 1 in the United States). Allowing companies to leverage themselves far beyond what was considered safe in the West was one of Japan's most successful stratagems. It worked well in the high-growth era, but when exports reached a plateau and growth slowed in the 1990s, these companies found themselves saddled with huge surplus capacity. Suddenly they began to feel the heavy weight of debt on their shoulders.

Judging by history, one could even argue that the Japanese show a cultural bent toward wild, heedless borrowing. Perhaps it was a result of the traditional intense love of the moment. It is remarkable how many Kabuki and puppet-theater plays revolve around debt, or around the misuse of money entrusted to the hero or heroine. (In contrast, Chinese theater is obsessed with injustice and law courts – the misuse of power rather than the misuse of money.) One of the most famous moments in Japanese puppet theater is the scene known as Fuingiri, 'Breaking Open the Seal,' in the play Meido no Hikyaku. An Osaka shop clerk, Chubei, driven by his love for the courtesan Umekawa, breaks open the seal on a packet of gold coins consigned to him by his master. He knows the punishment will be death, but he can't stop himself. Debt owed by daimyo lords to moneylenders in Osaka brought down the Tokugawa Shogunate in 1868. Debt was the very key to Japan's pre-Bubble financial system, with its cycle of assets-debt-assets. And spiraling debt and misuse of funds intended for other purposes is the hallmark of the bureaucrats who run agencies such as the tokushu hojin. In the corporate sector, a giant millstone of debt hangs around the neck of Japanese industry. In short, the Japanese are anything but natural savers. On the other hand, who is? It is human nature to borrow-and here is where the bureaucrats guiding Japan's financial system made a mistake that has had serious consequences for society. They punished noncorporate borrowers with usurious interest rates.

In Japan, lenders can legally charge interest of 40 percent, the sort of rate for which Dante confined usurers to the third ring of the Seventh Circle of Hell. While corporations enjoy access to capital at near-zero interest rates, private individuals have no alternative but to turn to sarakin, «consumer loan companies,» a nice name for loan sharks, who lend at official rates ranging from 30 to 40 percent, with actual rates sometimes reaching 100 percent. Failure to repay earns a visit from a crew of gangsters. The Ministry of Finance smiles on this system, because it believes such high rates dampen consumer borrowing. But despite MOF's best intentions, nothing will stop needy people from borrowing money. What consigning the consumer-loan business to gangsters did achieve was to drown millions of people in usurious debt. Saikaku remarks, «Of all the frightening things you can imagine, surely there is nothing as horrifying as having one's fortune ruined and being hounded by creditors. Nothing else even comes close.»

Sarakin are the hopeless debtor's last resort, yet it is estimated that in the late 1990s borrowers from loan sharks amounted to 12 million people (one in eight adults). In fact, the only part of the Japanese banking system to grow appreciably during the 1990s was this one, with assets leaping 25 percent in some years. Of Japan's 12