Japan

[GGard97342@xxxxxx]

In a message dated 24/02/2000 15:32:43 GMT Standard Time,
bmoore@xxxxxxxxxxxxxxxxx writes:

> I agree wholeheartedly that we must find an explanation for Japan. Why is
>  it that low rates there have not induced the private sector to deficit
>  spend, so that the government must do it?
>
>  I have a student working on this, and think one reason may be asset
> deflation:
>
>  Stock prices fell sharply from 89 to 91, but land prices did not. (My
>  student is trying to find a series for Japanese land prices. Have you seen
>  one?)

Very good questions, Basil Moore. Open the mind and try these answers for
size.

Japanese land prices are available from the Japanese Real Estate Institute at

http://www.reinet.or.jp/index-e.htm

Start your student off by reading Thornton or Tooke to learn the following:-
If a country's interest rates are lower than all other countries' rates,
money is lent abroad, not at home. This causes price deflation in the low
interest rate country and price inflation in the high interest rate country.
(Schumpeter gives a good summary and references.)

The theory that the opposite relationship is true derives from the answer
given in 1832 by the then Governor of the Bank of England, J Horsley Palmer,
to question 678 of the Althorp Committee. They are in the report of the "The
Secrecy Committee" of the Bank of England (see Schumpeter page 698). Send
your student to the Bank of England's Archives - Mr Gillett, the archivist,
is a very nice man - and ask him of her to read the answers to the other 912
questions which Palmer answered. Among them he will find some empirical
evidence, given by Palmer, which refutes his own armchair theorising about
interest rates.

Next get in touch with Professor David Llewellyn of Loughborough University
to learn something about the way the Japanese banks were affected by the
Basle Accord of 1988. A popular version appeared in the January 1992 edition
of "Bankers' World", then the journal of the Chartered Institute of Bankers
in London. To comply with the Accord the Japanese Banks had to raise their
tier one capital adequacy ratios, and as unprofitable banks cannot raise
extra capital, they probably had to reduce lending. Get him to check out if
this is true. The value of property depends upon how much one can borrow to
buy it, so reduced lending means crashing property prices.

It can mean crashing share values too, if people have been borrowing to buy
shares. Japanese banks' capital base is commonly invested in company shares,
so if lending to buy them is reduced, the prices go down, and the capital
base of Japanese banks falls, leading to further reduction in lending
capacity. For an account of the origins of the Basle Accord see "Essays in
International Finance No. 185", December 1991, International Finance Section,
Department of Economics, Princeton University.

It is of course a clever wheeze to buy the shares of companies to whom you
lend money, and the Japanese possibly thought they were improving upon a
German practice. But the German banks have long term liabilities in the form
of their internally invested pension funds, so they do not have to take the
risk of using their shareholders' funds to buy equities.

To add to the problems the Japanese Government fell for the propaganda of the
Henry George claque, and introduced a "Land Value Tax" in 1996. A land value
tax is a disguise for full or partial land nationalisation so it naturally
lowers land values.

On second thoughts the first thing you should do is remind your student of
the wise words of Dr Samuel Johnson, "You must rid your minds of cant."

The Japanese could be justified in thinking that the Basle Accords were an
Anglo-American conspiracy to wreck the Japanese banking system.

Have fun,

Geoffrey Gardiner