Re: Japan

[Greg Nowell <GN842@xxxxxxxxxxxxxxxxx>]

One of the questions here is whether the land values in the banks' portfolios
are marked to market, i.e., priced at current values or kept on the books at the
value of their origination.  This obviously is a big deal, when looking at the
banking system, and may not show up in listed land prices.

Land value is also only loosely connected to whether or not the loan is actually
performing.  A non-performing loan may be secured against land that is still
valued at par (=origination value) on the market, but the bank in question may
have no intention of foreclosing against company X that is part of the Keiretsu
or owned by the bank president's best buddy or son-in-law.

Japan has, it seems, a higher-than-average incidence of such arrangements.  (See
Katz, Japan: the Miracle that Soured)

But naturally the decline in land values has been linked to the decline in bank
solvency which is also connected to the decline of the stock market.

-gn.

"J. Barkley Rosser, Jr." wrote:

> Geoffrey,
>       Very interesting data source.  It definitely shows a
> peak in land prices around 1991 with gradual declines
> since.  This contradicts what is in Ito and Iwaisaku.
> Barkley Rosser
> -----Original Message-----
> From: GGard97342@xxxxxx <GGard97342@xxxxxx>
> To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
> Date: Thursday, February 24, 2000 9:03 PM
> Subject: Japan
>
> >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
> >
> >
> >
> >
> >
> >
> >
> >

--
Gregory P. Nowell
Associate Professor
Department of Political Science, Milne 100
State University of New York
135 Western Ave.
Albany, New York 12222

Fax 518-442-5298