Discussions of Japan’s economic achievements have largelyignored a glaring weakness: its second-rate financial system. Primitive by Western standards, Japan’s financial industry has beencharacterized by rigging of the financial markets (with tacitendorsement from governmental bureaucracy), a cross ownershipsystem which gives a few large corporations undue influence, andwidespread bank and securities fraud. The Japanese call theirfinancial markets the Bubble Economy, a reference to the rapidgrowth caused by easy credit and unbridled speculation during the1980’s.
The Bubble Economy also has an unreal aspect, as the Japanesehave somehow convinced themselves that it is distinct from the realeconomy and therefore cannot damage it. But the myth that landvalues and stock prices will always go up has beenshattered—and unrealistically high valuations of theseassets form the foundation for the entire Japanese financialsystem. The plummeting stock market has been most visibly in thenews, but Wood argues that falling real estate values willultimately have an even more sobering impact on Japanese banks,since so much of their lending has been collateralized by widelyoverpriced land.
All of this should give Japan-bashers no cause for rejoicing: adepressed Japanese economy has worldwide repercussions, as theJapanese buy less from overseas and try to sell foreign assets. Inthe long run the shock should be healthy for Japan’s financialinstitutions, encouraging more open business practices, betterregulation, and a generally more realistic basis for the markets. But in the short term, Wood predicts jarring economicadjustments.
THE BUBBLE ECONOMY reveals a side of Japan rarely evenconsidered in books devoted to Japanese business practices. Basedin Tokyo as Japan Finance Editor for THE ECONOMIST, the author canreasonably claim intimate knowledge of the workings of thefinancial industry. This thought-provoking account is marred onlyby the absence of documentation: no source notes, bibliography, oreven an index.