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The government's tack: to weaken the yen, make Japan's exports a little more affordable, buy a little time. Most people consider that a bankrupt solution for a nearly bankrupt nation. A weak yen certainly won't help the wide-eyed man with a two-day growth of beard wandering the tunnels connecting subway stations in central Tokyo. "HELP ME," reads a sign around his neck. "RESTRUCTURED." There were nearly 20,000 bankruptcies last year — the second-highest yearly total since World War II. "It's simple," says Andy Xie, Morgan Stanley's chief economist for the Asia Pacific region. "Japan has not evolved into a postindustrial econ-omy. Its dominant role in manufacturing isn't sustainable, not with countries like China gradually taking over this role." According to a recent study by the Japan Research Institute, an economic think tank, if Japanese companies continue to shift production to China at the rate they are now, Japan's envied $48.96 billion trade surplus will slip away entirely and become a deficit within five years. "Japan has to move up the economic ladder, and shift trade from goods to services and intellectual property," Xie says, "unless it wants to go back to being a poor country again."
There's a joke making the rounds in Tokyo these days. Mr. Suzuki goes to his local bank branch, rents a safety deposit box and locks away some cash. The next day he comes back and takes some money out. He does this again and again. Finally an exasperated bank manager asks, "Suzuki-san, why don't you open a bank account?"
Suzuki-san responds: "I'd love to. What collateral are you offering?"
The banks are Japan's immediate problem, the weakest part of the whole crumbling structure. The essential question now: are they chronically metastasized with bad loans — very sick but possibly curable — or are the banks on the point of complete implosion? The largest banks expect to collectively lose $17 billion this fiscal year. The latest official stat on irrecoverable loans is $135 billion, though nobody has ever trusted that figure: the only sure thing was that the mountain of bad loans from the bubble period, troubling enough at the time, has grown exponentially with bankruptcies and the decline in the stock market. Kenneth Courtis, vice chairman of Goldman Sachs in Tokyo, describes "Himalayas of debt crashing down on the economy." In January, Yoichi Masuzoe, a parliament member from the ruling LDP, gave voice to many unspoken fears when he pronounced, "By the end of March we will have a financial crisis — that is 100% true."
Japan's fatal misstep was to avoid the short-term pain of closing down dud companies and faltering banks after the bubble burst, the so-called "creative destruction" the U.S. allowed in the 1990-91 recession and after the savings and loan collapse of 1988. Tokyo said it wanted to avoid layoffs, that companies would recover when the economy perked up. The real story is that Tokyo's instinctive reaction has been to dole out government contracts to construction companies and make banks provide cheap capital to keep retail empires going. (In January, the government backed a bailout of struggling Daiei Inc., a retailing giant that needs $3 billion from its main creditor banks to stay afloat.) This kind of propping up and bailing out is expensive: healthier parts of the economy and eager entrepreneurs get starved for loans. Until 1998, Tokyo couldn't even admit how bad its banks' balance sheets were: it had no money in its deposit insurance fund. (Filling that up cost $142 billion in 1998.) Within three years, it had sunk $600 billion in a recapitalization plan that was too little, too late.
The drama now revolves around what Koizumi's government can do. On a tough-love trip to Tokyo last month, U.S. Treasury Secretary Paul O'Neill warned that if Japan didn't do some stiff brooming fast it could face "economic upheaval." In the Japanese context the meaning was clear: a loss of confidence, bank runs, financial collapse. Tokyo's greatest hope is a stiff restructuring of banks — one that keeps them afloat while at the same time forces them to drop deadbeat creditors — that doesn't freak out savers.
But there's another danger too: that Japan's complacent public will go along with some muddle-through plan, and no creative destruction will take place. "I've heard of one woman closing her account and then renting a safe at the same bank and stuffing her cash in there," says financial planner Masayuki Kihira. "But that's a rare example." Eighty-one-year-old Sachi Matsuyama of Tokyo recently closed her account, but with no particular urgency. "Interest rates were so low, there was no reason to keep my money there," she says. " I just have enough saved to pay for my funeral." That's becoming a kind of national mantra. "We are rich enough to sustain ourselves for another five years," says Sakakibara. That, he says, is the problem — an excuse for not acting. "Because we can do nothing, that's what we'll do. And that will only make things worse." Like the individuals who draw on their savings accounts to pay the rent and buy food, Japan is tossing money at propping up rotten banks and failing companies, building highways to nowhere and becoming poorer by the day. "If the situation continues for another five or 10 years," predicts Sakakibara, "then Japan will drop out of the group of developed countries." Japan now faces its toughest manufacturing challenge in decades: it must manufacture a future.