A man walks past a display of global stock indices (green for losses) in Tokyo. Photo: Kazuhiro Nogi/ AFP

U.S. tightens exports to China’s chipmaker SMIC, citing risk of military use

The ghosts of financial sins past are getting lots of column inches as lively Japanese growth fails to scare up inflation or notable wage gains.

Much of the focus has been on the walk of shame by Kobe Steel, Mitsubishi Materials, Toray Industries and other corporate icons caught cutting corners.

But the apparition best explored as Shinzo Abe’s reflation vision falters dates back 20 years – the collapse of Yamaichi Securities. That largely forgotten episode sheds light on why the economy isn’t returning to life the way the prime minister hoped.

The failure of one of Japan’s four fabled brokerages was arguably the most frightening moment of the Asian crisis. Yamaichi’s reckoning on November 24, 1997, came just as South Korea was agreeing to a $57 billion international bailout, at that time the largest in history.

Concerns quickly turned to what-ifs about Japan, then the No. 2 economy. If Korea, then the 11th biggest, was too big to fail, might Japan be too big to save?

That never happened, of course. On the day the Yamaichi news broke, then-Prime Minister Ryutaro Hashimoto was in Vancouver. There, he assured US President Bill Clinton that Japan’s banking system would stand its ground even after Tokyo’s own Lehman Brothers moment.

That pledge held true in the summer of 1998. Rather than risk fresh market turmoil, Tokyo injected public money into Long-Term Credit Bank of Japan (which later become Shinsei Bank) and Nippon Credit Bank (now Aozora).

In doing so, Japan set a dangerous pattern: treating the symptoms of its bubble years and resulting bad-loan crisis, not the underlying causes.

At least five years passed before Tokyo got serious about nudging banks to dispose of toxic assets. During that time, the deflationary forces Abenomics is still grappling with became firmly ingrained.

And they’re still with us. Since 2001, when the Bank of Japan pioneered quantitative easing, four different governors shoveled untold trillions of dollars of liquidity into a traumatized economy. All that largess turned Japan into a stimulus junkie, requiring ever bigger hits to maintain growth.

Since 2013, current BOJ Governor Haruhiko Kuroda has unleashed a monetary “bazooka,” and to limited effect.

Since 2013, current BOJ Governor Haruhiko Kuroda has unleashed a monetary “bazooka,” and to limited effect.

Inflation is less than halfway to Tokyo’s 2% target. Wages, adjusted for inflation, fell 0.1% in September from a year ago, down a fourth consecutive month.

And Mercer ranks Japan dead last in Asia in its annual estimate of wage increases. In 2018, it reckons nominal Japanese pay will increase by roughly half that of South Korea, Hong Kong and Singapore.

What gives? It’s those symptoms again. For all the talk of epochal structural reform, Abenomics has largely pumped old-school stimulus into bonds and stocks.

After cornering the government debt market, Kuroda & Co. began gorging on exchange-traded funds. That’s pushed interest rates negative and the Nikkei 225 index to 26-year highs. What Kuroda’s bazooka blasts didn’t do is create the domestic demand-led growth Tokyo has sought for decades.

True, Japan is enjoying the best run of growth in 16 years. But that’s largely thanks to buoyant global demand, not domestic retooling to loosen labor markets, increase innovation or cut red tape.

The glacial pace of deregulation explains why a 2.8% unemployment rate and the highest availability-of-jobs rate in 44 years aren’t giving workers a notable raise.

Is Japan ready to kick the stimulus habit? There’s lots speculation about BOJ “tapering” in 2018. We’ve been here before, though.

When the BOJ tried to raise rates in 2006 and early 2007, withdrawal symptoms – slowing growth, deepening deflation – scared it into returning to zero.

This, sadly, has been a recurring nightmare since Yamaichi’s crackup 20 years ago – one that explains why growth and stocks are up, but wages aren’t.

Abe has both the power and tools to break this cycle. He enjoys rare majorities in both houses of parliament and an economic blueprint the public supports. Abe must devote considerably more attention and political capital to putting deflation in the rearview mirror.

Deflation, remember, is a symptom of a lack of confidence among households and businesses, not the underlying cause of Japan’s waning competitiveness.

And yet, 20 years on, Tokyo is haunted by a lack of audacity. It’s still betting the same old strategies will create an organic, self-sustaining recovery. There’s a ghost of a chance of that happening.

Asia Times Financial is now live. Linking accurate news, insightful analysis and local knowledge with the ATF China Bond 50 Index, the world's first benchmark cross sector Chinese Bond Indices. Read ATF now.