Hastening to washington in the aftermath of September 11, the Japanese Prime Minister was dismayed to find the preoccupations of Bush and his aides far from the war on terror.footnote¹ Brushing aside Koizumi’s offer of the Self Defence Force, the President’s advisors homed in on the main question. When, they wanted to know, was his country going to deal with its bad debts? Japan has been the sick man of global capitalism for over a decade, since the bursting of its eighties’ bubble, but the situation is now deteriorating fast. The malaise has spread from the banking and finance sectors to infect the whole system, draining life from a once confident and powerful economy. The IMF has predicted a contraction of GDP by 0.9 per cent in the year to March 2002, followed by a further drop of 1.3 per cent the year after—the most sustained downturn the country has faced since the 1950s. Debt has snowballed to unmanageable proportions. In the face of darkening global conditions and its own intransigent post-bubble recession, the real threat to the US today comes not from a handful of Wahhabi fanatics but from Japan’s deflating economy. The process of decay, now gathering momentum, risks triggering an implosion that could suck in the entire region, if not the globe.

Barely a generation ago Japan could aspire to OECD leadership in wealth and productivity. In the early twenty-first century it is Number One in debt. The light fades slowly. GDP grew modestly through the 1990s at an average 1.3 per cent, but is still enormous, second only to the US; per capita GDP rose by 16 per cent. Japan remains the world’s greatest repository of wealth, its high savings and under-consumption supporting the US’s low-savings, high-debt regime. Its goods are still prized in the global marketplace and its trade balance, though shrinking, is still positive.footnote² But the appearance of normality is deceptive. Japan is the only industrial country in the postwar period to experience chronic deflation. The Nikkei—its 1989 pinnacle of 38,000 points no more than a distant memory when the Koizumi government came to power in April 2001—has broken, at least temporarily, the 10,000 barrier. A staggering 1,364 trillion yen (well over $10 trillion) has been wiped off the national assets since the bubble burst. Land assets have dropped by 775 trillion yen ($5.85 trillion) since 1989, and securities by 589 trillion yen ($4.44 trillion)—sinking to about one third of their 1989 levels—and remain very unstable.footnote³

With prices falling by about 1 per cent a year, and unemployment rising as companies go bankrupt or shift abroad, there is a real risk of Japan slipping into a savage deflationary spiral. Full, ‘lifetime’ employment has disappeared within less than a generation and the number of jobless has been rising rapidly. The official rate shows an increase (from a steady 2 per cent ever since 1977) to 3 per cent in 1994 and 5 per cent in 2001 (3.5 million), and 12.4 per cent for the 15 to 24-year-old cohort. A Cabinet Office estimate of September 2001, however, suggested a real figure of 10.4 per cent, or around 7.38 million out of work, based on estimates of jobs lost and of people wanting work, if not actively seeking it. If current estimates of the ‘surplus employed’, 8.1 per cent of those in employment or around 5.26 million, are added to these—as a possible sum of ‘future unemployed’—the figure is 13.5 per cent, or going on for 10 million. The recent suicide figures provide a dramatic index of social distress: over 30,000 per year from 1997 to 2000, or nearly 100 per day. This is three times as many as those killed in traffic accidents.footnote⁴

How has once-mighty Japan so fallen? The complex of problems the country faces has both a global dimension, in relation to the world economy, and a local one. A key aspect of the latter, it will be argued, lies in the unique system of the doken kokka or ‘construction state’, the focus of this essay. First, however, it may be useful to establish the actual scale of the country’s debt. For the private sector, estimates vary widely as to the total of non-performing loans within the Japanese banking system. The official figure of around 32 trillion yen (over $240 billion dollars) produces a vertiginous gap when set against deflation (see Figure 1); but this is generally considered only the tip of the iceberg. The total sum owed by businesses in trouble or actually bankrupt is set at 80–100 trillion yen ($600–750 billion) by the US government; 111 trillion yen (nearly $840 billion) by the IMF; and up to 240 trillion yen—$1.81 trillion, or nearly 50 per cent of GDP—by private-sector analysts.footnote⁵ This is over three times as much as the total amount—71 trillion yen (over $500 billion)—written off as bad loans by Japanese banks over the preceding decade.

As recently as 1995 the world’s top ten banks were all Japanese; today only two remain in the first rank. At the beginning of January 2002 the Governor of the Bank of Japan warned that the core capital-adequacy ratio of Japan’s major banks was just 5 per cent, barely half the level deemed financially sound by the Bank for International Settlements. Yet simply to write off all the debts would bring on a catastrophic wave of bankruptcies, deepening the recession and adding between 0.5 and 1.5 million—in the view of some foreign commentators, more like 3 to 4 million—to the current ranks of the unemployed. To liquidate them through an infusion of public funds would involve a vast amount—up to 50 per cent of GDP—while still merely shifting the load on to taxpayers’ shoulders.footnote⁶

Japan’s public-sector debt, however, is equally intractable. It now constitutes a staggering 12 per cent of total global debt—20 per cent, if unfunded pension and medical-care benefits are included. Merely to stabilize the current sum by the year 2005 would require an amount equivalent to 10.5 per cent of GDP—about 55 trillion yen or nearly $415 billion, a larger fiscal shift than has ever been attempted in an industrial economy. The figure has soared from 58 per cent of GDP in the 1990s to an anticipated 140 per cent for 2001, and is on track to reach 200 per cent by 2005.footnote⁷ The total for central and local government debt is expected to reach 666 trillion yen (around $5 trillion, or twelve years of tax revenues) by March 2002—over 800 trillion ($6 trillion, or sixteen years of tax revenues) if the deficits of public corporations are included. One helpful commentator has calculated that this sum in 10,000 yen notes would constitute a pile 800 times the height of Mount Fuji.footnote⁸ On current projections, the public debt will double by 2010, and treble in the following decade.

Japan is slowly running out of money. Of its current annual budget of around 80 trillion yen ($600 billion), over a third comes from national-bond issue—in other words, is borrowed; while a quarter of its payments—around 20 trillion yen ($150 billion)—must go to service the debt.footnote⁹ The Maastricht Treaty sets a limit for national deficits at 3 per cent of GDP; Japan only sank into deficit in 1992, after its bubble burst, but the figure has risen since then to 5 per cent in 1996 and to a predicted 11 per cent in the present financial year (see Figure 2).footnote¹⁰ For the decade of the 1990s as a whole, the national product increased by 57 trillion yen (over $430 billion), or about 10 per cent of GDP, but the debt by 342 trillion (over $2.5 trillion), or nearly 70 per cent of GDP—a mountain of debt for a mouse of domestic product growth.footnote¹¹ This is a worse position than that facing Britain in 1976, Italy in 1991 or even Weimar Germany in 1921; in short, Japan is now confronting a deeper public-debt crisis than any other nation in modern history.footnote¹²