Japan & Korea

For years, Japan and Korea were on similar economic tracks. This makes sense. Japan has been the dominant economy in Asia and the second largest in the world. It naturally follows that Korea would pattern itself after Japan. Korea used large industrial complexes or chaebol, similar to Japan’s kieretsu structure, to create sufficient magnitude to first compete and then dominate key industries. Banks and industrial companies worked together and owned each other’s stock. This pattern was successful for many years, as the Koreans became major world players in oil-tanker construction, steel, and chips. In the last few years, following the Asian collapse in 1998, the pattern has been quite different. Korea has been able to recover while Japan has been stuck in a long-term recession. The important difference has been in the country’s banks.

Historically, Japanese banks used land as the underlying collateral for loans. They looked less at the company and its ability to repay the loans than they did at the value of the underlying collateral. This was fine until Tokyo land values started to decline at about the same time the Tokyo stock market began its fall from 36,000 on the Nikkei Index to 11,000 today. Unfortunately, land prices have fallen more sharply than the stock market, with values in Tokyo at merely 10% of those found 10 years ago.

The Japanese banks, with the complicit consent of the monetary authority, have largely ignored the loans that have turned bad. They have acted as if they hoped they would all turn around, in time. The banks have continued to extend more loans to the same companies, to keep them afloat. That strategy has not worked. Consequently, the banks have a very large percentage of their loans that will not be recovered. Economists suggest that the failure to deal with the problem has restricted lending, and therefore, restricted growth in the economy. This makes sense, because the Japanese bond markets are not well developed outside of government issued debt, and the banks have been the main source of growth capital.

Korea, faced with huge loans to its conglomerates (or chaebol), pushed its banks to write off those loans that were beyond recovery. This meant that entire corporate groups were forced to deal with financial reality, selling off pieces or seeking bankruptcy. The key difference has been the government push.. In Japan, the finance ministry has acted as if they hoped the problem would disappear. In Korea, the government realized that action was required and bad loans have been cut from 8% of assets to 2%. The Chaebol were not “too big to fail”, and huge businesses have been sold. Daewoo is a good example; GM now owns a significant position. This is not a small reason why the outlook for growth in Korea is substantially greater than Japan, where the recessions grip is strong and unemployment is at 5.3%.