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Burst of U.S. bubble arouses old specters

by Hiroaki Sato

So the Nobel Prize-winning economist Paul Krugman has spoken: The “usual tools of economic policy — above all, the Federal Reserve’s ability to pump up the economy by cutting interest rates — have lost all traction” (“Depression Economics Return,” Nov. 14, The New York Times).

The article brought to mind my friend Takafusa Shioya’s conclusion in his book about the Japanese economic bubble that burst in 1989. Measures that had worked earlier did not work in dealing with the aftermath of the bubble. A top economic officer while in government, Shioya observed the policy struggle firsthand, often as part of it.

So, the worry now is that the United States might repeat the Great Depression. As this has come to the fore, the concern has receded that it might have to go through what Japan did after its bubble. Also, in place of the talk a few years ago of the onset of the decline of the American empire as President George W. Bush’s wars against Afghanistan and Iraq refused to go as planned, the talk today is of a “historic geopolitical shift” now that “the American free market creed has self-destructed.”

The latter judgment belongs to John Gray, a professor at the London School of Economics (“A shattering moment in America’s fall from power,” The Guardian, Sept. 28). I am in no position to pronounce anything as sweeping, but I was an eyewitness, in a way, of Japan’s economic rise and fall.

It is hard to remember this now, but in the 1980s Japan was depicted as an economic juggernaut about to swallow up the whole world, including the U.S. The most startling news still vivid in my memory was the Japanese purchase of the Exxon Building in late 1986 or, rather, the way The New York Times headlined this purchase on its front page. That building in Rockefeller Center — now simply identified by its street address — soars outside my window: My office is in the McGraw-Hill Building that stands right next to it.

When this was followed by the purchase of Rockefeller Center itself, it was as if the sky started to fall on Manhattan, nay, the U.S. of A. Saner voices said there was no need for the sky-is-falling talk because real estate investment simply means gaining the right to manage the property.

Still, there were self-mocking predictions that the star atop the famous Rockefeller Center Christmas tree would be replaced by the Mitsubishi logo, which, made up of three lozenges, looks like the atomic bomb shelter sign. Yes, the investor in Rockefeller Center was Mitsubishi Real Estate.

As fate would have it, I became the one to translate what I thought was Rockefeller Center’s last dunning letter to Mitsubishi. Mitsubishi was in arrears in paying monthly maintenance costs. When all the hoopla was over, the losses of Japanese investors in American real estate, it was said, went well beyond $1 trillion. But that was years later.

Japan’s economic insouciance was a spectacle to behold while it lasted. The rumor I heard later had it that Mitsui Real Estate, which bought the Exxon Building, did so without asking its price, while Mitsubishi bought Rockefeller Center (less than 40 percent of it, actually) simply out of rivalry.

The heading of a Time magazine article on the subject at the time caught the mood of the day very well: “I’ll Take Manhattan — and Waikiki.”

What enabled Japanese companies to behave like that? The bubble. There are a number of theories on what caused it. The majority seems to hold that it was prompted by the Plaza Accord of 1985 — an agreement to depreciate the dollar and appreciate the yen.

It worked wonders. The yen rose fast — from ¥221 to a dollar in 1985, to ¥160 in 1986, to ¥138 in 1987. That meant the prices of things in America were discounted by 40 percent for Japanese buyers in just two years. The Nikkei industrial average tripled in four years, from ¥13,113 in 1985 to ¥38,916 in 1989. Individuals became groggy. I heard a story of an ordinary Japanese citizen who bought an old castle in Germany.

There have been wild stories in America, too, of course, though I was mostly mesmerized by the improbable greed of corporate executives. One interesting thing, especially now that the American bubble has burst, is that “America has always had one economic policy for itself and another for the rest of the world,” as professor Gray puts it.

Examples are legion. Vis-a-vis Japan, the U.S. approach was dual. It preached the gospel of deregulation, even as it pressed for more regulation — both, where it suited itself.

In the meantime, the U.S. steadfastly deregulated. At the center of this deregulation was Alan Greenspan, chairman of the Federal Reserve Board from Presidents Ronald Reagan to George W. Bush. During his tenure spanning almost two decades, he remained a glad acolyte of Ayn Rand, refusing to regulate either derivatives or mortgage securitization.

The two “financial instruments” may best be described as sand castles built on sand castles.

Some Japanese economists who take the view that the Plaza Accord of 1985 triggered the Japanese bubble call its bursting a “money haisen,” the defeat in the money war. The metaphor is apt. The Japanese economy, halved from 1944 to 1945, did not recover to the 1944 level until 1952. In the decade of the 1990s that followed the bursting of the bubble the economy rose barely by 10 percent in real terms. In fact, the U.S. did far better during the decade of the Great Depression; its economy rose by a respectable 30 percent.

Unlike the Japanese bubble, the bursting of the U.S. bubble is having global consequences. The Nikkei industrial average is already back to where it was at the start of the 1980s. The decade in which Japan was dreaded as an economic juggernaut is now a vanishing dream.

Translator and essayist Hiroaki Sato’s most recent book is “Japanese Women Poets: An Anthology.”