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Asia's Financial Crisis

One block away from the Tokyo Stock Exchange, the streets at noon are normally bustling with life and activity, as the businessmen flock to their favorite lunch haunts, talking about the scores of the day. But today, November 25, the streets are quiet, deathly still. The legions of men in dark blue suits (with company pins on their lapels) stand huddled around the doors of the Exchange, nervously smoking, pacing, staring into the gray misty skies, and silently thinking in unison: can this really be the beginning of the end?

True, the TSE has seen better days anyway; it has fallen nearly 60% since its record high in the boom years. But today, there is a different feeling, a portentous gloom that has settled, as the unthinkable has happened: Yamaichi Securities, for a century a bedrock of the financial community, has shut its doors. Facing up to 6.7 trillion yen ($53 billion) in debts, the company that has funded Japanese companies and driven the economy through war and peace, boom and bust, has ceased operations, leaving uncertainty--at best--in its wake.

In response, the TSE's Nikkei 225 index (similar to the Dow Jones Industrial Average) fell more than five percent in the first hour of trading today, and stayed there until the close. For the moment, the response from around the world has been tentative; Wall Street immediately fell 1.4 percent but recovered that day to post a modest gain, and most European markets were also mixed. But perhaps the most telling signs were the bearish reactions in the already battered Asian markets. Hong Kong's Hang Seng index fell 1.8%. In South Korea, the stock index was down 7.2%, falling to a 10-year low. Bond markets tumbled, interest rates rose 1.55% and the won weakened--again.

Asian currencies have all suffered mightily over the last year or so. The Malaysian ringgit is 72% of what it was against the dollar a year ago, the Philippine peso 74%, the Thai baht 62%, the South Korean won 75%. This last figure is the most troubling, since although the other nations are not exactly world economic powers, South Korea is the world's 11th largest economy, and it is in serious financial trouble. Kia Motors, the centerpiece of one of Korea's major conglomerate cooperative groupings (called "chaebol"), has also recently failed, and the government pushed the once-mighty company into receivership. Eight other chaebol have collapsed this year alone. The International Monetary Fund has announced a bailout package, which actually scared investors more. As Dongwon Securities broker Choo Hee-yup said, "People think the IMF package will lead to rises in interest rates, cuts in fiscal spending, more corporate collapses and lower economic growth--the worst of all things investors can imagine."

Half a world away, the leaders of most of these nations met in Vancouver for the annual Asia-Pacific Economic Co-operation (APEC) conference. Naturally, the politicians tried to retain the rosiest possible outlook. President Clinton told a press conference that this "is a time for confidence in the future of Asia," Canadian Prime Minister Jean Chretien, citing the confidence of other leaders at the summit, asked "Do you think in your country, because of the turmoil, that you will move into a recession? I have asked that question to everybody and they all said 'no'."

Japan's Prime Minister Ryutaro Hashimoto, trying as hard as possible to separate Japan from what are viewed as lesser economies, declaimed, "I would like to make clear that Japan's problems are completely separate from those of the so-called Asian currency crisis...I would not like you to make such a connection lightly." But that connection must be made. Gerald Lyons, chief economist at DKB in London, told Reuters Financial Television, "I think Yamaichi and Japan must be seen in the context of what has been happening in Asia and Korea." Why? As a Thai financial official said, "Confidence and optimism are out, and uncertainty and gloom are in."

The problem, really, may be structural. The Korean chaebol are a case in point. These conglomerates essentially focus a diverse group of companies into an almost exclusive partnership, with a major bank or securities firm anchoring the finances, and providing liquidity and capital in the form of low-interest loans to chaebol partners whenever needed. During the 1960s, 70s, and 80s, this worked tremendously well, as risky startup companies who might not have received an initial capital influx were able to get started--risky ventures like Hyundai, Samsung, and Goldstar, for example. But the high-flying decades of development, where banks distributed risky loans to any chaebol member who asked nicely (and had connections), crashed hard. With many of those loans being defaulted upon, the securities firms are suddenly very insecure. Previously, if a unit in the chaebol run upon hard times and needed assistance, the bank was always there. But now, with hard times aplenty due to the far-reaching Asian currency crisis slamming overvalued currencies, when the bank needs assistance, none is forthcoming, for no business can give. That cash can only come from government, and government can only get it by dipping into its foreign reserves, which forces the won lower, and continues a vicious cycle.

The scariest thing about this scenario is that Korea is, in many ways, structurally similar to Japan. Japan's corporate groupings, called keiretsu, are also dependent on their central bank and securities firms for their financing. And Japan is also mired in a currency free-fall, with the yen dropping from a high of 78 to the dollar two years ago to 128 today, and a recession, with the Tokyo Stock Exchange down 25.2% from a year ago--the only major industrialized nation to have gone down in the past year's global bull market. Recently, Sanyo Securities, Hokkaido Takushoku Bank. (Japan's tenth largest), and a major second-tier regional bank, Tokuyo City Bank, have also failed. So with the centerpiece financial institutions failing, they cannot support their corporate partners, which puts a whole bunch of smaller companies in trouble.

Is the so-called "Asian currency crisis" affecting South Korea? Definitely. But is it, or South Korea's woes, affecting Japan? Hashimoto insists the answer is no. Russell Jones, chief economist at Lehman Brothers' Tokyo branch, agrees, saying "It's a totally different ballpark." For one, he says, Japan does not depend on inflows of capital. Its trouble were not caused by governmental account deficits, but deficits at individual banks. Additionally, Japan has foreign reserves of nearly $230 billion, which it can use to prop up the yen if needed. But as noted with the Korean example, doing so only weakens the yen further. And given that Japan is South Korea's largest trading partner (comprising 24% of imports and 14% of exports), a hard-hitting recession in Korea is bound to affect Japan, if only in terms of psychology. And if Japan is affected, Asia is affected. Just as Japanese and Korean financial institutions are having difficulty propping up their junior corporate partners, Japan and Korea themselves will have difficulty propping up junior economic partners like Thailand, the Philippines, and Malaysia in their current crises.

Furthermore, if Japan is affected, the world is affected too. With a falling yen, Japanese exports increase, which normally boosts the economy. However, just as Britain's recently high-flying pound has somehow not hurt its strong export sector, Japanese recent export increases are somehow not boosting its economy. In fact, the only result of Japan's increase in exports has been to re-ignite its chronic trade surplus with the US. Recently, Clinton was reported as telling Hashimoto, "If Japan's trade surplus with the United States shows a large increase, it would become a political problem." That is certainly true, and it is the final step in a demonstration of how a collapse of the Thai baht can, in the end, affect the political relations of the world's two largest economies. In the end, the economic is the political.

Outside the Tokyo Stock Exchange, there is nothing but gloom. That gloom may or may not be contagious. This may or may not be the beginning of the end of "irrational exuberance." For the moment, the world can ignore Asia's financial crisis. That may or may not last.

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