Vested Interests And Corruption

Why Things Stay The Same

I've been reading about corruption and money politics in Japan for the last 2months and I'm struck by how complicit the bureaucracy were in letting things get to where they got. The reason why they acquiesced so easily to the money was because of the very competitive nature of the bureaucracy internally. As the bureaus shed staff as they proceeded up the ladder, the discarded staff would have to find jobs in the private sector where they had few connections. Enter the politician who could help them in exchange for a favor here or favor there. Except it was played out more subtly; there was a tacit understanding that that is why a bureaucrat did favors for a politician, and in turn this was why politicians ferried money from private interests.

You can see that the entire government was captive to money simply because the bureaucracy functioned in a particular way. That's not to say it shouldn't have been as competitive. It is that the bureaucracy made itself vulnerable to corruption by being what it was.

The politicians for their part needed money. Money represented favours and therefore power, in a structure of quid pro quo exchanges. Money exchanged hands between politicians just so that deals could be made and the imbalances of the deals could be off-set by other favours and payments of money. In practical terms, it was the politicians' jobs to placate the complainers and whiners with more money. In turn, private industry spent the money so they could shore up favorable positions against the competition, and they all assumed the competition was paying as much in bribe money as they were.

No wonder things went the way they did. If you looked at the structure of this corruption in Japan, it is clear that the construction industry ended up being the emblematic industry of Japan, just as the military has become that industry for America. The construction lobby was simply too powerful to stop, let alone oppose.

What this wrought was a system where politicians would have prior knowledge of where certain developments would be and they would either tip of their corporate contacts or go in there themselves and profit from the insider information. The net result was increasing land value for over 40 years right up until when the bubble burst; since then it's been a deflationary spiral. Between 1945 and 1989, there was only 1 year where the mean property price went down.

What's really interesting about this is that Japan has been in a deflationary spiral for 20 years. it is possible the deflationary spiral will continue until the full inflationary effect of 40-odd years of Liberal Democrat-led is completely wound back down.

Demographics That Say No


The further interesting thing about 'the Bubble' bursting in 1989 is that signs of stress were there right up to the point where it popped. As property prices rose, it was becoming evident that Generation X in Japan would not be able to live as their parents did and have children as their parents did. Adding in the effects of abortion and contraception, there was a collapse in birthrates, which continues to this day. The deflationary spiral experienced by Japan has greatly to do with the shrinking population.

With fewer people to consume, it has been virtually impossible to ignite internal demand. The prognosis is even worse. This diagram is from Naoto Kan's prime ministerial blog:

 

[caption id="" align="aligncenter" width="568" caption="Japanese population projections"][/caption]

That doesn't bode well. The population peaked in 2000 and has been sliding down ever since. It's amazing what a small kink World War II was in the scheme of things, but that is an entry for another day.

What this seems to indicate is how quickly a combination of an aging population and inflated property price can send a nation into a deflationary spiral. Does that sound familiar?

Yeah, I thought 'Australia'!

This sort of curve is probably why the previous government brought in the baby bonus, shore up the upward curve of the population. It is also why immigration is active. There are a lot of people invested in property in Australia - and the prices are so high most of the major cities in Australia make the international list for least affordable cities - and this is being kept up by squeezing supply to keep up the demand. The question is, how long can this keep going before birthrates really crash? And when they do crash, doesn't that imply there's a deflationary spiral ahead?

So Who's Vested Interests?

Back to the point of vested interests. Here's the thing about the deflationary spiral in Japan. It's all about the deleveraging, but none of the banks want to give up on the paper value of properties they've ended up owning. So they're simply waiting for buyers who will buy these properties at an approximation of what the banks have rated them as, as opposed to writing them off. In other words, they want to maintain the fiction that the bubble era prices are somehow still relevant. And successive governments in Japan have been shoring up these banks at the expense of the tax payers, and these banks have not lent to small businesses. That part sounds familiar to what is going on in America in the aftermath of the GFC.

The politicians in Japan for most part since the bubble have been borrowing money to prop up moribund banks and construction companies, and now they're running out of credit. There's talk of increasing the consumption tax as well as simply printing money and hyper-inflating out of debt like the Weimar Republic tried. Given how the Weimar experiment ended, it seems like an idiotic move; which leaves only the hard option of raising taxes and paying off the debt with an ever shrinking workforce. Understandably there's very little stomach to make that hard call, which is the same hard call they have been unable to make in Japan.

Which leads me to ask, to whose benefit are they persisting? Surely it can't just be endless gormlessness? It seems again, it's for the bureaucrats who need a place of employment after their careers in government, the politicians who need money to run elections, and general construction companies that need tenders to build more unwanted civil projects.

The thing about all of this is that if you substitute 'general construction' with say 'mining', you start to get a picture of the so-called two-speed economy in Australia. If our government keeps bowing to pressures from these industries, and keeps avoiding doing what is right for the rest of the nation, it's going to eat the future. That's the lesson of history we're seeing in Japan.