Global Steel Trade; Structural Problems and Future Solutions

Three factors contributed to tipping the Japanese economy into recession beginning in 1997 after posting
5.1 percent real GDP growth in 1996. First, fiscal policy turned sharply contractionary, as cuts in public
works spending reduced public demand by almost 1 percent of GDP while tax increases hit private
demand. Second, the Asia financial crisis, which began in the second half of 1997, contributed to a decline
in foreign demand, with goods and services exports down 5.6 percent between the second quarter of 1997
and the fourth quarter of 1998. 74 Finally, the failures of a major bank and securities firm in the fall of
1997 75 adversely affected business and consumer confidence, and contributed to a sharp decline in the
supply of bank credit. 76
In late 1997 and 1998, Japanese banks were criticized by domestic firms for generating a credit crunch,
apparently as they withheld new credit to questionable borrowers and worked on shoring up their balance
sheets. Though gross bank lending had declined in 1997, it fell by more than 2 percent in 1998 and more
than double that in 1999. 77
After an initial delay, the Japanese government responded to the deteriorating situation with significant policy
steps in a number of areas. To compensate for the drop in private sector demand, the government reversed its
contractionary fiscal stance, increased spending in initial and supplemental budgets, and provided tax incentives
for such items as housing. 78 To stabilize the financial sector and reduce the risk of systemic crisis, the Japanese
government passed several key legislative measures in 1998, including the provision of substantial public funds,
with toughened conditionality for bank recapitalization with those funds. 79
It is often said that Japanese banks have provided loans based on their relationships with their borrowers,
rather than on projections of future company cash flow or other risk-based assessment screening. 80 The
1999 Economic Report of the President, in a generalized discussion of the merits of market-based versus
relationship-based finance, noted that the best example of this in Japan was “the ‘main bank’ relationship
that many established firms traditionally have with their primary lenders.” 81 This appears to be the case
particularly in keiretsu groupings. The report goes on to outline the perceived benefits of such a system, but
Japan’s Faltering Domestic Market in the 1990s
The loss of Japanese steel demand during the 1990s was severe and prolonged. Japanese steel
demand overall fell nearly 30 percent, and the fall in demand for certain products was even more
severe. Hot-rolled sheet demand, for instance, dropped by 45 percent in the domestic market over the
past decade. The fall in domestic steel demand was not a short-term phenomenon, but was instead a
long-term structural decline that coincided with Japan’s deeper economic problems, including the
crash of Japan’s stock market in 1990, the end of the construction boom, and the movement of
Japanese automobile plants overseas. The high prices charged by the steel producers themselves
also contribute to the problem of low demand.
This loss in domestic demand, coupled with the retention of production capacity levels in the 1990s,
aggravated what is often recognized as a longstanding problem of surplus capacity for Japanese
producers. Most of the sources that have characterized Japan’s steel industry as having substantial
surplus capacity in the late 1990s view the fall of domestic demand over the last ten years as the
leading cause. A 1999 report by a MITI-sponsored committee discussing structural problems facing
the steel industry stated that over 15 percent of total capacity—or about 17 million MT—was a longterm
“surplus,” a figure consistent with other measures of Japanese excess capacity.
Numerous Japanese industry experts interviewed for this report recognized that surplus steel
capacity has, in fact, long been a problem for the Japanese steel industry, dating back to a capacity
buildup that resulted in industry-wide capacity of approximately 140 million MT by the early 1980s.
While Japanese producers had taken some steps to cut capacity in the late 1980s, any major
capacity cuts had ceased by the early 1990s.
Chapter 3: Behind the Crisis—Japan 79