How the miracle nation sank

We really knew Japan was sliding into an economic morass three snowy New Years ago, when a young man knocked at our door and tried to borrow my wife's housekeeping money.

We know him well - he works at our local building society, whose glass and stainless steel office towers over the picturesque wooden houses and shuttered shops of our half-rural, half-industrial village a couple of hours out of Tokyo.

His building society has branches all over Japan. Could this solid pillar of the world's biggest economy after the US (or the third, perhaps, after China - Chinese figures are dodgy) possibly need the contents of one British housewife's handbag? Whatever became of rich, hi-tech Japan, that was well on its way to owning the whole world?

"Can you help us out, Jenny-san?" our visitor asked. "If you have any spare money around the house, please come and pay it in straight away. It's only for 24 hours. You can take it out again tomorrow."

"We'd like to help," said Jenny, businesslike for once. "But as it happens, we don't have an account with you. And," she added, perhaps a shade on the catty side, "what you have just said doesn't exactly encourage us to open one, either. Why does your rich and famous building society need our housekeeping money?"

"Well, it's no big deal," he said. "I'll try next door." And off he went.

I went round later to ask what was going on. His office looked prosperous, the parking lot full of new cars. "We don't keep cash here over the weekend," he explained. "We were afraid that someone tried to take his money out this morning, the word would get round that we couldn't pay, and in an hour we'd be cleaned out. People here are getting very nervous."

Back home, the phone rang. "If you have any money in the Yokohama, take it out," a friendly neighbour advised. "They'll be the next to go." Jenny went down to look, and sure enough queues were making withdrawals. It turned out to be just a rumour, but the fact that it was being spread about one of Japan's oldest banks showed how jumpy Japanese were getting, even then.

They're a lot jumpier now. In 1998 a panic run on Japanese banks and deposit-taking institutions like building societies, credit unions and post offices was narrowly avoided. Truck-loads of new banknotes, hastily printed by the Bank of Japan for emergency distribution, are still in the vaults, but the effects of the crisis are still evident - and getting worse every day. In 1998 a bank chain in Japan's northern island went belly-up, and depositors lost their all. As one result, the Japanese government guaranteed deposits, but after 1 April this year only up to 10 million yen (some £57,000), and from next year depositors are on their own. Another result was the collapse of Yamaichi Securities, Japan's fourth biggest brokerage. The American giant Merrill Lynch took over most of its branches, but last month, after losing $600 million, Merrill Lynch started to leave Japan. The Tokyo stock market is down 50 per cent since the American firm arrived, and is now barely a quarter of its peak in 1989.

Resisting even Yankee sales-talk, Japanese investors now shun stocks and shares like mad cow disease - which, adding to Japan's woes, struck last year. At the end of last year Japan, once famous for secure lifetime employment, had a million heads of families out of work. From New Year's Day, Hello Work! (the optimistically-named government labour exchanges) have been open six days a week, but have few new jobs on offer.

The trouble is not that Japan, as a nation, is going bankrupt.

Japan is still the world's biggest creditor, and its trade surplus, while falling, is still near record heights. Both America and Britain would be in desperate straits if the Japanese took their investments home. Japanese with jobs still work hard, and their products are in hot demand - last year the Toyota Camry and Honda Accord easily held their places as the most stolen cars in America.

Overall Japanese unemployment at 5.6 per cent is the highest in 45 years, but is still below general European levels. Suicides attributed to debts and loss of jobs are four times what they were a decade ago, but at 8,500 a year, still not high by international standards. Yet two- thirds of Japanese are anxious about their futures, according to a year-end cabinet poll, with less than one in 10 expecting their lives to improve, the gloomiest outlook ever recorded. The figures say Japan is sliding into a deflationary spiral, better known, the last time it gripped the industrialised world, as a depression. What's gone wrong?

A good place to start is with the young man who tried to borrow Jenny's housekeeping. He's 28, unmarried, and is never likely to marry. He has no account with his own firm because he has no need to build a house. He lives with his parents, meaning that - as their eldest son - he will inherit the family home. He is not bad-looking with, as of now, a secure job. But - here's the catch - he is an only son. By Japanese custom his wife will be expected to move in with his parents and care for her in-laws until both die, which, Japanese being the world's longest-lived people, could be 20 or 30 years of unpaid slavery. A generation ago, most marriages were arranged, and brides had little choice. These days they do, and young women have gone on strike against skivvying for tyrannical mothers-in-law. Result: two-thirds of Japanese men under 30 are unmarried, and unlikely ever to tie the knot. More than half of male Tokyo-ites under 35 are fancy-free, with poor marriage prospects.

Japan's output of babies is drying up. Why? Take the young woman next door to us. She's 35, single, and lives with her parents. She contributes nothing towards her keep - another Japanese tradition - and as a result has a fat bank account, designer clothes and a fancy car. But she spends long evenings at home watching TV. Parties for both sexes are still rare in Japan, and considered daring. Her best chance of meeting Right-san is at a noisy, twice-yearly shrine festival, with village busybodies looking on, or at work. But Japanese seniority-based pay scales mean men of her age are short of money to take her out, whereas men aged 50 to 60, the peak earning years, are mostly married, with other ideas in mind.

Every Japanese expressway junction has a string of garish "love hotels" offering rooms for "rests" at £30 an hour, day or night, condoms available, no luggage needed or questions asked. The patrons of these establishments, unique to Japan, were once mostly married to each other, and embarrassed by the flimsy paper screens around Japanese bedrooms. But a string of recent scandals, involving headmasters, judges and high-ranking police officers being caught with under-age schoolgirls they chatted up through the internet, show that love hotels are no longer innocent love-nests, if they ever were. No respectable woman would be seen leaving one these days.

What about the growing Western custom of living together before, or even instead of, marrying? It is still rare in Japan, and we know only one such couple. They are caught in a classic tug-of-love, a husband who hopes to use his children to lure an erring wife back, and a wife who has found A.N. Other. What unromantic census-takers call POSSLQ (Persons of Opposite Sex Sharing Living Quarters) are hard to find in Japanese statistics, but one stark figure throws light on the situation. Marriage may be going out of style in the rest of the industrialised world, but parenthood, luckily for us, is not. In Iceland, where few bother to marry at all, 62 per cent of births are illegitimate. In Sweden it is 55 per cent, France 44 per cent, Britain 39 per cent, the US 33 per cent, and even in once strait-laced Ireland, 31 per cent. In Japan it is one per cent.

There are many reasons. Illegitimacy is a bitter shame, for mothers and babies alike. With high rents and low starting wages, young people cannot afford unsupervised living quarters. Abortion is cheap and easy. But one reason stands out: young people are shying away from sex, the first step towards a shared life, the fun part if we can believe the love-songs. Japan is losing its most precious resource, new Japanese. A huge social change of our time, a free-wheeling attitude to marriage, is passing Japan by.

Japan's population will peak in this decade, then fall steadily. By 2800, as things are going, the whole nation will fit comfortably into Tokyo's main football stadium. Sex-averse young people and empty cradles make life duller, but why the dire economic consequences now? The answer is in the statisticians' fertility rate, the number of babies born to each woman in her lifetime.

America's is 2.06 babies per woman, just about replacement level, meaning there will be a new generation to work and pay taxes so Uncle Sam can in theory repay the money he is borrowing from their parents now. Japan's rate last year was 1.29 babies per woman, far below replacement. One result of fewer marriages and babies, and young people living with parents, is that new, bare-floor household formation has all but ceased. Housing starts are declining, along with sales of refrigerators, vacuum cleaners, washing machines, school uniforms: all the paraphernalia of a new family. These, not designer handbags or new cars, are the only reliable source of domestic demand, which alone can give the economy a healthy future now export sales, especially to Europe and the USA, are dwindling fast. Older, stingier Japanese can make do with what they've already got, and buy less and less.

Japan is working itself into a wealthy extinction.

Other industrial countries have declining fertility rates, too. Britain's last year was 1.73 babies per woman, Italy's 1.1. But these figures are made up by immigration, legal and illegal.

Immigrants are pure economic gold: they arrive ready to work, set up homes and settle in. Japan itself benefited enormously after the Second World War, when six million refugees and defeated soldiers flocked from Korea, China and Taiwan. But they were all Japanese, and Japanese-only is still the immigration policy. Today there are few Japanese living abroad, and they don't want to take their chances in depressed Japan. There are always, of course, desperate people with nowhere else to go. In 2000 Britain took in 10,185 refugees, the USA 24,000, Germany 11,446 - and Japan, 22. Five of these, Afghans, await deportation on the grounds they now face no persecution at home. Another major trend of our time, immigration from poor, overcrowded to rich, baby-short countries, is passing Japan by.

There is another economic downside to Japan's stagnant, ageing population. Ever since 1945, as country people flocked to the cities and started new families, land in crowded regions has gone up in value, through good and not-so-good times. So when city land began its really dizzying climb in 1985, few Japanese wondered why, even when the Emperor's 300-acre palace in central Tokyo was valued at more than all Canada - quite apart from the problems Emperor Akihito would have faced trying to reign from Moose Jaw.

In fact, almost no land in Japan was sold at these crazy prices. Instead, Japanese banks accepted land as collateral to buy more land, and when prices got into the stratosphere, to buy shares in Japanese companies. In the words of financier Bernie Cornfeld, the whole nation sincerely wanted to be rich. The result was one of the wildest booms in history, and then the inevitable bust, when it was discovered the real demand for land, and hence its long-term real value, is actually falling, as fewer and fewer couples need land for new homes.

The banks had lent huge sums against wealth that never really existed. Now they cannot collect on their loans and dare not lend more, so struggling firms, starved of capital, go under, jobs are lost, spending falls, more jobs go, fewer babies arrive, and Japan slides even further into its economic black hole.

Why did Japan do nothing to stop this made-in-Japan disaster? Is it now too late to recover? As things are going, yes. Tomorrow, from our village perspective, we'll see why.