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October 18, 1998 MARKET INSIGHT Elizabeth Allen of Japan Fund
By KENNETH N. GILPIN
ntil the Federal Reserve Board cut interest rates again and Congress agreed to more than $90 billion in financing for the International Monetary Fund, the biggest development last week in the effort to stave off global recession seemed to be made in Japan.
After numerous false starts, Tokyo announced a $500 billion plan to rescue ailing Japanese banks. Western officials, who have been pressing the Japanese to shore up their banking system, hoped it would help pull the Japanese economy out of recession.
Those were the hopes. But as the details filter out, the plan appears to offer less rather than more.
Elizabeth Allan, a portfolio manager at the Japan Fund for the last 11 years and a student of the country for more than a quarter-century, put it in perspective during a telephone conversation from Tokyo early Friday morning.
Q. What role do you think Asia, and Japan in particular, played in the decision by the Fed chairman, Alan Greenspan, to cut rates?
A. I think the reason he did it is because the Japanese stock market has reacted so weakly to the bank package. As of Thursday, the market was actually below where it was when the package was announced.
Q. The bank program was billed as one that would reform Japanese banks, allowing the healthy to survive and the weak to fail. It doesn't do that, does it?
A. This is a bailout, not reform. I think the system needs to be reformed, but the politicians have a different view. They much prefer a muddle-through approach rather than a dramatic one, and seem to have retreated from an approach which calls for a stringent inquiry into the health of the system.
Q. Still, we're talking about half a trillion dollars. Won't that help?
A. On a short-term basis, it does look as though the stimulus that is part of this announcement will have some positive impact on the economy, even though it will help most of the country's traditionally strong interest groups the most, like agriculture and real estate interests.
Q. Consumers are seen as another troubled element in the economy. Have you seen evidence that demand is picking up?
A. I have been here about a week on this trip, and one of the things I have been looking at is the retail sector.
As I wandered around shops last weekend, there were mobs and mobs of people out, but not many were walking out of the stores with shopping bags. That tells me people are interested, but in terms of actual purchases it looks somewhat subdued.
Q. What was the talk?
A. One of my favorite sources to find out what folks are thinking is taxi drivers. I had one on Thursday who was utterly scornful of the bank package, saying that everyone involved in the package lied to the people. He also said that until there is confidence in the system, there will be no change, and that consumers are not so easily fooled. That is exactly the point. Until there is some way of knowing which banks are solvent, the whole economic infrastructure is suspect.
Q. You are not exactly describing an economy on the mend. How do you invest the Japan Fund's money under such conditions?
A. We have tried to maintain a balance between unexciting but attractively valued domestic names, and there are some, even in a weak economic environment.
I have also been looking at Japanese pharmaceutical companies, which until recently had a fairly low profile on the international scene. Some of the larger-cap names are Takeda, Yamanouchi and Chugai.
Q. A year ago, some people were saying Japanese stocks were cheap. They are even cheaper now. What sort of advice do you give to someone considering investing?
A. It is important to be very selective investing in Japan at this point and has been for some time. But for those with a time horizon of five years or more, it is important to realize that at some point Japan, an important country with many strengths, will come out of this.
Q. What sort of indicators suggesting a turn is coming are you looking for?
A. The most important ones are a reduction in capacity in many areas, starting with the banking system. If they try to keep every bank alive then even the best ones will be hard pressed to make a profit. But it is not limited to banking. It is also true in a number of other sectors, from agriculture and retailing to manufacturing.
Q. Will the rest of Asia remain sick until Japan gets well?
A. Most people would say the rest of Asia can't rebound without Japan. A stronger Japan would be a positive. But Asia is going to need to think about planning for its short- and mid-term future without the help of a stronger Japan.
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