JAPAN: A MODEL FOR WHAT NOT TO DO
ASIA'S RICHEST ECONOMY SAW ITS ASSET BUBBLE BURST SIX YEARS AGO. SINCE THEN IT HAS
AVOIDED MAJOR DEREGULATION, CORPORATE RESTRUCTURING--AND GONE NOWHERE FAST.
Stocks plunge. Real estate goes bust. Consumers get tightfisted. That scenario is a cold, new reality in much of Asia, but to
Japan it's a familiar story. Ever since Japan's financial and real estate bubble burst in the early 1990s, the economy has limped
along, with annual GDP growth averaging just over 1%. Indeed the Tokyo market has been down so long--the Nikkei index
has yet to climb back to more than 58% of its 1989 peak of 38,916--that the shock from October's stockquake was no big
deal. In contrast to double-digit swings in much of Asia, the Nikkei fell just 4.3%.
Even so, Asia's continued tailspin poses the most serious danger to Japan since the yen rose to 80 to the dollar in 1995,
threatening to fatally throttle the sole sustaining force in Japan's economy--the competitiveness of its blue-chip exporters.
Buoyed by a weaker yen over the past two years, Japan's exporters have made Asia their fastest-growing market. Today 44%
of Japanese exports go to Asia, vs. just 25% to the U.S. Now with those markets stalling out, sales of Japanese cars and
electronics are set to sink.
Making matters worse, up to 70% of Japan's Asia-bound exports are capital goods, like factory machinery, that are headed for
an especially sharp fall. Most Asian countries have already significantly overinvested in new factories and capacity. Fearing the
worst, economists in Tokyo are cutting their growth forecasts for Japan in the current fiscal year to zero or a bit above. "We
had a financial and a real estate bust already in Japan," says Geoffrey Barker, chief of Asian research at Schroders Securities
Asia in Hong Kong. "Now we may be about to have an industrial bust." Nor can Japanese companies expect to make up much
of the slack by shifting exports to the U.S.--especially not with a newly vigilant Washington on the lookout for dumpers.
Japan had appeared to be on the road to recovery last spring. Then Prime Minister Ryutaro Hashimoto decided to both raise
taxes and reduce government spending to shrink Japan's huge budget deficit (7% of GDP). Bad call. Consumption collapsed
and growth plunged 2.9% in the second quarter of 1997, the worst quarterly showing in 23 years.
Now the stakes are rising. If the stock market takes another dive (it remained just under 16,500 at October's end, when
FORTUNE went to press), Hashimoto may have to rethink his austerity drive--simply to avoid a new crisis. Still suffering from
the collapse of asset values in Japan, the insurance companies--and to a lesser extent the banks--will be in a sweat if the market
goes much below 16,000. A drop to that level would wipe out most of the unrealized stock gains in their portfolios, making the
future more desperate for imperiled insurers and complicating the banks' efforts to set aside required reserves. One major
insurance company, Nissan Mutual Life Insurance, collapsed in April this year, and there is widespread expectation in Tokyo
that it will not be the last.
Even with those risks, many economists question whether Japan can afford to apply any new Keynesian or supply-side tonics,
given the size of its budget deficit and the huge burden it faces in caring for the world's most rapidly aging population. "Japan's
policymakers are adopting a fatalistic approach," says Peter Tasker, a strategist at Dresdner Kleinwort Benson. "They
managed to prevent heavy unemployment and bankruptcies of major corporations in the 1990s. Now they feel the economy
may just have to take its lumps."
If the setbacks roiling the rest of Asia make it impossible to dodge a contraction, Japan can only hope that its coming slump will
at least force it to deregulate and restructure the way it should have ten years ago. That, of course, is a lesson its neighbors
would do well to ponder too.
--Edward W. Desmond
Copyright ¸ 1997, Time Inc., all rights reserved.
library.northernlight.com
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10 years of flatness. It is unfathomable, but the Japanese are living it.
Jack |
