On the prowl in Japan
biz.scmp.com
Tuesday, October 8, 2002
On the prowl in Japan
WILLIAM PESEK of Bloomberg
It has all the makings of a Tom Clancy novel - the Central Intelligence Agency investigating a far-off economy for fear its downfall may hurt Americans.
Perhaps Mr Clancy could write in a part for his hero Jack Ryan, who might zoom in, uncover the ugly economic realities and save mankind. If Mr Clancy were inclined to spin such a tale, he might look to Japan for some inspiration.
Japan's four-year bout with falling consumer prices will be the focus of a United States CIA meeting, the Nikkei English News reported last week. The newspaper did not identify its source of information and the CIA will not comment. There is little reason, though, to doubt the dispatch - the story is just too bizarre to think anyone made it up.
But, then, is it really all that fanciful to think US intelligence officials are worried about Japan?
If the nation's deflation problems were to spread around the globe, the US would have a massive economic and national security dilemma on its hands. Perhaps the CIA was spooked by an October 2 New York Times story exploring whether the US would experience a slump like Japan's.
The odds do not favour that happening but then the CIA is there to detect dubious global trends before they hurt Americans. It does so, in theory, by seeking out, co-ordinating and evaluating information so the White House can make informed decisions about the world around it. So is Japan's economy really a national security threat?
True, the fact the world's second-biggest economy is withering away is in no one's best interest. And yes, the Nikkei-225 Index is at levels not seen since Ronald Reagan's first term, Margaret Thatcher was arguing "we'll never leave Hong Kong" and the Soviets were on the hot seat for shooting down a South Korean jetliner.
No, the real concern is probably fears of something worse than Japan-like malaise - a full-blown US depression. Again, this is all highly unlikely. The US economy may have fallen over but there is little reason to fear it will be like Japan and take nearly a dozen years to get up again.
But it is the "what ifs" and the "what thens" the CIA is paid to fathom - and that seems to be what the clandestine agency has in mind here. If the US did in fact go the way of Japan, what happens to the world's superpower? No one knows, of course, but it is safe to say it will not be pretty.
That even the CIA is interested says much about the state of things in Japan, however.
While US spooks in Washington and spies abroad have little merit among economists, the CIA may sense Japan is losing its war against deflation. And, so far at least, it is hard to dispute it. In fact, deflation will probably get a lot worse before the trend ends.
The stock benchmark's swoon is the clearest indication of Japan's plight. It is plunging amid fears a government bad-loan task force may recommend seizing weak lenders and forcing their worst customers into bankruptcy.
Share prices plunged to another 19-year low yesterday on fears that Japan's decision to fix debt-straddled banks might lead to a rash of corporate failures.
Investors have known for years that these steps were necessary and inevitable yet the mere hint they may be on the way is encouraging many to sell stocks.
Japan's newly appointed banking regulator Heizo Takenaka is wasting little time tackling the bad-loan crisis. Tokyo estimates bad loans amount to 52.4 trillion yen (HK$3.3 trillion), a tenth the size of Japan's economy. Standard & Poor's puts the number at three times that, and its estimates seem much more credible.
As this process unfolds, unemployment will rise as firms fail. KPMG's Japan president Takeshi Kimura last week was named to the bad-loan task force - a development that has Japan Inc in near panic. He wants banks to cut off credit to the "Dirty 30", a term that refers to the nation's worst corporate deadbeats.
Publicly naming the group would be progress for Tokyo's culture of secrecy.
The idea of going after the companies, though, is nothing short of revolutionary.
Mr Takenaka also is saying no company is too big to fail - outright heresy in an economy that has long been carrying its weakest links. Companies in Japan are no longer too big to fail, but too big to save.
Deflationary pressures are almost certain to accelerate in that environment. And that is not such a bad thing. It is a nightmare for debt holders, corporate profits and property owners but the high prices of many goods in Japan are unsustainable. Simply put, costs must come down.
With unemployment at a near-record high, sliding prices are about the only thing propping up consumer confidence. It is akin to a stealth tax cut that is leaving consumers with greater spending power. Lower prices also mean more competitive goods.
So when even the CIA thinks Japan's woes are serious enough to study, we have problems. The stock price slide is sending the same message: Those betting on a near-term recovery in Japan may be disappointed. |
