Japan's downturn unnerves investors around the globe
BY MICHAEL ZIELENZIGER
Mercury News Tokyo Bureau
TOKYO -- A major sell-off ricocheted across Asia on Monday and into high-technology stocks on Wall Street, after the Japanese government confirmed that the world's second-largest economy shrank by 1.4 percent during the final three months of 1999, showing the country is still in recession.
The dismal economic news served as something of a wake-up call to American high-tech investors who were looking for revived Asian economies to help boost exports of U.S.-made hardware and software to the Pacific Rim. The impact on Wall Street was greatest in the high-technology sector, as the Dow Jones Industrial Average rose 18.31 points while the tech-heavy Nasdaq index fell 141.29 points, or 2.8 percent.
Japan's disappointing economic report also meant new worries for Prime Minister Keizo Obuchi, who must call a general election by mid-October. Only last week, opinion polls showed that less than 50 percent of voters support his ruling coalition.
Despite official assurances that signs of economic revival are finally in sight, the benchmark Nikkei stock average fell some 3 percent, or 560 points, after the government said Japan's gross domestic product contracted at an annual rate of 5.5 percent in the fourth quarter. In the previous quarter, Japan's economy shrank 1 percent.
The October-December decline was the biggest since the economy fell 2 percent in the spring of 1997 and the third-largest quarterly decline since the end of World War II.
There had been some expectations that the October-December period would show a decline, as the flow of tax money for public works projects dwindled and consumers curtailed spending. The government had toned down its optimistic predictions in recent weeks as evidence grew that growth had stalled.
But the downturn was far more severe than most economists had forecast and confirmed that Japan has not yet escaped its worst economic downturn in half a century. Officials blamed Y2K fears, smaller year-end bonuses and a sharp drop in exports for falling consumption. But they somewhat dismissed the significance of their own data, pointing to rising capital investment as a sign that economic recovery is imminent.
``Everyone knows consumption in January-March will be good,' Finance Minister Kiichi Miyazawa told reporters. ``The fact is the economy is clearly improving.'
But investors, who headed straight for the exits, apparently tuned out his positive spin.
The broader Topix index of Tokyo stocks fell 4.6 percent, as investor took profits out of the only sector that has been rising recently, high-tech and Internet companies. Markets in Seoul, South Korea; Manila, Philippines; Jakarta, Indonesia; and Hong Kong quickly followed suit, heading down sharply. The Taiwan market also suffered a record sell-off, amid growing concerns that a victory by a pro-Independence candidate in Saturday's presidential election could heighten friction with China. Later, the sell-off spread to Wall Street, where the technology-heavy Nasdaq index had reached a record high only Friday.
In a sense, the sharp stock-market decline in Tokyo showed that the realities of the ``old economy' could still drag down the optimism surrounding the new one.
Bullish foreign investors have bought into Japan's restructuring potential lately, bidding up the prices of stock in such ``new economy' sectors as cellular telephones and Internet business. But rising stock prices have encouraged the nation's old-line politicians to defer the painful restructuring its old-line manufacturers still require.
That was obvious in the Economic Planning Agency figures, which showed that a 5.8 percent decline in the winter bonuses traditionally paid to workers in December helped cut personal consumption by a steep 1.6 percent during the quarter.
But EPA head Taichi Sakaiya pointed to rising corporate profits, increasing machine orders and rising spending on information technology as signs that the worst of the country's economic woes was passing.
Sakaiya maintained that the economy still could reach Obuchi's goal of 0.6 percent annual growth for the fiscal year ending in March, especially because of rising sales of cellular phones, personal computers and Internet-related hardware.
Richard Katz, senior editor of the Oriental Economist, a newsletter published by Toyo Keizai, which tracks Japanese economic issues, had the opposite interpretation. ``One year after the recovery is said to have begun,' he said, ``we are virtually right back where we started from. So you have to ask yourself whether January-through-June wasn't just a pause in a single recession that started in 1997.'
Katz and other economists are worried that the performance of Japan's economy this year will roughly mirror last year's, with two consecutive quarters of growth followed by two quarters of decline. ``What this zigzag makes very clear is that when the government throws money at the economy, it grows, and when it doesn't throw money at the economy, it ceases to grow,' Katz said.
Jesper Koll, chief economist for Merrill Lynch in Tokyo, supported the government's positive views, saying, ``Business investment is indeed coming through. Capital expenditures are on a positive footing. I think for the year 2000, 1.8 percent GDP growth is in the cards in Japan.'
In a normal cycle of economic expansion, the 4.6 percent increases in private-sector investment described by the Japanese government would be seen as a leading indicator of economic growth, since they demonstrate that companies are investing in the future.
But Ronald Bevacqua, chief economist for Commerz Securities Japan noted that in today's bloated Japanese economy, increases in capital spending are coming ``at the expense of wages and employment,' because technology is displacing redundant workers.
Ultimately, these layoffs drag down consumer spending, which still accounts for more than 60 percent of Japan's economy.
``As long as that is the case, we can have a strong rebound in capital expenditures but still a weak overall recovery. That's exactly what I am forecasting,' Bevacqua said. ``I'm not ready to be a bull yet.'
The Obuchi government hoped that massive government spending, cheap home loans and tax cuts in the first half of the year would inspire enough confidence that the nation's fickle consumers would start spending. That would build momentum toward a self-sustaining recovery as the year progressed.
Now it appears that corporate spending will have to take up the slack. |
