Slowing US Economy Less Able To Withstand Japan's Woes
By Brian Blackstone
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The Japanese economy has had a year's worth of bad
news in the space of a week.
And while the decade-long slump in the world's second largest economy hasn't
dragged the global economy with it, and in some ways has even helped the
U.S. boom, the rest of the world can't stay immune forever, economists say.
Monday, Japan's Nikkei stock index shed 3.6% to hit a 16-year low of 12,171
amid political and economic turmoil that dim any chances of a sustained
recovery.
On Thursday, Japan Finance Minister Kiichi Miyazawa called the country's
fiscal situation "very close to collapsing." And Prime Minister Yoshiro
Mori's administration appears to have already collapsed, with Mori expected
to resign this spring, according to press reports.
Even a government report that the economy grew a faster-than-expected 0.8%
in the fourth quarter was dismissed in favor of components in the report
that suggested further weakness. Consumption, the engine of domestic-led
expansion, contracted 0.6%, while business and government spending accounted
for the lion's share of growth. The price deflator, meanwhile, fell 1.7%.
Despite the bleak news, the consensus still appears to be that Japan's woes
are just that: Japan's.
Despite the size of its economy, Japan is well down the list of major export
markets for the U.S. Last year, the U.S. only exported about $65 billion
worth of goods to Japan, or roughly 0.6% of gross domestic product. By
contrast, the U.S. exported $178.8 billion in goods to Canada, $111.7
billion to Mexico, and $116 billion to the euro zone.
From the U.S. perspective, the financial relationship dwarfs the trading
relationship. Recent economic and political turmoil notwithstanding, Japan
is still a rich country, and its high saving rate makes it a tremendous
source of investment capital, which has helped finance the investment boom
in the U.S.
"The big question is (the behavior of) capital flows from Japan," said Clyde
Prestowitz, president of the Washington, D.C.-based Economic Strategy
Institute and former trade negotiator in the Reagan Administration.
Some Benefit From Japan Slowdown
Ironically, the U.S. has in many ways benefited from Japanese economic
weakness in recent years. With the U.S. running at 4%-plus growth rates in
the late 1990s, it needed a sponge for excess growth and inflation. So
Japan's relative weakness helped to contain the former via a widening U.S.
trade deficit, which worked as a drag on total economic growth, and the
latter by in effect importing disinflation from Japan.
"When Japan slowed down in the 1990s, there was a very effective offset -
the boom in the U.S.," said Barry Bosworth, an economist at the Brookings
Institution.
Meanwhile, high-spending, low-saving Americans made good use of the
financial capital from low-spending, high-saving Japanese. One reason
Corporate America has been able to invest heavily in new technology has been
both the attractiveness of the U.S. for global investors and the vast
amounts that Japanese investors have had to pump into the U.S.
That's not to say that the U.S. hasn't felt any of the effects of the
Japanese downturn. Agriculture and commodity prices have plummeted,
affecting producers of those raw materials, in part because of a lack of
demand from Japan, economists contend.
And with Japan unable to serve as a growth engine for Asia, the U.S. is left
without the ability to offset domestic weakness with export strength.
"If Japan were doing better, we wouldn't be slowing as fast," said
Prestowitz.
The U.S. could start feeling the effects of the Japanese slowdown more
broadly if it affects currency markets. Late Monday, the dollar was fetching
about Y120 - roughly midway between the Y147 peak that the dollar achieved
in mid-1998 and the Y100 trough seen in late 1999.
If the yen were to depreciate much more from current levels, Japanese
industries with vast operations here, like automobiles, could decide it's
more price competitive to ship products from Japan, Bosworth noted. And if
their domestic operations continue to suffer, Japanese firms will have less
to invest in their U.S. operations.
Little Hope In Near Term
A big question remains as to what exactly Japan can do to lift itself out of
its deflationary spiral.
As the Economic Strategy Institute's Prestowitz noted: "I think the good
news is they really have no alternative but to take serious measures."
Some economists think the answer lies in money supply expansion, and that
Japan should target a level of inflation and pump liquidity into the economy
until it achieves it.
But the Brookings' Bosworth thinks that Japan has already taken a lot of
measures advocated by economists like adding fiscal stimulus, addressing its
banking sector mess, and cutting interest rates to almost zero.
"I haven't heard anyone with a convincing story to tell" on what else Japan
can do, Bosworth added, noting that the slowdown is concentrated in the
Japanese household sector, and stimulative efforts won't be successful
unless Japanese consumers are convinced to spend more.
Whether or not anything can be done to lead to a sustained rebound,
economists agree that it won't happen soon enough to take pressure off the
U.S.
"With the U.S. economy softening, we need all the help we can get," said
Sung Won Sohn, chief economist at Wells Fargo Bank. But for now, "Japan
simply is another drag."
-By Brian Blackstone; Dow Jones Newswires; 201-938-4156;
brian.blackstone@dowjones.com
(END) DOW JONES NEWS 03-12-01
04:55 PM
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