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March 18, 2001

The American Risk in Japan

By JEFFREY E. GARTEN EW HAVEN — We have often seen how the fate of the American economy cannot be divorced from global markets, and how even a spark abroad can create a fire at home. In 1987, for example, the stock market crash was precipitated in part by a dispute between Washington and Bonn over interest rates and trade. In 1998, a financial crisis that began in Thailand ultimately spread until it forced a dramatic bailout of one of America's largest hedge funds — a rescue that prevented an implosion of many American banks. Now Japan is the trouble spot that ought to keep us up at night.

When Tokyo's economic bubble burst in the early 1990's, we held our breath because it seemed the world's second-largest economy couldn't go into a tailspin without taking the global marketplace with it. In the end the fallout was contained, but that was the result of unusual circumstances. America was entering a powerful business expansion, Europe was boosted by a new common currency and a burst of internal deregulation, and Mexico, India, China and other nations were reaping the rewards of having recently opened their economies to foreign trade and investment. In that heady environment, Japanese stagnation didn't have as much global impact as we feared it would.

The current global economic scene, in which America and Japan together still account for over a third of global production, is starkly different. America is headed for recession, European growth is slowing and most emerging markets are fragile. With other engines of the world economy spluttering, further deterioration of the Japanese economy could finally have a serious effect on us.

Today, Japan's economic growth is stagnant, property values are declining, government and corporate debts are at an all-time high. Despite the fact that Tokyo has poured trillions of yen into public works and lowered interest rates to negligible levels, not only has the economy failed to respond, but serious deflation is in the air. Adding to the woes, the country's political leadership is in meltdown, with Prime Minister Yoshiro Mori having agreed to resign next month, leaving behind a fractured one-party system of exhausted politicians bereft of new ideas for how to reverse Japan's descent.

One looming problem is that as the Japanese economy contracts, so could American exports. This would hurt the earnings of many of our most important companies, further impairing their stock prices. But the Japanese banking system, already choking on bad debts, is the major point of vulnerability. The reason is that Japanese banks carry much of their reserves in the form of Japanese equities, and the major stock market index has now declined to its lowest levels in more than a decade. If some Japanese banks become insolvent, that could impair the health of foreign banks that have extended loans to them or that have other complex financial relationships. A crippled banking system would be unable to extend credit and would therefore drag down Japanese companies, too. In recent days, the Japanese government has acknowledged these acute problems, but given its miserable track record, whether it will address them effectively is another question.

If Japan's problems mount, companies there could begin liquidating their investments abroad. In the late 1980's American officials and business leaders worried that Japan would sell some of its American holdings as leverage to get the United States to ease its pressure to open the Japanese economy to trade. Most experts concluded that would never happen because the value of the Treasury securities held by Japanese was so vast that selling some would weaken the price of the billions they still held. However, if Japanese investors become sufficiently desperate now, selling may be the only option.

Japanese entities still own some $350 billion of Treasuries, about 25 percent of all such holdings outside of the United States, not to mention hundreds of billions of other marketable bonds and stocks. Japanese firms own some $150 billion in direct investments in America, more than those held by any other foreign country except for the United Kingdom. And Japanese companies employ over 550,000 Americans.

A Japanese sell-off of American assets could mean more downward pressure on our softening economy — more surplus property, more layoffs. It could mean that the Japanese would exchange dollars for yen, weakening the dollar, which in turn would lead to increases in the price of imports that are now crucial to our economy. Rising prices in a no-growth economy — stagflation — may be more possible than we think.

Everyone wants and expects the Federal Reserve to bail out the economy, not only by lowering interest rates on Tuesday when the Open Market Committee meets, but also by lowering rates over the next several months. But if Japanese investors sell off their American assets and cause the dollar to sink, the Fed could face an agonizing dilemma. On the one hand, cutting interest rates could help revitalize the economy and the stock market. But it could also further weaken the dollar by making dollar- based returns less attractive, thereby discouraging European and Latin American investors from continuing to invest in American securities.

We have seen how herd-like markets can run wild, and were there to be a precipitous decline of the dollar, the Fed would have to consider holding rates steady or even temporarily raising them. This is not a position that Alan Greenspan would want to be in. As consumers, investors, employers and employees, neither would we.

Jeffrey E. Garten, dean of the Yale School of Management, is author of "The Mind of the C.E.O."

http://www.nytimes.com/2001/03/18/opinion/18GART.html?pagewanted=all

-- Martin Thompson (mthom1927@aol.com), March 17, 2001

Answers

Japan Inc. Is in Trouble

Saturday, March 17, 2001

IN THE INTERCONNECTED modern world, weakness can be as dangerous to competitors as strength. Japan is the latest example.

Its economy once threatened to surpass ours. Now its decline threatens to take us down. And Europe is starting to wonder whether troubles in Japan and the United States might take it down, too. Like foot and mouth, this economic disease can spread on the wind.

Before the Japanese bubble burst in 1990, U.S. business acknowledged that it needed to learn from the Japanese model -- organizational strategy, worker loyalty, constant innovation and government support for business. But the very success of Japan Inc. proved to be its undoing.

Stock prices and real estate values became vastly inflated. What had gone up, went down in a hurry. An incremental increase in interest rates might have prevented the crash. But the bureaucrats thought: Why tamper with a winning streak?

Even after the crash, the Japanese bureaucracy was incapable of making the adjustments a good coach makes at halftime. The result: Japan has experienced an average of only 1 percent annual growth in the past decade. The Japanese stock market has fallen to a 16-year low. Japanese debt is the highest proportionately of any major economy.

The argument among America's Japan watchers is whether Japan's problems are systemic or the result of bad policies. Or both.

The Clinton administration's advice was for Japan to spend its way out of recession, to clean up its banking system and to deregulate so as to foster greater competition. But when action was taken, it was too little, too late. The expected Japanese Century has begun with Japan Inc. flirting with bankruptcy.

Meanwhile, Japanese unemployment has risen from 2 percent to about 5 percent, higher than this nation's, and fewer Japanese now have lifetime job security.

So, what are the lessons for the United States?

One is that although the mantra of change, change, change is not always helpful, even a conservative country must alter its course in a storm. Ten years is a long time for an economic engine to be stuck in low gear. We are lucky to have a system of checks and balances. We can make mistakes, and we can fix mistakes. There is an advantage in choosing leaders openly, instead of behind closed doors, as in Japan.

But there are ways we don't control our own destiny. Globalization presents vast opportunities -- and dangers. When a foreign economy is in trouble, we can give friendly advice, even prop up a currency or a banking system. But there are some things people have to do for themselves.

In the case of Japan, it is not clear how much pushing and pulling the new Bush administration will do.

All logic tells us that Japan is a strong country that will rebound. It will probably be in a position to give us advice sooner than we would like to hear it. Cycles, don't you know? Nothing succeeds like success until it stops.

http://search.excite.com/r/sr=news|ss=japan;http://www.sfgate.com:80/c gi-bin/article.cgi?file=/chronicle/archive/2001/03/17/ED198385.DTL

Now, about those dot-coms . . .

-- Martin Thompson (mthom1927@aol.com), March 17, 2001.

This is starting to look like the Japanese crisis thread.

-- Martin Thompson (mthom1927@aol.com), March 17, 2001.

Business & Technology 3/19/01

In Japan, a vicious cycle of oversaving Consumers scrimp, the economy swoons

By Peter Hadfield

TOKYO–Blame couples like Osamu and Hiroko Miyake for Japan's decade- long slump. Living in a modest house near the city of Chiba, east of Tokyo, they buy only bare necessities. They spurn restaurants, bars, and amusement parks. And the couple, in their 30s, have no children to dote on.

Osamu and Hiroko are followers of a trend called setsuyaku, or frugal living. In her sparse kitchen, Hiroko shows how she puts into action tips picked up from books, magazines, and television programs that advocate a setsuyaku lifestyle. "I clean the sink with diluted vinegar–see?" Hiroko gives a demonstration. "It's cheaper than using soap. I compost all the food, and instead of throwing away old clothes I now recycle them."

Such thrift extends to bathing as well. "We recycle our water, taking it from the bath and pumping it into the washing machine. These are things we never did when the economy was booming."

Since publication of a 1998 book, The Benefits of a Frugal Life, similar books, Web sites, and setsuyaku clubs have burgeoned, teaching people how to make a virtue of doing without. However admirable, all this frugality is a major drag on the Japanese economy. After 10 years of economic stagnation and a weak revival last year, the country seems headed for another disastrous round of falling prices and failing banks and businesses. Last week Japan's finance minister jolted investors by saying the government's finances are "near a state of collapse."

Thrift is good. Still, a few contrarians see a brighter picture. "If you don't consume, you're saving," says Tokyo-based economist and author Eamonn Fingleton, who notes that falling prices mean consumers get more for their money. "Japan now accounts for about one third of all the world's new savings each year."

With a savings rate 27 times higher than that of the United States, each Japanese household now has an average 14 million yen (about $117,000) stashed away. Years of big export surpluses have added to the country's cash mountain and its hoard of gold and foreign exchange. Japan ended fiscal 1999 with 84.7 trillion yen in net assets abroad. Even more-typical analysts, who focus on the plentiful bad news, spot silver linings. Noriko Hama, senior economist at Tokyo's Mitsubishi Research Institute, sees the savings hoard as a "huge potential source of wealth." Says Hama, "The best thing about the Japanese economy right now is that everything is so bad. Things are moving toward change, and we are in the realm of 'If it's not hurting, it's not working.' "

Many economists say Japan's problem is not a lack of wealth but of confidence. Osamu Miyake, who works for a food-importing company, earns no less than he did a few years ago, but he is certainly spending less. "I'm worried about the future of the economy, and about my pension," he says. "So we save more. It's all in stocks and shares." The value of those holdings has plunged as the Nikkei index hit 15-year lows–causing the Miyakes to tighten their belts even further.

http://search.excite.com/r/sr=news|ss=japan;http://www.usnews.com:80/u snews/issue/010319/japan.htm

-- Martin Thompson (mthom1927@aol.com), March 17, 2001.

I wouldn't worry about the Japanses too much. Their fantastic savings will help them through this crisis. If they need to, these enormous pools of savings will be liquidated and returned home.

It is the US that should be scared. It is mostly the US which owes the Japanese these enormous sums of money. Japanese have already begun the process of liquidation and no doubt, it will soon excellerate. The de-leveraging of the North American economies with put us through into a severe and long-term depression.

-- Ishkabibble (abudahhab@home.com), March 18, 2001.

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Japan banks to bite bullet By Emiko Terazono Published: March 18 2001 22:18GMT | Last Updated: March 18 2001 22:51GMT

It is not everyday that Japanese banks share the headlines of American breakfast news with the likes of rapper Sean "Puffy" Combs.

As European and US equity markets fell last week on speculation of a Japanese bank failure, Americans may have been forced to ponder the possible consequences of a financial crisis in Japan immediately after a news item on the jury verdict for Mr Combs, the multi- millionaire impresario.

While Japanese bankers and authorities the next day denied the possibility of a banking meltdown, an announcement by three banks set to merge to create UFJ Holdings, that they would double their loan loss charges and post losses for the current year to March, helped to alleviate the panic.

The move by UFJ raised hopes that Japan's banks, burdened with non- performing loans, were now ready to bite the bullet. Although a closer look at UFJ's numbers showed that the actual write-offs were hardly substantial, the willingness to raise the losses by 40 per cent to Y223bn ($1.8bn) seemed to indicate a resolve to tackle the bad loan problem.

"They increased the losses and showed that they weren't dressing up figures. People thought they were being honest," says Naoto Odagiri, analyst at BNP Paribas.

Last week's panic is understood to be linked to traders with short positions in Japanese banks, trying to push the share prices lower, but overseas worries about the health of the sector are far from misplaced.

The sector is burdened with massive bad loans, with some analysts estimating the total amount to be as high as Y33bn, about 6 per cent of the country's gross domestic product.

The sharp decline in share prices also have a negative effect on Japanese banks, whose exposure to the stock market equals some 150 per cent of their core capital - alarmingly high compared with European and US counterparts whose figures are between 10 and 20 per cent.

Sanwa Bank, which will merge with Tokai Bank and Toyo Trust in April to create UFJ, admits that the announcement would not solve all its bad loan problems. But an official says by almost doubling the loan loss charge from previous estimates, it was being proactive about its non-performing loans at a time when the economic outlook was deteriorating. "It is a sign of our determination to increase the amount of direct write-offs in the future", says one official.

The bulk of the group's Y1,130bn write-off stems from provisioning for bad loans rather than a sharp increase in direct write-offs of bad loans from its balance sheet. Write-offs this year will hit Y500bn, about 1.5 times the previous year.

The group will realise gains on Tokai's head office building in Nagoya by selling it to an associate company and leasing it back. UFJ also announced it would close more branches and cut an extra 1,000- 7,000 jobs over three years.

Some analysts complained that the announcement failed to clarify UFJ's position with loans to Daiei, the troubled retailer with Y2,400bn in debt. With Sanwa and Tokai, along with Sumitomo Bank and Fuji Bank, as Daiei's main creditors, UFJ will have a large exposure to the retailer after the merger.

Despite such concerns, however, the announcement was positive for the sector as it will undoubtedly add pressure on other banks to follow suit, said analysts.

"If UFJ had almost to double its write-downs as a result of a review of their assets, then it's safe to assume that the other banks are in the same boat," says Nozomu Kunishige at Lehman Brothers.

While few analysts expect a banking crisis ahead of the March business year-end, there are whispers of a bank failure in April or May. Although the banks will not have to include the latent losses on their shareholdings in their balance sheets and profit and loss accounts, they are obliged to reveal their unrealised loss figures.

"The real uncertainty is the period running up to the results season [in May]," says Koyo Ozeki at Merrill Lynch in Tokyo.

http://markets.ft.com/ft/gx.cgi/ftc? pagename=View&c=Article&cid=FT3POPY4HKC&live=true&useoverridetemplate= ZZZ6MJPM90C&tagid=ZZZR4COD20C&subheading=asia%20pacific%20equities

-- Martin Thompson (mthom1927@aol.com), March 18, 2001.