Help Others? Japan’s Got Big Trouble Itself

When the latest trade figures last week showed U.S. exports slowing and imports swelling, Clinton Administration officials reacted angrily, calling on Japan to boost its economy and help other countries in Asia.

Japan was accused of maintaining a weak yen to boost its own exports. “We view with considerable concern” Japan’s inability to spur its economy, blustered Lawrence Summers, deputy Treasury secretary. He bluntly told the Japanese government to unleash $80 billion worth of tax cuts or public spending.

But yammering and bluster from Washington will not cause Japan to do anything because the U.S. fails to understand that the world’s second-largest economy is near depression.

The situation is tense leading up the March 31 end of Japan’s fiscal year. Further problems will occur in April, which will be a critical time for setting a course for Japan. By extension, that will affect the economies of the rest of Asia, the U.S. and the world.

So to see what’s ahead for a lot of the world, take a close look at the game and the stakes in Japan today.

Right now Japan’s 19 or so major banks are trying to clear their books of massive amounts of doubtful loans in preparation for meeting international capital requirements by March 31.

The falling yen--down 20% against the dollar compared with a year ago--has made it harder for banks to keep up their base of capital. It forces them to call in loans, pushing companies into bankruptcy at home and pulling back loans from overseas, hurting already ailing economies in Southeast Asia.

The result is a credit crunch crippling Japanese business, causing unemployment to rise and spreading fear of bank failure among Japanese depositors.

The Japanese government has appropriated $130 billion to fund a Deposit Insurance Corp. and is ready with $100 billion more to shore up bank capital reserves. It is also using the people’s government-guaranteed postal savings accounts to invest in stocks in order to keep the Nikkei-225 stock index above the 15,000 level so that the shareholdings undergirding bank capital reserves don’t melt down.

The situation is so grave that to a prominent economist in Tokyo and a U.S. Nobel laureate, it recalls the U.S. in the early 1930s and the floundering of President Herbert Hoover.

“The government is taking measures similar to the Reconstruction Finance Corp. in the U.S.,” says Richard Koo, chief economist of the Nomura Research Institute in Japan. The RFC was the 1932 brainchild of a bewildered Hoover. It invested in companies and banks but didn’t do enough to arrest the Depression, and stronger measures had to be taken by the Roosevelt administration in 1933.

Economist Milton Friedman also sees the connection. He said last week that “the Japanese government has been behaving like Hoover in 1930-31, holding back on public spending. They need to open the money gates.”

Policies will change in April when the government releases a supplemental budget containing roughly $76 billion in public-works spending and $15 billion in tax cuts, estimates economist Kazuhide Uekusa of Nomura--who nonetheless doubts that will turn the economy around.

In April, Japan’s insurance companies will have to take big losses writing down real estate and other assets on their books to present values.

And Japanese pension funds will have to report that they have earned only a little more than 1.5% a year over time because they invested solely in Japanese government bonds. Such returns are inadequate to meet their eventual obligations to retirees in Japan’s aging population.

By contrast, U.S. pension funds, even before this bull market, typically earned 8% to 10% a year. They did so by investing partly in venture capital and emerging companies, blending high-risk rewards with more stable returns from blue-chip stocks and bonds.

Thus U.S. pension funds have created new industries and been a strength of the economy, whereas in Japan inadequate pension returns pose a problem.

So how can Japan recover?

Its salvation will be the savings that Japanese families have socked away in the guaranteed postal savings accounts. They amount to an astounding $9.2 trillion at present, an average $76,000 in savings per person. That’s the second-largest pool of capital on the planet, after the U.S. pension funds.

Now aware of their retirement savings plight, the Japanese people will soon seek higher returns than the 0.5% the postal savings accounts pay. “Inevitably, they will funnel some of their money to U.S. markets,” predicts Harald Malmgren, a Washington-based advisor to Japan’s pension funds on how they might reform.

So the outlook is that Japanese funds will buoy U.S. markets and perhaps investment markets elsewhere even as Japan’s economy, now shrinking after 23 straight years of expansion, continues to struggle.

Longer term, however, the potential for Japan’s household savings is that they could form the basis for an equity market to finance emerging companies and foster the kind of new business climate that has proved so fruitful for the United States.

But that won’t be done in 1998. Creating vibrant stock markets in Japan will take time, Malmgren explains, because the country today lacks the infrastructure of venture capital, equity financing for small companies and even people trained in investing. In short, Japan has capital but lacks capital structure.

How long will it take to build such a structure? About three years. Japanese officials have said for years that economic reforms would be completed around 2001. And now they might actually meet that schedule, awakened by the Asia crisis’ shock to Japan’s system.

Meanwhile, dormant markets in Asia are cutting U.S. exports while sending in imports that displace U.S. products and slow U.S. job growth. Economists James Doti and Esmail Adibi at Chapman University in Orange estimate that San Jose, Los Angeles, Seattle and Portland, Ore., will suffer 20% cuts in job growth this year because of the Asia crisis. Orange County job growth will be reduced by 16%. And economies from New York to Minneapolis and Houston to Phoenix will be slowed also.

Which prompts a final reflection: Many have long seen the Japanese economy as a competitive threat because of its strength. In fact, the real threat has come from its weakness. Just as we don’t gain from others’ troubles, recovery and prosperity in Japan would benefit us all.

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James Flanigan can be reached at [email protected]