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Japan Signals a Major Shift in Little Moves

August 06, 1995|JAMES FLANIGAN

In obscure moves that will help define the world economy for the second half of this decade, the Japanese government last week rushed to stop a run on a bank and avert a slide toward financial depression.

It loosened regulations on Japanese investment abroad and made other decisions that should result in faster growth for Japan's economy while leading to lower interest rates in the United States and the rest of the world.

It was a desperation move, made not only because panicky depositors had withdrawn $900 million from Tokyo's largest credit union. Japan had to act because four years of sub-par growth in its domestic economy has been dragging down the global economy.

"I can see slowing throughout Asia," says Yukuo Takenaka, an American whose accounting and finance business, Takenaka & Co., has offices in Los Angeles and Tokyo. Friday's unemployment figures confirm slowing in the U.S. economy.

A pickup in Japan could reverse that worrisome pattern. But to understand what lies ahead, it's necessary to go back to the underlying cause of Japan's troubles: the bubble of bad loans from the 1980s. That's when prices of real estate and company shares were bid up in a dizzying spiral as Japan's banks lent money against speculative values.

The spiral ended long ago. In its aftermath, the total of non-performing loans in Japan's financial system today is estimated at about $600 billion, according to Patricia Hagan Kuwayama, an economist at J.P. Morgan & Co. Japan's Ministry of Finance says the total is closer to $500 billion, but other estimates put it at $800 billion.

In any case, we're dealing with more than 10% of Japan's gross domestic product. If you reflect that the U.S. savings and loan crisis amounted to only 3% of U.S. GDP, you get an idea of the workout problem facing Japan.

Share prices on Japan's stock market are now roughly 60% below their 1980s highs. And prices of land and buildings have fallen about 65%, according to high-level Japanese bankers.

But in most cases, stock holdings and buildings have not been written down on the books of banks or companies that own them. As with the S&Ls, losses remain to be paid for by somebody--company shareholders or taxpayers.

Questions arise: Why is the crisis only now being acted upon? How could the bubble stay inflated for so long?

The Japanese economy, supposedly managed tightly by government ministries, has continued to tick along at low rates of activity since 1991. Imports fell 12% from 1991 through 1994, and even the country's exports, measured in yen, are down 4% over the period.

Deflation has lessened hardships on Japanese consumers. "The price of beer and a lot of other goods are down here," reports Eamonn Fingleton, the Tokyo-based author of "Blindsided," a book on underlying strengths in Japan's economy. Discount stores stocked with goods from South Korea and Thailand have become features of Japanese life.

Overall, the Ministry of Finance and the Bank of Japan have tried to manage the crisis, letting the bubble deflate slowly through small adjustments.

But things have been getting out of hand lately, with hints of corruption touching even the respected ministries. Before last week's run on Tokyo's Cosmo Credit, failures at two smaller credit unions were tied to real estate speculators with connections in the Ministry of Finance.

Stresses at Japan's 21 major banks, which hold about $250 billion in bad loans, are growing acute.

"So Japan has decided to reflate its economy; that will be a big story for the next several years," says Lee Thomas, vice president for international markets at Pacific Investment Management in Newport Beach.

The Bank of Japan, adopting the policy that Federal Reserve Board Chairman Alan Greenspan used to help U.S. banks in the early 1990s, is pushing down short-term interest rates and encouraging Japanese banks to invest in long-term government securities at higher rates, thus locking in secure profits and nourishing their balance sheets back to health.

Meanwhile, the Ministry of Finance has taken steps to encourage Japan's insurance companies and other financial institutions to invest outside Japan for higher returns. In cooperation with the United States, Japan has embarked on a determined effort to lower the value of the yen.

All of this is healthy for the world economy. Japanese investment capital flowing into foreign bond markets will tend to lower U.S. interest rates, says economist Robert Laurent of the Federal Reserve Bank of Chicago. Indeed, increased Japanese investment may show up in this week's U.S. Treasury auction.

Of course, a recovering Japanese economy will be a challenging competitor. Japanese companies have used their strong currency to build low-cost manufacturing facilities throughout Southeast Asia.

But U.S. companies are no slouches. They have gone through the restructuring that awaits many Japanese companies and banks.

And a faster-growing world economy will offer more opportunity than one in which Japan is limping.

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