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Investors Shop for Bargains in a Changing Japan


TOKYO — Amid deep gloom and great anxiety about Japan's economy, investment bankers and financiers are flocking here from all over the world to make deals because they sense a turning point.

Many are American, and they are buying busted real estate properties and bad loans from banks at great discounts.

Investment banker Morgan Stanley is said to be buying 1,200 condominium units from Daikyo Inc., a troubled developer, for $93 million.

Credit Suisse First Boston, in an alliance with Secured Capital, a Los Angeles firm, recently purchased $1 billion worth of nonperforming real estate loans from Mitsui Trust for $75 million, or 7.5 cents on the dollar.

Bankers Trust has bought into Nippon Credit, GE Capital bought Toyo Insurance and Merrill Lynch is hiring refugees from the bankrupted Yamaichi Securities.

It is a remarkable turn of events, a mere decade after Japanese investors paid outrageous prices to buy "trophy" properties such as buildings in New York's Rockefeller Center, Hotel Bel-Air in Los Angeles and Pebble Beach golf course near Monterey.

And as the Japanese learned then, there are no sure bets in this world. Many of the deal makers now crowding the elegant lobby of Tokyo's Imperial Hotel will lose money, even buying at less than a dime on the dollar.

"Americans don't understand the different ways the Japanese think about land prices and real estate, just as we didn't understand U.S. cash flow returns," says Yuichi Ishikawa, who developed One Colorado Center in Pasadena and now heads a construction company in his native Tokyo.

Still, the Americans' timing could be right as rain.

"The Japanese economy has hit bottom," declares Richard Koo, chief economist of the Nomura Research Institute. "This is the first time since the bubble burst in 1990 that real changes are being made."

Criticism for Dithering

The foreign investors are placing their bets as international criticism of Japan for dithering on the laggard economy reaches fever pitch--and on the eve of what people like Koo believe is a fundamental, if belated, change.

The government has made a U-turn in policy in coming to the support of the economy and the banks, Koo says, predicting that currency and stock markets will soon take notice. He expects the yen to rise against the dollar, perhaps returning to a ratio of 110 yen to $1, a rate last seen in 1995.

By U-turn, Koo is referring principally to the $120-billion program of public spending and tax cuts Prime Minister Ryutaro Hashimoto is pledging in order to revive Japan's economy. Details of Hashimoto's plan--and the all-important question of tax cuts--are imminent.

Such massive steps will bring a revival no doubt, at least for now. And that will help the economies of Southeast Asia, which waxed prosperous over the last decade on investment from Japanese industry and have been devastated by the sinking of Japan's economy.

The United States will also be helped, although a fall in the dollar's value could lead to higher interest rates and the long-awaited "correction" on Wall Street.

But pump priming is only a short-term fix. The real question in Japan today is whether the country will move to correct its deeper structural problems.

They include $600 billion worth of bad loans held by Japanese banks, the legacy of 1980s real estate excesses and more recent ventures in Southeast Asia; severe overcapacity in Japanese industry--production plants built to export goods to the world that are a burden now that the world has changed; the difficulties Japanese companies have in earning a good return on investment, which leads to the difficulties Japanese pension funds have in earning the return needed to support Japan's coming surge in retirees.

In many ways, Japan today is entering a period of industrial restructuring comparable to what the U.S. went through in the 1980s, but perhaps more painful for Japan because of its recent tradition of job security--not really lifetime employment, but close.

The investment bankers gathering in Tokyo today believe that Japan will restructure its economy. One early sign is the so-called Big Bang reform that began April 1, opening up the nation's financial services industry to international competition.

Giving the investors further confidence is the country's great hoard of household savings, roughly $10 trillion in guaranteed postal savings accounts, small bank deposits, home safes and mattresses.

Giving them pause are the vested interests in Japan's economy, from its army of powerful government officials to corporations and individuals who have had it good under a 50-year system of protection and government direction.

Postwar Economy

Japan's economy for most of the half-century since World War II demonstrated one of the greatest advances in history. The government of a devastated nation in the late 1940s, with the encouragement of the U.S. occupation forces led by Gen. Douglas MacArthur, created industries to employ the people.

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