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Recession Jolts Japan, Batters World Markets

Asia: Shrinkage in first quarter forces Tokyo to acknowledge economic woe. News puts yen in a virtual free fall, prompts concern of export battle in region.

June 13, 1998|VALERIE REITMAN and SONNI EFRON | TIMES STAFF WRITERS

TOKYO — The Japanese economy delivered further jolts to world markets Friday as government data confirmed that the nation has slipped into recession and the beleaguered yen continued a virtual free fall.

Though not a surprise, the economic shrinkage in the January-March quarter was worse than expected. The news sent markets tumbling in Europe and Latin America as well as elsewhere in suffering Asia, where the tumbling yen stands to make life even tougher.

Though U.S. markets recovered late in the day, the ongoing slide of the yen left the Dow Jones Industrial Average down more than 200 points for the week and promises a steeper falloff in U.S. exports to Asia, in turn threatening American profits and jobs.

The Japanese government, which has fanatically avoided the word "recession," finally acknowledged that the economy shrank at an annual rate of 5.3% in the quarter ended March 31, a figure surpassing the most pessimistic of forecasts. Analysts had on average predicted a 1.4% decline.

With a revised annualized drop of 1.5% in the fourth quarter of last year, the figures meant the world's second-largest economy has met the standard definition of recession. The figures also showed a drop in real gross domestic product of 0.7% for all of fiscal 1997-98.

It is Japan's first year of negative economic growth since the 1974-75 oil shock.

The Japanese economy's ill health was also reflected across Japanese society as an ominous string of new reports showed the nation's modest divorce rate soaring 9% compared with a year earlier, suicides rising 5.6% and bankruptcies surging for a fourth straight month, up 37.5% in May.

By late afternoon in New York, the yen was trading at 144.33 to the dollar, down from 143.98 Thursday, an eight-year low. The yen has slipped about 3.5% against the dollar this week alone, and 45% in the last three years.

The decline has been fueled in part by the flight of Japanese insurance companies and other big investors dumping yen because they can make more money elsewhere. There is no sign of that ending.

Analysts predicted that the yen decline will trigger a fresh round of currency devaluations from Japan's battered Asian neighbors as they struggle to keep their vital exports competitive with the suddenly cheaper yen.

"The only game in town now is who's going to export more to the U.S.--Asia or Japan," said Jesper Koll, vice president at J. P. Morgan in Tokyo.

"At 140 yen to the dollar, Japan is hyper-competitive," said Koll, who believes that the yen could hit 180 by year's end.

The yen's tumble has also renewed fears that China, which has so far resisted competitive pressure to devalue its currency, the yuan, will have to devalue to keep its exports competitive. Beijing has taken other steps instead to help its export sector, such as cutting interest rates and raising tax rebates.

In Washington on Friday, China's ambassador, Li Zhaoxing, called on the Group of 7 industrial powers to intervene to halt the yen's slide.

The latest round of yen selling started Thursday after U.S. Treasury Secretary Robert E. Rubin, while not ruling out that Washington would help Tokyo support the yen, indicated that such a move would be pointless until Japan took more steps to bolster its economy.

Meanwhile, the South Korean bourse plunged 8.1% Friday to its lowest level since 1987. Markets in Southeast Asia also tumbled. Stock prices skidded 2.2% in Malaysia, 1.6% in Thailand and 1.3% in Taiwan. And there were steep declines in Mexico, Brazil and other Latin American markets.

Why has the bottom fallen from under the yen? Blame not just skittish foreign investors but also Japanese institutional investors. With interest rates at record lows, they see no hope of making money at home and so are dumping billions of yen and pouring the proceeds into more lucrative U.S. and European investments that offer fivefold higher returns.

"The Japanese economic situation is hell, the U.S. economic situation is heaven," said Masahiro Nakagawa, deputy general manager of finance and investment at Yasuda Mutual Life Insurance Co. in Tokyo, which this year will sell $1 billion worth of yen and invest it in overseas markets.

Insurance companies are among the biggest yen sellers because they make their money by investing clients' premiums. Pension funds and other institutional investors are also sending their capital out because the slumping Japanese stock and real estate markets and low yields on Japanese government bonds have led to major domestic losses.

Nippon Life Insurance Co. Chairman Josei Itoh says just 10% of its $292 billion in assets are invested overseas, yet those holdings bring in more profit than the 90% of assets invested in Japan.

"Interest rates of 1% to 2% are even lower than during the Great Depression of 1929," Itoh said. "It gives a great sense of anxiety to people."

As a result, capital outflow from Japan is expected to continue, further weakening the yen.

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