ESSAY
The Sinking Sun?
By WILLIAM SAFIRE
WASHINGTON — Stock markets
are slumping because the world's
second-largest economy has admitted that it
is near collapse and shows no sign of
knowing what to do.
Your assets and mine have been dwindling for other reasons as well. High-tech tulip bulbs were fated to wither. The soaring U.S. economy had to land sometime, softly or otherwise: the vaunted "new economy" did not repeal the business cycle.
Yet what most concerns many institutional investors and other heavy hitters is the effect on world markets of the trauma of Japan. While our stock indexes dip toward 1998 levels, its has just gone through 1985.
Why? Because Japanese executives and the government they control never understood their need for competition. While the Sonys and Toyotas set world standards for innovation and marketing, the rest of Japan's companies — producing 90 percent of that nation's goods — refused to let outsiders compete.
Mom-and-pop stores were protected from domestic chains; those chains were protected from overseas competition; bankers, industrialists and politicians protected one another. The consequence: productivity plunged to less than two-thirds of that in the U.S. That false protection has been ruining Japan.
Liberal economists around the world confidently gave the Japanese the answer a decade ago: cut interest rates to stimulate the economy and have the government spend, spend, spend. Tokyo officials dutifully slashed rates to zero, subsidized failing companies to prevent unemployment and went on a Keynesian spending spree. That led to the current disaster. And the same gurus are advising another decade of similarly misguided medicine.
Small wonder that the Japanese resist gaiatsu, "outside pressure." When the lame duck prime minister, Yoshiro Mori, arrives in Washington next week, he will become a conduit for a wholly different approach.
I deduce this from papers now being studied in the Bush White House and at Treasury, State and Defense. These include the National Defense University's November 2000 report by Richard Armitage and Paul Wolfowitz; the McKinsey Global Institute paper by Masahiko Aoki and Paul Romer on "Why the Japanese Economy is Not Growing," and the article by Michael Porter and Hirotaka Takeuchi in the May-June 1999 Foreign Affairs, "Fixing What Really Ails Japan."
The economic heart of these documents is in a line from McKinsey: "In a misguided effort to protect jobs and maintain stability, the government subsidizes the inefficient players and blocks the entry of competitors."
The Bush people will not be so crude as to say: "Look, Prime Minister, the way to avoid dragging the world down the drain is to close 20 of your weakest banks and make those remaining write off bad loans. Let hundreds of inefficient companies go bankrupt and save face by giving them long-term no-interest bonds. Join the deregulation revolution, stop depending only on exports for growth and open your markets to global competition. Then resign and be remembered in history as a hero."
That would be impolite and impolitic. Instead, we can hope that Treasury Secretary Paul O'Neill will fondly reminisce about how the U.S. taxpayers combined with private industry to spend $160 billion in 1980's dollars to bail out the crazily lending S.& L.'s, thereby returning our financial system to a firm footing. O'Neill can also expound on the wisdom of tax cutting, spending restraint and buying dollars with yen.
At the same time, Secretaries Colin Powell and Don Rumsfeld (with deputies Armitage and Wolfowitz prepared to give other aides a pop quiz on their N.D.U. report), will bolster Japanese morale with assurances that Japan, not China, will be the "bedrock" of our Asian strategic defense policy. (Powell's rhetoric rests heavily on bedrocks.)
Bush's new take on Japan offers no quick fix for the stock market shakeout. But the current turmoil focuses minds on the need for talk with Japanese reformists about ways competition can help turn their economy around. The sinking sun can rise again; needed most to restore confidence is to know that the big, slow fix is under way.
The paradox: Japan got into trouble by protecting its businesses from overseas competition. America can get into trouble by failing to enable its medium-size businesses to compete with giants. We should both put our trust in antitrust. ----------------------------------------------------------------------------------------------------- Japan - Asia: Japan's decade-long slump casts uneasy shadow over Asia
SINGAPORE, March 15 (AFP) -
The need for Japan to pull its anaemic economy out of a decade-long slump has taken on an increased urgency for the rest of Asia now the US economy is slowing sharply, analysts say.
A meltdown of the world's second largest economy could be disastrous for Asian countries reliant on Japan as an export market, they say.
Japan is the largest importer in Asia and a collapse could trigger a crisis similar to the 1997 meltdown that paralyzed momentum in Thailand, South Korea and Indonesia and ultimately affected Russia and Brazil, warned Rob Scott of the Washington-based Economic Policy Institute.
"If their (Japan) economy collapses, it will certainly have a negative impact on the region," said Scott.
The recovery from the 1997 crisis has been credited to a then-buoyant US economy hungry for cheap Asian imports, and providing the region with a buffer to the spluttering Japanese economy.
But the US crutch has gone and more than ever Asia needs an urgent reversal of economic fortunes in Japan, economists said.
In addition to being a major regional investor, Japan absorbed about 12 percent of Asian exports last year valued at 158 billion US dollars. The US, the largest export destination, took in 22 percent of Asian goods and services valued at 293.3 billion US dollars.
"Japan is a bigger risk not so much because the economy is sluggish but rather what the Japanese will do about it," said Gerard Teo, a Singapore-based strategist for Dutch bank ABN Amro's Asian Economics and Markets division.
Steve Brice, an economist with Standard Chartered Bank's global markets division, said: "Japan is not helping the regional economic situation at the moment. From a trade angle, there is significant exposure in the region."
Last year, Japan took in 23 percent of Indonesian exports, 15 percent of Philippine and Thai exports, and 13 percent from Malaysia.
"It's a significant factor for all these countries," said Brice.
In Thailand, the first country to be hit by the 1997 crisis, analysts said Japan's problems could hamper both regional exports and new investment.
"It's going to be important because the Japanese are such a big investor and they consume so many Asian products," said Yuanta Securities investment analyst Pongpan Asapinyakul.
"It will filter down to the Thai market because Thai exports to Japan are huge and the Japanese are influential foreign direct investors."
Australian Prime Minister John Howard said a weak Aussie dollar had so far shielded Australia from the worst of Japan's slump by keeping its exports affordable in Japan.
Japan is Australia's biggest market for primary exports such as coal, steel and wool, and Howard admitted a further collapse could be damaging.
Equally worrying for the rest of Asia is that Japan might devalue its yen in a desperate resort to put life back into its economy after other measures such as spending more than 100 trillion yen (830 billion dollars) in stimulus packages were given the thumbs down by investors.
Bank of Japan governor Masaru Hayami has acknowledged calls for a massive depreciation of the yen as one means of propping up the economy, but cautioned it would be "another drastic, unconventional policy."
A yen depreciation would spark a vicious cycle of currency depreciation from other Asian countries to protect their export competitiveness in third markets where they compete with Japan.
"Our view is that from a rational perspective, a weak yen doesn't solve Japan's problems," said Teo at ABN Amro.
The Dutch bank in a recent report warned that a weak yen "would trigger a new round of competitive depreciation, given the high dependence on external demand and electronics in the region."
For example, close to 45 percent of South Korean exports compete with those from Japan in third market.
Barclays Capital, the investment banking division of Barclays Bank PLC, said the yen-won "is the crucial exchange rate in terms of determing Korean economic growth prospects.
"If yen-won moves below 10, a large section of Korea's export sector loses competitiveness which would compound current economic problems." -------------------------------------------------------------------------------------------------- Don't forget California. I don't often quote our local Cronicliar rag, but this has some facts on Japan trade and investment in California. And I do know that Sun Micro does _a lot_ of Japan business:
Ailing World Economies Slam
Stocks
OVERSEAS THREAT: A Japanese
crisis feared in U.S.
Sam Zuckerman, Chronicle Economics Writer
Thursday, March 15, 2001
As if the U.S. economy didn't face enough
problems already, a new threat is taking center
stage: a potential financial meltdown in Japan.
Japanese stocks are at their lowest level since
1985. Government finances are in chaos. Some of
the nation's banks are near failure.
Economists and stock market strategists fear the
contagion could spread. In a global economy in
which national borders mean less all the time, a
breakdown in Japan could slash growth, cut
corporate profits and destroy jobs around the
world.
"There is a danger of a crisis," said Anirvan Banerji,
research director at the Economic Cycle Research
Institute in New York. "A Japanese recession
would bring us one step closer to a global
recession."
Such a turn of events also could have serious
ramifications for California's economy. Japan was
the state's second-largest trading partner last year,
accounting for $12 billion worth of purchases of
high-tech equipment and services, according to the
California Technology, Trade and Commerce
Agency.
Last year, 1.1 million Japanese tourists spent $3
billion in the state.
In 1998, according to the agency's latest statistics,
Japanese companies invested $34 billion in
California. That amounted to one-third of all foreign
investment in the state and provided 160,000 jobs,
21 percent of which were in high-tech
manufacturing.
PROBLEMS GO BACK YEARS
The world's second-largest economy has been in
the doldrums since the early 1990s. That's when
Japan's version of a financial bubble burst, bringing
grossly inflated stock and real estate prices crashing
down.
Since then, Japan's economy has limped along,
sometimes growing weakly, sometimes falling into
negative territory.
Lately, though, what was a chronic problem has
turned acute. A nearly 40 percent plunge in the
benchmark Nikkei stock average over the past
year, taking it below the 12,000 mark, threatens to
bring down the nation's financial system, analysts
warn. That's because Japanese banks hold
corporate stock as part of their capital.
"The Nikkei being at present levels is the catalyst,"
said Carl Weinberg, chief economist at the New
York research firm High Frequency Economics.
"Any level below 13,500 causes banks to be
functionally insolvent."
The end of March is a date of reckoning for the
banks. That's when a new law goes into effect that
forces them to begin recording the value of their
stock holdings at market value, not the prices they
originally paid for shares.
That could wipe out billions of yen in capital,
pushing some banks under. With lenders on the
ropes, Japan's economy would be starved of credit
and could fall into a deep recession.
None of this means that the collapse of the
Japanese banking system is a foregone conclusion.
The government could step in and bail out the
healthiest institutions. The point is simply that
Japan's banks face a high level of risk.
ECONOMIES LINKED
The problems of Japanese banks might seem
remote to a stock trader in New York or a
manufacturer in Germany. But the rest of the world
is tightly bound to the Japanese economy in ways
both direct and indirect.
In the most immediate sense, part of the recent
tailspin in U.S. and European stocks markets could
be due to Japanese investors selling their foreign
holdings to raise cash. "Who knows how much of
today's drop in the Dow comes from Japanese
investors selling U.S. stocks?" said Weinberg.
Beyond that, Japan accounts for an important share
of worldwide demand for goods and services, most
notably in the markets for industrial equipment.
Japanese corporations have been major buyers of
Internet infrastructure gear, for example. A big drop
in orders from Japan would intensify the sales slump
faced by U.S. computer and telecommunications
companies. "A U.S. economic recession would be
deepened," said Banerji.
The threat to the banking system is by no means the
only sword hanging over Japan's economy.
Corporate and consumer confidence is terrible. The
nation's notoriously tightfisted consumers are
spending at even lower levels than usual.
Meanwhile, a key island of prosperity, the export
manufacturing sector dominated by household
names such as Sony and Honda, is facing a drop in
demand as the U.S. and European economies
weaken.
It adds up to an economy that faces multiple threats.
"People believed that Japan was in a slow recovery
mode," said Union Bank of California economist
Keitaro Matsuda. "Now there are new signs of the
economy losing steam, and that's got everybody
spooked."