Japan Willing to Take Pain for the Gain

Shows you how much the experts know. For more than a year, prominent investment experts in the United States and Europe have predicted the collapse of the Tokyo stock market, because they believed that share prices were too high.

So what has happened? Stocks in Tokyo fell less than those in New York in the worldwide decline of last October. And Tokyo share prices have just made up all their lost ground with a sustained rise over the last three weeks, as Japanese investing institutions grew confident about the economy.

The stock market is not the only surprise. Experts have predicted difficulties for the Japanese economy ever since 1985, when the value of the yen began to rise against the dollar. Japan’s exports would be hurt, they said, and growth in its home market couldn’t compensate.

So what has happened? Overcompensation. Spurred by an expanding domestic market, the Japanese economy is one of the world’s fastest growing right now, says a study by the Center for International Business at Columbia University. Unfortunately, that same study finds growth in the U.S. economy worrisomely slow.

Are the super-achieving Japanese playing by different rules, or is there something the Americans could learn from their example?

There are lessons, and they’re simple. Learn to take short-term pain for long-term gain, for example. In 1974, the oil price rise hit Japan harder than the United States. But it reacted differently, notes economist James Galbraith of the University of Texas. Japan took the full oil price inflation in a single year and suffered a recession. But inflation tailed off after that initial shock, and Japan’s economy resumed its gains.

The United States, by contrast, put price controls on U.S. oil to mitigate the OPEC rise. But that caused creeping inflation, and cost of living pay supplements only compounded the problem.

The 1980s show a similar pattern of discipline versus slack. Japan took in a lot of capital through trade surpluses in the mid-80s, but its government didn’t let the money inflate the economy. It continued to discourage consumers and encourage savers--by keeping interest income tax free.

Limited Options

Now, to boost the economy and head off unemployment, the government is going to tax savings and encourage the people to spend.

The U.S. government, by comparison, borrowed abroad to finance military expenditures and a growing consumer economy simultaneously--which was foolish enough. But then it failed to cut its deficit when the economy was strong and so has limited options as the economy slows down.

Not everything the Japanese do is admirable. Japan’s trade policies, for example, have been outright protectionist. That has worked for them but has also given rise to retaliatory U.S. protectionism that could work against Japan and many other nations, too.

And some things the Japanese do are simply different. As the Tokyo market trembled last fall, the Finance Ministry asked investing institutions not to sell stock. So they didn’t, and a rout was avoided. Such government interference wouldn’t happen here but did there because the Japanese believe that the interests of social order override those of market efficiency. You can argue the point, but the systems are undeniably different.

Yes, but can the Finance Ministry keep stock prices elevated? No, but it may not have to try. The market will adjust as the economy shifts. The Japanese parliament is about to take up agricultural reform, says Jonathan Francis, international economist for First Boston Corp., and that could free up land for housing development. Nomura Securities is already picking stocks--such as retailers Ito Yokada and Marui--for the new consumer era in Japan.

But a Japan looking homeward offers no consolation to competitors. Japanese exporters are opening plants overseas, particularly in the United States. “For the next 10 years minimum,” says Yukuo Takenaka, a Japan-born American executive with Peat Marwick, the accounting firm, “U.S. companies will need a Japan strategy, either to take advantage of opportunity or to defend their position--because one way or another the Japanese are going to impact you.”