A Vote of Confidence in Los Angeles : Real-Estate Purchases by Japanese Show Their Faith in U.S.
On the premise that Japanese investors are generally shrewd, their enormous holdings of prime commercial property in Los Angeles should be viewed by Angelenos as encouraging and reassuring. Commercial property is a long-term--as well as a relatively illiquid--asset, so investors who acquire and hold it evidently expect the local economy’s future to be bright. Presumably such expectations underlie the remarkable growth in recent years of Japanese property holdings in Los Angeles as well as in several other major metropolitan areas including Honolulu, San Francisco and New York.
At the end of 1986 Japanese firms and institutional investors owned 16 of the 32 largest commercial buildings and major building sites held by foreign investors in the prime business area of downtown Los Angeles. At the end of 1987 the corresponding figures were 24 of 40. The total investment represented by these Japanese holdings approaches $2.5 billion. In the aggregate, these holdings make up about 30% of the prime commercial property in downtown Los Angeles.
Some people view this phenomenon as disquieting, or even alarming, rather than reassuring. Instead of seeing the Japanese position as an encouraging indicator that the Los Angeles economy’s prospects are bright, they worry that it may foretell an excessive degree of Japanese economic leverage, as well as an effort by the Japanese to acquire and exercise economic influence in a somewhat devious way.
The worriers are wrong. Japanese acquisition of commercial property is a legitimate, sound, healthy reflection of the manifest strengths--as well as some of the weaknesses--of the U.S. economy.
Japanese property acquisition is a specific example of increased Japanese holdings of U.S. assets of all types--including government and corporate bonds, equities and direct investment in plant and equipment--currently making up a total asset pool worth more than $250 billion.
While these holdings are enormous, they should be placed in proper context. The aggregate value of all U.S. tangible assets is probably well over $15 trillion. Japanese holdings are therefore perhaps 1.6% of the total.
In economic terms, Japanese holdings of U.S. assets in general, and of Los Angeles real estate in particular, have resulted from a process of voluntary exchange: The United States imports more than it exports (that is our trade deficit with Japan) while Japan buys more U.S. assets than it sells Japanese assets to Americans. This voluntary exchange results because, under present circumstances, U.S. citizens and corporations choose to import more from Japan than they export, while Japanese citizens and corporations find more attractive opportunities for investing in the United States than they find at home.
As with all voluntary exchanges, presumably both parties benefit. For the United States the result has been higher levels of investment and consumption than would otherwise have occurred, and the generally impressive performance of the American economy in recent years; sustained economic growth over the past 5 1/2 years, the longest period of uninterrupted peacetime growth in this century; increased employment amounting to 16 million jobs in the past seven years; the lowest unemployment rate (5.5%) since 1979, and reasonable price stability since 1982.
For Japan the result also has been sustained economic growth, slowly rising levels of consumption and its emergence as the world’s largest creditor nation.
Japanese property acquisition in Los Angeles has contributed to increased construction, higher employment and improved business-office facilities.
If the U.S. wants to alter this pattern of voluntary and mutually beneficial exchange--that is to say, the sale of U.S. property and other assets to compensate for our large, though gradually declining, trade deficits--we have it in our power to do so. We simply have to spend somewhat less, save somewhat more and invest the difference. This can be accomplished in various ways: an added tax on consumption (Japan, as well as virtually all developed countries, levy much heavier consumption taxes than we do, and in particular much heavier taxes on gasoline); allowing for the partial tax deductibility of saved income (Japan’s tax system provides much more extensive incentives for savings than did our now-repealed IRA and Keogh plans), and continuing pressure on our Japanese trading partners to reduce their restrictions on imports of beef, citrus and other products while opening further opportunities for sales in Japan of American engineering, construction, information, legal, financial and other services.
Reshaping the prior pattern of exchange, which has had both “quids” and “quos” associated with it, requires a combination of straightforward changes in U.S. domestic policies as well as persistent and tough negotiation with a major and respected ally--one, it should be remembered, that shares fundamental national interests and democratic values with the United States.
