Tokyo’s Woes: How Bad Can Things Get? : U.S. impact: Trouble across the Pacific can result in a wide range of problems here. The trade deficit may widen and interest rates may rise.
In the economic universe, Japan seemed invincible and alone, blessedly sheltered from the ups and downs that bedevil the United States and other major powers.
It seemed so, that is, until a few weeks ago. A stumbling stock market and plunging yen have erased not only Japan’s image of invincibility but could affect the U.S. economy in ways not widely recognized, analysts say.
“We are joined at the hip, whether we like it or not,” said Jack R. Rodman, managing partner at Kenneth Leventhal & Co., an accounting and real estate consulting firm.
Americans may feel the effects of Japan’s financial turbulence in different ways: A weaker yen, for instance, creates new problems in curbing the U.S. trade deficit, even at a time of progress in trade talks with Japan. In the coming months, beleaguered Japanese investors may scale down their presence in the U.S. real estate market. Similarly, Tokyo-based banks may slow down their U.S. expansion plans.
And rising interest rates in Japan will create some pressure for higher U.S. rates.
“The people that are sitting back and saying, ‘This is great, the Japanese are starting to take some licks of their own,’ better start thinking about their adjustable-rate mortgage going up 50 bucks a month,” Rodman declared.
Surely, the Japanese have taken some licks of their own. This year alone, Tokyo stocks have lost a quarter of their value, causing pain for banks, corporations and institutional investors. At the same time, the once mighty yen has slid sharply, pushed by fears of inflation, while spurring those same fears as it continues to fall.
This one-two punch in the stock and foreign exchange markets, some believe, gave Japanese negotiators an extra willingness to compromise recently on trade issues. Although Japan’s economy has become less export-dominated, its big corporations still count on vast sales to America.
“A trade war with the United States cannot be a plus for the yen,” said Allen Sinai, chief economist with Boston Co., a New York economic consulting firm.
By the same token, expectations of trade harmony may be a plus for the yen: The currency rallied on foreign exchange markets late last week after announcements of trade compromises affecting U.S. commercial satellites, supercomputers, retail firms and other matters.
What do Japan’s recent financial gyrations portend for the U.S. economy?
The news may be good and bad. Take the U.S. banking industry. American banks in recent years have lost substantial ground to well-heeled rivals based in Tokyo. By last June, Japanese banks owned 10.8% of all banking assets here, and significantly higher amounts in California, New York and some other regions, according to the American Bankers Assn.
But the recent problems at home--steep losses on the stock market, rising interest rates, a skittish real estate market and the weaker yen--may force Japanese banks to scale back their U.S. growth plans. In addition, they may have to charge higher interest rates, reflecting the higher costs they face for capital--eroding a past advantage they’ve held over U.S. banks.
“The interest rates charged by Japanese banks in the U.S. are likely to go up a bit, enabling loans offered by U.S. banks to be more competitive,” said Robert H. Dugger, chief economist at the bankers association.
Such an outlook may comfort U.S. bankers, particularly the many that charged up to half a percentage point more for commercial loans than their Japanese competitors did. But for builders, developers and other Americans faced with the possibility of a reduced source of investment funds, a cutback in Japanese activity may not be viewed as good news.
“Instead of complaining about the Japanese, Americans will say, ‘Gosh, we’d love to have more investment in this country,’ ” said Gavin Dobson, president of Murray Johnstone International, a money management firm in Chicago.
Moreover, the yen’s drop represents a new problem in narrowing the U.S. trade deficit, just at a time when it appears that Japan is easing some of its entry barriers for American products. The weaker yen--and stronger dollar--means Japanese companies could charge less for their products in the United States, reversing the trend of recent years.
The yen’s drop “is going to have a much bigger impact on our trade deficit with Japan than the negotiations we’re conducting right now,” predicted William Harrington, an international economist with the WEFA Group in Bala Cynwyd, Pa.
Yet not all the events in Japan will have much of an impact in America. Even in today’s global economy, trouble in the financial nerve center of Tokyo does not automatically spread to another center, such as New York.
In fact, it appears that the opposite may occur as long as investors view one region’s vulnerabilities as isolated from those of another. “The problems in Japan generally make our markets look more attractive,” said Stephen H. Axilrod, vice chairman of Nikko Securities in New York, noting that Japan’s Nikkei stock average was widely viewed as overvalued.
Similarly, a spurt in interest rates in one nation does not automatically translate into a rise of rates in another.
To be sure, a jump in Japanese rates creates pressure for higher U.S. rates; America needs to attract Japanese investors to finance its budget deficit through their purchases of U.S. Treasury securities. But U.S. bonds continue to hold allure for the Japanese because the dollar has shot up as the yen has wilted--a factor that partially offsets the pressure on U.S. interest rates.
“We’re cushioned from those financial problems to a major degree as long as the dollar remains strong,” said David M. Jones, chief economist at Aubrey G. Lanston & Co., a New York investment firm.
Still, no one can say how long a solid dollar will calm investors who shop around for the highest rates. (When inflation is considered, Japanese interest rates are hovering at levels similar to U.S. rates; West German rates are somewhat higher.) Analysts will watch with interest in the coming days to see whether the Japanese continue to buy Treasury offerings at their past levels.
“Their financing of the U.S. budget deficit could lessen--it could drop off,” said William V. Sullivan Jr., director of money market research for Dean Witter Reynolds in New York.
The dramatic evidence that Japan’s financial system is capable of troublesome fits and starts--like those endured everywhere else--owes in part to an irony. For years, U.S. officials have pushed Japan to make its economy more like America’s, with greater emphasis on consumer spending and less on saving.
Such a consumer-oriented economy is naturally more vulnerable to swings in interest rates and harm from inflation, according to economists.
At the same time, Japan’s economy remains strong by the basic measures of productivity and industrial competitiveness. Despite recent events, all agree that Japan remains an economic powerhouse and expect it to shrug off its current troubles without great harm.
“There’s a few scars in Japan’s hide showing up here,” Sinai said. “But this is not the setting of the rising sun. Again and again, Japan has shown itself to be extraordinarily good at handling difficult financial situations.”
