Japan’s Money Troubles Begin to Jolt U.S. Economy : Finance: Japanese investments abroad are being cut. But some American firms may find advantages.
High interest rates, falling stock prices and weak property sales are slowing Japan’s financial juggernaut.
That’s of great concern in the United States, where Japanese money has supported everything from the U.S. budget deficit to the expansion of urban skylines. The recent reduction of such investment has been partly responsible for depressing U.S. commercial real estate values and driving up American interest rates, many experts say. And U.S. businesses may find it harder to tap Japanese banks--by far the world’s largest--for loans.
But Japanese financial problems could narrow the overwhelming advantage that Japanese companies have enjoyed over U.S. firms because of cheap capital. It also could help U.S. banks and other businesses seeking inroads in Japan.
“One and a half years ago (the Japanese) were raising money for nothing. They were on steroids,” says Kenneth S. Courtis, chief economist at Deutsche Bank Group in Tokyo. “Now it is back to the normal interest rate structure they lived with in the 1960s.”
Japanese banks and life insurance companies, scared off by a faltering U.S. economy, are scaling back their U.S investments. Nippon Life Insurance Co., with billions of dollars in foreign investments, said recently it would invest only 10% of its new funds overseas, down from about 16% last year. Of the money that does go overseas, more will go to Europe where healthier growth is anticipated.
Real estate companies, too, are retrenching, weakening already depressed real estate markets in the United States. “They were the one bright light in the whole picture,” Alan Woodhull, a Japan expert at Merrill Lynch Capital Markets in New York, said of Japan’s real estate investments in the United States earlier this year.
Shuwa Corp., which has been one of the most aggressive Japanese investors in U.S. real estate, is said to have put some of its properties in California, New York and Washington, D.C., up for sale.
The company’s Taco Bell building in Irvine, for example, is for sale, Orange County real estate brokers say. Japanese newspapers report that the company has $7.7 billion in debt and has suffered from price drops of retail store stocks in which it invested heavily.
Japanese investors--among the biggest suppliers of capital to the U.S. economy in the 1980s--so far have removed almost $10 billion from U.S. stock and bond markets in the first half of this year, according to figures released recently by the Securities Industry Assn., a New York-based trade group.
That pullback is making it more difficult for the U.S. Federal Reserve Board to help revive the American economy with lower interest rates. Current U.S. interest rates already are so unattractive that Japanese investors cut back their purchases of U.S. Treasury bills by two-thirds at the last auction, and there are concerns over the level of Japanese participation at future auctions.
The outflow of money has also put pressure on the dollar, which has lost nearly 20% of its value against the Japanese yen since early this year, threatening to push prices up further.
The impact of the credit crunch on Japan is less clear. Japan’s financial sector is feeling some pain. And smaller Japanese companies are likely to suffer from higher capital costs.
But most observers say Japan’s largest industrial companies, flush with cash thanks to cheap capital during the 1980s, will emerge healthy if somewhat sobered.
To a large extent, Japan’s current cash crunch was engineered by government authorities. In an effort to cool the nation’s economy, the Bank of Japan has steadily raised interest rates. And Japan’s Ministry of Finance, concerned about exploding land prices and speculative stock buying, has ordered banks to cut down on their financing of land and stock deals.
The resignation this week of Ichiro Isoda, chairman of giant Sumitomo Bank, in connection with a branch head’s involvement in stock speculation was a warning to other bankers to stay away from land and stock deals, says an executive at a major Japanese regional bank.
The Ministry of Finance has also proposed an increase in land taxes to cool rising land prices.
But Japan’s financial mandarins may be getting more than they bargained for.
The stock crash, for example. The financial system is reeling from plummeting stock values that have erased about $1.7 trillion, or 38%, from stock values since the market’s peak late last year. The Ministry of Finance was forced to ease certain investment requirements and take other measures earlier this month to prevent a further fall.
Land prices, too, look like they are heading for a fall. Condominium sales in Tokyo have already shown signs of weakening and real estate brokers say few deals are being made. Experts say fire sales of land by big Japanese companies that had invested heavily in real estate during the 1980s boom could push land prices down by as much as 20% to 30% over the next several months.
One company forced into such fire sales is Itoman & Co. Over the past five years, Itoman President Yoshihiko Kawamura had borrowed heavily from banks to refashion his old-line company from a trader in suit fabric into a real estate empire with interests ranging from golf courses in Vancouver to industrial parks in Thailand and housing projects in San Diego.
But now, unable to meet costly bank payments, Kawamura announced last week that Itoman would pull out of real estate altogether, unloading more than $5.4 billion worth of property over the next year to pay off its debts.
A drop in land prices would contribute to tighter money by making it more difficult for landowners to borrow using their property as collateral.
The hardest hit by recent events have been the Japanese banks. By reducing the value of the banks’ extensive stock holdings, the stock crash has dramatically shrunk their capital base. Under Bank of International Settlement regulations set to go into effect in 1993, the banks will be required to either raise new capital or cut back on their lending.
With their own stock prices down about 50%, Japanese bankers will find raising the money costly, and many are already lowering lending targets.
And if land prices fall, Japanese banks--just like their U.S. counterparts--could find themselves stuck with a growing portfolio of bad loans. Between 1987 and 1989, banks increased their investment in loans to individuals and for property-related deals by 53%, adding $512 billion to those risky assets.
As in the United States, riskier lending stemmed in part from deregulation of interest-rate controls, which has taken place in Japan over the last five years. Because banks had to pay higher interest rates to depositors, they sought borrowers willing to pay higher interest rates. Those new borrowers were high credit risks, says Hirohiko Okumura, chief economist at Nomura Research Institute.
While the problems are still a far cry from those at U.S. banks, U.S. credit-rating agencies such as Moody’s Investors Service have begun downgrading ratings of Japanese banks, cutting the top AAA ratings that many Japanese bankers had assumed would always be their privilege.
One unlikely beneficiary of the Japanese banks’ cutback in lending is the struggling U.S. bank sector in Japan. “The Japanese are sending their customers to us,” says a U.S. banker in Tokyo. In September, foreign banks in Japan raised their yen lending to $66 billion, up 27% from the previous month, according to the Nihon Keizai Shimbun, a Japanese economics newspaper.
Losers include the U.S. Treasury and American real estate developers, all of whom are finding it more difficult to attract Japanese money.
“You are already seeing a notable reduction in syndicated loans” by Japanese banks, said Courtis of Deutsche Bank. “This is bad news for the U.S. Foreigners aren’t going to buy large quantities of U.S. debt.”
Some U.S. companies hope that their Japanese manufacturing rivals, now saddled with higher capital costs, will also be hurt.
The higher capital costs may eventually force Japanese firms to scale back somewhat on investment and research plans. The days are over when they could issue convertible bonds paying interest rates as low as 2% by including options to buy shares at a later date.
But even without the advantage of cheap capital, such industrial powerhouses as Hitachi and Toyota are likely to remain strong. Heavy investment in factories in recent years has boosted productivity at most leading Japanese companies far above that of their U.S. competitors, while strong research spending has helped Japan generate more patents than its strongest U.S. rivals.
The balance sheets of Japanese companies are also stronger. The 1,493 companies listed on Japan’s stock exchange had $512 billion in cash at the end of March, according to the Nihon Keizai Shimbun. Ratios measuring their debt levels, which were twice as high as those of their U.S. counterparts in 1975, are now lower.
Even companies with poor earnings can avoid dealing with high interest rates and still keep capital spending strong by turning to their cash hoard. Isuzu Motor, for example, says it will finance at least half of the $300 million required next year to modernize its truck factory by using cash on hand.
Smaller Japanese companies will feel a credit pinch. Bankers predict a sharp increase in bankruptcies among smaller companies over the next four months if interest rates remain high.
Over the long haul, the rise in capital costs could lead to consolidation in Japanese industry, with Japan’s strongest companies swallowing weaker companies. Already, Japanese firms have shed cultural taboos that once discouraged takeovers. Japanese companies acquired 328 foreign firms and 217 Japanese firms in the year ended March 31, a 16% increase over the year before.
In an environment where capital is scarce, large companies capable of generating cash flow through steady exports could prove themselves well-positioned to acquire weaker companies. This could leave the largest of Japan’s industrial giants larger and stronger than ever.
