In the Tough Years to Come, We’ll Spell Relief S-a-v-i-n-g-s

Suddenly Japanese investors, pressed by financial troubles at home and losing money in the United States, are having second thoughts. Last week Matsushita denied a Tokyo news report that it was getting cold feet about acquiring MCA, but elsewhere reports are widespread that Japanese buyers are chagrined at their U.S. investments.

“They are losing money and don’t think they did the right thing,” says an international investment banker, describing attitudes in the Japanese banking and business community. Thanks to a double whammy of declining real estate prices and falling dollar values, Japanese investments in Los Angeles, Chicago and New York office buildings--including Rockefeller Center--have turned out to be losers.

Acquisitions of U.S. retailers and industrial companies have led to disappointments as well.

Make no mistake, those Japanese losses mean trouble for U.S. stock and bond markets and for U.S. mortgage interest rates.

To understand why, you have to realize that “the Japanese have been naive investors,” says Roy C. Smith, a limited partner of the investment firm of Goldman Sachs and a lecturer at New York University’s business school. They got carried away with easy money. As Japan’s 1980s trade surpluses produced abundant capital in Tokyo, investors bid prices up too high in stock and real estate markets. Then Japanese companies borrowed against those stock and real estate values and paid top prices overseas for buildings, securities and works of art.

Now that game is over. Trade surpluses are shrinking and interest rates are rising, as the Bank of Tokyo tries to curb speculation. Stocks and real estate prices have fallen by one-third--with further declines to come, according to Akio Mikuni, head of Mikuni & Co., a leading credit rating agency.

Matsushita, the consumer electronics giant, may yet acquire the U.S. entertainment company MCA--because doing so fits a long-term business strategy. But most Japanese banks and companies will shy from acquiring overseas assets for a while. Indeed, many would be glad to raise cash by selling what they now own.

Americans shouldn’t feel smug that the financial juggernaut stubbed its toe after all. Because the woes afflicting Japanese investors reflect a worldwide problem--the shortage of savings--that may hurt the U.S. economy most of all.

That’s a big word, savings. When economists use it, they mean more than the household bank account or cookie jar. They also mean profits that corporations retain and reinvest, and surpluses in government budgets. National saving, in other words, is the sum of sacrifices made so that a brighter tomorrow can be financed, the essential underpinning of economic growth.

But because recent years and decades have seen government deficits instead of surpluses, corporations financing with debt rather than retained earnings and individuals piling up credit rather than saving, future growth may not be as rapid as in the recent past.

Specifically, the Organization of Economic Cooperation and Development says its 24 member nations, ranging from the United States to Iceland, can’t hope to continue the 2.8% average annual growth they have enjoyed in the years since World War II because world savings are inadequate.

So what will happen? The ‘90s will be a time of rebuilding savings, a time when interest rates will be relatively high to offer a return to capital. “Assets will deflate and returns to capital will rise--or in plain language, house prices won’t go up but interest rates will”--says Peter Rona, head of Rona & Co., a firm guiding investments in Hungary, and a director of the investment arm of the Industrial Bank of Japan.

Real estate assets are already deflating, here and in Japan.

And U.S. interest rates may be about to rise. Even though U.S. rates may seem high, at 8% to 9% for government and corporate bonds, they’re low compared to Japan and Germany, when adjusted for inflation. That is, when the rate of inflation is deducted, the effective U.S. interest is about 4%, compared to effective rates of 6% in the other countries.

That disparity is unlikely to last in a time when U.S. needs are competing for capital with Germany’s rebuilding of its eastern section and Japan’s expanding domestic economy.

Note that Germany is rebuilding and Japan is expanding. The decade ahead doesn’t promise a depressed world economy so much as a demanding one. Capital will go to the most productive users--and, it is hoped, competitive U.S. companies will be among them.

Keep that optimistic thought in mind, because all you’re likely to hear in the next few weeks will be cries of pain from the U.S. economy as the government borrows massively to finance the deficit. The Treasury must raise $65 billion to $70 billion--a record--in November and December. To raise that money, it will have to tap U.S. investors because “Germany and Japan won’t be helping out,” says David Jones, research director of Aubrey G. Lanston, a government bond dealer. “In fact we’ll be lucky if they don’t dump the U.S. Treasury bonds they now hold.”

So U.S. mortgages and business loans will cost more, and U.S. stock and bond prices will be under pressure. Nobody will get carried away with easy money in this demanding decade.