For years, the Japanese economy has boomed, sucking in more and more products from abroad while flooding world markets with exports of everything from cars to computers.
But sharp stock price declines, rising interest rates and declining property values are finally taking their toll. Automobile sales are slowing. Machinery orders are falling, along with businesses’ capital spending plans. Corporate profits are flat. Big bankruptcies are rising.
As a result, Japan’s muscular economy is showing signs of tiring--and may even be flirting with recession.
That’s bad news for the U.S. economy. Economists have looked to Japanese imports of products and exports of capital to help keep the expected American recession shallow and short. But lower growth in Japanese consumer spending and capital investments will substantially reduce that nation’s purchases of U.S. goods, possibly reversing hard-won gains by American firms in Japanese markets.
Japan’s troubles may hurt American companies at home too. As the Japanese economy sours, firms in such industries as autos and semiconductors will try to sell their excess production in the United States rather than cut production and lay off workers. The result? More Japanese market share at the expense of American rivals.
The Japanese slowdown could also contribute to a worldwide credit crunch. Experts predict that with fewer exports and higher costs of oil imports, Japan will become a net importer of capital early next year.
That means that Japan, which has plowed its capital surplus into financing investment around the world, could temporarily end up competing with U.S. and European companies for scarce capital. Already, Japanese financial institutions are pulling money out of U.S. stocks, bonds and real estate, putting upward pressure on U.S. interest rates.
At first glance, Japan doesn’t look like a nation headed for a downturn. Department stores, most of which have been plastered with Christmas trimmings for nearly two months, are packed with shoppers. And that’s before employees have received their fat end-of-year bonuses.
U.S. firms say their sales in Japan remain strong. U.S. exports of machinery and computer equipment nearly doubled to $14.7 billion last year from 1986. Digital Equipment Corp., with 3,800 employees in Japan, says it continues to grow at a rate of more than 20% a year. Only the difficulty of hiring new workers is limiting growth, it says.
Yet subtler signs paint a different picture.
After rising steadily for 20 months, Japanese automobile sales in November were down 2.7% from the year before. Growth in housing starts is down sharply, and corporate profits have been flat most of the year.
In the past couple of months, Japan has seen a rise in bankruptcies, reversing a steady decline since 1986, according to Teikoku Data Bank, an information service.
Kyowa, a construction company that borrowed heavily to speculate in real estate, has filed for bankruptcy, becoming Japan’s third-largest bankruptcy since World War II.
A branch manager of Itoman Co., another company whose real estate debts threaten to swarm it, drowned himself in his bathtub as government investigations into the company’s highly leveraged real estate deals broadened.
High interest rates and falling asset values are depressing consumption, while declining corporate profits are dampening spending on new factories. Many small firms that have not speculated in real estate say they too are in danger of going bankrupt.
“The symptoms of recession have come out surprisingly quickly in recent days,” says Makoto Sakurai, chief economist at Taisho Research Institute Co., an independent think tank. Japan has not been in a recession since 1974.
Individuals and companies with real estate or stocks are already beginning to feel some pain. In October, Tadami Umezawa put his $400,000-plus house, 1 hour away from Tokyo, on the market at a price suggested by the broker. He has lowered his price 10%, but still no buyers. Unless he can sell, he can’t afford the land to build a new home closer to work.
“High interest rates are the main problem,” says Umezawa. “They could bring down the economy.”
Many executives agree. Seventy-five percent expect a downturn by next summer, according to a recent survey. Most are angry at the Bank of Japan’s policy of keeping interest rates high.
With the economy treading water in Japan and shrinking in the United States, earnings are headed for sharp declines. Jesper Koll, chief economist at S. G. Warburg Securities’ Japan branch, predicts that profits will fall 18.5% in 1991 from this year. Lower earnings, combined with higher capital costs, he argues, will force companies to reduce growth in capital spending to 5.3% next year from 17.8% in 1989 and 14% estimated for 1990.
Koll says Japan’s economy will shrink on a quarter-to-quarter basis in the first half of next year, although for the year growth will remain a healthy 3.6%.
Salomon Bros. Asia Ltd. forecasts import growth slowing to 4.8% from 8.3% last year. U.S. exports of food may remain steady, but beef, lumber, semiconductors and computers are expected to fall.
High-tech sales are likely to decline more rapidly than overall imports as Japanese firms cut purchases from foreign suppliers and return to Japanese buyers. U.S. semiconductor makers are already seeing their market share shrink after several years of growth.
As domestic markets shrink, Japanese companies will aim their excess capacity at the U.S. market.
Earlier, Honda predicted that its U.S. plants would become a production base for exports to Japan. Instead, the capacity is feeding a boom in U.S. sales. Honda’s American sales grew 25% in the last 10 days of November from year-earlier numbers, while they fell 27.9% in Japan for the month.
Meanwhile, most observers predict a continued slowdown in Japanese investment overseas.
A weaker economy will also shrink Japan’s role as banker to the world. Japanese purchases of U.S. stocks were 89% below year-earlier levels between April and October, bond purchases down 72%.
Koll predicts that Japan’s capital surplus (its excess of capital outflows over inflows), which fell from $79 billion in 1988 to an estimated $35 billion this year, will actually become a capital deficit of $8 billion in the first half of 1991. The key reason: a rise in imports caused by higher oil prices, coming as exports are slowing.
A cooling economy is what Japan’s government planners want. Prices, already the highest in the world, rose 3.9% in November from the year before--the fastest growth since 1982. Slower growth should help moderate inflation.
In April, after the spring wage offensive--when unions negotiate industrywide raises with employers--most observers believe that the Bank of Japan will lower interest rates again, helping to rejuvenate the economy and make U.S. bond markets more attractive.
Higher public works spending, which Japan promised the United States in recent trade talks, should also begin kicking in then.