GROWING U.S.--JAPANESE TENSIONS : As Some Ridicule U.S., Japanese Having Own Economic Troubles
In all the furor over Japanese officials mouthing off about U.S. workers and managers, less notice has been taken--on this side of the Pacific anyway--of the economic troubles bubbling up in Japan and of pressures on Japanese companies and industries.
Those pressures are very real and could explain why the normally reserved Japanese have begun to sound arrogant, ill-informed and boorish--like their nemesis, Lee A. Iacocca of Chrysler.
But this is not a game of sticks-and-stones-may-break-my-bones. It’s important to understand the troubles behind the Tokyo wisecracks and to know what lies ahead in Japan’s economy. And it’s important for Americans to understand the real strengths and weaknesses of Japanese industry, so they don’t frame their debates on competitiveness around illusions and hobgoblins.
In simplest terms, Japan’s economy is in trouble because the real estate bubble of the late 1980s--to which Prime Minister Miyazawa referred Monday--is deflating. The bubble in Japan was much bigger than the overbuilding in U.S. commercial real estate--and is far more central to Japan’s industrial economy. By one estimate, real estate in Japan rose by $50 trillion in the latter half of the 1980s, compared to a 20% increase in gross national product to $3 trillion.
But the real significance of overpriced Tokyo office buildings is that they served as a tower of power for Japanese companies, whose shares on the Tokyo Stock Exchange were priced on the basis of real estate they owned. As the real estate rose in value, so did the stocks, leading companies to make easy profits speculating in each other’s shares. That further bid up stocks and real estate until prices became truly giddy--stocks selling at 100 times underlying company earnings and real estate so weirdly priced that a square mile of downtown Tokyo was said two years ago to be worth more than all the land in California.
Those exaggerated stock prices gave Japanese companies a tremendous advantage--they could borrow money very cheaply, often at interest rates of 1% or less. That allowed them to keep up high levels of investment at home and overseas. Sony, for example, paid $3.5 billion for Columbia Pictures, 212 times the film studio’s profits.
While the bubble lasted, Japanese companies didn’t have to report big profits or pay high dividends to keep shareholders happy. Pension funds and the mutual funds that represent household savings were satisfied with continual gains in stock prices.
Reality began to set in two years ago. The Tokyo stock market has fallen about 42% since the beginning of 1990, and the fear in Japan is that it will unravel another 40%. The Ministry of Finance said Monday that it will study ways to shore up stock prices, so as to prevent Japan’s economy from falling into recession.
Meanwhile, Japan’s companies are cutting back on capital investments as they struggle to beef up short-term profits and increase dividends. For a long time, major corporations--Toyota, Matsushita and others--have reported profits of 7% to 8% on investment, about half the level of comparable U.S. firms in a normal year. The low returns were seen as a badge of honor, proof that Japanese companies looked beyond quarterly earnings to the long term.
In truth, it was Japan’s 1% costs of capital that made the low profits acceptable. Now, Japanese interest rates are 6% and above, and times have changed. The Ministry of Finance is demanding that companies pay higher dividends. Companies need to earn more, in any case, to pay off $90 billion worth of stock warrants issued in the 1980s. In Japan, as in the United States, easy money has dried up.
While the going was good, Japan’s companies invested wisely and unwisely. In electronics, massive investments secured world leadership in memory chips--a key component of computers--but led to tremendous overcapacity and losses for all of Japan’s producers.
There have been blind spots: Japan’s companies bet the ranch on high-definition television but lag U.S. firms in developing the more advanced digital television.
On the other hand, Japanese technology in computer screens leads the world. And in cars, Toyota’s efficiency in manufacturing is putting all the world’s automobile makers in the shade.
The point is that Japanese industry is no slouch but no juggernaut either. The slurs of Japanese politicians notwithstanding, U.S. productivity remains ahead of Japan’s and the world’s--and the gap has been widening in manufacturing.
In the broader sense, Japan’s economy has come far, but it has made sacrifices for the journey. One statistic speaks volumes: Park land for Tokyo’s 12 million residents amounts to one-sixth that of Paris, one-fifteenth that of London or Bonn and one-twentieth that of Washington.
But there’s no need to add to the name calling. The fact that Japan hasn’t done it all only means that it’s challenged to do more.
And it will meet the challenge, says Yukuo Takenaka of Takenaka & Co., an American investment banker who does business in Los Angeles and Tokyo. “In a Japanese company, the first principle is survival,” says Takenaka. “The managers and the employees will sacrifice for success.”
Will U.S. managers and employees do the same? That’s the real question behind the criticism of Miyazawa and others. Americans should regard it as a wake-up call.
