After Decades of Boom, Japan Could Face a Bust : Economy: Stock and land prices have slumped. Business and consumer confidence have been shaken.


Sales of $1,000 designer dresses have plunged, but department stores remain crowded with shoppers and Matsushita Electric's $2,300 wide-screen television set is selling like hot cakes.

Nightclubs serving the young are still doing a brisk business, but Ginza bar operators say business customers show little interest in the bars' $300-a-drink services.

Demand for overseas tour packages is strong. But business travelers are on strict budgets, forcing airlines to tear out business and first-class seats and expand the economy sections of their planes.

Welcome to recession--Japanese style.

The boom in stock and land prices of the late-1980s has turned to bust, and now the problems are taking a toll on business and consumer confidence. Housing starts have plunged while corporate investment and consumer spending are slowing. In the last quarter of 1991, Japan's economy actually shrank. Nobody debates anymore about whether the land the Imperial Palace sits on is worth more than the State of California.

But with severe labor shortages and a national tradition of lifetime employment, there have been no sizable layoffs, and few Japanese actually worry about losing their paychecks. Instead of firing workers, companies redeploy them--and life goes on.

So far, Japan's economic slowdown has produced a lot of cautious behavior but few of the hard luck stories so common during a U.S. recession.

However, there is growing concern among economists, politicians and business leaders that the great Japanese economic machine may be headed for a serious breakdown. Their fear is that the economy has become so overheated in recent years that the process of cooling it down might cut deeply into the nation's industrial might and create much broader problems.

Although government officials insist the economy is merely going through a brief adjustment, Prime Minister Kiichi Miyazawa acknowledged the scope of the problem today by announcing a package of stimulative measures, including immediate spending on public works and tax cuts for small businesses. Japan's ruling Liberal Democratic Party faces an important election for the upper house of Parliament in July and the measures are a sign that the government is worried about the direction of the economy.

But Tetsuo Tsukimura, the chief economist at the Tokyo branch of the U.S. brokerage Smith Barney, Harris Upham, is more pessimistic.

"This will be the worst recession in postwar Japan," he says. Tsukimura gloomily predicts a 0.4% decline in Japan's gross national product this year--which would be the first since 1974.

Tsukimura, whose past forecasts have been more bearish than his colleagues' and usually more accurate, says the slump could drag down the U.S. economy and others as Japan absorbs fewer imports and provides less capital to the world. "Japan's economic deterioration will prevent an American recovery and undermine Asia's growth," he argues.

At the same time, some economists see little advantage to American and European companies seeking to gain an edge against Japanese rivals in global markets. The reason, they say, is that Japan tends to step up--rather than curtail--its export drive when times get tough at home.

To boost the economy, Japan will spend more than 75% of the government's $115-billion public works budget before September. Tax cuts for small business would encourage investment in labor- and energy-saving devices, the government says.

And the Bank of Japan, which has resisted pressure to cut interest rates, is expected to announce a 0.5 to 0.75 percentage point discount rate cut later this week.

Masaru Yoshitomi, director general of the Economic Planning Agency said early today that the measures would inject more than $30 billion into the economy and help Japan attain its 3.5% growth target for this year.

But many economists and business leaders are already calling for additional government spending in a new supplementary budget--a move for which Miyazawa recently expressed support. If the additional spending adds up to $38 billion, growth in the second half of the year would reach 5.3%, nearly triple existing projections, says Kermit Schoenholtz, economist at Salomon Brothers Asia.

At least until September, however, most economists agree that the Japanese economy will hobble along at a growth rate of 1% to 2%, generally considered a recession by Japanese standards.

The pessimists, however, say the worst is yet to come. What makes the current recession different from the past, and more like typical American recessions, says economist Tsukimura, is the buildup of unsold goods by companies that has occurred in the past year in spite of production cuts.

While declines in inventories are a common event at the beginning of most American recessions, Japan has never before been forced to actually cut its stocks of goods on hand, Tsukimura notes.

There is evidence that the cutback is already causing pain for hundreds of thousands of subcontractors.

Minoru Yoshida, 45, stamps out muffler brackets and dozens of other small parts for Mitsubishi Motors trucks. He says his sales are down to one-sixth of what they were last year and getting worse.

"This is the first time it has ever been this bad," says Yoshida, who has been in business for 20 years.

For large companies with big payrolls they can't cut, the pain shows up as lower profits.

Tsukimura believes that earnings for the 225 companies that make up the Nikkei index will show a decline of an estimated 35% in the fiscal year that ends today and will drop an additional 50% in 1992.

Companies have implemented a broad range of cost-cutting measures, ranging from the use of cheaper copy paper to management salary cuts.

The critical question for Japan is how far companies will cut their investment in new plant and equipment.

"Companies like steel and semiconductors which require large amounts of money will limit investments to what is absolutely necessary to remain competitive," says Josen Takahashi, researcher at Mitsubishi Research Institute, who predicts a sharp decline in investment spending.

Japan's economic problems bode ill for the U.S. economy. "Rather than invest overseas, we are focusing on domestic needs," says Hiroshi Yamamura, chief economist at NLI Research Institute, the research arm of Nippon Life, a Japanese insurance company. Yamamura says the company has about 14% of its $24 billion in outstanding investments overseas, down from about 20% two to three years ago.

Less cash from Japan could mean higher interest rates in America and another aborted recovery.

But many analysts caution against interpreting the trouble at Japan Inc. as an opportunity to grab markets from Japanese competitors.

In a recent survey by the Economic Planning Agency, many key Japanese companies said they plan to increase exports to help offset sluggish local demand.

"There is no reason an export boom won't happen," says Jesper Koll, economist at Warburg Securities. "People are going to dump their products overseas."

Indeed, exports may be the solution Japanese corporations are waiting for. "As soon as they (corporations) see the U.S. in recovery, things will change," says Mineko Sasaki-Smith, analyst at Credit Suisse's Tokyo office.

"That is just the way our economy works," says Minoru Takita, economist at Sanyo Investment Research. "If conditions are bad at home, we push exports."

Copyright © 2019, Los Angeles Times
EDITION: California | U.S. & World