COLUMN ONE : Chastened Yen Heads for Home : Japan’s big U.S. investment wave has ebbed, in wake of changed economic times. Investors are retrenching, raising fears that the American economy may suffer.
In Michael Crichton’s best-selling thriller “Rising Sun,” a retired Los Angeles police detective familiar with the ways of Japan offers a brief explanation for that country’s buying binge in the United States.
“Americans are eager to sell,” he says. “It amazes the Japanese. They think we’re committing economic suicide. And of course they’re right.”
The character in Crichton’s novel reflects a familiar conventional wisdom: America is selling its future to Japan. Rep. John D. Dingell (D-Mich.) once complained that the United States was “addicted” to foreign investment. Comedian Jay Leno wondered if the Home Shopping Network in Japan simply displayed a map of the United States. As Akio Morita, the patriarchal head of Sony Corp., once warned: “If you don’t want Japan to buy it, don’t sell it.”
But far from gaining a lock on America’s destiny, Japan’s investment wave that first gained momentum in the United States seven years ago has crashed head-on into a U.S. recession on one side of the Pacific and Japan’s own faltering economy and credit crunch on the other.
Now, fears that Japan is buying too much in the United States are giving way to fears that it may be spending too little.
The fallout has already led to a severe tightening of money flowing into a wide group of U.S. investments, from the cash-starved commercial real estate business to the art market. An accelerated drying up this year of Japanese investment money, frequently used to buy U.S. government securities, could also put significant upward pressure on interest rates.
“It’s ironic that four to five years ago there was concern the Japanese were buying America. Now, it’s as if people are asking, ‘Why won’t you buy America?’ ” said New York investment banker Daniel Schwartz, publisher of the newsletter Japan M&A; Reporter.
For some of Japan’s investors, who hold $140 billion worth of U.S. assets, the main reason is that America in some ways resembles a financial black hole. Many of the same investors who made headlines paying staggering sums for U.S. businesses and real estate are stuck with cash-draining resorts, half-empty skyscrapers, banks burdened by problem loans, overpriced artworks, sluggish manufacturing operations and costly management problems.
Among the examples:
* Kuboto Corp. invested $130 million in Stardent Computer in Newton, Mass., only to see the maker of engineering computers fold at the end of last year amid management strife and technological problems.
* Golf course tycoon Minoru Isutani is selling the prized Pebble Beach resort near Monterey for a $350-million loss, nearly $20 million in red ink for every month he owned it.
* Japanese tire maker Bridgestone pumped $1.4 billion into the North American operations of Firestone Tire and Rubber after discovering that its 1988 purchase, once lauded as a model acquisition, needed a far more extensive retooling than originally believed.
“Wall Street used to laugh at the Japanese for paying way too much for acquisitions, but we said these were ‘strategic prices.’ We can’t do that anymore,” said Toshio Fukuhara, a mergers and acquisition specialist with Nikko Securities in Tokyo.
No one is suggesting an outright fire sale of assets in the United States, but a partial retreat is possible. At a closed-door Wall Street conference in December, Wells Fargo & Co. Chairman Carl E. Reichardt predicted that some Japanese-controlled banks in California could be for sale soon.
While the San Francisco-based bank would not comment on Reichardt’s statement, which was confirmed by sources familiar with his talk, it reflects a widely held sentiment among the state’s bankers that some Japanese-controlled institutions in California are lackluster at best.
The slowing of Japan’s investment in the United States comes at a time when competition is rising for what Japanese money is available. Japanese investors and companies are showing more enthusiasm for investing in their own country, Southeast Asian countries that boast high growth rates and an economically unified Europe.
Although Japan is still investing billions of dollars in the United States, the amounts are falling fast. The latest figures from Japan’s Ministry of Finance show overall investment running at roughly half of the levels in 1989 and 1990. Merger activity in the United States for Japanese firms plunged by two-thirds last year, with the number of deals falling to 117 from 192 and the dollar value plunging to $3.8 billion from $11.9 billion, according to the New York investment bank Ulmer Bros.
The drop-off in real estate investment is even steeper. The Los Angeles accounting firm Kenneth Leventhal & Co., which surveys Japanese real estate investment every year, expects the Japanese to taper off to $3 billion to $5 billion in U.S. real estate in the next few years, less than one-third of the amount they were buying in the late 1980s.
Other businesses are feeling the pinch as well. As recently as two years ago, the art market was buoyed by Japanese money. The high point came in May, 1990, when retired Japanese industrialist Ryoei Saito made international headlines by spending $160.6 million on two paintings in a single week.
Now, overall prices are down from 20% to 30% from the peak period in 1990 as Japanese money has evaporated, said Bonnie Barrett Stretch, editor of the Artnewsletter in New York.
Not all Japanese investments have gone sour and not all Japanese investors are abandoning the United States.
Although some analysts believe Sony paid too much for the former Columbia Pictures, its acquisition of the former CBS Records is now lauded as a solid acquisition. And some real estate experts, among them Kenneth Leventhal partner Jack Barthell, argue that despite today’s moribund office market, some of the one-of-a-kind buildings Japanese investors bought will be viewed as great bargains years from now.
Other investment experts say a new breed of Japanese investor has emerged that is more rational than his predecessors.
But Japanese investors no longer enjoy the fruits of a booming economy and a powerful currency that made sky-high prices paid in dollars in New York or Los Angeles seem like a bargain in Tokyo or Osaka when translated back into yen. Gone also are Japan’s rock-bottom interest rates, surging stock prices and soaring real estate values that combined to give Japanese investors unprecedented buying power.
The change in Japan’s financial atmosphere has brought a new sobriety to some markets. No longer, for example, can U.S. developers put up a building or hotel on speculation, then count on a “Tokyo takeout.”
The term was used by some developers in the 1980s when describing how they expected to be bought out at a hefty profit by wealthy Japanese investors.
“A lot of projects were built on the expectation that an ever-increasing amount of capital would continue coming into our market from Japan,” said Jack Rodman, another Kenneth Leventhal partner.
Japan’s banks have tightened the spigot on money they are making available. Part of it is because of pressure from Japan’s central bank, which since 1990 has sought to rein in Japan’s speculative real estate and financial market.
Those same financial institutions also are putting pressure on some of their biggest borrowers, many of whom obtained loans using now-devalued securities as collateral. Federal bank examiners in the United States are stepping up their scrutiny of Japanese banking offices in this country, with particular emphasis on their real estate loans.
All this is bad news for the Japanese investors who bet huge amounts on two of the most overbuilt markets in the United States today--office buildings and hotels. Many were the once-in-a-lifetime “trophy” properties--the Arco Towers in Los Angeles, Rockefeller Center in New York and Pebble Beach near Monterey.
But turning headline-making purchases into profitable ventures is proving difficult for some. Until a couple of years ago, Japanese buyers paid little attention to how much income the properties produced in the short run, counting instead on future appreciation and boasting that their purchases had less visible intangible values.
Some Japanese investors paid so much for hotels and resorts in Hawaii and California that the properties “will lose money for a lifetime,” said Donald W. Wise, a hotel expert with the CB Commercial real estate firm.
In one frequently cited example, Tokyo’s Sazale Group spent a record $1.2 million a room in 1989 for the Bel-Air Hotel in Los Angeles. The purchase led one Connecticut consulting firm to award Sazale its “Brooklyn Bridge” award for most questionable foreign investment after calculating that the hotel would have to charge $1,200 a night and be two-thirds full year-round to make a profit.
An angry Sazale countered that the acquisition boosted the firm’s international prestige, came with valuable land and gave it the valuable “Bel-Air” name.
When Japanese interest rates were rock-bottom, that kind of long-term strategy seemed unassailable. But as interest rates in Japan jumped in 1990 and office vacancy rates soared as the U.S. economy softened, Japanese buyers were suddenly squeezed for cash, exposing as faulty the theory that U.S. property values would rise unabated.
“Fundamentally, this was a stupid conclusion in the long run. I do not believe real estate can produce value unrelated to its income-producing capacity,” said real estate expert Anthony Downs of the Brookings Institution think tank in Washington.
The financial devastation is reflected in the fact that some real estate executives, as reported in a recent issue of the newsletter Japanese Investment in U.S. Real Estate Review, now call four of Japan’s sickest real estate firms the “AIDS group.” That stands for Azabu Tatemono, Itoman, Daiichi Real Estate and Shuwa, firms that were active in the United States.
Los Angeles, now one of the softest commercial real estate markets in the nation, was for years a preferred site. Japanese investors snapped up about 40% of the premier downtown office space at a time when rents seemed headed toward a lucrative rate of $40 a square foot. Now, nearly one in four offices is empty, rents have dropped well below $20 a square foot and an occasional tenant enjoys enough clout to bargain for $10-a-square-foot rent.
For sellers, getting rid of their properties to Japanese buyers often seemed effortless. Such was the case with the 1990 purchase of the 86-room Beverly Rodeo hotel in Beverly Hills by an entity affiliated with Shinko Engineering in Osaka. The Beverly Rodeo was purchased quietly for $43 million or a staggering $500,000 a room, according to sources familiar with the deal.
Hotel officials declined to talk about the sale. But previous owner Max Baril called it “very spectacular” for him. “It was an extremely easy sale,” he said.
Needless to say, Japan’s investment debacles in the United States have tarnished the reputation its investors once enjoyed as shrewd, long-term players capable of shrugging off short-term losses on their purchases.
These days, it’s the sellers--ranging from Los Angeles billionaire Marvin Davis to bureaucrats at the federal savings and loan bailout agency--who look like the savvy deal makers.
Two years ago, the Japanese firm Maruko Inc. spent $66.5 million to buy the Hyatt Grand Champions Resort near Palm Springs from the Resolution Trust Corp., the agency disposing of troubled former thrift properties. Some experts smugly characterized the sale as a textbook case of a sharp buyer taking government bureaucrats to the cleaners, predicting that Maruko could sell the hotel within five years and double its money.
But it’s the bureaucrats who seem to have had the last laugh. Maruko’s overambitious spending eventually led it to seek bankruptcy court protection in the United States and Japan. Southern California commercial real estate experts say it is unlikely that Maruko could get a price anywhere near what it paid for the resort.
Likewise, Davis’ sale of Pebble Beach to Isutani in 1990 is now considered one of real estate’s savviest deals. “No developer in the galaxy should have done that deal,” CB Commercial’s Wise said.
The problems of some acquisitions have been exacerbated by the haste with which the deals were made. Bridgestone’s purchase of Firestone came after rival Sumitomo Rubber’s buyout of the Dunlop Group, and just as another rival, Italy’s Pirelli, entered the hunt for Firestone. Bridgestone’s $2.6-billion bid was an astonishing one-third higher than Pirelli planned to pay.
Bridgestone reviewed the financial data, but unlike corporate Japan’s typical plodding decision-making process, it bought Firestone without inspecting the plants and did not detect serious structural problems.
“The corporate culture of Bridgestone is to study things very slowly and carefully,” said Jim Smith, a spokesman for Bridgestone/Firestone Inc. in the United States. “But in this instance, they did not have the luxury of time.”
Now Bridgestone is paying for it on the bottom line. According to Japan’s leading financial daily Nihon Keizai, Bridgestone’s $38-million net profit in 1991 would have been 10 times higher had it not been for the drain on resources caused by the Firestone acquisition.
Fukuhara, the Nikko Securities merger specialist, said the lessons of the Bridgestone/Firestone deal have had a chilling effect on Japan’s industrialists in their acquisition of U.S. concerns.
Still, Japan’s investment debacles seem to be doing little to quell anxiety about Japanese purchases. Perceptions persist that Japan is still on an unstoppable shopping spree in the United States. Indeed, the recent proposal by Nintendo to buy a majority stake of the Seattle Mariners baseball team triggered new fears that Japanese money threatens prized U.S. institutions such as baseball.
But the reality facing Japan today is the need for retrenchment from its overseas binge. That sobering view is evident in the change of attitude by Nihon Keizai. Once an enthusiastic booster during the heyday of Japanese overseas investment, the newspaper now faults investors for failing to properly analyze the risks involved. As the headline of a recent editorial read: “Japanese firms must learn when to retrench or withdraw.”
