Japan’s Economy Is <i> Deja Vu</i> for Americans
Behind the loud and public trade disputes with the United States, important changes are occurring in Japan’s economy that should be reassuring to investors, business people and politicians in both countries.
Most immediate is recovery from recession. “We think the economy has bottomed; consumption is increasing and the economy is beginning to grow again,” says Takashi Kiuchi, chief economist of the Long-Term Credit Bank of Japan, one of the institutions most responsible for financing Japanese industry’s rise to global prominence.
And that’s good news everywhere. With $3 trillion a year in goods and services, Japan’s economy generates a lot of business worldwide, including about $60 billion from the United States.
Yes, that is less than the $100 billion-plus in goods and services that the United States buys each year from Japan, hence the trade problem between Tokyo and Washington.
In response to U.S. demands for a reduction of that trade deficit, Japan Tuesday announced deregulation measures for nine industries, from construction to insurance, opening them to foreign competition.
The moves were cautious and unspecific, however. They represent progress, U.S. Trade Representative Mickey Kantor said Tuesday, although not enough to “meet U.S. concerns.”
So trade arguments will continue, but most likely in a friendly manner. Both sides understand that the real issue is that Japan adapt its economy to the world, buying freely from other countries as well as selling to them.
Toward that end, Japan has begun restructuring its industry in ways that will be familiar to Americans who have lived through a decade of downsizing, layoffs and intense business competition. In fact, if you think of American-style discount stores or of how the U.S. government handled the savings and loan crisis and the problem of ailing banks, you can predict developments in Japan in the next few years.
Japanese consumers will lead this economic recovery, a departure from the past. The discount store phenomenon is growing rapidly, attracting customers and the attention of international investment managers.
Michael Steinberg, who analyzes Japanese stocks for Nomura Securities in New York, likes Kato Denki, an electronics chain that sells Panasonic, Sony and other brands at a discount because it buys in volume from the manufacturers--a standard practice in U.S. retailing but a revolution in Japan.
Michael Lindsell, the Tokyo-based investment manager for GT Global Japan Fund, favors Autobacs 7, a company that is able to sell automobile accessories at prices half its competitors’ because it imports Japanese auto parts--from plants in Asia or the United States--or it gets volume discounts from manufacturers in Japan.
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Discounting is not a simple matter in Japan. On one hand, it is directly related to U.S. trade concerns. Japan used to be the land of controlled markets and prices, which gave Japanese companies high profits in the home market to make them more competitive abroad. Now, companies can’t raise prices to earn profits, so they are being forced to cut costs.
And that is leading to downsizing and layoffs and a shift in the informal Japanese retirement system. Japan’s multiple-layered and controlled retail markets served as a kind of retirement plan for a system from which employees retire at age 55 with only small pensions. Jobs in small shops were a way for retirees to earn income, but such mom-and-pop stores can’t survive in the competitive environment now growing up in Japan.
Major layoffs have not yet hit the big companies, says Lindsell. But almost 70% of Japanese employees work for smaller firms, and more than 100,000 people are losing their jobs each year because small companies are going bankrupt, writes Alexander Kinmont, Tokyo-based investment strategist for Morgan Stanley.
Why has Japan’s economy, which seemed impregnable a few years ago, hit such difficulties? Because the money stopped, just as it did in the United States when banks and S&Ls; ran afoul of bad loans. In Japan, where real estate prices were bid up to giddy heights--a square block of Tokyo was said to be worth as much as all of California--problems were inevitable and have turned out to be huge. The major banks have been left with an estimated $250 billion of bad loans, a sum greater than all the losses in the American S&L; mess.
Japan’s response has mirrored that of the U.S. government. The Bank of Japan, the equivalent of the Federal Reserve, is lowering short-term interest rates so banks can borrow cheaply, invest in long-term government bonds and earn profits to repair their balance sheets.
Meanwhile, the bad real estate loans are being placed in separate subsidiary companies--Resolution Trust Corps. by another name--and sold off to private investors at discounts.
Amid all of this, Prime Minister Morihiro Hosokawa is trying to change the political system to make government more responsive to urban voters and consumers. And he is encountering fierce opposition, with political opponents investigating his tax returns--shades of his opposite number, President Clinton.
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“I call Japan a clone of the United States,” says a Japanese investment manager who finds deja vu reassuring. He notes that many of the problems Japan is facing today have been dealt with in the last decade or so by U.S. business and government.
And, just as predictions of doom regarding the S & L mess, competitiveness or bank loans proved wrong here, so Japan’s economy and society are likely to emerge stronger from their present trials.
Maybe that’s why some U.S. pension and mutual fund managers are investing in Japan’s market today, as alarmists worry about trade wars and stocks tumble in both countries. Long-term investors know from experience that worry is loud, but progress is quiet.
