Is Sun Rising or Setting for the Japanese?

Fumiko Osawa, owner of a small Yokohama shop that sells packaged tea, feels almost hopeless about the future of Japan’s economy.

Stocks have plunged 15% in the last two months, land prices are less than half their late-1980s values and the population is rapidly aging. Osawa fears that Japan is headed for “depression.”

“I think the only ones who make money will be doctors and those who sell graveyards or run nursing homes,” Osawa said. “We can’t expect a glorious future.”

Many share Osawa’s gloom. Indeed, the country’s dominant mood is one of apprehension and discouragement, an outlook also reflected in how the rest of the world views Japan these days.

Repeatedly disappointed by Japan’s failure to emerge robustly from its worst economic retrenchment since World War II, citizens here and experts around the world seem to have lost confidence in this miracle nation--a disillusionment that has driven the yen down a remarkable 34% against the U.S. dollar since April 1995 and caused a dramatic sell-off by stock market investors.

Yet some analysts argue that Japan’s economy is on the rebound and in much better shape than many people believe. After all, the real personal income of the Japanese is rising faster than that of Americans, and Japan’s economy is growing faster than the U.S. economy.

These incongruities reflect the riddle of an economy in the early stages of a historic transformation--a shift from a cozy world of regulation and protection to a new era marked by the fierce pressures of free competition. It is a painful transition, but one that many think is needed for Japan to remain strong. So plunging stocks and widespread gloom reflect fear of what may lie ahead, not the economy’s current performance.

“Right now, the situation of the Japanese economy is fairly good, because it’s grown for more than three years,” said Kenji Mizutani, a prominent economist who is president of Tokai Research & Consulting Inc. “The bottom was October 1993. From then, the economy has risen. . . . The downward trend of the stock market reflects an expectation of a sluggish economy in the future.”

J.P. Morgan calculates real economic growth in Japan last year at about 3.4%. By comparison, in the U.S., where stocks are booming and the citizens voice optimism about their economic future, the economy grew only 2.5%. The Group of Seven economies of rich industrialized nations overall are estimated to have grown just 2.3%.

Even during the three worst years of Japan’s “recession”--1992, 1993 and 1994--the Japanese economy still expanded, albeit very slowly, growing 1.1%, 0.1% and 0.5% in real terms, respectively. The inflation-adjusted average annual income of Japanese workers rose about 5.5% in that period, according to government statistics. Real wages are estimated up 3.0% last year and are projected to rise 3.1% this year.

Yet many Japanese feel their nation faces a crisis.

Keishi Degawa, a sales manager for Namco Ltd., a major video maker, frets about the future competition: “Technology in Southeast Asian countries has caught up with Japan’s. Unless Japan can achieve a structural cutting of costs, it cannot be competitive with those countries.”

One thing that definitely lies ahead is higher taxes, a key instrument of Prime Minister Ryutaro Hashimoto’s transition strategy. The government says a tax boost is critical if it is not to be bankrupted by the needs of an aging society in the 21st century.

Private-sector experts are sharply divided over whether the planned tax hikes are a good idea. Some say the Japanese economy is in such bad shape that boosting taxes risks choking off the recovery.

“What we hear recently is the government is committed to cutting the budget deficit, which means cutting the [government spending] pillar that has been holding the Japanese economy up,” said Richard Koo, an economist at Nomura Research Institute Ltd. “If that pillar is removed, the whole house could come crashing down. I think that’s what people are worrying about.”

But bureaucrats at the Finance Ministry, the key force behind the tax boost, appear to have succeeded in influencing public opinion to accept the tax increases as inevitable. And some analysts insist that prospects for the economy are not so bad even with the planned tax hikes.

“It was a fad [in the 1980s] to think Japan was unstoppable,” said Ronald Bevacqua, an analyst at Merrill Lynch Japan. “It’s a fad now to think of Japan as able to do nothing. In both cases, that fad had moved way off of reality.”

Some analysts say that falling stock prices and a sense of crisis in Japanese society help build the conditions for a badly needed shakeout in various industries, especially the troubled banking system--a shakeout that would leave solid companies stronger than ever as weaker ones disappear through mergers or carefully controlled bankruptcies.

“I think [the gloomy mood] is being fed by the authorities,” Bevacqua said. “The reason they are doing this is they do, indeed, have plans for the economy. They have plans for weeding out the weaker firms, in the industrial sector as well as the financial sector. But it requires enormous pressure to move the process forward. Some of that pressure comes from the stock market [when prices fall]. Some of it comes from this fanning of pessimistic sentiment.”

The recent sharp weakening of the yen illustrates how gloom can help Japan solve some of its problems. The dollar traded late last week in Tokyo at about 121 yen, after hitting nearly 123 yen Wednesday in New York. That marked the weakest yen since February 1993. A weaker yen boosts Japanese exports and makes it more difficult for foreigners to sell to Japan--both of which should promote growth in the Japanese economy and job stability for workers here.

The 225-share Nikkei index closed Friday at 18,330.01--less than half its all-time peak of 38,915.87, reached at the end of 1989.

As Japan strives to recover through restructuring, perhaps the most important and difficult challenge is the banking sector. Banks are burdened by about $250 billion in bad loans, according to official estimates, and some private analysts say the real figure could be twice that much.

In November, Prime Minister Hashimoto proposed a set of “Big Bang” reforms aimed at creating a much less regulated and more competitive financial market in Tokyo by 2001. Hashimoto named his plan after a set of British reforms carried out in 1986 that revitalized London markets and were known as “the Big Bang.”

While many analysts are skeptical of how thoroughly the reforms will be carried out, there is a growing consensus that authorities are serious about trying to solve Japan’s banking problems through industry consolidation.

For example, late last month, Moody’s Japan K.K., the Japanese unit of the U.S. rating agency, changed its rating outlook for four of Japan’s top 20 banks to negative from stable.

“Japanese policy . . . is shifting from one of protection . . . to one of resolution via liquidation, which may expose creditors to risk,” Moody’s explained. It identified the banks as Nippon Credit Bank, Hokkaido Takushoku Bank, Yasuda Trust & Banking Co., and Chuo Trust & Banking Co. It added, however, that deposits in the banks were still “investment-grade” because the Japanese government would not allow depositors to lose their money.

“If the ‘Big Bang’ is executed, this [creates] a world where the strong get stronger and the weaker must go bankrupt,” said Kunio Miyamoto, chief economist at Sumitomo Life Research Institute. “The government plan is to reach that stage in four to five years.”

Hashimoto’s overall deregulation proposals--which at this point remain vague--aim to apply similar pressures for consolidation and streamlining in many sectors of the economy, analysts say. The ultimate goal is creation of a more competitive Japan in the 21st century.

*

Makiko Inoue of The Times’ Tokyo bureau contributed to this report.