Downturn May Lead to Major Increase in Imports to the U.S.

As stock markets around the world stagger from a chain of events that started with currency devaluations in Southeast Asia this summer, some observers here say the next big wave out of Asia may be a humongous export boom.

An Asia-wide export drive, combined with other factors, including pressures on Japanese banks to bring home overseas capital, could inflict far more serious trouble on the U.S. economy than what it has suffered the last few days, these doomsayers warn.

“I would see tremendous pressure in the next six months on U.S. companies from these exporters in Asia,” said Kenneth Courtis, chief economist for Deutsche Bank Group in Tokyo.

Of course, massive exports would trigger political reactions in the United States and elsewhere, leading to trade barriers that would prevent the world’s economies from being overrun. But nobody needs a trade war.

The main reason for concern is that plunging currencies, lower real estate prices and slowing economies have now slashed the cost of manufacturing--as calculated in dollars--throughout almost all of Asia.

From Japan and South Korea to China, Malaysia and Singapore, high savings rates plus strong national and corporate commitments to capital investment mean many new factories have come on line for everything from semiconductors to automobiles.

At the same time, slower economic growth has reduced Asian demand for the products these new factories are capable of churning out. The U.S. market, however, is open and strong. Thus American firms would be facing a fresh wave of cheap competition--while their own export markets in Asia are drying up.

Asia, including Japan, now produces 42% of world exports, and the cost structure has dropped by 50% to 60% compared with about two years ago, Courtis said. “They have huge amounts of up-to-date capacity. All of these economies desperately need growth and will try to get it through exports.”

In Japan, meanwhile, the world’s second-largest economy, a falling stock market could trigger repatriation of overseas capital by Japanese banks that are concerned about meeting “capital adequacy” requirements under international banking rules.

Japanese banks depend on unrealized gains on their large stock holdings to serve as a buffer against any threats to their stability from bad loans. Analysts estimate that the Nikkei stock average would need to go down nearly another 2,000 points before these gains would disappear. If that point came, the government would be under enormous pressure to rapidly stimulate the economy and take other measures to boost stock prices.

The other way stock prices affect Japanese banks--and potentially the world economy--is related to global banking rules that allow unrealized gains to serve as part of the capital banks must hold in order to qualify for full participation in global banking.

“As the stocks go down, it reduces the capital they can use,” noted Elizabeth Daniels, banking analyst at Morgan Stanley Japan Ltd.

The benchmark Nikkei index has not declined as steeply as other world markets in recent days, but it had been dropping for months. It is already at a two-year low.

The main problem with this, Courtis said, is that Japanese banks might choose to cash in some of their overseas assets, such as U.S. Treasury bonds, and bring that money back to Japan to beef up their capital adequacy ratios under Bank of International Settlement rules.

Eiji Yamamoto, a professor of economics at Konan University in Kobe, says that means the flow of Japanese money into the United States could dry up.

“If the money does not go into the United States like it has been, the dollar-yen exchange rate will be reversed” toward a stronger yen, Yamamoto said. “The U.S. dollar cannot stay this strong if capital from all over the world doesn’t flow in. If this [global stock market crash] goes far enough to affect the dollar’s exchange rate, it will be really serious.”

Etsuko Kawase of The Times’ Tokyo bureau contributed to this report.