Report Paints Dark Picture of Japan’s Economic Future


Even as officials here are to offer details today of their $124-billion plan to jolt this nation out of its economic doldrums, a controversial new report argues that unless Japan takes quick and drastic action, it is headed for a long period of deflation and decline.

“We conclude that the long-term prospects for growth are poor,” says the report by David Asher, an Oxford University Japan scholar, and Andrew Smithers, chairman of Smithers & Co., an economic consultant in London. “A large portion of Japan’s considerable wealth and economic potential stands to be frittered away by misguided economic policies in the coming decades, just as in the 1990s.”

Bulls argue that Japan has turned a corner. But Asher and Smithers calculate that Japan’s true public-sector debt in 1997 probably exceeded 150% of gross domestic product--about 50% worse than standard estimates--and that corporate debts are about triple U.S. levels. The pension system is grossly underfunded and an aging population means the worst is yet to come, they say.

“Even with the highest savings rate in the world, even with the highest level of foreign currency reserves in the world, it’s still unsustainable,” Asher said by phone from London. “The only question now is what to do when the hard landing occurs.”


The report--noteworthy for its comprehensiveness, gloomy conclusions and readership among the financial elite--arrives at a time of unprecedented global fears about the future of the world’s No. 2 economy.

After six months of hand-wringing and incremental measures that have failed to reassure the bearish markets or the anxious Japanese public, the ruling Liberal Democratic Party is expected today to release details of the record package that the government hopes will blast the economy out of recession by summer.

The United States worries that a prolonged slump in Japan, with an economy 6.5 times the size of China’s, could stunt growth in Asia and dent the U.S. economy.

Already, an anemic Japan is shunning imports from stricken Southeast Asian nations and shipping America more and cheaper exports. Japan’s imports from Asia fell 18% in February, while the U.S.-Japan trade imbalance surged 21% that month--a trend with potentially nasty political consequences.


Japanese officials say they now have the economy in hand but are getting a drubbing from the pessimists in the world press.

On Tuesday, the Foreign Ministry released a 52-page report defending Japan against charges by the U.S. government and others that it is doing too little to bring about an Asian recovery. Reminiscent of glossy publications issued to counter the “Japan-bashing” of a decade ago, the report seeks to debunk “misperceptions” about the Asian economic crisis.

It argues that Japan in no way contributed to the crisis and has handed out $37 billion in aid--more than any other nation--since the turmoil began last year. The report also notes that Japan imports more goods per capita from the United States than America imports from Japan.

On Wednesday, Eisuke Sakakibara, the Finance Ministry’s vice minister for international affairs, declared that the economy has hit bottom. Sakakibara asserted that the U.S. stock market is “now approaching its peak” and “Japan is the only country where there is no bubble.”


But Asher and Smithers maintain that land values are still grossly inflated, even after their 73% drop since the Japanese “bubble” burst in 1990, with Tokyo office space fetching triple the London price and 10 times that of New York.

“Japanese urban property prices are likely to continue falling in real terms well into the next century,” they assert.

Further, the two bears argue that the floundering Japanese stock market--now trading at about 1986 levels--is still more overvalued by historic standards than even the levitating U.S. market. They estimate that the benchmark Nikkei index should come to rest at about 10,000--a shocking drop from its Thursday close of 15,761.69.

Meantime, Asher says Japan’s woes will create unprecedented investment opportunities for U.S. firms. “The potential for electronics companies in California to take over their Japanese competitors is growing by the minute,” Asher said. “The tables are turning.


“Whether it’s creative destruction or just destruction, there’s going to be big opportunities here,” he added.

Asher said he believes deflation is unavoidable, but that fast deregulation, cleanup of the bad-debt problem and a tax code revamping could put Japan back on track after two or three painful years. “The longer they wait, the worse the crash is going to be,” he said.

But critics say Asher overstates the danger of the public debt and understates the real strengths of the Japanese economy, which includes $1 trillion in net overseas assets. And some bulls argue that Japan’s problems are being overstated in Western financial circles.

“I am optimistic about Japan for the first time in 10 years because I think the Japanese government has finally woken up and they are doing the right things,” said Richard Koo, a senior economist at Nomura Research Institute, who cited the government’s December decision to use public funds to shore up the shaky banking system as a correct, though much-criticized, step.


Ironically, one of the most bullish analysts in Japan is Pelham Smithers, strategist at ING Barings Securities in Tokyo and son of the bearish Andrew Smithers. In contrast to most analysts--and the International Monetary Fund--who are forecasting slightly negative or minuscule growth in 1998, ING Barings expects Japan to post 1.9% growth. And the younger Smithers said Thursday that it is “reasonable” to believe that the Nikkei stock index could rise to 20,000 by year end--double his father’s prediction.