Tokyo Braces for Shocks

The financial crisis in Indonesia is being watched nervously in Japan, whose massive investment in the crisis-wracked Southeast Asian country has closely intertwined the two economies.

With $21 billion in Japanese investment, Indonesia ranks first among Asian countries as a target for Japan’s foreign direct investment--ahead even of China, with its far greater population and rapid growth rates, according to Japanese Finance Ministry statistics.

Japanese banks also have about $22 billion in outstanding loans to Indonesia. As more of them turn bad due to the region’s economic crisis, that adds to the already worrisome portfolio of nonperforming loans of Japanese banks.

The risks for Japan were reflected in an announcement Friday by Moody’s, the U.S. bond-rating firm, that it is downgrading Mitsubishi Motors Corp.’s long-term debt rating to Baa2. That is just two notches above the junk level, where purchase of bonds is considered speculative rather than of investment grade.

A key reason for the rating cut, Moody’s said, was that Mitsubishi Motors’ exposure to weakening Southeast Asian markets “is high relative to its total production.”

“The biggest impact on Japanese companies and banks is that their assets [in Indonesia] are becoming so much less valuable,” said Chang Yi, an analyst at Kokusai Securities Co. in Tokyo. “Whatever they have invested in the past is now worth less. . . . The second problem is that Japanese companies operating in Indonesia will face various difficulties. Especially, their earnings will be much smaller.”

Most Japanese bank loans to firms operating in Indonesia are in dollars or yen. But some are in rupiah, whose value has plummeted by some 80%, “so they will lose some money from these loans” even if the borrowers do not default, Chang added.

But even if a significant portion of Japan’s Indonesia loans turn bad, that sum pales compared to Japan’s domestic problems: The Japanese banking system is officially estimated to be burdened with about $220 billion in bad loans, and many private analysts say the real figure is at least twice that. Although Indonesia is the world’s fourth most populous country, it remains so poor that its economy is only a fraction of Japan’s.

“It’s obviously not good that there be instability and potential loss of investments” in Indonesia, said Tim Condon, a regional economic analyst at Morgan Stanley in Hong Kong. “But in terms of the size of Japan, it’s not very much money.

“I think Japan is certainly able to weather that. Indonesia isn’t large enough to make that [alone] an argument for Japan going into a recession.”

Still, a sudden spurt in newly troubled loans from overseas lending in Asia has the potential to shift the situation from one in which bad loans are gradually being written down to one in which the total problem is increasing again, analysts say.

That, in turn, could lead to tighter credit conditions in Japan, which could trigger more bankruptcies and a further slowing of the economy.

The greatest regional impact from Indonesia’s troubles is in Singapore, Condon said.

“There are strong links between Singapore and Indonesia, and trouble in Indonesia would have a destabilizing impact on Singapore,” he said. “That explains the stock market performance in Singapore the past few days.”

Stocks in Indonesia, Singapore, the Philippines and Hong Kong all closed trading Friday down 16% or more for the week. Singapore stocks fell 7.43% on Friday alone, hitting a seven-year low, with the benchmark Straits Times Industrial Index down 94.35 points to 1176.35.

Malaysia’s benchmark index fell 3.07% Friday, also to its lowest level in seven years. Hong Kong’s benchmark Hang Seng Index fell 359.89 points, or 3.89%, Friday to hit 8,894, its lowest close since May 1995. The benchmark index in Manila closed down 8.33% on Friday, its lowest since April 1993.

Tokyo stocks fell sharply Friday morning on fears of fallout from Indonesia’s problems and the general Asian crisis, but partially rebounded in the afternoon. The benchmark Nikkei Index closed down 24.08 points at 14,995.10.

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The regionwide stock market declines reflect how in the current Asian crisis, troubles in one country have reverberated through the region and back again in a vicious downward spiral that seems to have no end in sight.

“All the economies of Southeast Asia and their currencies had been overvalued compared to their actual economic power. There was a huge gap, and now the gilt is finally coming off,” said Junji Ota, an economist at Okasan Research Institute in Tokyo.

“It is hard to say what the appropriate level is,” Ota added. “But I think Asian stock and currency markets will keep going down, or at least remain at this level for awhile, because speculators and investors are now giving up on Asia and all the capital is flowing out of Asia and into the U.S. market.”

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

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Of Rupiah, Ringgit and Won

Since the collapse of Thailand’s currency, the baht, on July 2, every Asian currency except China’s has declined against the U.S. dollar--most of them dramatically. The falloff has impoverished the region. Currency values against the dollar:

INDONESIA (RUPIAH) Friday: 8,150

THAILAND (BAHT) Friday: 52.75

SOUTH KOREA (WON) Friday: 1,810

PHILIPPINES (PESO) Friday: 44.15

MALAYSIA (RINGGIT) Friday: Friday 4.71

JAPAN (YEN) Friday: 132.09

Source: Bloomberg News

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* MAIN STORIES: A1