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Tokyo Is Finally Grabbing The Economy By The Horns

International Business: JAPAN


This year has been a real bummer for Tokyo officialdom. A series of credit union collapses and Japan's first postwar bank failure have sent anxiety levels soaring. A new world competitiveness study by the Swiss International Institute of Management Development says Japan is falling behind the U.S., Singapore, and Hong Kong. And Japan's four-year economic slump has corporate leaders wailing for relief. "This downturn has gone on way too long," laments Toyota Motor Corp. Managing Director Fujio Cho.

While Japan's economic ills run deep, a surprising burst of economic and political activism is beginning to lift Tokyo's pervasive gloom. By any measure, it looks as if Japan is turning a corner. If policymakers' recent moves to restart and deregulate the economy gain momentum, a Japan that's increasingly linked to fast-growing Asian markets could even return to annual growth rates of 4%, some economists believe.

PARALYSIS FADES. The battle to rejuvenate the economy is being fought on three fronts. This summer's currency-market interventions by the Bank of Japan, the U.S. Federal Reserve, and the German Bundesbank have pushed the yen back to its lowest point in a year, prompting exporters to raise profit estimates. The Bank of Japan's half-point cut in its discount rate, to 0.5%, on Sept. 8, has helped lift the Nikkei stock average 22% from this year's low. And odds are that the government soon will unveil $100 billion in new spending.

There are also signs that Japan's damaging political paralysis may give way to assertive leadership. A shakeup within the pro-business Liberal Democratic Party, the biggest player in the three-party coalition government of Socialist Prime Minister Tomiichi Murayama, could lead the way. International Industry & Trade Minister Ryutaro Hashimoto (page 74), whose deft handling of the U.S.-Japan auto trade dispute won him celebrity status at home, is now considered a shoo-in to assume presidency of the LDP in a Sept. 22 leadership vote.

In general elections expected early in 1996, Hashimoto, 58, aims to return Japan's biggest party to uncontested power for the first time since 1993, when the LDP was ousted by renegade reformers. Hashimoto, a former Finance Minister, is expected to be sympathetic to corporate Japan's calls to use public money and tax breaks to bail out banks and halt the 60% slide in commercial-property prices since 1991. "The collapse of financial institutions has damaged confidence in the Japanese economy," he says. "What I have to do is restore the economy....I will use any weapon I have."

But even under the current government, moves already under way should keep Japan from falling back into a recession. With the dollar's value expected to rebound to 105 yen or higher, from 79 in April, the economy may expand 0.5% this year and 1.6% in 1996. To get Japan back to its long-term growth potential of 3% to 4% will require more aggressive steps, however. That's why recent policy changes suggest there is cause for hope.

REPLENISHING RESERVES. Take Japan's battered lenders, now saddled with an estimated $800 billion in bad debt due to the collapse of the bubble economy. The burden is standing in the way of an economic recovery by keeping banks from increasing lending for everything from cars to homes. But with short-term interest rates at historic lows, banks are now getting a once-in-a-lifetime chance to replenish depleted equity reserves by borrowing from the money market at close to zero interest to finance purchases of government bonds yielding 2.9%. On top of that, speedy cash infusions by the Ministry of Finance (MOF) and Bank of Japan have prevented widespread panic after runs by depositors at several big credit unions and the collapse of Hyogo Bank, a big regional lender near Osaka.

The scares probably have softened public resistance to the use of taxpayers' money for further bailouts and raised interest in replenishing Japan's $10 billion Deposit Insurance Corp., whose reserves have been wiped out by the recent banking failures. The MOF might also issue bonds to capitalize newly created "work-out" banks to assume the bad loans of weaker players. And it could set up something like the Resolution Trust Corp., the agency that bailed out U.S. thrifts. The Japanese version would assume and sell eff assets of Japan's housing-loan corporations, or jusen, whose problem credits total $60 billion.

The MOF's efforts to solve the banking problem are only one sign of economic reform. This year's import boom is also opening up the economy in historic fashion. Thanks to a wave of foreign products, Japan's current-account surplus plunged 15% in dollar terms in July. Indeed, most economists believe Hashimoto's goal of lowering Japan's trade surplus from 3% of gross domestic product now to as little as 1% by 2000 is achievable.

The import surge is turning Japan's inefficient retailing sector on its head and offering consumers real savings. And, surprisingly, it's waking up Japan's high-technology sector. Intense price competition from Compaq, Apple, and IBM have spurred Japanese rivals such as NEC Corp. to make similar moves, sparking a boom in personal computer sales. Lower prices for cellular phones have demand soaring, and a raft of new long-distance companies has shaved 50% off the average price of calls to the U.S. There is even talk of splitting Nippon Telegraph & Telephone Corp., the national phone company, into five independent units to spur competition.

Even more deregulation could take place. Some 40% of Japan's manufacturing output is micromanaged by 10,000-odd rules, many of which keep out foreign rivals and shield unproductive players. But even though Hashimoto believes "there is a lot more to do" to deregulate the economy, he may still be loath to throw open all the portals of Fortress Japan if it means the nation's 3.2% jobless rate will soar past 5%. Nonetheless, Hashimoto--or any other leader--will continue to face heavy pressure from Washington to deliver measurable improvements in Japan's trade surpluses. That's likely to keep a fire under Japan to boost domestic spending, deregulate, and address critical questions. Will the country's high-cost manufacturers and bloated labor force eventually leave it a spent industrial giant with diminished growth prospects? Or will Japan endure the short-term pain of radical corporate overhauls and higher unemployment to emerge revitalized at home and abroad for the long haul?

The betting is that policy-makers, invigorated by the economy's scary brush with bank failures and recession, are finally trying to lay the groundwork for revitalization. New political leadership could give that effort a tremendous assist--if Hashimoto chooses to rise to the challenge.

Getting the Motor Started

If officials push through the tough measures needed for revitalization, Japan could roar back. If not...


Japan Transformed

Deregulation moves ahead

Yen depreciates as current account shrinks

Exports rise as competitiveness is regained

Corporate investment revives

Resolved bank crisis strengthens financial system

Long-term annual growth 4.0%


Japan's Secular Decline

Halfhearted deregulation keeps yen high

Production continues to move offshore

Unemployment approaches Western levels

Corporate investment remains depressed

Bad-debt woes carry on into next century

Long-term annual growth 1.0%

DATA: DRI/MCGRAW-HILLBy Brian Bremner in Tokyo

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