Will Japan's $87 Billion Cash Injection Stop The Pain?

"It was an enormous coordination effort. There is no way we could have let confidence be destroyed."

--Eisuke Sakakibara

Deputy Director-General

Japanese Finance Ministry

Welcome to crisis management, Tokyo-style. Despite wails from stock traders and property investors, Japan's financial technocrats have spent three years squeezing out the speculative excesses of the 1980s. But when the regulators' purge began hitting blue-chip manufacturers and ordinary consumers, the bureaucrats had to do an about-face. On Aug. 28, after the Nikkei stock average fell below 15,000 for the first time since 1986, Prime Minister Kiichi Miyazawa unveiled an $87 billion plan to pull the economy out of its funk. The product of scrambling among Finance Ministry aides and political bigwigs, it's Japan's largest stimulus effort ever.

Miyazawa's economic fix (table), centered on massive public-works spending and aid for banks and the real estate market, should halt the country's economic tailspin. But whether it can quickly result in the 3.5%-a-year growth the government desires is another matter. With 70% of the stimulus plan not due to kick in until the fiscal year beginning next April, economist Geoffrey Barker at Baring Securities (Japan) Ltd., thinks the Japanese economy will grow a mere 1.5% in 1992.

To further fuel Miyazawa's efforts, the Bank of Japan may cut its 3 1/4% discount rate by another quarter-point this month. And although tax revenues are expected to be down $40 billion this year, Yuji Tsushima, chief fiscal-policy guru of the ruling Liberal-Democratic Party, thinks the Finance Ministry may have to slash corporate taxes. "As a last resort," he adds, the government may have to buy Tokyo Stock Exchange shares should the Nikkei plunge again.

Still, Japan's corporate malaise almost guarantees that a strong recovery is a ways off. Manufacturers' inventories are bulging as consumer spending--down 3.2% in June--shows no signs of a comeback. Even the biggest names are battening down. A few days after Miyazawa's announcement, Nissan Motor Co. disclosed that it would lose $160 million in the current fiscal year. As a result, it's slashing 4,000 jobs and cutting capital spending by 15%. And with semiconductors and consumer electronics lagging, Toshiba Corp. said on Sept. 1 that it will cut capital spending by 38%.

GOOD TIMING. The behind-the-scenes maneuvering that led to the $87 billion plan was Japanese politicking at its best. It all began on Aug. 10, the day the Nikkei broke 15,000. In the LDP's headquarters, politicos, who had been pressing bureaucrats for months for forceful action on the economy, were ready to blow a fuse. The stock market had barely closed before Tsushima, a former senior Finance official, jumped into his white, chauffeur-driven Toyota for a 30-minute heart-to-heart at Miyazawa's office.

Tsushima had already cooked up a big spending package for fall. He argued that with the prospect of bank and insurance company failures looming larger as the market cratered, the economy couldn't wait. "He trusted my judgment," says Tsushima of Miyazawa. "The time was right."

As soon as Tsushima departed, Miyazawa, a former Finance Minister who helped draft a $40 billion stimulus package in 1987, began phoning close contacts at his old ministry to demand action. The Postal Ministry, which is likely to funnel more of its savings-plan billions into the stock market, was also drawn in, as were other ministries. And sure enough, as the Nikkei slumped to 14,309 a few days later, Finance Minister Tsutomu Hata called on big investors to stop selling and revealed that the government wanted to help shore up sickly banks. That alone helped the Nikkei rebound 26% (chart). Then, Miyazawa disclosed the scope of the recovery plan.

If any sector of the economy stands to gain right away from the government's package, it's the battered banks, burdened by an estimated $240 billion in real-estate-related nonperforming loans. To help clear balance sheets of problem assets, the Finance Ministry and big banks are working to set up a company to buy and liquidate the billions in real estate now being held as collateral against loans that have gone sour. The government is likely to contribute to the effort, and bank sources say they themselves may raise as much as $24 billion.

With small companies griping that they can't obtain loans at any price, banks are already beginning to pare staffs, close branches, and reduce expenses as the political price of receiving official aid. Dai-Ichi Kangyo Bank Ltd., the world's biggest lender, on Sept. 1 said it would squeeze $800 million out of its computer budget and force top executives to take pay cuts of 5%. "We should blame ourselves for mismanagement," admits DKB Managing Director Hisao Kobayashi. "We don't believe that a divine wind will take care of everything."

As the Japanese economy struggles to regain its lost momentum, banks aren't going to be the only ones enduring a measure of pain. Still, the government's $87 billion program is a necessary first step. Even if the economy doesn't kick in as rapidly as some hope, chances are that Miyazawa's deft move will keep things from growing even worse.

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