Japan's Rising Anxiety

On the island of Kyushu in southern Japan, dozens of multijointed robots twirl, bend, and bow as they turn out Pulsars at Nissan Motor Co.'s latest high-tech assembly line. But with domestic auto sales in the pits, the robotic ballet is proceeding in slow motion. Opened in June, the plant is producing just 166 cars a day, or 25% of its capacity. Nissan fears it may take as long as a year before the plant is running at full speed.

It's not only the auto-building robots that are slowing to a crawl this summer. The shock wave of Tokyo's 31-month-long stock market collapse is spreading to the real economy, and hundreds of plants are suddenly suffering the same fate. As inventories mount, profits skid, and consumer and business spending stalls, bureaucrats are backpedaling on assertions that the economy would rebound by fall and achieve 3.5% growth for the fiscal year ending in March. "They thought they could manage a soft landing," says chief economist Peter Morgan of Merrill Lynch Japan. "That doesn't look possible."

Morgan is among a rising number of analysts who think the economy will grow only 1.1% this year (charts). Faced with such predictions, policymakers are acknowledging that they must move to head off even greater damage. On July 24, Prime Minister Kiichi Miyazawa announced his government would launch some $50 billion in public-works spending by mid-September, a month earlier than planned. And Bank of Japan Governor Yasushi Mieno cut the discount rate by half a percentage point, to 3.25%. Admits one central banker: "We didn't realize the depth of the pessimism."

PUNY GAINS. According to many economists, the bureaucrats still don't. Calling the moves overcautious, the critics note that Miyazawa's package actually amounts to $28 billion in new funds, with the remainder coming out of borrowings already allocated for other purposes. At best, estimates Masaru Takagi of Fuji Bank Ltd.'s research arm, the plan will add just 0.8% to economic growth over the coming year, hardly enough to pull Japan out of its slump. Many executives also contend that with inflation now a mere 2%, interest rates are too high. That's why analysts think the Japanese will soon be forced to boost public spending and slash the discount rate again.

The prospect of job losses may spur such action. Some companies are already cutting back on part-time work to reduce costs. With semiconductor makers' capital spending alone expected to fall 30% this year, analysts think even full-time workers may soon face layoffs. To avoid jeopardizing the sacred job security of salaried workers at major companies, says a senior Finance Ministry aide, "we'll take any measures." Many high-ranking businessmen want such measures now. Nissan Chairman Yutaka Kume, for one, is calling for an income-tax cut to spur consumer spending. "Revitalizing the Japanese economy," agrees Toyota Motor Corp. President Shoichiro Toyoda, "is an absolute necessity."

BLUE FUNK. With Japan's annual trade surplus expected to mushroom to some $130 billion this year and next, as demand for imported goods languishes, the Bush Administration is also pressing Miyazawa to step on the gas to remove pressure from the world economy. But archconservative Finance bureaucrats continue to prefer a measured pace, standing steadfastly against tax cuts. With unemployment at 2.1% and employers still posting more jobs than there are applicants, policymakers fear too much stimulus will rekindle the inflation and financial excesses of the 1980s.

Still, the bureaucratic mood is changing. A few days before the latest economic maneuvers, Mieno had for the first time voiced concerns over the financial system's well-being. He also acknowledged that the economy was weaker than he had expected. Rattled by Germany's discount-rate hike and by the lowest Japanese money-growth rate in 15 years, the Nikkei stock average responded to Mieno's expressions of anxiety by plunging to a six-year low of 15,541. Miyazawa's and Mieno's actions have done nothing to turn stocks around. With machine-tool orders down 45% in 1992 and big electronics makers' profits now expected to fall more than 20% in the current fiscal year, traders and executives alike are in a blue funk. "The Japanese government's economic policy is not very good," complains Japan Federation of Employers' Associations President Takeshi Nagano. "That's having a big psychological impact."

To be sure, Japan will stay highly competitive for a long while. Over the past five years, manufacturers have poured nearly $3 trillion into factories that are the envy of the world. To protect those investments now that the economy is stalling, notes senior economist Kenneth S. Courtis of Deutsche Bank Capital Markets (Asia) Ltd., "companies are slimming down to their rock-hard competitive core." But in so doing, they may only be accelerating the country's slide. The robots of Kyushu may be moving to an even slower beat before the bureaucrats finally decide to act.

Before it's here, it's on the Bloomberg Terminal.