Fraying Nerves In Tokyoby
In the game of capitalism, Japan's powerful Ministry of Finance has always played by its own rules. While other industrial powers largely opened their economies to the realities of global finance and trade, Japan's markets have remained in the MOF's iron grip. And in the name of protecting the financial sector, the MOF has artificially pumped up stock prices, giving banks and companies alike a free ride instead of forcing them into badly needed restructuring.
Now, the super yen is increasing pressure on the MOF to change its ways (table, page 50). While Japan has much experience in managing yen shock, the currency these days is looking a lot stronger than the ministry. Asian central banks keep dumping their export-earned dollars and buying more yen--partly to pay back billions' worth of yen-denominated debt and partly to strengthen their own currencies by bulking up yen reserves. Speculators, too, continue to sell dollars, betting that the yen's rise is inexorable.
So the MOF is hearing more and louder complaints at home. Small domestic businesses are getting beaten up by cheaper imports. Even savvy exporters have seen their price competitiveness erode. Meanwhile, banks and insurers are getting battered by a 17% stock-market drop this year, which aggravates their bad debt woes. And Washington may use the currency crisis to step up its demands for freer trade.
The pressure is beginning to tell on Tokyo, where the once close-knit bureaucracy is starting to splinter and backbite. Fed up with the foot-dragging, International Trade & Industry Minister Ryutaro Hashimoto, a former Finance Minister, lashed out in early April and urged the MOF to "urgently get down to work on comprehensive measures" to halt the yen and revitalize the stock market. Only then did Finance Minister Masayoshi Takemura agree publicly with MITI's call for a cut in the discount rate, now at 1.75%. But so far, Bank of Japan Governor Yasuo Matsushita has balked. Although the MOF and Bank of Japan have traditionally worked hand in glove, a senior MOF official confirms that the central bank's glacial response is creating divisions among the two corps of powerful bureaucrats.
The only action expected soon is the Apr. 14 unveiling of a boilerplate stimulus package to crank up domestic demand: speeding up public-works spending, adding $12 billion to the budget, extending planned tax cuts, and eliminating stock-transaction taxes to lift share prices. And the central bank will probably lower the discount rate by 50 or more basis points soon afterwards.
PRICE CUTS. These measures hardly spell relief for Corporate Japan. With the yen around 83 to the buck, 200 major companies will see their expected 20% rise in pretax earnings in 1995 get hammered down to 5.1%, according to a survey by the newspaper Nihon Keizai Shimbun. Besides earning less abroad, they're losing market share at home to U.S. companies making the most of the weak dollar. Chrysler Corp. has announced plans to cut the Japanese price of its Jeep Cherokee by 10%, to $39,630. Improved price competitiveness has already helped computer makers such as Compaq, IBM, and Apple double their collective market share in 1994, to around 30% of Japan's $9 billion-plus PC market.
Wholesale distributors and small retailers, which collectively represent about 30% of total employment, are getting hit even harder. As prices fall for imported goods such as beef, vegetables, and luxury items, companies that stock only domestic items can't compete. "This could mean a wave of employment restructuring," warns J.P. Morgan Securities Inc. economist Jesper Koll.
No wonder the MOF is under the gun. Some observers even say the ministry worsened the present crisis by inflating financial wealth in 1992, instead of forcing banks and companies into greater efficiency. When the bubble economy burst in the early 1990s, the ministry pumped some $200 billion of postal and pension savings funds into the stock market. It worked for a while: The Nikkei stock average climbed 50% even while Japan was in its worst postwar recession.
But beginning this year, foreign investors pulled out of the market, taking profits on the huge stock and yen appreciation. More investors fled after the Kobe quake on Jan. 17. Now, the Nikkei has fallen back to levels that batter the equity portfolios of Japanese banks and life insurers. And analysts believe the market could fall far below its current 16,000 level. The upshot is that the MOF "has lost a lot of prestige," says an executive with Yamaichi Securities Co., one of Japan's Big Four brokerages.
For Japanese business, the MOF's botched rescue just postponed the inevitable. If the market had been allowed to tank two years ago, argues David Asher, an MOF critic and consultant to U.S. House of Representatives Republicans on Japan matters, companies would have faced restructuring and bankruptcies. But the yen was around 120 then. Now, with yen pressure even stronger than in 1992, companies and financial institutions face a more painful adjustment. "By freezing the market at higher levels, MOF allowed companies to maintain their irrational behavior," says Asher.
Without radical moves to attack the trade gap, currency relief seems nowhere in sight. Japan's stubborn surplus has barely budged, even though its goods have lost competitiveness. If anything, exporters are redoubling efforts to hang on to market share overseas. Furthermore, Japanese banks and companies continue to unload dollar-denominated assets, from U.S. Treasury bills to MCA Inc., to shore up their finances. Since nonperforming loans and real estate won't evaporate, financial institutions are likely to keep bringing capital back home. That will boost the yen further still.
The strong yen has cut Japan's economic growth outlook to around 1% for 1995--and some think Japan may even fall back into recession. Another quick fix like the stock market bailout could just weaken the MOF's credibility further. With Washington talking tough again, whispers of a more open Japanese economy are becoming shouts in Tokyo. Since its latest intervention scheme uas such a flop, the MOF may now have no choice but to listen.
THE MINISTRY OF FINANCE UNDER PRESSURE
As Japan's key regulator and policy heavyweight, the Ministry of Finance is at the center of the yen crisis. The heat is on Masayoshi Takemura's Ministry from many sources--some with conflicting demands.
-- Small domestic businesses want to keep trade barriers intact. Their size and inefficiency prevent them from operating in an open market.
-- Big international businesses and exporters want a weaker yen. They lose pricing power and market share with every additional uptick in the currency.
-- Banks and insurers want stock prices to rise. They need portfolio gains to offset the bad loans and troubled real estate investments on their books.
-- Washington wants Japan to open markets and stimulate its economy to reduce the trade surplus. Negotiators say this is the root cause of Japan's currency problems.