Japan Yanks On The Economic Reins

Tokyo opts for another year of slow growth-and an export surge

To an American trade hawk, it may seem Japan's Ministry of Finance was up to its old tricks. Responding to warnings from U.S. Trade Representative Charlene Barshefsky, Finance Minister Hiroshi Mitsuzuka in early June said that Japan's surging trade surplus is "a passing phenomenon." Just two days later, Tokyo revealed that Japan's current-account surplus for April nearly doubled, to $9.8 billion, from the year before. Most economists expect the surplus to keep ballooning for the rest of the year. Meanwhile, Tokyo is suppressing demand for imports by hiking taxes and cutting spending, slowing the economy just as it is gathering speed.

What are the fiscal mandarins thinking? Some skeptics fear the Ministry of Finance policies will throw the economy back into recession and renew trade friction with the U.S. as well. But the MOF is gambling it can win at a subtler, longer-term game. Before letting the economy gallop forward and embracing the "Big Bang" deregulation of its financial markets, the MOF would like another year of slow growth of 2% or even less. The extra time, and revenue from the tax hikes, would enable the MOF to start repairing the budget, which was ravaged by $531 billion in road repavings, rural irrigation projects, and other wasteful measures aimed at keeping the economy afloat the past six years.

The austerity policies also would relieve pressure on the Bank of Japan to raise its record-low interest rates. That's important because a sharp hike could devastate the balance sheets of Japan's banks at a time when they need to write off some $200 billion in bad debts. "The government's attitude is that a year of dull growth is a price worth paying," says Richard Jerram, economist at ING Barings Ltd. in Tokyo.

As usual, the cost of all this will be borne chiefly by Japanese consumers and foreign exporters. In April, Japan's consumption tax jumped from 3% to 5%. Tokyo also announced it will roll back annual income-tax rebates and hike fees for the socialized medical system. Altogether, these moves will raise some $80 billion this year. "The nation at large is in a retrenchment mood," says Kazuo Nukazawa, senior managing director of Keidanren, the Japan Federation of Economic Organizations.

FRESH STRAINS. Sluggish domestic spending will translate into weaker demand for imports, which already have been hit by the weaker yen. Despite the currency's 13% jump since May 1, to 111 to the dollar, it's still 30% off its level of two years ago. Among the hardest hit will be Asian nations such as Thailand and Indonesia, which depend heavily on exports to Japan.

Fresh strains in Japan-U.S. trade relations are another likely result. Soon after the trade figures were released, U.S. Treasury Secretary Lawrence H. Summers pleaded for Tokyo to boost domestic demand and cut its surplus. Yet while U.S. companies exporting to Japan, such as Compaq Computer Corp. and Ford Motor Co., find the going tougher, the resurgent export powerhouses of Japan are on a tear in the U.S.

Take autos. In May, foreign car sales in Japan slumped by 27% from a year earlier, to a mere 22,919 units. Cars made in the U.S. by the Big Three as well as by the American factories of Honda, Mitsubishi, and Toyota did especially poorly. At the same time, Japan's share of North America's passenger-car market hit 31.3% in the first four months of 1997, 1.2 points higher than last year's record level. Japanese auto exports to the U.S. should jump at least 20% this year. It's a similar story in electronics. After nearly a decade-long decline, during which production shifted to Southeast Asia, exports of Japanese-made televisions have risen for the past seven months, surging by 33%, to 358,000 units, in April alone.

Despite the disturbing signs, Tokyo is betting it can stave off a backlash. The question is whether Japanese companies can resist the temptation to export as much as possible. Some 40% of Toyota Motor Corp.'s $6.1 billion in recurring profits last year was due to currency gains. "I hope [companies such as] Toyota and Honda will keep things in moderation," says Mitsubishi Corp. President Minoru Makihara.

The MOF figures chances of strife will be reduced by the more aggressive stance of American manufacturers, who have increased their competitiveness and offshore presence since the first Japanese onslaught of the 1980s. And so far, Washington's protests have been restrained, partly out of fear that Japan's recovery remains fragile. If Washington brings pressure now to strengthen the yen, Japan's economy could well slip back into recession. But Tokyo is betting that if it curbs the budget gap and sets the stage for serious deregulation, foreign trade partners and Japanese citizens will agree that the extra year of pain was worth it.

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