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Date: Sun, 14 Jun 1998 15:55:28 -0700
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From: Sid Shniad <[EMAIL PROTECTED]>
Subject: Japanese recession rocks world economy
The Globe and Mail Saturday, June 13, 1998
JAPAN'S STUMBLE FELT AROUND GLOBE
Recession humbles former economic superpower
By Barrie Mckenna
WASHINGTON -- It's been a slow awakening, but any Canadian trying to buy
U.S. dollars lately has felt the force of a financial crisis that until now
may have
seemed a distant echo.
Trampled by a stampede of global investors to the United States, the Canadian
loonie sank this week to 67.97 cents (U.S.), the lowest in its 140-year
history.
And you can blame Japan for everything.
Yesterday, Japanese officials confirmed what economists have been warning for
months: The world's second-largest economy and motor of Asia is mired in a
full-blown recession. Preliminary results show that Japan's economy shrank a
breathtaking 5.3 per cent in the first three months of this year. That,
combined
with a 1.4-per-cent contraction in the last three months of 1997, certifies
a grim
prognosis that will continue to send shudders around the globe.
That's why, when investors fleeing Japan look for a safe place to park their
money, the United States seems more attractive than Canada with its
dependence on commodities such as lumber and metals, and its low interest
rates.
A common misconception is that the Asian crisis, now nearly one year old,
originated in Thailand with the collapse of its currency.
The truth is that the problem began -- and ultimately, must end -- in
Japan. The
world's greatest lender nation is on its knees.
Its banking system is near collapse; its economy is shrinking for the first
time in
30 years, and the yen, already down nearly 45 per cent against the U.S. dollar
since mid-1995, is in a free fall.
How Japan wrestles with those problems will have a profound effect on Canada
and the rest of the world. If the current trend persists, economists warn of a
North American stock-market crash, an even weaker Canadian dollar in the
months ahead and an ever-rising tide of cheap Asian imports.
"Japan is the No. 1 strategic issue facing the world economy right now," said
Kenneth Courtis, a Canadian and chief economist at Deutsche Bank Group in
Tokyo. " . . . The locomotive of Asia is pulling backwards rather than
forwards
and that means that, in effect, Japan is exporting its deflation to its Asian
neighbours, and indeed, to the world economy."
Flash back to 1990. The Japanese economic juggernaut seemed unstoppable.
Japanese investors were bidding up prices for virtually everything around the
world -- for real estate, stocks and even Van Goghs. The Imperial Palace, a
few
hectares of Japanese gardens and thousand-year-old walls in central Tokyo, was
informally valued at more than the real-estate value of all of Canada and
roughly
the same as California.
But the inflation bubble soon burst. Real-estate prices tumbled, stocks
fell and
massive amounts of wealth disappeared in Japan in the early 1990s.
However, someone apparently neglected to tell Japanese bankers and policy
makers about the reversal. They continued as if nothing were amiss. Through
the mid-1990s, Japanese banks ignored their bad loans at home and made even
riskier ones elsewhere in Asia. This dangerously overheated economies such as
Thailand and Indonesia.
When those countries' currencies -- all tied to the U.S. dollar -- nose-dived,
creditors simply could not pay back the Japanese banks, and the game was over.
Now analysts are tallying up Japan's debts, not its assets. Bad loans held by
Japanese banks are estimated to be worth in excess of $1-trillion (U.S.).
That's
about twice the size of Canada's economy.
To make matters worse, the Japanese government embraced fiscal conservatism
just as the economy was finally showing some signs of life. Last year, Japan
raised its sales tax and passed a law to balance its budget by 2002. It was
dangerous medicine for an already feeble economy.
Now, in a delayed reaction to some of those miscues, the yen is also
collapsing.
"This is Japan catching up to the devaluation of some of the other Asian
currencies," said Avery Shenfeld, senior economist at CIBC Wood Gundy in
Toronto. "An ill-advised decision to tackle their deficit put them further
behind
than when they started."
Still, Japanese consumers and many corporations were quicker to grasp what
their government apparently did not. Abandoning the system of lifetime
employment, companies began to lay off workers and curb hiring. The jobless
rate has soared to a postwar high of 4.1 per cent. That's low by Canadian
standards, but the way Japan calculates its statistics probably understates
the
severity of the problem.
For many working Japanese, salaries and bonuses are now falling. This has
further shaken consumers.
In the meantime, the effects of Japanese Prime Minister Ryutaro Hashimoto's
earlier conservative financial policies, such as the higher sales tax,
continue to
hurt. And some of the sectors most in need of a shakeup -- banking and
construction -- have yet to address their problems. Dozens of companies, while
technically bankrupt, continue to operate because the banks won't let them
fail
for fear of causing layoffs and disclosing soured loans.
News that Japan is in a recession is no great surprise to anyone living on
Canada's West Coast. In British Columbia, where about a third of the economy
is tied to Asian exports, the effects have been particularly severe.
Economists
say the province is probably already in a recession of its own.
Over all, Canadian exports to Japan plunged 38 per cent in the first
quarter. The
Asian economic collapse has also dragged down prices for many of the region's
key exports. Japan and its Asian neighbours once consumed a disproportionately
high share of the world's basic commodities such as lumber, steel and oil.
That
has, in turn, depressed prices for those goods.
In the mid-1990s, Japan was the land of opportunity for companies like Douglas
Homes Ltd. of Vancouver. Japan had a severe housing shortage and some of the
wealthiest consumers in the world. In the good times, Douglas sold 200
prefabricated, Canadian-style homes a year in Japan. This year, the company
will do better than most B.C. home builders by selling slightly more than half
that number, relying on its good Japanese business partners and reputation for
quality products.
"It's not really the currency. It's consumer confidence," explained Scott
Ando,
the company's general manager. "People in Japan are scared to take the risk of
buying a new home because they are worried they might lose their job. There's
no job security any more."
How to get Japan back on track is the topic du jour among analysts, economists
and investors. For months, they have pleaded with the Japanese to recharge
their
stalled economy by slashing taxes, increasing government spending and freeing
up tightly regulated areas of its economy.
In mid-April, Mr. Hashimoto responded with a 16.5-trillion-yen stimulus
package ($174-billion Canadian). But parliamentary approval has bogged down
and the money won't actually start flowing until later this year.
"Fiscal measures taken to date are too small to turn the economy around,"
economists Jeffrey Young and Tomoko Fujii of Salomon Smith Barney in
Tokyo warned in a report this week.
The package sounds a lot and it is. But it won't be enough to stop Japan's
economy from shrinking as much as a full percentage point for the full year,
further depressing the yen, economists say. Deregulation is an even longer
haul.
Meanwhile, Japanese officials insist they can't prop up the yen without help
from the United States, which seems happy to let the U.S. dollar continue to
rise. Indeed, U.S. Treasury Secretary Robert Rubin is taking the tough-love
approach to Japan, insisting this week that the responsibility for the
latest jolt
from Asia rests squarely with the Japanese.
"The weakness of the yen reflects the economic conditions in Japan, and can
only be remedied by restoring economic strength in Japan," Mr. Rubin told a
Senate hearing in Washington on Thursday.
A Toronto-based money manager who specializes in Asia said he has virtually
written off Japan.
"I have been following Japan for 10 years now," he lamented. "It's essentially
been stagnant and they still have yet to face up to the real problems . . .
They
are probably the shortest-lived economic superpower in history."
--
Michael Perelman
Economics Department
California State University
Chico, CA 95929
Tel. 530-898-5321
E-Mail [EMAIL PROTECTED]
