Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!americast.com!usa-post Newsgroups: usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Tue, Jul 28 1992 Date: Tue, 28 Jul 92 04:32:03 EDT Message-ID: 07-28 0000 BONUS: Japanese economy slows down USA TODAY Update July 28, 1992 Source: USA TODAY:Gannett National Information Network As the economy struggles, worried lawmakers facing re-election meet late into the night. They debate what to do: Boost government spending in a bid to get the economy going, or sit back and see what happens. Confronted with something they've never seen before - an economy that seems to have a solid foundation but just can't right itself - the lawmakers feel helpless. They decide to wait, watch and pray for a rebound. WHAT HAS THE CENTRAL BANK DONE? It has slashed interest rates, hoping to cushion the economy's fall by making it easier for businesses and consumers to borrow and spend, and by fattening the profits of beleaguered banks. But financial markets shrug. Critics say the rate cut is too little, too late, and panicky investors bail out of stocks. This isn't a scene out of Washington, although it could have been. Instead, it's a scene played out over the past few days in a country that once looked untouchable. WHAT COUNTRY IS BEING TALKED ABOUT? This all occurred in - believe it or not - Japan. Friday night, Japanese lawmakers, including Prime Minister Kiichi Miyazawa, met to debate an emergency economic aid package. Even though the Japanese government continues to run budget surpluses and arguably could afford a rescue package, lawmakers couldn't agree on a plan and postponed further discussion until September. WHAT HAS THE CENTRAL BANK DONE? Monday, the Bank of Japan - that nation's Federal Reserve - cut its discount rate to 3.25% from 3.75%. That rate, which the BOJ charges commercial banks for short-term loans and serves as a base for all sorts of short-term loans in Japan, has been cut five times in 13 months. The Tokyo Stock Exchange wasn't impressed by the BOJ's move. The 225-share Nikkei average fell 124.45 points Monday, or 0.8%, to 15,373.34. The Nikkei has plunged about 60% from its December 1989 peak, and 35% in 1992. That 60% drop would slash a $10,000 investment to $4,000. HOW BAD ARE THINGS GETTING? Behind this stunning string of events - and others like them the past two years - is a Japanese economy that can't seem to say "Go" anymore. "It's not as if the Japanese economy is going to hell in a handbasket, but it certainly has lost much of its forward momentum," says John Lilley, Tokyo-based economist for consultants MMS International. WHAT ARE THE SIGNS OF DISTRESS? The most conspicuous is the stock market's decline. Also unsettling: National tax revenue fell 0.5% last year, the first drop in 16 years. Much of the decline was due to a drop in corporate profits. Nissan's profits plunged 47% last fiscal year. Toyota's were down 22%, while Honda's fell 21%. And money supply growth - the heartbeat of any economy - is at a record low rate, because the nation is going through its own painful credit crunch. WHAT DO THE OVERALL NUMBERS LOOK LIKE? Instead of cruising along at average annual growth rates of 4%, 5%, 6% or higher, as was common in the '70s and '80s, Japan's economy is barely moving. Growth this year will be 2% at best, experts say. That's a recession by Japanese standards and the worst year since 1974, when gross domestic product shrank in the wake of the 1973 Arab oil embargo. Growth has still been strong enough to keep Japan's amazingly low unemployment rate near 2%. And it's still vibrant enough to help keep many Japanese companies up among the elite of global corporations. WHICH GROUPS ARE BEING HURT? Japanese investors, who've seen their wealth shrink as their stock market has plunged, are no longer the biggest buyers of U.S. government securities. That title belongs to investors from Taiwan. Japanese businesses are no longer the ones grabbing headlines by investing in U.S. companies or snapping up expensive U.S. real estate. That sort of attention goes to companies such as British Air, which just bought a 21% stake in USAir. WHAT ABOUT THE BANKS? They are no longer viewed with awe from abroad as untouchable towers of strength. The Nikkei's plunge has tarnished their image because, unlike U.S. banks, Japanese banks are big investors in stocks. For instance, Sanwa Bank and Tokai Bank each own 5% of Toyota's outstanding shares. Mitsui Trust owns 5% of Sony. So the stock market's plunge has meant a sharp drop in the value of many banks' assets. At the end of 1991, Japanese banks were sitting on nearly $200 billion in unrealized stock gains. Those paper profits total less than $80 billion today. WHY HAS THE JAPANESE ECONOMY FALLEN? The forces that have brought the once sky-high Japanese economy to this less lofty position include the bursting of Japan's incredible speculative boom in the '80s. Then, land prices soared to almost unimaginable heights - $300,000 for a square meter of commercial real estate in downtown Tokyo, for example. The Nikkei charged upward. The yen, in part because the USA wanted a weaker dollar, rose 50% from early 1985 through the end of 1990. DID THE BANK OF JAPAN HELP TO WEAKEN THE ECONOMY? The BOJ knew that bubble needed to be pricked to prevent an even worse explosion later. Beginning May 31, 1989, it began raising short-term interest rates and continued to do so until July 1990. Japan's economy started to slow. WHAT ROLE DID THE USA'S RECESSION PLAY? The USA's appetite for Japanese goods didn't disappear, but it did diminish. Exports to the USA leveled off, choking Japan's economic growth. Also hurting Japanese growth was the growing strength of exporters such as Mexico, South Korea and Taiwan. Adding to the uncertainty for Japan's economy was Iraq's August 1990 invasion of Kuwait. Japan, dependent on imported oil, saw its stock market get rocked. Confidence in its market was further eroded over the following two years by repeated brokerage scandals that entwined top government leaders. WHAT CAN JAPAN EXPECT NOW? There are a few experts who say Japan will emerge from this slump in a year or so with an economy that is stronger than ever. Kenneth Courtis, Deutsche Bank's economist in Tokyo, argues that Japanese firms' huge investments in factories and equipment in the past 10 years will give them an advantage over foreign rivals. DOES EVERYONE SEE SUCH A ROSY FUTURE: Many others, such as Bill Emmott, author of the 1989 book The Sun Also Sets, The Limits to Japan's Economic Power, say Japan's economy is in bad shape. Emmott says the damage done to banks by the stock market plunge means the credit crunch may last for another year or longer. Douglas Ostrom, chief economist at the Japan Economic Institute in Washington, projects a Japanese economy still meekly poking along in 1993 near its current 2% growth rate and then not accelerating much from there in the following two or three years. Bonus Editor: Ed Kelleher. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM