The country's effort to attract investment could reinvigorate economies throughout Asia.
From banks and finance houses near Tokyo's Imperial Palace to trading rooms on Wall Street and economic think tanks in Washington, excitement is running high because Japan's economy finally is awakening from a decade-long slumber. The experts' focus is on the Bank of Japan, the nation's central bank, which has been taking actions to dramatically expand the supply of lendable funds in Japan's economy. In the last week, the BoJ-- the Japanese equivalent of the U.S. Federal Reserve--has driven short-term interest rates to zero as a way to push investors into longer-term Japanese government bonds.
In the veiled world of Japanese government policies, the BoJ may also have begun to buy government bonds as a way of creating new money--printing yen, in effect--to spread liquidity through Japan's economy.
"The central bank has unmistakably acted to substantially increase money supply in the financial market," says Takashi Kiuchi, research director for the Long-Term Credit Bank of Japan.
What's happening in Japan today is a "very complex series of operations" that will rebuild bank balance sheets and get them to start lending again. "If the BoJ actions work, you will see a flood of money come into the stock market, and the economy and financial system will begin to emerge from the worst crisis of a major economy since the 1930s," says Kenneth Courtis, the Tokyo-based chief economist of Deutsche Bank.
Consequences for the world economy will be profound.
Japan, at $4 trillion in annual output of goods and services, is the second-largest economy in the world.
It comprises 70% of the total economic activity of Asia. For years its economic doldrums, which began with a credit crunch affecting real estate and banking in 1990, have held back Asia's recovery and cast a shadow over the global economy.
Repeated infusions of public-works spending--building roads and bridges all over Japan--have not revived the economy. But what the Bank of Japan is doing today is different, explains Adam Posen of Washington's
Institute for International Economics, a think tank.
Posen is also author of the 1998 book "Restoring Japan's Economic Growth." "Together with the banks' cleanup of bad loans, today's actions will give Japan sustainable good growth for the next three years at least," Posen says. Long-overdue changes are taking place. Banks are writing off bad loans--Dai-Ichi Kangyo wrote off $9 billion and Fuji Bank $5.7 billion in bad loans last Thursday. The top 15 banks are opening their books to qualify for government assistance, which will allow them to begin lending again.
Japan's companies are restructuring, more slowly than U.S. companies did in the 1980s, but restructuring nonetheless. Truck maker Hino Motors is reducing its work force by 400; Chiyoda, a leading developer of oil and gas properties, is restructuring with the help of the Kellogg, Brown & Root division of Dallas-based Halliburton.
"Japan's major exporting companies, including its auto makers, continue to introduce new products. They haven't lost the art of product development," says Charles Clough, an investment strategist for Merrill Lynch who has been studying Japan for signs of recovery.
Japan has opened up to foreign investment as never before. General Electric Capital has bought Toyo Insurance and other firms. Financial services firms Merrill Lynch, American International Group and Citigroup have made major investments in Japan in the last year.
"My American friends are investing because they see a once-in-a-lifetime opportunity in Japan. I agree with that," says Tachi Kiuchi, executive vice president of Mitsubishi Electric, who spent many years managing his company's operations in the U.S. Japan is even reducing its protectionism, says Clyde Prestowitz, head of Washington's Economic Strategy Institute, who has been a longtime critic of Japan's industrial policies. For example, Delphi Automotive Systems, the newly spun-off parts division of General Motors, sold $1 billion worth of auto parts to Japanese auto makers last year, Prestowitz notes.
What's the upshot of all this change? The yen will weaken as Japan's money supply expands. It is already doing so, moving from 108 to 123 to the dollar in the last month. That could hurt other Asian countries because a cheap yen makes Japan's goods competitive.
But the currency disadvantage will be offset by the fact that Japan's banks will once again be able to lend in Asia.
And growth in Japan's economy--by more than 3% a year, economist Posen estimates--will take the burden off the U.S. as the only expanding economy. Asian growth will help U.S. exporters. Investment will flow to Japan's stock market. In fact, stocks of small companies traded on Japan's over-the-counter market, which is dubbed the "Jasdaq," could rise sharply.
The Jasdaq is up 22% so far this year because small companies have been able to get bank loans and increase their business, reports David Linehan, Asia specialist at New York's U.S. Trust, an investment company. Linehan cites small companies such as Don Quijote, a discount retailer, and companies in information technology, a field bound to take off as Japan restructures its old-fashioned, relatively computer-free business systems.
Nidec, a maker of disk-drive spindles, is an example of Japan's new information companies. Others cited by mutual fund managers in the U.S. and abroad include Data Communications System, a firm started by former employees of phone giant Nippon Telegraph & Telephone, and Mimasu Semiconductor, a processor of silicon wafers.
Small companies, information technology, that's the formula that helped the U.S. economy to prosper in the last decade. Japan is now going to do likewise. A great productive economy--and a formidable competitor--is awakening. No wonder excitement is running high.
* James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.
Copyright 1999 Los Angeles Times. All Rights Reserved
July 13 2002