What went wrong with Japan Inc.? World's economic bright spot becomes a part of the gloom

April 05, 1992|By John E. Woodruff | John E. Woodruff,Tokyo Bureau

Tokyo -- Even the businessmen who tear up the world's electronics and automobile markets don't always get it right.

Last summer and fall, economists here say, the men who head some of this country's top corporations got it so wrong that they sharply steepened and deepened the Japanese economic downturn now sending ripples through the world economy.

Now, some economists say, Japan's economy may not recover until 1994.

"When a balloon breaks, you can't make it start expanding again just by blowing more air into it," Tetsuo Tsukimura, chief economist for Smith Barney, Harris Upham Japan, said last week. "It's going to take time."

A year ago at this time, Japan looked like the one big industrial economy that would weather the global downdraft relatively unscathed. As recently as January, Prime Minister Kiichi Miyazawa could still plausibly promise President Bush that Japan would be "the engine" to pull the world economy out of its gloom.

Today, Japan is part of the gloom.

Hope that Japan might pull the rest of the world out of the economic doldrums has given way to debate about how deep and how long Japan's own slowdown will be. And there are worries that Japan may become a drag on the recoveries of other industrial nations, including the United States.

What happened between April 1991 and April 1992?

The slowdown's underlying cause has been a need for a respite from the giddy buying and investing spree Japan's big banks, corporations and investors went on in the easy-money euphoria of the second half of the 1980s.

But many private economists say serious errors by the silver-haired business and government stewards of "Japan, Inc." made the nose dive sharper and deeper -- and probably longer -- than it needed to be.

The key error was a too-little, too-late approach in cutting back, Mr. Tsukimura said.

"For most of the past year, the assumption has been that corporate investments, research spending and employment could continue to grow, little affected by the slowdown in consumer demand," Mr. Tsukimura said. "Consumption was flat all year, but producers didn't cut back inventories of finished products nearly soon enough.

"Now we are seeing the disastrous results of those assumptions."

The results have come with a rush.

For more than a month now, Japan's corporate giants have been forecasting profits that profits this year will be 40 percent to 70 percent lower than last year's.

Unlike U.S. automakers and other recession-bound U.S. companies, the Japanese companies have not projected their losses. But some economists say some big companies, especially some big banks, might face a losing year or two before a turnaround.

A year ago, Tokyo stocks were already down 35 percent from their "bubble economy" peak of the late 1980s. Now they are down 30 percent more, nearly half of that decline coming in the last four weeks.

Tuesday, the government announced a long-awaited $30 billion pump-priming package. The stock market dropped sharply again instead of rising. Wednesday, the Bank of Japan followed up by cutting its key discount rate three-fourths of a percentage point. The market dropped sharply again.

This month the country is waiting for calculations that will show whether the three months that ended Tuesday were the second consecutive quarter of what economists call "negative growth." That would meet the classic definition of a full-blown recession. Japan has had that experience once -- 19 years ago, in 1973 -- since World War II.

The government still predicts a turnaround late this summer. Mr. Tsukimura and many other private economists disagree.

Producers' inventories may not be under control before the end of this calendar year, Mr. Tsukimura said. The mounting problems of Japan's banking system probably will further extend the slowdown, at least into 1994, he said.

"The first signs of real recovery may be seen in the mid-1990s," he said. The problems of Japan's banks, in particular, reach well beyond Japan.

The country's 11 biggest banks, which pumped huge sums of easy capital into the world economy throughout the 1980s, have held their overseas lending stagnant for more than a year.

Instead, those banks have been busy borrowing heavily themselves, Linda Daquil, senior analyst for UBS Phillips & Drew, said last week.

Scrambling to meet the new capital requirements the Bank for International Settlements will impose by March 1993, Japan's 11 biggest banks have added 40 percent in the last 12 months to the unsecured loans they have taken out from other corporate lenders, mainly insurance companies.

They now owe more than $69 billion in subordinated loans, Ms. Daquil estimated.

Still, the banks will be hard put to speed up lending soon -- in Japan or overseas -- even if the Bank of Japan cuts its discount rate below 3.75 percent.

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