Tokyo stock slide could slow Japanese investment in U.S.

April 09, 1992|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- The free fall of prices on the Tokyo Stock Exchange could slow Japanese investment in the United States but is less likely to prompt a flight of Japanese capital already here, according to experts.

Still, any major disruption of Japanese investment could have implications for the U.S. economy, particularly in its fragile post-recession state. A major flight of capital probably would unsettle the markets and drive up interest rates, which could hamper the economic recovery that apparently has begun.

"It is going to have a negative impact on the U.S. economy at a time when we are slowly pulling out of recession," Bryan Johnson, a policy analyst who has studied Japanese investment for the Heritage Foundation. "I think this is something that could prolong the recovery."

The Japanese had $83.5 billion directly invested in U.S. companies and owned $67.6 billion in U.S. stocks and bonds at the end of 1990, according to the U.S. Bureau of Economic Analysis. That excluded substantial holdings in U.S. Treasury securities and bank deposits.

Japan's direct investment -- defined as holdings of 10 percent or more of the stock of a U.S. company -- has been growing by an average of $13 billion annually in recent years.

The decline could have a bright side, however, putting upward pressure on the yen and helping U.S. industry by making Japanese imports more expensive for U.S. consumers and U.S. exports to Japan cheaper.

A central fear is that Japanese investors might act together, compounding the impact of any retreat.

"I think very often the big banks and big security firms will act as though they are colluding without actually doing so," said Edward M. Graham, senior fellow at the independent Institute for International Economics.

"No Japanese institution wants to be totally out of line with the rest. If you get one jumping out, that could be seen as a signal for others to jump out."

Econometric studies by the institute have directly linked a nation's wealth to activity overseas: A reduction in wealth is likely to lead to a reduction in foreign investment.

"Just on that basis alone, you have to take it seriously," Mr. Graham said. "If wealth drops, which the drop on the Nikkei surely heralds, that would reduce the propensity to invest abroad."

Hiroshi Ito of the Japan Center for International Finance said for many Japanese corporations the fiscal year ends in April, May or June, and this could be a time of decision.

"I think if the current situation were to continue, Japanese companies will not make their investments abroad," Mr. Ito said. "Maybe the rates of increase will be reduced, but I don't think they will reduce the amount they have already invested."

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