Japan's Bubble Economy

April 15, 1992

While the Tokyo stock market meanders at its lowest levels in six years, Wall Street punctured the 3300-mark for the first time yesterday. Does this mean that the Japanese economy is in worse shape than the American? Don't believe it. The U.S. recession is for real, reflecting structural defects that signal declining influence worldwide; the Japanese recession is primarily a healthy, deliberate, government-induced puncturing of a speculative bubble.

Indeed, the Japanese recession in many ways is the kind of recovery the U.S. would dearly like to have. Japan's trade surplus is spurting again, its growth rate by year's end may be above 3 percent, unemployment and inflation are under 2 percent, the government budget is slightly in the black and private investment is still running at 22 percent of gross domestic product (twice the U.S. rate.)

So why has the Nikkei average plunged? Because Japan's biggest investors -- its banks and giant corporations -- are in the process of liquidating wildly unwise investments at home and abroad in skyscrapers, hotels, golf courses, shopping malls, art works and businesses now plunging into bankruptcy. Banks, which own 10 percent of all the equity shares traded, are especially hard-put to meet reserve requirements because they are stuck with assets of vastly shrunken value. Corporations that used to buy one another's stock are also unloading to protect their capital base.

For Americans, who only a few years ago were worrying that Japan Inc. was buying their country, the bubble bursting across the Pacific now raises quite opposite concerns. There is reason to worry that Japanese investment capital, which did so much to finance the boom-boom Reagan era, is no longer so easily obtainable. Capital is now flowing back to Japan at an annual global rate of $36 billion after years in which Japan's annual outflow reached $100 billion.

These figures highlight a crucial difference between the two economies. Japan, as the world's largest creditor country, can afford to let its bubble burst; the United States, now the world's biggest debtor, would be hard-pressed to handle a similar situation. Instead, Americans can be thankful that Japan's strong capital position reduces the drag effect its recession is having on all the industrial democracies. Wall Street can move to new highs not only because U.S. interest rates are low but because the Japanese financial squeeze can be largely contained internally.

What both countries should learn from this situation is that they are not in a zero sum game. What is bad for Japan is not good for the United States, and vice versa. Rather, their mutual interests converge more and more, protectionist rhetoric notwithstanding. Leaders in both nations should realize that the well-being and stability of much of the world will depend on their cooperation.

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