Japan recession unlikely to benefit U.S. economy Depressed demand could hurt exports

April 20, 1992|By John Woodruff and Thomas Easton | John Woodruff and Thomas Easton,Staff Writers

NEW YORK -- Phillips Foods Inc., the popular restaurant and seafood processing chain headquartered on Maryland's Eastern Shore, is at a trade show in Tokyo this week hoping to add canned soup and packaged fish to the 380,000 Chesapeake Bay crabs it has successfully sold to Japan in the past year.

But even as Japan's voracious appetite for crustaceans appears to be expanding 15 percent to 20 percent annually, David Osborn, chief executive of International Resources, a Columbia,

Md., producer of specialty chemicals used in plastics, has watched his company's sales to Japan decline 15 percent to 20 percent in the past six months following years of steady, double-digit growth.

The contrasting experience of the two companies comes as a recession in Japan threatens to curtail burgeoning U.S. exports and otherwise hamper an already weak economic recovery here. Next to Canada, Japan is the largest foreign buyer of U.S. products, responsible for about 14 percent of international sales in goods and significant amounts of services such as travel, transportation and royalties.

Although a struggling Japan might make for some happy faces along Detroit's auto assembly lines or in what's left of the U.S. steel and electronics industries, Americans are far better off in the short run if Japan's economic sun is rising and not sinking.

Depressed demand in Japan, for example, could also drain vitality from the rest of the world, thus curbing other markets for U.S. exports. And panicky sales of U.S. real estate and other assets by previously acquisitive Japanese corporations and tycoons could further undermine real estate prices and prompt a wave of additional defaults for U.S. banks.

Such sales have not occurred yet. But a two-year crash in Japanese share prices and an unprecedented surge of bankruptcies have prompted Japanese financial institutions to dramatically pull back on extending credit and investment abroad.

That might have little direct impact on the U.S. stock market. According to Goldman Sachs, only 6.5 percent of U.S. equities are owned by foreigners, and the Japanese own less than 1 percent.

But it could have a profound influence on the availability of credit, compromising the prosperity of U.S. companies and indirectly affecting their share prices. Edward Yardeni, chief economist at C. J. Lawrence, reckons Japan's international lending has been cut in half since 1989, when it peaked at almost $200 billion, and he predicts it could drop an additional 75 percent in the next year.

In the pivotal market for U.S. government debt, Japan has been transformed from a significant buyer in the 1980s to a seller in the 1990s, according to U.S. Treasury Department statistics.

Similar Japanese disenchantment is becoming evident in its investment in U.S. real estate and businesses. From numerous new manufacturing facilities to Rockefeller Center to two of the largest movie studios, Japanese companies had purchased vast holdings in the United States. Now most analysts in Japan don't foresee aggressive dumping of overseas assets that would drive down foreign real estate prices or stock markets. Instead, they expect a continuation of the patterns set as Japan's economy slowed over the past year:

* A sell-off of profitable overseas speculative assets to cover losses at home, whenever conditions in the local markets allow advantageous sales. Thus, in Hong Kong, virtually all Japanese-owned downtown buildings have been sold over the past year. All went at fat profits in Hong Kong's soaring property market. In the United States, where commercial real estate prices are depressed in most areas, Japanese owners have done far less selling, analysts here say.

* Selectively bailing out of properties that were bought in losing or misguided deals. A favorite example among analysts is the Pebble Beach golf course in California. Japanese investors reportedly paid $841 million in 1990 for the famed course and then failed to get permission to create an exclusive club, prompting a February resale to a Japanese bank consortium for $500 million. It was a debacle of legendary scope.

In the past, Japan's long-term approach to downturns has proved extraordinarily effective. For more than four decades of its seldom-interrupted postwar boom, its megacorporations have seemed to know just what to do about a slow economy:

* Concentrate even more on exports to unload excess finished inventory overseas, at bargain prices, if necessary. In the process, they often have ended up turning slumps into chances to grab bigger shares of foreign markets.

* Invest more, or at least sustain investment growth, to keep workers employed and to keep their research and development lead intact. Japan has thus often gained several strides, in both technology and productivity, on overseas competitors that couldn't match their investment pace.

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