Japan's recession could infect the U.S. Tokyo must take steps to correct the economy

THE OUTLOOK

July 05, 1998|By J. Leffall

JAPAN'S ECONOMY, long in the doldrums, has officially slumped into recession, posting two consecutive quarters of economic contraction -- its first since 1992. The yen has been battered against the dollar, severely shrinking Japanese spending. Its banks have mountains of bad debt on their books. Industrial production is falling. In the past, recession in Japan eventually led to recession in America. As economic woes in Japan continue, what will be the implications for the U.S. and global economy? Will there be a domino effect? What would keep a recession from spreading?

Gil Knight

Fund manager, Allied Investment Advisors, Baltimore

The problem with Japan is that it's suffering a bout of deflation. In Japan they are using a system that is not allowing for recovery and they've not addressed the basic concerns like the bad loans some of their banks made. What makes our life difficult is the continuing problems they are facing without any correction to them. As the yen keeps declining, other countries go down, too. It's a cultural barrier as well.

Japan's economy has been known in the past to be very closed to outsiders and also very thrifty. Thus there has been an outflow of currency in Japan instead of a currency stimulation from within. What will help them is if they start circulating, start buying. Likewise, if the Japanese deal with their loan problems, global confidence will be restored, maybe not overnight, but people will feel a lot better in dealing with Japanese banks.

But they need to open up the books, so to speak, and let the world see how bad the damage really is and be honest about their situation. Then their economy will begin to straighten out. We need to remember that Japan is by no means broke. It's just that its money isn't circulating in a healthy and positive way.

Sung Won Sohn

Senior vice president and chief economist, Norwest Corp., Minneapolis, Minn.

It's not just a Japan problem, it's an Asian problem. I worry that as the Asian situation gets worse, that it will last more than a year and eventually Hong Kong, China and other nations will have to devalue their currency as a result of Japan's problem. It could spread to Latin America as well, and then we may see a global debacle and the U.S. may not come out unscathed.

The big problem is Japan is involved in what we call "crony capitalism," which is allocating loans based on political alliances. They need to stimulate from within but if they continue to procrastinate, the world will suffer.

James Glassman

Chase Manhattan Securities, New York

Well, it already has been a domino effect and the problems there have added to woes in the rest of the region. The only reason they'll prevent an outright depression is the civic projects they're working on, but that's only a temporary solution.

On the other side of the spectrum, our trade deficit is rising. That's means anybody who exports is seeing a big drop in sales to Japan and other points of interest in Asia.

As the year moves on we will start to feel a small bite, I think. The irony, though, is that Americans are benefiting from the drop-off in Asia. Computers, oil and mortgage rates are all down. But there is a dark side to this -- when we are buying more of their goods and they are not buying any of our goods.

Nairman Behravesh

Chief international economist, Standard & Poor's, Lexington, Mass.

There is a very high risk for the crisis to taper west, and in a way there already has been a domino effect. The weakness of the yen is hurting countries like Korea and other emerging Asian economies. There is a 25 percent probability that this will get a lot worse. Worst-case scenario: You have a depression throughout Asia. Already our trade deficit is the biggest it has been in a long time, and it's hurting exports.

The nuts and bolts of fixing the crisis in Asia lay in Japan, The Japanese need to get back on their feet, primarily through tax cuts and more spending. For instance, they have a lot of infrastructure products and that's what kind of kept us going during our Depression. But they need to do more than that. When you have something like this, people get despondent and don't want to spend.

The government needs to do more spending even if it's on bridges and tunnels and even if that goes nowhere, boosting the demand side of the economy, which is as of late lacking.

It's my belief that America can weather the storm but time will tell. There is only so much the United States can do.

Japan is going to have to step up to the plate.

Pub Date: 7/05/98

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