Economic distress in the land of the $9 cup of coffee

The Economy

March 19, 2000|By WILLIAM PATALON III

Four years ago, returning from a reporting trip to China, two colleagues and I stopped off for several days in Tokyo, and saw first-hand the economic distress facing the Japanese people. On the way to a meeting -- at which we arrived early and killed time drinking $9 cups of coffee at a nearly empty restaurant -- the taxi driver lamented that things "just weren't the same" as they were during the 1980s, when Japan Inc. seemed destined to dominate the world.

In those days, the cabby recalled, he was busy every night, rushing businessmen to important meetings or taking couples out on the town. The Japanese worked hard, but were prosperous, and played hard, too. No more.

In the '80s, Japanese companies led every industry they and their government targeted: automobiles, copiers and consumer electronics. Their wares were better than ours, and were usually cheaper. Their stock market was a rocketship and the wealth from stocks spilled into real estate, shooting property prices skyward. The affluence of the Japanese was unrivaled, and they snapped up U.S. companies and such symbolically important properties as Rockefeller Center and the Pebble Beach golf course.

Of course, that hurt our pride, sparking anti-Japanese sentiment, though we feared the invincibility of the "Japanese Superman."

Even our stock market took trading cues from its counterpart in Japan, spawning the aphorism: "When Japan sneezes, Wall Street catches a cold."

But prosperity proved fleeting: Japan's bull market boiled into a bubble, a speculative mania for both stocks and real estate that ended as all bubbles do -- with a collapse. The Nikkei 225 index, which topped out just below the 39,000 mark in late December 1989, dropped by nearly half to 20,200 by the following October. It's played a seesaw game since, bottoming at 12,800 in October, running lately at 19,000, and never retracing its highs.

Getting Japan back on track is important: It's the world's second-largest economy, and is the keystone for Asia: If Japan continues to struggle, economists say, it could short-circuit that region's recovery from the nasty "Asian contagion" that swept the world in 1997 and 1998.

Japan's ailments "are bad news for the rest of Asia," says Steve H. Hanke, professor of applied economics at the Johns Hopkins University and chairman of Friedberg Mercantile Group Inc., a currency-trading house. "And it's much better if Europe, Japan and America are all experiencing similar growth." Unfortunately, Japan's economy is in much worse shape than it was four years ago, when the taxi driver shared his woes with us that night in Tokyo. Worse still, the turnaround may be years away.

While the U.S. economy has been racing along at a 4 percent clip, Japan's economy shrank a greater-than-expected 1.4 percent during the October-to-December quarter. That was the second straight quarter it declined, Japan's government reported last week.

"I think the situation is getting worse -- not better," says Peter Ennis, editor-in-chief of the Oriental Economist, a trade journal that focuses on relations between the United States and Japan. "Japan is where the U.S. was 15 years ago, right at the beginning of the Rust Belt crisis. But Japan is so much more reluctant to accept the societal implications of drastic change. That's going to elongate the process."

Japan's road to recovery is pock-marked with potholes.

For one thing, Japan is not an open economy, meaning there's less foreign competition there than we see here in the United States. That's partly why sticker prices for consumer goods -- or that cup of coffee -- are steep.

Then there's "lifetime employment," Corporate Japan's practice of never cutting workers.

Where U.S. firms boosted productivity by cutting workers and replacing them with technology, Japanese companies invest in technology -- but keep the workers, yielding only marginal productivity gains. Layoffs have commenced in Japan, though only in scattershot fashion.

Japan's fiscal and monetary policies during the 1990s have been a disaster, such experts as Hanke say. The central government has tried repeatedly to "prime the pump" with public works projects that some consider a waste. The government is spending more than it takes in, and its debt has soared: Moody's Investors Service predicts that debt will reach a worrisome 140 percent of gross domestic product this year, Hanke says. At the same time, the central bank has stubbornly kept the money supply too tight.

The country's financial system, too, remains a mess, according to Hanke, whose firm has "shorted" Japanese bank stocks -- a bet those shares will drop. Though Ennis, the trade-journal editor, says the banks have cleaned up their problems, Hanke is clearly confident that trouble lurks.

Ennis is confident that a "New Japan" -- leaner, stronger and more open -- will emerge from this decade-long malaise. Strong opposition parties -- which really don't exist -- will arise, spurring debate on such important issues as government, the economy, defense and U.S.-Japan relations.

Some of this change will be spurred by the Japanese, Ennis predicts. This group entered the work force as the decade opened, having attended the top universities with the promise -- and expectation -- of lifetime employment and success-assured careers.

Those promises have not been kept, and members of this group are rejecting tradition, striking out on their own, and creating the kinds of startups that entrepreneurs in their 20s and 30s are unveiling in the United States.

In a culture like Japan's, it will be years before Tokyo's cabbies see the bustle of boomtime Japan. But Ennis believes that it will happen.

"Japan is a great country," he says. "And great countries always recover."

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