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Japan Inc. in the red
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March 13, 1998: 4:19 p.m. ET
As Asia's powerhouse putters along, many lose yen to invest; recession ahead?
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NEW YORK (CNNfn) - Suicides lead Sumo wrestling on the Nippon nightly news. Corporate bankruptcies are through the roof. And the double-digit growth spurt that fueled Japan's post-war rise to economic superstardom has gone AWOL.
So can you really blame some experts for lamenting that the Sun seems to be the only thing left rising in this troubled land?
For the first time in over two decades, Japan Inc., the arbiter of Asia's economic fortunes for so many years, seems headed towards a recession.
Sobering economic data released Friday by Japan's Economic Planning Agency showed a 2 percent contraction in Japan's economy for October to December, from the previous quarter. The numbers immediately prompted a rare government concession that its original projection for 1 percent growth this fiscal year - which ends March 31 - had been premature.
In fact, officials now warn, Japan's economy may actually shrink 0.4 or 0.5 percent. Should the prediction pan out, it would mark Japan's first slide into recession since fiscal 1974 to 1975, when the economy shriveled 0.7 percent.
A raft of bankruptcies
As if that weren't enough bad news for one day, a leading credit research firm reported Friday that a record 17,300 debt-saddled Japanese firms would go bankrupt in the 1997/98 fiscal year. Tokyo Shoko Research, according to reports, said total corporate Japanese debt had reached 13.5 trillion yen, or $104 billion, a third straight annual record
Bankruptcy debt in February alone reportedly soared 41 percent from the comparable period a year ago, while corporate bankruptcy shot up 29.4 percent, to 1,586.
"The corporate business situation is getting harsher by the day," a contrite researcher was quoted as saying.
That Japan should be in such a bind is hardly shocking to anyone who has followed the vagaries of the Asian crisis in recent months. Despite sporadic promises from the government to take strident measures to invigorate Japan's enervated economy, the percentage of disposable income consumers actually spent dipped to a record low in January.
The government, meanwhile, has taken what skeptics see as a standoffish policy, preferring to pour 13 trillion yen, or more than $100 billion, in bailout aid into weak banks, rather than simply close them down.
For investors, the upshot is a paradox: wobbly though it may be, Japan remains the world's second-largest economy, far ahead of its closest European rival - Germany.
"If you were going to say where is there more value, I'd say there's probably more value in Japan, but you just need a lot more Maalox to withstand all the volatility while you're going through this period," said Sandy Batten, a senior international economist with Citibank Global Asset Management, which runs a Tokyo office.
Investing is 'a little nervy'
Batten expressed the slightly unorthodox view that Japan's economy would grow slightly in calendar 1998, once the effects of a recent income tax cut begin to kick in and consumer spending picks up. Asked what he thought of Japan's equity market, Batten said he thought it was "a little nervy right now."
But he added that as the government owns up to its problems and accelerates fiscal spending, as it has begun to do, Japan will surmount its difficulties.
"As sloppy as it is now, it's going to be a whole lot better than a year ago," Batten predicted. He added: "I'm not saying that the Japanese economy is going to be the rosebud of the G7 [group of industrialized nations], but I think that the markets right now are a little myopic."
But Paul Fraker, a Japan portfolio manager with Brown Brothers Harriman, takes exception to this assessment, arguing that Japan has already had its chance to put its house in order - and botched it.
"Japan has backtracked pretty significantly from taking a radical surgery approach to the bad debts problem," he said. He traces the government's policy backdown to November and December, when the Japanese markets plunged, triggering panic across the country. After the fall, Tokyo embarked on a recapitalization of banks to enable them to be able to continue lending money.
"They basically made a choice that they would rather muddle through than make any change in the near future," Fraker said.
Clyde Prestowitz Jr, the president of the Washington-based Economic Strategy Institute, agrees.
"The Japanese have not yet taken the steps to clean up their financial industries, to stimulate their economy," he said. "The steps they are taking are not sufficient. They're not closing down banks, they're trying to maintain the old convoy system."
Prestowitz says the Japanese response, on the consumer level, has been to take money out of banks and stash it under their mattresses. He also insists that the Japanese government had the money to solve its problems but had chosen to waffle on reform instead.
Opportunity awaits for the choosy
In fact, to buffer the blow to the economy from contraction, some Japanese politicians are likely to propose an extra budget totaling $77.5 billion in the new fiscal year, which begins April 1.
That said, mutual fund investors with long experience in Japan assert that opportunities beckon to savvy investors.
"I'm looking at essentially alternative forms of financing, the non-bank companies, outsourcing companies, and small banks that are doing quite well," said David Ishibashi, portfolio manager with Salomon Smith Barney. "But if you're in a fund that only wants to look at companies with large-capitalization value, then I guess you're screwed."
Ishibashi also cited such corporate titans as Sony, Honda and Toyota as evidence of Japan's enduring status in the global arena. "Do you see Sony doing badly?" he asked. "Will Toyota have difficulty selling cars?"
The trick for investors, he said, is triage.
"There's a division between good companies and bad companies in Japan," he said, "and you'll see a continued polarization between stocks, and the good investor will be able to choose."
--By staff writer Douglas Herbert
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