TIME: Almanac 1995

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<text id=92TT0621> <title> Mar. 23, 1992: Recession, Japanese-Style </title> <history> TIME--The Weekly Newsmagazine--1992 Mar. 23, 1992 Clinton vs. Tsongas </history> <article> <source>Time Magazine</source> <hdr> BUSINESS, Page 44 Recession, Japanese-Style </hdr><body> Capital is getting more expensive, workers are balking at having to work so hard, and the Golden Age seems to be over By Barry Hillenbrand/Tokyo For months the Japanese searched fitfully for the right word to describe what was happening. At the Bank of Japan, the nation's central bank, officials spoke of "an adjustment phase." Prime Minister Kiichi Miyazawa admitted only to "a difficult situation." The Economic Planning Agency, the government's record keeper, referred delicately to a "retreat." Then two weeks ago, for the first time since 1987, the agency dropped its boilerplate reference to the "expansion" from its closely watched Monthly Economic Report, and the word game was over. Japan's economy, the world's second largest, conceded the experts, was in recession. That admission confirmed the bad news businessmen had been reading in their spreadsheets for several months. "In 1991 one market after another turned bad," says Yoshihiko Wakumoto, senior vice president of Toshiba Corp., which now admits that its pretax profits for fiscal 1991, ending March 31, may be down a whopping 42%. In April, when many Japanese companies announce their results for 1991 fiscal year, most will report declining profits. Blue chips like Sony, NEC and Matsushita have all experienced drops of over 40% in pretax profits. Japan's security houses, hit by declining commissions from a falling stock market, will announce even more dramatic drops. Nomura Securities, once Japan's most profitable company, is talking about an 80% decline in profits. Auto manufacturers, banks, airlines, steel companies, department stores--all are in a slump. Technically, what is happening to the Japanese economy does not meet American criteria for a recession, normally defined as at least two consecutive quarters of negative growth. While economic growth has slowed in Japan, it has not ceased. Government economists are predicting a 3.5% increase in GNP for 1992. Outside experts are not so sanguine. But nearly everyone agrees that GNP growth in Japan is unlikely to slip into negative numbers, as it did last year in the U.S. and Britain. "There's no question that we are in a recession," pronounces Kunio Miyamoto, chief economist of the Sumitomo-Life Research Institute. "But it is a recession, Japanese-style." That's a recession with full employment and declining, though still positive, growth, which many Japanese are hoping will run its course in a relatively short time. But a number of economists and businessmen don't think this one will be that simple. The current "recession," it is feared, may mark the beginning of a fundamental shift in the Japanese economy. During the last half of the 1980s, Japanese companies based much of their expansion around the world on the wildly inflated values of the Tokyo Stock Exchange and Japan's frenzied real estate market. Now both those markets have collapsed. And with long-term interest rates up from 5% to 7%, Japanese companies are less able to sell vast quantities of high-quality goods at razor-thin profit margins. Added to this are pressures from shareholders for a greater return on investments, from Japan's trading partners for restraints on its aggressive trade practices, and from its own citizens for a reduction in their working hours so they can enjoy the fruits of 40 years of relentless toil. As in the U.S., the recession in Japan springs from the go-go days of the 1980s. From January 1985 to December 1989, the Nikkei stock average shot up from 13,136 to 38,915, fattening Japanese stock portfolios with tremendous paper profits. At the same time, the real estate market was so hot that corporate land holdings were typically more valuable than the factories built on them. And since 59% of all Japanese own their own homes, the great surges in real estate values made nearly everyone feel wealthier. Many companies and some individuals began to borrow vast sums of capital for expansion, using their stock or real estate portfolios as collateral. Cheap cash also allowed Japanese companies to fund costly research into technologies like semiconductors and liquid crystal displays that weren't likely to bring returns for many years to come. From 1986 to 1991, $3 trillion was spent on new plant and equipment, including robotics and other labor-saving manufacturing devices. An additional $600 billion went for research and development. And $167 billion more went abroad to build new manufacturing facilities and purchase such assets as Rockefeller Center, Columbia Pictures and automobile plants in the U.S. and England. But by 1989 there was concern in Japan that this real estate-inflated bubble was in danger of bursting. A consensus emerged that it had to be deflated. The Bank of Japan began pushing up interest rates. The Ministry of Finance published regulations to discourage real estate speculation. The bubble began to deflate. And the Tokyo Stock Exchange went into a swoon which is yet to end. Currently flirting with the 20,000 level, the Nikkei average is down 47% from its peak. Real estates prices fell as much as 30% in Tokyo and 40% in Osaka. But deflating the bubble has caused serious disruptions in the financial-services, insurance and real estate sectors of the economy. In turn, Japan's star industries, autos and electronics, have suffered setbacks. Among the reverberations: -- Banks were left holding $454 billion in outstanding real estate loans backed by significantly shrunken collateral. While some of the stronger institutions are propping up potential failures at the government's request, many fear that Japan may see its first bank failures since the 1930s. -- Domestic auto sales, which climbed from 3 million to 5 million between 1985 and 1990, have slumped back to below 5 million. Nissan, for example, lost 4.2% in unit sales during February, and is reducing working hours and generally cutting costs. -- Even the electronics industry, for many a symbol of Japan's economic might, is suffering. Though income from its foreign subsidiaries, including its newly buoyant movie and record business in America, will allow giant Sony to declare a worldwide profit of $1.2 billion, its core business at home is expected to lose $156 million for fiscal 1991, its first loss ever. As a result, Sony plans to lop off $2.15 billion from its capital-spending budget and $1.8 billion from R. and D. -- Unlike many of their American counterparts, Japanese firms typically do not respond to economic setbacks with massive layoffs. But not everyone escapes. Foreign workers holding jobs in the construction and service industries are being laid off in large numbers. Many companies are also shedding part-time workers, mostly women. In January overtime hours in major companies dropped 17.8%, the steepest decline since 1975. While the official unemployment rate still hovers just above the 2% mark, it is likely to move beyond 2.5%. But even a Japanese-style recession, with little unemployment and modest growth, can be uncomfortable, especially for businessmen accustomed to easy profits. Bankruptcies are increasing, corporate profits are forecast to drop 6.3% in 1992, after a 15.4% drop in 1991, and the future does not look good. The government is preparing a spending package designed to kick-start the economy out of its lethargy, though many doubt it will rev up all that easily. Says Kenichi Ohmae, managing director of the Tokyo office of McKinsey & Co. and the author of several best-selling business books: "This is the first time we have experienced an asset-based recession. Nobody knows how deep it is." Ohmae is one of a number of businessmen and economists in Japan calling for significant restructuring of the economy. First, he wants to see a complete revision of Japan's land policy that would give protected farmland over to industrial and residential use. Another advocate of reform, Akio Morita, chairman of Sony, outlined in January a series of proposals for what he called a "new management philosophy" for Japanese business. In essence, he urged that companies be less aggressive in capturing markets, especially abroad. At home, he wrote, they should build a more humane and fair society by, among other things, lowering working hours, paying higher salaries to workers and increasing dividend payments to shareholders. In order to pay for all this, Morita concluded, companies may have to raise prices and abandon the market-share strategy. Morita's proposals derive from his concern about the antagonism generated by Japan's aggressive trade policies abroad. He believes that kinder, fairer, gentler corporations would contribute to the harmony of the world as well as make the lives of Japanese workers better. Other economists and businessmen believe Japanese corporations must change because of the forces unleashed by the collapse of the stock and real estate markets. Another argument for change is that investors are no longer willing to wait for long-term payouts on their investments. "Those days are over," argued Richard Koo, a senior economist at the Nomura Research Institute, in an article in the economic weekly magazine Toyo Keizai. From now on, he predicted, companies will have to increase prices or withdraw from unprofitable lines of business if they are to meet investors' expectations. Will companies accede to these demands for change and begin to pay higher dividends? They may have no alternative if they wish to raise capital on the Tokyo market. Large Japanese insurance companies, the institutional investors that help move the Tokyo market, are increasingly free from regulatory control by the government, which directed their investments toward supporting national development. Certainly the drive to improve the quality of life inside Japan has gained significant momentum in Japan. "That's all people are talking about these days," says Ohmae. To pay for those improvements companies will have to change their behavior by raising salaries and cutting back on working hours. Theoretically this will reduce competitiveness, says Ohmae, but "we have always come up with better ways to compete when challenged in the past." Don't count Japanese industry out, warns Ohmae, even if wages and dividends are increased. A number of respected economists believe the Japanese economy will make a recovery without having to undergo significant structural changes. The billions spent on capital investments in the 1980s mean that Japan's factories are loaded down with modern equipment ready to produce efficiently. While consumers are spending cautiously, they are sitting on more than $7.69 trillion worth of savings. Japan's 20% savings rate runs far ahead of the U.S.'s (3.2%) and even Germany's (14.1%). Wage increases, which will be negotiated next month in many industries, will not be large (so much for Morita's pleading), but household income will be on the rise since inflation is running at less than 2%. "Real income for many people is safe, and that's a great help," says Kermit Schoenholtz, director of economic research at Salomon Brothers in Tokyo. Historically, Japan has shown a knack for adjusting to external economic crises. But now Japan faces a more complex crisis, emanating from within. The nation must restructure its economy to accommodate not only shareholders' demands for a higher return on their investments but also the wishes of workers eager to enjoy the prosperity they have created. To do this, the country must reform deeply ingrained attitudes toward work, leisure and the world outside. Such changes could threaten the very foundations of Japan's economic success. As such, they are not easily undertaken--even by a nation as successfully competitive as Japan. </body></article> </text>