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                                                                                BUSINESS, Page 44

Recession, Japanese-Style


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.