TIME: Almanac 1993/TIME Almanac 1993.iso/time/040290/0402206.000

Text File | 1992-08-28 | 12.0 KB | 239 lines

                                                                                BUSINESS, Page 50

Pop! Goes the Bubble


Japan gropes for its confidence as the yen falters and the stock
market plunges

By BARBARA RUDOLPH -- Reported by Gisela Bolte/Washington, Barry
Hillenbrand and Seiichi Kanise/Tokyo


    Japan: land of the rising yen, unstoppable economic growth
and perpetual bullishness. That was the image that emerged in
the 1980s, as Japan's financial juggernaut rolled forward with
seldom a pause or a setback. The most striking symbol was
Tokyo's stock market, which consistently scaled heights that
seemed unattainable by any global standard. Property values
rose astronomically, yet inflation was virtually nonexistent.
The money machine kept churning, as if powered by some magic
force, difficult to fathom and nearly invulnerable to financial
stresses and strains in the rest of the world.

    Suddenly Japan is caught in a powerful downdraft of
pessimism. A vexing combination of tightening financial
conditions, trade tension with the U.S. and political weakness
at the top has sent Tokyo's financial markets into a funk. The
slide is threatening to choke the country's economic growth and
sap the ebullient confidence that has filled Japanese investors
and businessmen in recent years. "The pendulum has once again
swung in Japan," says Richard Koo, a senior economist at the
Nomura Research Institute. "It's now over to the doom-and-gloom
side, when objectively speaking, Japanese companies remain the
strongest in the world."

    The most stunning measure of Japan's mood swing is the Tokyo
market, where the Nikkei average closed at 30,372 last week,
down 6.9% for the week and 22% from the all-time high it
reached last Dec. 29. In a fit of near panic last Thursday, the
market plunged 6% in just one morning session -- equivalent to
a 162-point drop in the Dow Jones average -- before recovering
later in the day to post an overall 3% loss. "We knew it had
to come sooner or later. Many of us just stood there blankly,"
said a floor dealer. Another market watcher described it as a
"bottomless swamp." The market edged upward on Friday as
bargain hunters poured in, but a new era of wariness had
clearly arrived. THE MARKET THAT WAS DREAMING A DREAM, blared
a headline in Nihon Keizai Shimbun, a financial daily.

    So far, the bad case of nerves has been confined mostly to
Tokyo, but the anxiety could prove contagious; in the
interconnected global economy, a downturn in Japan would tend
to drag down other countries as well. On Wall Street, the Dow
Jones average fell 37 points last week, to close at 2704.28,
reflecting concern that bearish Japanese investors could pull
back on their U.S. holdings. The Japanese Finance Minister,
Ryutaro Hashimoto, declared on Friday that he was "extremely
concerned" about the drop of the Tokyo market and the yen, which
has fallen 7% against the dollar since mid-February. At week's
end Hashimoto met in Los Angeles with his American counterpart,
Treasury Secretary Nicholas Brady, to seek support in
stabilizing the Japanese currency.

    The weak yen has been a prime culprit in Japan's trouble,
raising the threat of inflation and putting upward pressure on
interest rates. The yen has sagged largely because of the
quickening outflow of Japan's immense cash hoard to other
countries, where Japanese investors have found investments more
lucrative or stable than at home. Says Nomura's Koo: "We got
into this mess because Japanese investors were always moving
money abroad." Example: Ito-Yokado, a Japanese supermarket
chain, agreed last week to pay $400 million for a 75% stake in
Southland Corp., the Dallas-based operator of the 7-Eleven
chain of convenience stores. At the same time, Japanese
investors have developed a case of "Europhoria" about
opportunities on the Continent, thanks in part to the sudden
rise of capitalism in Eastern Europe.

    Political instability at home has undermined the yen as
well. Prime Minister Toshiki Kaifu, 59, who is outside the Old
Guard of the ruling Liberal Democratic Party, lacks the
political support to serve as a bold leader. "That poor
gentleman," says one Japanese bureaucrat. "They are all trying
to sink him. He gets no help." While Kaifu is moderately
popular, he is not seen as someone who can dramatically improve
relations with the U.S. or boost Japan's influence in the
world. Says a disappointed financier: "Japan has not emerged as
the superpower that it was expected to be."

    In many respects, the erosion of the yen is driven by
emotion rather than reality, since Japan's economy is still
growing at a robust rate of about 4.5%. "It's really
psychology, running in just the opposite direction of the
underlying economic forces," says C. Fred Bergsten, director
of Washington's Institute for International Economics. To prop
up the yen, the Bank of Japan first tried intervening in
foreign-exchange markets, spending $10 billion, or 17% of the
country's currency reserves, to buy yen and dump dollars. Since
that proved futile, the central bank last week boosted the key
discount rate by a full percentage point, to 5.25%. That is
modest enough by U.S. standards, but a huge increase from last
May's 2.5% rate.

    Besides seeking to buttress the yen, the Bank of Japan was
trying to prevent an outbreak of inflation. Consumer prices are
rising at a relatively modest 3% annual rate, but the official
index fails to provide an accurate measure of many worrisome
signs. Residential land prices in the booming city of Osaka
rose 56% last year. So far in 1990, hotel rates have risen 9%,
and the price of a bottle of Kirin beer is up 6.7%. Petroleum
prices also rose last year, no small matter for a country that
imports nearly all its oil.

    The Bank of Japan would have moved sooner to raise interest
rates and stave off inflation, but it was stymied by the
Ministry of Finance, which wanted to delay the increase in an
effort to prop up stock prices and sustain economic growth. The
battle between the central bank and the Finance Ministry was
unusually public and sparked widespread anxiety among
investors. "For the first time in memory, there was an open
dispute. That was very un-Japanese, and it caused a lot of
uncertainty," observes Robert Hormats, vice chairman of Goldman
Sachs International. By midweek the Finance Ministry agreed to
the rate increase. But not everyone cheered the end of easy
money. Says Hormats: "Once the Japanese established a tighter
monetary policy, it took the wind out of the stock market."

    Fighting inflation is a relatively new challenge for the
Bank of Japan. For most of the 1980s, inflation was a faint,
distant threat. Low oil prices kept increases at bay, even
while property values soared. The rampant speculation in land
prices, in fact, which made slivers of land in downtown Tokyo
worth a fortune, was a powerful engine for the stock market.
Investors could use their real estate holdings as collateral
for buying stocks on margin. Then they could turn around and
use their stocks as collateral to buy more real estate.

    Prices for Japanese stocks eventually reached levels that
seemed ludicrous by comparison with other markets. Even today,
Tokyo shares sell for an average of 45 times annual earnings,
in contrast to a multiple of 15 in the U.S. Despite the
difference, many investors believed Tokyo stocks would never
plunge from those levels because the market was perceived to
be much more carefully controlled and even manipulated by the
Japanese government and industry. A handful of securities firms
control most stock trading, the theory went, and they would be
able to prop up prices should any serious selling begin. On
Black Monday in 1987, such intervention helped keep Tokyo's
losses under 15%, in contrast to a 22.6% drop in the Dow, giving
credence to the notion that Japan was a special, blessed case.
In the final analysis, though, the Tokyo market appears as
vulnerable as any other to the laws of supply and demand. "It
was a classic bubble," says John Makin, director of fiscal
policy studies at the American Enterprise Institute in
Washington.

    What the Tokyo market's downturn proves is that Japan is no
longer isolated from financial forces outside its borders.
Japan's first spate of trouble came late last year when West
Germany raised its interest rates to battle inflation. The
Bundesbank acted out of concern about the high costs of
monetary union with East Germany, but the effects of its move
were soon felt in Tokyo as well as in every other financial
capital. Since Japan's government bonds vie with West German
securities for the funds of global investors, Japan was
eventually forced to increase its own interest rates to
compete.

    The increase in credit costs has prompted economists to
predict a slowdown for Japan's growth. While only a few predict
a recession, many economists believe high interest rates could
dampen consumer spending. High rates and the depressed stock
market could also discourage capital investment by Japanese
corporations. Virtually all equity financing planned by major
Japanese firms was suspended temporarily last week in an effort
to prevent bogging down the market. Companies ranging from
Sumitomo Metal Industries to Matsushita Electric Industrial
postponed major plans to raise funds.

    Another source of concern among the Japanese is the
increasing tension in negotiations aimed at closing the trade
imbalance between the U.S. and Japan. While Tokyo's global
merchandise trade surplus shrank from a peak of $96.4 billion
in 1987 to $77.1 billion in 1989, much of that decline came
from increased trade with European and Asian countries. Despite
Japan's increasing imports of American products, the U.S. trade
deficit with Japan has remained largely unchanged, stuck at the
current level, around $50 billion.

    Since most Japanese feel their country has made ample
attempts to open its marketplace to U.S. goods, the
increasingly noisy drumbeats from Washington have created fear
that the bilateral relationship is faltering. "There is a great
deal of concern about the outright hostility in Washington that
exists against Japan," says Sam Nakagama, a Manhattan
economist. "Americans don't seem to care about this, but it is
paramount in Japan." Trade negotiators reached an agreement
last week to allow Japanese universities and government agencies
to import U.S. supercomputers. But the two sides have made
little progress so far in related talks over satellites and
lumber products.

    Japan now stands at the beginning of a period in which it
must re-evaluate its financial position. The country is still
flush with cash, having posted a current-account surplus of $69
billion last year, but that is down from $87 billion two years
earlier. (One reason is the surge in Japanese travel, which
boosted the country's deficit in tourism spending from $3.7
billion in 1985 to nearly $20 billion last year.) Japanese
moneymen are not likely to start selling off their investments
all over the world, since those were made with long-term goals
in mind. But some of the boldness may go out of Japan's
acquisitiveness as the country adjusts to its new financial
conditions at home.

    In the meantime, the Tokyo market may be in for a few more
rounds of volatility. Most forecasters expect the market to
fall even further. No matter where the yen and the Nikkei
finally settle, the recent churning in Tokyo's financial
markets suggests that Japan is a less independent -- and
probably less dominant -- economic power than it had been
considered.

    That message was driven home last week, when the Tokyo stock
exchange was forced to acknowledge a loss of prestige as well
as profit. Because of falling share prices and the softening
yen, the exchange has yielded its huge lead as the most
valuable stock market in the world. As measured in terms of
total market capitalization, the Tokyo exchange is now worth
about $2.9 trillion. That means it has been chopped down to
Wall Street's size.