TIME: Almanac 1995

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<text id=93TT0762> <title> Dec. 13, 1993: Japan:How The Miracle Finally Ended </title> <history> TIME--The Weekly Newsmagazine--1993 Dec. 13, 1993 The Big Three:Chrysler, Ford, and GM </history> <article> <source>Time Magazine</source> <hdr> THE ECONOMY, Page 34 Japan:How The Miracle Finally Ended </hdr> <body> As the U.S. recovery builds momentum, the once mighty Japanese economy remains stuck in its deepest slump since World War II. When the volatile Nikkei stock index plunged 3.9% last Monday, many shell-shocked Tokyo investors feared that the entire economy was heading toward the abyss. "We saw the edge of hell," one shaken broker said. The Nikkei recouped the one-day loss only after Prime Minister Morihiro Hosokawa made a panicky promise to jump-start the economy. But the market's 17% drop since August provides another piece of striking evidence that Japan's postwar miracle of sustained growth has come to an end. The recession marks the collapse of the very policies that enabled Japan Inc. to bestride the globe in the 1980s. Emboldened by the surge of exports of cars and electronic goods and the availability of cheap capital, Japanese firms built new factories at a dizzying pace and snapped up foreign gems like Hollywood studios. Meanwhile, speculators pushed Japanese land and securities prices to astonishing heights. But as the 1990s began, a worldwide recession and rising challenges to Japanese exports burst the speculative bubble and sent the economy spiraling downward. When it closed at 17,459.35 last week, the Nikkei index stood at less than half the peak it reached in 1989. "The Japanese are in a period of intense structural adjustment, which they have not yet come to grips with," says Robert Hormats, vice-chairman of Goldman Sachs International. Among other things, the country's leaders must cope with a maddeningly paradoxical problem: an overstrong currency at a time of a weak economy. The yen remains at near-record levels because Japan's trade surplus with the rest of the world creates a powerful demand for the currency to buy the goods, and thereby raises its value. The yen now trades at 109 to the U.S. dollar, making it more than twice as strong as a decade ago. The currency's strength has made Japanese goods prohibitively expensive in many countries and has led Japanese firms to open plants overseas to hold down prices. Those moves, in turn, have triggered another problem: domestic job losses in a country that is accustomed to virtually full employment. Japan's official jobless rate is now 2.7%, up from 2.1% in 1992. According to the Sanwa Research Institute, Japan stands to lose 1.3 million jobs by the end of the decade if companies continue to accelerate the rate at which they build foreign factories. The recession is forcing profound and painful changes in many of Japan's most cherished business practices. After four straight years of shrinking profits, Japanese companies have begun to shred the social contract that guarantees workers lifetime employment. Virtually every major firm from Toyota to Toshiba has announced cutbacks by attrition; and while big employers dare not say so in public, many are considering outright layoffs. Some are resorting to so-called voluntary retirement schemes that can quickly become more forced than voluntary. The target of such moves: Japan's army of 2.35 million idle workers, or 3.6% of the labor force, who need do little more than stare out windows under assurances of permanent employment. While the job cutbacks have lightened corporate payrolls, they have worsened the slump by keeping shoppers out of stores. Household spending dipped 1.7% in October for the fifth consecutive monthly decline and the worst showing in 12 years. "We planned to take a summer vacation somewhere, but we decided against it because the future seemed so uncertain," says Namiko Bannai, whose husband is a computer engineer for a major electronics firm that has twice made him work overtime without extra pay in recent months. "When my husband did not get his overtime pay, we had to dig into our savings to make the payment on our housing loan." With consumers keeping their wallets and purses shut, Japanese economists expect the country's gross domestic product to shrink in fiscal 1993, which ends next March, for the first time in 19 years. Jobs are not all that firms have been slashing: executives are also cutting back on investments that once helped Japan flood the world with innovative products. The government expects Japanese companies to reduce capital outlays 3.5% in fiscal 1993, even as manufacturers chop research and development spending fully 20%. While such penny-pinching may conserve cash in the short run, it could further erode Japan's competitive power. "For more than 30 years, we never had any risk when we invested in new plants," says Akio Mikuni, president of Mikuni & Co., which rates corporate securities. "We just expanded capacity at a steady rate. To do that, however, you need a reliable export market. But now that game is over." If Japan hopes to keep foreign markets open to its exports, it will have to make significant concessions. A measure of the force of change at work is the once unthinkable decision to allow rice imports, which Hosokawa has quietly approved over the protests of politically powerful farmers. Pressure for the move came from negotiators seeking to wrap up talks under the General Agreement on Tariffs and Trade. Does all this mean the sun is finally setting on Japan Inc.'s economic empire? Don't count on it, say many experts. "Clearly there are difficulties," says Alan Tonelson, research director of the Economic Strategy Institute in Washington. "But this is primarily a period when some of the financial excesses of the late 1980s are being shaken out. The result is going to be a Japanese manufacturing sector that will be leaner and meaner than before." If that sounds familiar, it is because U.S. firms have been retrenching and reorganizing in recent years to become more competitive with the Japanese. Now it is Japan's turn to play catch up. By John Greenwald. Reported by Edward W. Desmond/Tokyo and J.F.O. McAllister/Washington </body> </article> </text>