U.S. economy will feel Japan’s pain Japan situation both relevant and disturbing to investors OPINION By Christopher Byron MSNBC CONTRIBUTOR March 12 — “If I were the head of the Bank of Japan, I’d charter every helicopter I could get my hands on, fill them with money, and dump the cash over downtown Tokyo, starting tonight. That economy has simply got to be reflated somehow. We are at a critical juncture.” The speaker was a top global markets analyst at a New York-based, $5 billion-plus money management firm, eyeing with gloom the Monday sell-off in U.S. stocks that once again spread overnight to the markets of Asia — most notably Japan’s.

ON FRIDAY, the steep slide of stocks in the U.S. led to a Monday plunge in Tokyo and Hong Kong. Then, when U.S. stocks tanked again on Monday in New York, the ripple effects rolled right back to Asia, triggering sympathy selling in Tokyo and Hong Kong from almost the opening bell on Tuesday.

But there is more at work here than just the reinforcing effect of ricochet selling between New York and Tokyo. A pervasive gloom and even fear is spreading through money managers everywhere regarding the situation in Japan itself — most notably, the continuing deterioration of that country’s financial markets and economy.

The situation in Japan is both relevant — and disturbing — to U.S. investors, for two reasons: First, it underscores the difficulty any government has in devising a policy to stimulate growth in an economy awash in excess capital investment. And secondly, it puts yet more stress on the financial markets in the U.S., which are now beginning visibly to waver from selling pressure in technology stocks and, more recently, the Dow industrials as well.

During the 1990s, Japan became almost a roadmap for the situation that has now developed in the U.S. It was exactly 20 years ago, in the spring of 1981, when book publishers everywhere were falling all over themselves to bring out the next big book on the so-called Japanese economic miracle — a lot of which was said to involve certain allegedly egalitarian Japanese style management theories that were all the rage in places like Hewlett Packard Corp. and Intel.

Those theories — popularized in a book bearing the title “Theory Z; How The U.S. Can Meet The Japanese Challenge” — were often cited by U.S. management consultants as the reason why Japan’s economy began the 1980s growing at a less than 2.8-percent rate and ended it at a 6.3-percent rate.

In reality, it was capital spending that fueled the boom, uncorking a speculative frenzy in Japanese stock prices, lifting the Nikkei 225 Index from 6,500 at the start of the decade, to a 1990 peak of nearly 39,000. The result was a Japanese style “wealth effect,” with the economy awash in so much excess capital that, by the end of the 1980s, Japanese companies and wealthy individuals had become the functional equivalents of The Greater Fools in every major investment market on earth.Mori

The Japanese were the dominant buyers at the top of the market in New York real estate. They became the final, take-home-the-prize buyers at every major art auction. They bought golf courses, movie studios — whatever was for sale… and always at top, clear the room prices.

The Japanese stock market bubble finally popped in January of 1990, and it has taken 10 long years since then — a decade-plus of grinding relentless decline — for the Japanese to accept that the reversal hasn’t simply been temporary. From 6.3-percent growth at the end of the 1980s, Japanese economy fell to nearly zero growth in 1993, then sputtered back up to 3-percent growth in 1997, then fell apart all over again and is now once again showing almost no growth at all.

Japan’s leaders have tried everything imaginable to turn the situation around and get the economy on a path of sustainable growth, but nothing has worked. They have engaged in heavy deficit spending, they have cut interest rates nearly to zero. Meanwhile, the Japanese government’s debt has ballooned, the yen has plunged, and government officials now mutter of a looming economic collapse.

All this has happened without any of the signs what most people would recognize as evidence of a depression. The unemployment rate for January stands at just under 4.9 percent which is barely double the level of a decade ago. Inflation is almost non-existent, as it has been throughout the decade.

The problem is, economic growth — and new investment — has all but ceased, and signs are now emerging that the financial system could face an enormous liquidity crisis that some experts fear could break out at any moment. U.S. ECONOMY IN DANGER Many of these same forces are now at work in the U.S. economy. After a decade of runaway capital spending in technology, enormous excess capacity has developed — a capacity that has continued, until almost the present moment, to run unchecked in the face of weakening demand.

That boom, in turn, had fueled a speculative explosion in U.S. stocks, with American investors replacing Japanese investors as the Greater Fools in one market after the next — most notably the IPO sector on Wall Street.

Now, that bubble has popped too, and policymakers are only just beginning to catch the first glimmerings of the dilemma that has bedeviled leaders in Japan for a decade: How to put a floor of sustainable growth under the economy in the absence of a stock market-fueled “wealth effect.” So far, the only lever tried — a 100-basis-point cut in short term rates by the Federal Reserve — has accomplished nothing. As a result, pressure is building for more — and bigger cuts — even as policymakers in Washington now eye the Bush Administration’s plans for a tax cut as the next weapon to be wheeled into the battle.

No one knows, of course, whether any of these things will work — or how long a turnaround will take — or whether we will get one at all. But the lesson of Japan is that it will take longer than people now think, and any recovery will be weaker than folks want. It is not a pretty view, but it is a realistic one — and here as in Japan, it seems to have everyone stumped as to how to go about dealing with it. Not a good situation, to be sure.

http://www.msnbc.com/news/543318.asp#BODY

-- Martin Thompson (mthom1927@aol.com), March 12, 2001