The setting sun: Will Japan's banking crisis spread?

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Cover Story 3/26/01

http://www.usnews.com/usnews/issue/010326/market.b1.htm

THE SETTING SUN

Will Japan's banking crisis spread?

Back when George W. Bush's father was president, Americans worried about Japan's economic strength. Now the big worry is its weakness. Having drifted in and out of recession for a decade, the Japanese economy seems near a breaking point.

Earlier government rescue efforts gained little beyond a skyrocketing public debt. Spending often went to unneeded public-works projects, while banks failed to use the extra cash to write off bad loans. Now, growth has stalled, and investors have fled Japan's stock market. Several major banks, which, unlike U.S. banks have large stock holdings, are near collapse, threatening the solvency of thousands of companies.

But will Japan's troubles cross the Pacific? Workers at the U.S. arm of Toshiba in Irvine, Calif., have already felt the first wave. With capital scarcer at home and slowing U.S. demand for electronics, Toshiba warned last month that net profits would be 30 percent lower than expected and said it would lay off 500 workers. Other Japanese manufacturers–Sega, Sony, and TDK Electronics Corp.–have also cut their U.S. staff rosters in places like Carrollton and Peachtree City, Ga.

Dollar dumping. But a few thousand laid-off workers is small change compared with the big-dollar impact should Japanese banks liquidate their huge U.S. investments before their books close on March 31, warns Brookings Institution Asia expert Edward Lincoln.

William Breer, of the Center for Strategic and International Studies, agrees: "In desperation, Japanese banks will pull U.S. holdings," since their U.S. assets are much easier to sell off than Japanese holdings. Yet if the banking sector isn't cleaned up, cheapening the yen is the likely policy option. That could hurt U.S. business.

"The yen could drop to 140 to the dollar. U.S. exporters won't be able to compete, and they might push protectionist strategies, which would throw a wrench into the Bush administration's Asia policy," says Adam Posen of the Institute for International Economics.

Combined, an asset sell-off and a yen slide could be brutal. Harder to measure is the psychological impact on U.S. stock markets. Though Japan's market typically reacts to events in America, some analysts now believe the Japanese morass shares blame for recent falls in U.S. stock markets.

And shell-shocked Nasdaq junkies aren't likely to get any comfort from Tokyo. Japan says its economy grew 0.8 percent at the end of 2000, but analysts believe the country will slide into negative growth in the current quarter. The country's unpopular prime minister, Yoshiro Mori, appears set to resign, to be replaced, almost surely, by another faceless technocrat lacking muscle to reform the banks.

"It's a pretty scary scenario," says Carl Weinberg of High Frequency Economics. "It's the first time we've seen a banking system at risk in a major economy." -Joshua Kurlantzick

-- Swissrose (cellier3@mindspring.com), March 21, 2001


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