cj#795> News Bulletin (Ballard): Japan to fall?


Richard Moore

From: Carolyn Ballard <•••@••.•••>
To: <recipiet list suppressed>
Date: Thu, 2 Apr 1998 23:48:00

Carolyn Ballard, freelance writer
Email:  •••@••.•••
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Sent:   Thursday, April 02, 1998 7:10 PM
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Subject:        Japan


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Global Intelligence Update
Red Alert
April 3, 1998

Sony's Chairman Warns of Impending Collapse of Japanese Economy

Norio Ohga, Chairman of Japan's Sony Corporation, warned today that Japan's
economy was close to collapse and that Japan's collapse could lead to a
worldwide recession.  According to Ohga, the Japanese economy was facing
its most difficult time ever.  He compared Japanese Prime Minister
Hashimoto to Herbert Hoover:  "What President Hoover was saying then, there
are so many similarities with what Prime Minister Hashimoto has been saying
recently.  Hoover triggered worldwide recession.  I just hope remarks by
Prime Minister Hashimoto won't trigger worldwide recession".  According to
Ohga, the central problem facing Japan is deflation, driven by a lack of
consumer spending in Japan.  Ohga therefore called on the Japanese
government to stimulate the economy, increasing consumer spending and
stabilizing prices.

Ohga has merely stated the obvious.  Japan has been stagnant throughout
most of the 1990s and its condition is worsening. The Bank of Japan's
"business condition diffusion index," which tracks business sentiment has
fallen to the worst level since 1994. This understates the problem.  The
extended malaise of the Japanese economy is wreaking structural damage as
time goes on.  Both Daiwa and Tokai banks announced cuts in lending to
large companies while it was announced that capital spending in general
would decline in 1998.  As with the United States in the 1970s, the decline
in the availability of capital triggered by the banking crisis means an
increasingly aging and less efficient industrial plant.  As this happens,
Japan's exports become less competitive, increasing pressure on the yen.
As the yen declines, the willingness of investors to invest in yen
denominated paper declines, increasing the capital crisis.

The obvious answer is to stimulate the economy, as Ohga suggested.  But
Japan's financial condition is much worse than the U.S. condition in the
early 1980s.  Stimulating consumption must come at the expense of the
savings rate.  A high savings rate at low interest is now and has always
been the foundation of the Japanese banking system.  The availability of
nearly free money to banks that are in dire trouble is the only thing that
permits them to continue functioning.  Eliminate the constant infusion of
savings and the banking system would collapse and with it the inefficient,
linked companies who depend on cheap money to maintain their balance sheet.
Increasing domestic consumption is the long-run solution, but as the
Japanese bureaucrats understand very well, it is not clear how to get there
from here.  Increased consumption would stimulate the economy, but only
after knocking the bottom out of the banking system.  Ohga, who heads one
of Japan's more successful companies, is not completely sensitive to the
precarious condition of most other Japanese companies.

This means that Ohga's warning should be taken seriously while his solution
cannot be.  Ohga's warning is an important turning point in the Japan
story, since it represents a dire prediction from a leader of the Japanese
business community, someone who cannot be dismissed as merely a
sensationalist or alarmist.  If Ohga is worried, everyone should be.  The
problem is that there does not appear to us to be any way out of Japan's
dilemma.  This is not the first time Japan has faced this dilemma.  During
the 1920s, a very similar banking crisis took place.  The result was a
devastating recession and the emergence of political extremism.

Until this point, analysts have been focused on the question of whether or
not Japan can avoid economic disaster.  It has been our position that
Japan's economic fate has been sealed ever since the Japanese government
decided to follow a strategy that refused to deal with the emerging banking
crisis--that is, since around 1992.  Now, Sony's leader has come close to
the same conclusion, at least in the sense of facing the magnitude of the
crisis.  From our point of view, the central question is no longer whether
the Japanese economy is facing calamity, but rather what the consequence of
that calamity is going to be.  One aspect of this is its effect on the rest
of the world.  We are not certain that Japan's decline will have an
enormous negative effect outside of Asia.  The second aspect is its effect
on Japan itself.  Since the end of World War II Japan has been a liberal
democracy, a system imposed by the United States.  If Japan goes into a
depression, it will be a very different country than the prosperous and
cocky Japan of the 1980s.  With that difference will come wrenching
political changes.  We urge analysts to study the 1920s in order to get a
sense of the possible evolution of Japan, should Ohga be correct.


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