MICHAEL CLUGSTON November 30 1987


MICHAEL CLUGSTON November 30 1987



They are on a worldwide spending spree. Last week the giant Japanese electronics company Sony Corp. bought the record division of New York-based CBS Inc. for a breathtaking $2.6 billion—and acquired the rights to Bruce Springsteen’s recordings. In the same week, the large Japanese real estate group Kowa announced in Paris that it was investing $572 million in an office and retail complex to be built by 1991 on the Left Bank. And in October a leading Japanese insurance company, Dai Ichi Seimei, purchased a parcel of prime Manhattan property for $1.1 billion from U.S. investment bank Citicorp. In almost every part of the globe, the Japanese are aggressively buying—and they already own more than $1 trillion of real estate, corporations, natural resources, bonds and outright loans in other countries.

Now in its third wholesale economic restructuring in as many decades, Japan is fashioning itself into a world financial giant—and its new strength could produce a startling reorientation of the world economic system. When its leaders helped to pull it from the debris of the Second World War, Japan was a poor and defeated country. But in the 1960s Japan built an economic base on the production of cheap and sometimes poorly made consumer goods. Then, in the booming years of the 1970s, Japan changed course, flooding the world with superbly manufactured stereos, televisions and cars. Now, with barriers to its exports growing and with the value of the yen soaring, Japan is changing its economic attack. With its legendary unity of purpose and economic foresight, the country is exporting money, as well as goods, to a willing world. At the same time, it is encouraging home consumption of its own manufactured goods to partly make up the shortfall in exports. Of the shift away from export manufacturing, senior Japanese government member Hiroshi Ohki said: “We have been moving in the same direction for almost 40 years. Now we are reviewing everything.”

Spree: Already, Japan has the seven largest banks and the largest investment banking firm in the world. Giant Nomura Securities Co. Ltd. of Tokyo has a market capitalization of $60 billion— compared with only about $7 billion for Salomon Brothers Inc., the largest U.S. securities firm. Using that wealth—created partly by the high yen—this year alone Japanese buyers have snapped up casinos in Las Vegas, golf courses in England and wine châteaus in France. Last May another Japanese insurance company, The Yasuda Fire and Marine Insurance Co. Ltd., made headlines around the world when it paid a record $52 million for the Dutch impressionist painter Vincent van Gogh’s Sunflowers, painted

in 1888.

Pressure: Of the $197 billion in foreign capital which the United States imported in 1986, more than one-third came from Japan. Ten years ago Japanese financial firms were barely noticeable. But now their actions can trigger currency swings and move money markets. And, as a result, there is increasing pressure on Japan to assume greater responsibility for stabilizing the global economy. Indeed, last week Japanese officials were promoting the prospect of using the yen as a world reserve currency similar to the dollar. Said Kozaki Rinichi, chairman of Tokyo’s Toyo Trust Investment Management Co.: “It took Britain 100 years and the United States 50 years to become the richest country in the world. It took Japan five.”

That remarkable transformation, made possible partly by the cohesive and conformist nature of the Japanese nation, has had a high social cost (page 26). And the country also faces problems within its own economy. Unemployment reached a postwar high of 3.2 per cent last May, as companies adjusted to change by cutting back on expenditures or diversifying. And with the new economy still not fully developed, overall economic growth is not as swift as it has traditionally been. Last week Noboru Takeshita, who succeeded Yasuhiro Nakasone as prime minister on Nov. 6, also experienced firsthand the continuing resentment other countries have toward his nation’s exporting power: U.S. Commerce Secretary William Verity accused Japanese government ministers at a meeting in Tokyo of destroying foreign industries with floods of exports, and he demanded that Japan open up its domestic market to imports.

Rampage: In the past, Japan’s solution to economic problems, including the oil price increases of the 1970s and the global recession of the early 1980s, was to increase exports. But the success of that policy became the country’s biggest problem as huge trade surpluses with other industrialized countries, particularly the United States, built up. By September, 1985, Japan’s trade surplus with the rest of the world had risen to a stunning $81 billion. Then officials in Europe and the United States began pressing Japan to reduce its trade surplus by buying more foreign goods.

At a meeting in New York, leaders of the G-5—the top five industrial nations, the United States, Japan, West Germany, France and Britain—sought a solution to the surplus problem. Their decision—the so-called “Plaza Accord,” named after the hotel in which they met—was to let the value of the yen rise in order to make Japanese goods more expensive and less attractive to importing countries. For then-prime minister Nakasone, it was a major concession to world opinion. And in the past 26 months, the yen has risen by 75 per cent against the value of other currencies— leading the Japanese to coin the word endaka, meaning the rampaging yen, to describe the phenomenon. In July, 1985, one Canadian dollar could buy 183 yen; at the end of last week, the dollar bought only 103 yen.

Surplus: The dramatic strengthening of the yen quickly affected the Japanese economy. During 1986, exports dropped by 16 per cent and industrial production fell to its lowest level in 11 years. And while some sectors of the economy, particularly steel and cement, had been struggling, the expensive yen hurt them even more. That led to an unprecedented series of shutdowns of mines, blast furnaces and industrial plants, with oneindustry towns suffering the most. Faced with high production costs in their own country—a trend that had begun even before the Plaza Accord—Japanese firms have moved a significant amount of their manufacturing to plants abroad, mainly to cheap labor bases in newly industrialized countries, especially South Korea and Taiwan.

At the same time, Japanese automakers—under criticism in the United States after their share of new car sales rose 550 per cent from 1970 to 1984have moved some production to plants in the United States itself and Canada. Other manufacturers, including the makers of color television sets, also began opening U.S. plants. Those moves helped to stabilize Japan’s trade surplus with the United States at $67 billion in 1986. Said Tsutome Sugiyama, Sony’s

manager of corporate communications: “We call the process ‘globalization.’ It was well under way before endaka, but there is no doubt that the high value of the yen will speed up the process somewhat.”

Impact: By 1990 the amount of offshore manufacturing as a percentage of total industrial output could more than double to almost nine per cent. That shift would create jobs and technological benefits in the countries in which Japan invests—a pattern less likely to lead to the sorts of trade imbalances that the world is currently attempting to overcome.

But it would also make it difficult to measure exactly the volume of Japanese goods entering the United States, Canada

By mid-1987 Japan seemed to have overcome many of the setbacks that it suffered from the Plaza Accord. In June industrial production rose 3.4 per cent, the highest monthly increase in seven years. And the number of business failures in September was 32 per cent lower than a year earlier. Still, the ability of Japanese manufacturers to cope with a decline in exports remains partly dependent on the government generating enough growth within the country to absorb goods once destined for other nations. When Nakasone agreed to the Plaza Accord, he was counting on Japanese consumers spending more money on Japanese goods. But Takeshita is still dealing with a nation of inveterate savers. In 1985 the Japanese had a personal savings rate of 16.1 per cent—comparatively high, given rates of 8.6 per cent in Canada and three per cent in the United States.

and other countries. Said one Japanese diplomat: “The bilateral trade account is going to become irrelevant very soon.”

Last spring, in a departure from the government’s traditional restraint policy, Nakasone cut interest rates and passed a $56-billion spending package that stimulated a housing and public construction boom. It effectively sent Japanese consumers on a spending spree to snap up domestic and imported goods. The new strategy has had a sharp impact on economic development this year. Japanese exports fell 1.2 per cent in the second quarter, while domestic demand increased by 1.1 per cent. As a result, there was essentially no overall growth in the Japanese economy during

that period. Said Masakazu Kubota, staff economist with the Keidanren, the Japanese federation of economic organizations: “This shows that the re-emphasis of the economy is taking effect.” Dominance: Meanwhile, one of the most spectacular results of the strong yen has been Japan’s swift transformation into the world’s banker. The currency’s new popularity made it the country’s biggest export, replacing automobiles and stereos. Said Hans Angermueller of Citicorp: “U.S. banks’ preeminence is being dissolved by the aggressiveness of the Japanese.”

Japan’s financial dominance is a revolutionary development. The transformation began in 1980, when the government removed restrictions on the amount of money that Japanese could invest overseas. Afterward, Japanese banks, insurance companies and securities firms poured billions into world capital markets, concentrating on government bonds and, more recently, securities. Although the buyers of van Goghs and Manhattan skyscrapers caught public attention, those direct overseas investments represent only one dollar in 12 of Japan’s total foreign investment. In fact, in 1980 Japan borrowed more than it loaned to other countries; by 1985 the country’s net international assets had soared by more than $260 billion. And at the end of 1986, Japanese banks held $31 billion in Canadian bonds alone, representing almost one-quarter of all foreign holdings.

A report by the Bank of Nova Scotia compares that flow of capital to a simi-

lar flood from oil-producing nations during the 1970s. Indeed, Japan’s capital surpluses have made it the leading international creditor, a kind of loan officer to the world. Concluded the Scotiabank report: “As the strong yen has depressed export earnings, corporations have turned increasingly to trading financial instruments to maintain profitability. Recent reports suggest that profits [from such dealings] account for at least half of the total earnings of many Japanese industrial firms.” Frenzy: The pervasiveness of capital export is reflected on the floor of the Tokyo stock exchange. Before the world stock market crash on Oct. 19, the Tokyo exchange was the most overvalued market in the world, according to securities experts. The Nikkei stock index, an average of 225 stocks traded on the exchange, reached a record high of 26,643.43 on Oct. 14. Last week the Nikkei was off by 15 per cent from its peak and the frenzied buying of the past several months had subsided. Trading volume is now between 200 and 500 million shares a day, compared with a common trading volume of 700 million shares before the Black Monday crash.

The vast foreign holdings of Japanese firms give them a large measure of control over interest rates in the borrower countries. Because the Japanese are such large buyers of bonds, they are able to get a good return. And bond market rates help to determine interest rates for business loans, mortgages and consumer credit. Said Barry Steers, Canadian ambassador to Japan: “This expansion of Japan does not mean that we are getting another set of gardeners. We are getting new managers, and we are going to have to adjust to the way the Japanese want things done.”

Profits: Japan’s influence was felt sharply last May in the United States when some of the larger Japanese financial institutions speculated against the dollar by selling off large sums—as much as $500 million—in U.S. Treasury bills. After the U.S. dollar had dropped, the Japanese then bought back the suddenly cheaper T-bills, making a huge profit on the currency difference. Because of that manipulation, U.S. interest rates rose sharply as U.S. banking authorities attempted to attract buyers back. Under pressure from U.S. officials, Japanese Finance Minister Kiichi Miyazawa ordered the companies to stop speculating against the dollar.

But Japanese traders may not continue to obey the ban. Said Toyoo Gyoten, Japan’s vice-minister of finance for international affairs: “Our control used to be complete, but the situation is changing. When I talk to the younger traders, they are independent. They are more interested in making maximum profits for their companies.”

Despite Japan’s dramatic accumula-

tion of financial power, many of its citizens still openly worry about their future. Inefficient industries are heavily subsidized by the government.

And Japanese companies, even those renowned for their guarantees of lifetime employment, have launched austerity drives and layoff programs at home plants while establishing operations in other countries.

“The age of multinationalism has finally arrived in Japan,” said Shiro Miyamoto, former president of the Japan External Trade Relations Organization. “It won’t be an easy transition.”

While the country tries to cope with the new economic era, its citizens must also resist the temptation to over-

react to foreign critics. Said reporter Kazue Suzuki of the Tokyo daily Asahi Shimbun: “ ‘Japan-bashing’ has become part of the Japanese vocabulary.” Last summer many Japanese were shocked by TV footage showing U.S. congressmen on Capitol Hill smashing a Toshiba radio with a sledgehammer. The politicians took that action to protest the fact that a

Toshiba subsidiary had broken an international law by selling submarine equipment to the Soviet Union.

Clout: The traditional hostility and envy that Japan’s formidable economic strength has attracted may only increase as the full impact of its financial clout is felt worldwide. Japan now faces the difficult task of balancing its own need for economic prosperity with the sensitivities of its trading partners in North America and Europe. Japanese economic planners say that they are trying to avoid the mistakes that led to industrial decline in the United States and Britain. But pressures will mount on the tiny island nation to take on a lead-

to on a ership role on the world stage. And that status, many observers believe, is inevitable for success-driven Japan.


in Tokyo