BUSINESS

EXPOSING JAPAN INC.

HIGH INTEREST RATES DERAIL THE TOKYO STOCK MARKET AND THREATEN JAPAN’S STRONG ECONOMY

TOM FENNELL March 12 1990
BUSINESS

EXPOSING JAPAN INC.

HIGH INTEREST RATES DERAIL THE TOKYO STOCK MARKET AND THREATEN JAPAN’S STRONG ECONOMY

TOM FENNELL March 12 1990

EXPOSING JAPAN INC.

BUSINESS

HIGH INTEREST RATES DERAIL THE TOKYO STOCK MARKET AND THREATEN JAPAN’S STRONG ECONOMY

Like a sumo wrestler growing stronger with each victory, the Tokyo stock exchange surged ever higher over the past decade. But last month,

the value of shares on the exchange dropped by $700 billion in little more than a week, temporarily jolting other financial markets around the world. At first, the nervous New York Stock Exchange followed its powerful counterpart, but last week Wall Street shrugged off the Japanese shadow and surged ahead as investors decided that the health of the world’s financial markets did not depend on economic events in Tokyo alone. Said Julian Mayo, a British investment-fund manager in Tokyo: “We are seeing another one of the great precepts of the 1980s being punctured. Just as heavyweight champion Mike Tyson was not invincible, neither is the Tokyo stock market.”

After rebounding earlier last week, the Tokyo stock exchange’s bellwether Nikkei stock index fell by 762.41 points on Friday to close the week at 33,829.58, down 9.7 per cent from Feb. 16—the day the market began its sudden descent. And as the Nikkei crashed, a battle between the state Bank of Japan and the ministry of finance over monetary policy clearly exposed a growing menace to the Japanese economy—inflation and rising interest rates. The bank, deeply concerned about inflation, which is now running at more than three per cent compared with 0.8 per cent a year ago, wants to raise interest rates for the fourth time in 10 months,

even if that forces a massive sell-off on the Tokyo exchange. But the powerful finance department, which regulates the exchange, believes that the current 4.5per-cent interest rate is high enough.

Amid growing economic problems in Japan, President George Bush and Japanese Prime Minister Toshiki Kaifu met last Friday and Saturday at a California desert resort to discuss a number of contentious trade and economic questions that will also be felt on the floor of the Tokyo exchange—including how to reverse the yen’s downward drift without drastically boosting Japanese interest rates. After the sessions, both leaders pledged to resolve their countries’ trade disputes. Bush said that both men would instruct their negotiators to “redouble their efforts.”

The crisis on the Tokyo

exchange has been growing over a long period. The great bull run, which began in earnest in 1985, was fuelled by the so-called triple merits—falling interest rates, an appreciating yen,

and declining international prices for oil, an imported energy source on which Japan is critically dependent. But over the past two years, those trends have all reversed, and now what Tokyo investors call a double demerit has set in. Since Jan. 1, the yen has lost five per cent of its value against its archrival, the greenback, and inflation, fed in part by rising oil prices, is adding to the upward pressure on interest rates. Many economists say that officials with Japan’s four largest securities firms, who control 60 per cent of all trading on the Tokyo exchange, seriously underestimated the trend to higher interest rates, both in Japan and worldwide. As a result, they have been caught off guard as other investors sell off stocks and purchase high-interest-paying investments at home and abroad.

The continuing tumult on the exchange last week also underscored something far less tangible than stocks and bonds in Japan: the perception that somehow the island nation’s powerful economy, the second largest in the world, with a gross domestic product (GDP) of $2.8 trillion, was exempt from the economic storms that have battered its competitors. That perception is acute in the United States,

where, despite far higher worker-productivity levels and a GDP of $5.2 trillion, polls show that Americans see a Japanese economic takeover as the greatest single threat to their security. Many leading U.S. executives voice the same fear. Says Chrysler Motors chairman Bennett Bidwell: “We, the great believer in free enterprise, are having our pants removed, an inch at a time, by a centrally orchestrated, totally committed economic aggressor.”

Those American fears were reinforced last year, when powerful Japanese firms purchased

a number of American corporate and cultural jewels. Among them: Sony Corp.’s $4.4-billion purchase of the Columbia Inc. entertainment conglomerate in October, and a month later, Mitsubishi Estate Co.’s $992-million takeover of 51 per cent of Rockefeller Group Inc., which owns New York City’s Rockefeller Center, home of the Radio City Music Hall. But now, with the Tokyo exchange in decline, and inflation and international monetary pressures leading the way to even higher interest rates, economists such as Mayo say that Japan’s reputation as an unstoppable economic Goliath has been shattered.

As Japan’s image of invincibility crumbled under a wash of sell orders, the country battled to come to terms with the new reality emerging in its wake: that economic fortunes are not purely a domestic affair, but are closely linked to events in other countries. Michael Gregory, an economist who studies Japan for the Royal Bank of Canada in Toronto, says that Japanese finance officials apparently thought that rapidly increasing consumer prices, a virtually unknown occurrence in postwar Japan, were

temporary phenomenon, and that interest rates could easily be regulated. Gregory adds that, by the time they finally realized last year that inflation—mainly in real estate and food— was a problem, it was too late, and Japan’s central bank was forced to launch its stiff rapidfire series of interest-rate hikes.

Japan’s consumers are already paying astronomical prices for everyday goods. A recent survey found that the prices of 122 products were 41.37-per-cent higher in Japan than in the United States. In Japan, where the average

monthly wage is the equivalent of almost $2,700, cantaloupes sell for $50 apiece compared with $2.99 in Canada, and a kilogram of rice sells for $5.50 against $1.99 in this country. And the Japanese may have the highest housing costs in the world. The average Japanese home is so small that bedrooms often double as living rooms, and they cost 10 times as much as their Canadian counterparts.

Some of the economic problems that were laid so glaringly bare by the Nikkei’s tumble are complicated by critical international monetary agreements. In 1985, the leaders of the world’s top five industrial countries signed the Plaza Accord in New York. The accord was designed to reduce dramatically the U.S. trade deficit— currently at $130 billion worldwide and at $52 billion with Japan—by bringing the value of the dollar down, making U.S. exports more competitive. And as Bush headed west to Palm Springs, White House spokesman Marlin Fitzwater pointedly said, “We expect Prime Minister Kaifu will come to understand the extent of our concern in this area.”

Under the terms of the Plaza Accord and subsequent agreements, central banks, including Japan’s,

agreed to bring the greenback down in value, even if that included propping up the value of their own currencies with higher domestic interest rates. But now, with the yen falling against the dollar and inflation rising, Japan’s central bank is under immense pressure to stabilize the yen and hold inflation in check.

Other powerful international factors are also buffeting the Japanese economy and Tokyo stock exchange. Global interest rates have risen steeply since the beginning of the year, primarily because the West German government has been forced to keep raising interest rates to cool its inflation, now running at 2.8 per cent, compared with 1.2 per cent in 1988. And as the demand for capital grows around the world, that is also putting upward pressure on Japan’s interest rates. But as President Bush and Prime Minister Kaifu argued over their differences, even the desert sunshine of a California winter could not warm the cold winds buffeting Tokyo.

TOM FENNELL