US Economists Fidget Over Japanese Slump

Analysts assess the possible effects of Japan's economic slump on Tokyo's trading partners

AMERICAN perceptions of Japan's economic power have given way to concerns that the Asian nation's current financial problems will hurt the United States, now struggling out of recession.

Tokyo's plunging stock market, business bankruptcies, and falling bank and real estate assets have clipped Japan's aggressive investments and its ability to lend. Economists are assessing the impact of that downturn on the US finance, real estate, and manufacturing sectors, for which Japanese money has been vitally important.

Japan is experiencing its own credit squeeze, as banks grapple with falling stock values and higher capital requirements. With less money around to borrow, Japanese business is more inclined to bring earnings home rather than send them abroad. The recent severe slump of the Nikkei stock index, though startling to some observers, has only accelerated a Japanese retrenchment from activity in the US that began in 1990.

Economist Maria Ramirez, president of New York-based Maria Ramirez Capital Consultants, says Japanese banks will continue to shrink, dampening growth in the US and other countries that rely on borrowing for expansion.

The US government has relied heavily on Japanese firms to buy its debt, including Treasury bills, government bonds, and other securities. The Japanese are second to the British as the leading foreign lender to Uncle Sam. Last year, Japan held 1.4 percent of the $3.7 trillion US public debt, compared with 2.1 percent in 1990 and 2.9 percent in 1989. Japan is bound to continue this downward trend in 1992, according to Treasury Department spokesman Scott Dykema.

With US interest rates at their lowest levels since the 1970s, Japanese investors who do venture out of their domestic market will likely make their short-term investments in Canada, Europe, and Latin America, where higher rates promise a better return on their money. Ms. Ramirez says US investors who are disappointed with continued interest-rate reductions on US bank deposits and money markets will largely fill in the vacuum left by the Japanese. American investors are flocking to US government securiti es.

Japan is also far less bullish on US real estate, in which many high-profile Japanese investors have been burned by purchasing commercial real estate at inflated prices in a flat market. From 1987 through 1991, Japan spent $80 billion in the US real estate industry, roughly half of it on investments and half in loans. New Japanese investment fell to just $5 billion in 1991, a 61 percent drop from 1990.

California, which appeared to be leading the nation's real estate recovery, has suffered a setback as important Japanese lenders have tightened their reins.

Stephen Finn, a managing partner with Kenneth Leventhal & Co., a real estate and financial-services firm in Washington, says the Japanese investment "tide is going out" of the US real estate market. "The level of investment could drop as low as $2 billion to $3 billion this year," he says, a 50 percent fall from 1991. Most of that will be invested in California, Mr. Finn says.

Japanese manufacturers are curbing expansion after following a charged-growth strategy. Tighter credit and balance sheets have sobered Japanese firms. They now focus more on their bottom lines than blazing costly new trails in trade.

According to Japan's Economic Institute, the country's economy will grow by 2 percent this year, compared with 1988, when economic growth topped 6 percent. Japanese manufacturers are paring down their budgets for new plants and equipment and for research and development.

US Department of Commerce figures show that Japanese corporate expansion has slowed dramatically in the US. In 1991, Japan invested $4.3 billion in US business and industry, compared with an average $17.3 billion a year from 1988 to 1990.

Some economists expect that the slower growth will mean that fewer, perhaps none, of the Japanese automakers will build plants in the US. Ramirez says the long-term Japanese investments in "US bricks and mortar are leveled off."

David Secrest, executive vice president of the Whalen Company, a Washington-based trade and investment advisory firm, counters that assertion: "Since Japanese companies always have a longer-range horizon than US firms, they have an incentive to keep investing to produce cars here."

Japanese automakers are trying to compensate for the new US limitations on Japanese imports and the higher standards for US content in Japanese cars sold in the US. Mr. Secrest's client, Toyota, looks forward to capturing more of the US market and has built a Camry production facility in Georgetown, Ky. But he concedes, "To the extent that the American economy is sluggish, Japanese investments in factories here are a disincentive."

The downturn in the Japanese economy does not bode well for US exporters eager to market their goods and services directly or through other countries to Japan.

US trade officials who bank on redressing a nagging trade imbalance with Tokyo could be sorely disappointed in coming months, when the US trade deficit with its Asian partner will probably increase due to poor Japanese demand and reduced purchasing power for imports.

Japanese Prime Minister Kiichi Miyazawa, who is scheduled to meet President Bush in Washington this July, has acknowledged that most of Japan's growth will be export-driven in the months ahead.