East Asia: Up From the Ashes?

From Singapore to Seoul, empty office towers, silent factories, and mute lines of the jobless shout out the same headline: "East Asia Held Hostage!"

Japan, which accounts for 70 percent of East Asia's economic output, is pulling neighboring countries into a quagmire of negative growth.

Despite rising financial-market turmoil and foreign pressure, Tokyo for many months has failed to adequately stimulate its economy and overhaul a house-of-cards banking system.

While Japan's government has dithered, its economy has slid into recession. Consequently, smaller countries in what was once the world's most dynamic region sorely miss a vibrant Japan - a main target for export-led growth and source of vital new credit.

"We cannot see growth restored in Asia until it is restored in Japan," President Clinton recently said. Some economists fear that through protracted bumbling, Tokyo could spread the financial chaos worldwide

Even Japan's recent sweeping, top-dollar plans to spur the economy and squeeze out bad bank loans appear too little, too late. Tokyo will probably require the shock of a worsening financial crisis before it takes the massive steps necessary to lead East Asia out of decline, say many economists and stock analysts.

"I think it was Milton Friedman who once said that only in periods of real crisis do you get real change," says Paul Matthews, president of an East Asia oriented funds family in San Francisco called Matthews International Funds.

"The crisis has to be so painful that there is a groundswell of public support for biting the bullet of reform," says Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis. "It is not there yet."

The rising financial tumult in Asia confronts investors with a wrenching choice: Stay away for safety's sake, or begin moving into the region and seize on the investment opportunity of a lifetime.

The region's fundamentals are exceptional. US Treasury Secretary Robert Rubin noted recently that East Asia has "had decades of strong growth based on great underlying strengths - a strong work ethic, high savings rate, discipline, and an intense focus on education."

Moreover, the region plays host to some of the world's finest companies in the most promising industries. The stock prices for many of these firms now go for a song.

Since last year, some of the world's most renowned investors, including George Soros, Sir John Templeton, and Mark Mobius, have swept into the region with cash in hand.

But if this is the investment opportunity of a lifetime, the central question is: Whose lifetime? Ours or our grandchildren's?

"Americans are so accustomed to a quick fix, but in Asia it will take a long time for a turnaround, maybe many years," says Mr. Sohn.

The casualty list for regional markets is long and daunting.

This year the benchmark equity indexes have sunk, in local currency terms, by 16 percent in South Korea, 20 percent in Hong Kong, 26 percent in Malaysia, and 28 percent in both Thailand and Singapore.

Moreover, the rising problems in Japan - underscored by the checkered efforts in Tokyo and Washington to stem the decline of the Japanese yen - threaten to spark a meltdown in global financial markets.

A sudden collapse last October in Hong Kong (see story, bottom right) threw Wall Street and European financial markets into a tailspin, however brief.

Consequently, most market analysts advise typical investors to curtail, but not eliminate, their exposure to Asia. Those with a long-term horizon of more than five years could consider gradually dipping into the region in a well-diversified way, either through regional mutual funds or in single-country funds, focusing on the most promising markets. (See stories, right.)

Investors keen on Asia should monitor Tokyo's economic policymaking, the bellwether for regional economies, say analysts and economists.

Today, the view of Tokyo is jarring. After years of ignoring the extent of its economic problems, Japanese bureaucrats are derided as pursuing the "Alfred E. Neuman School of Economic Management" (motto: "What, Me Worry?"). Exasperated foreigners call Prime Minister Ryutaro Hashimoto "Herbert Hoover Hashimoto," after the US president who did not prevent the US tumble into depression.

Japan - and by extension East Asia - will be on the verge of a rebound when the government fully recognizes the crisis and takes urgent, concrete steps toward tax cuts and banking reform, say analysts and economists. Investors can profit by recognizing such measures early.

"The date of a turnaround usually comes at about the first time that an official forecast is issued that proves to be too pessimistic," Lawrence Summers, US deputy treasury secretary, said recently. Japan has only begun to acknowledge its harsh challenges.

"Like the ostrich, they have pulled their head out of the sand," says Joshua Feurerman, manager of the Emerging Markets Fund at State Street Global Investors in Boston. "Now," he says, "a lot of money managers would like to see them actually implement something major rather than just talk about it."