ECONOMY-JAPAN: Falling Yen May Drag the Rest of Asia With It

By Suvendrini Kakuchi Reprint | | Print |

Suvendrini Kakuchi

TOKYO, Jun 15 1998 (IPS) - For the first time in ten years, Junko Shimzu and her family will spend their summer vacation not lazing on Waikiki Beach or some other exotic destination outside Japan, but at an ancestral home a mere three-hour drive from Tokyo.

“The weak yen has not made it economical to go on foreign tours anymore,” she says.

“If I spent 6,000 U.S. dollars for our summer vacation last August, then this time it will be at least another thousand more. With the Japanese economy so unsteady and my husband’s bonus reduced as well, we have to learn to stay put.”

Shimzu’s concern over the steady decline of the Japanese currency against the U.S. dollar is echoed all over Japan and across the region, as economists fear that its effects could be more frightening than those of the currency crisis that whipped most of south-east Asia last year.

To compound Japan’s woes, domestic production shrank for the second quarter in a row in March by 1.3 per cent.

The once mighty yen has fallen 11 percent against the U.S. dollar since the start of the year and economists predict a further slide to 160 or even 170 by autumn. It was trading at 145 to the dollar on Monday.

The immediate effect, say economists, are stronger exports but it also means a tight rein on imports, not a welcome scenario for most of Asia, which sells many products to Japan.

The yen’s fall is attributed partly to the inability of Japanese banks to deal with bad loans carried over from the bubble years of the eighties when speculative lending was carried out against inflated property prices. These loans are estimated to amount to at least 550 billion dollars.

Japanese bankers, according to official reports, lent as much as 120 percent of collateral value in the 1980s.

But the Japanese have learnt a bitter lesson. Prices for choice locations in downtown Tokyo have dipped 75 percent or more since 1989, making Japan a bargain bin for rich Western investors eyeing the market with gleaming eyes.

While the yen’s fall is expected to boost sales of exporting companies, even they are upset with the rapid slide that the currency is experiencing.

While profits will swell in the short-term, the current situation is disheartening because it is viewed as a sign of the deepening “stagnation” of the Japanese economy with even worse consequences for the rest of Asia, said a spokesman for Sony Corp, Japan’s leading electronics producer.

Sony’s profits are expected to swell by up to 6.0 billion yen (41.3 million dollars). But the spokesman says Japanese manufacturers are happy to settle for an exchange rate of between 110 and 120 yen to the U.S. greenback and are not ready to cope with wild swings.

What is needed is faster structural reform of the Japanese market that is imperative for a stronger economy. The weak yen might increase profits but could derail structural reform, the spokesman explained.

Toshiba, another major electronics company, notes that 50 percent of its income is dependent on the local market and unless domestic demand picks up, profits from its overseas sales are not going to help much.

The weak yen is expected to hurt Asian exports to Japan, which accounts for 70 percent of Asia’s gross domestic product.

Analysts contend Japan will reduce imports from Asia because the weak yen will make Asian products less competitive in the Japanese market, a trend that will hurt the recovery of faltering Asian economies.

Imports from every Asian country has fallen this year. Overall in March, imports from the region shrank 7.5 percent, records show.

The Japanese retail traders say that if they raise prices to pass on the effects of the yen’s depreciation to consumers they will end up with fewer customers and lower revenue.

The yen’s continued fall has triggered a regionwide selloff of stocks and sparked fears that China might be compelled to devalue its currency, the yuan.

Cash-rich Western investors, however, are on the lookout for opportunities and are grabbing property and property-related bad loans as fast as Japanese banks can bundle them into attractive packages.

The Nikkei, Japan’s largest financial daily, reports that as many as 40 Western institutional investors are eyeing property-related loans held by Japanese banks. The list includes the big names like Merrill Lynch and Co., Cargill Inc., and Goldman Sachs and Co.

They have stepped in after players from the Asian region, hit by their own financial crisis last year, have retreated, says the newspaper. Morgan Stanley bought 1,200 unsold condominium units from Daikyo, a major condominium developer for 12 trillion yen (almost 83 billion dollars) or about 34 percent of book value.

Goldman Sachs purchased a securitized real-estate product from Yamato Mutual Life Insurance Co. for about 60 billion yen (413 million dollars) around 10 to 30 percent of book value.

“The situation reminds me of the late 80’s when everybody rushed into the real-estate market except that this time it is the Americans coming to Japan,” commented Takashi Ishizawa, a senior economist at LCTB Research Institute, an affiliate of Long-Term Credit Bank of Japan.