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07/12/2001

Update: Japan, Part I

This coming fall will mark 12 years since the Tokyo Nikkei
Index peaked at 39000. As of this writing the key stock market
barometer for the country now stands at 12000. For the Japanese
it''s been 12 years of despair.

I keep folders of articles and notes on various parts of the world,
ostensibly so I can put these pieces together, and I came across a
comment from Mort Zuckerman, publisher and editor-in-chief of
U.S. News, which appeared in the 9/11/00 issue. Little has
changed to alter what he labeled his "perfect storm forecast."

"Several of Tokyo''s biggest banks fail or become so shaky that
global lenders refuse to deal with them. Panic-stricken investors
pull their money out of the country. Interest rates soar. The
ensuing run on the yen leads to a collapse of the currency and the
stock market. Because there is no fiscal capacity to restimulate
the economy, it goes into free fall."

Japan has suffered over the past ten-plus years from a lack of
government vision and leadership. What was once thought by
some to be a strongpoint for Japan, total government control of
the economy, has proven to be a huge impediment for sustained
economic growth.

The biggest problem today that new Prime Minister Koizumi will
shortly be tackling in an official way is the problem of Japan''s
estimated $1 trillion + in bad bank loans.

Under Japan''s system, the government and the banks worked in
tandem to insure the common good...or so they hoped. The
government supplied the banks with political and financial
support, even those that were failing, while the banks promised
to grease the palms of the politicians by funneling funds into
industries the government deemed critical, even if prospects for
Company X were poor.

On top of this "I''ll scratch your back if you scratch mine"
philosophy was the principle between companies that did
business together, in which they would buy each other''s stock to
keep the prices up, as opposed to having to face shareholder
pressure for lackluster performance.

Three years ago, the government poured $570 million into
bailing out the banks, but the banks didn''t then take the
necessary steps; restructuring loans to troubled but viable
companies while jettisoning those that simply had no future (and
whose loans should have been written off). So we had another
failed program and all the while, the government was also laying
on one economic stimulus package after another, most geared
towards the construction industry (which funds 10% of the ruling
LDP''s war chest) and unneeded public works projects.

By this past March, with government debt equaling over 130% of
the country''s total economic output (in the U.S. the percentage is
well under 60%), with property values having fallen 65% since
their peak in 1991, and with the bad loan problem and persistent
deflation, then Finance Minister Miyazawa felt compelled to say
his government''s finances were in a "catastrophic situation...and
very near collapsing." [Imagine the panic in the U.S. if our
Treasury Secretary ever echoed similar comments.]

At the same time, a major daily in Tokyo ran a front page
editorial wherein it commented that "A crisis of pernicious
deflation, which could destroy people''s lives, is looming."

Consumer prices have dropped about 18 straight months in
Japan. And that''s also not exactly a great thing for corporate
profits.

So nothing is changing in the Land of the Setting Sun. It''s
stagnation times ten. Plus there is another dominant issue for
policymakers. The country is aging rapidly. It is estimated that
its current population of 120 million will shrink to 100 million by
2050. Japanese women give birth to 1.39 children in their
lifetime (2.1 is the "breakeven" level for population growth).
And by 2050, over one-third of the country will be over 65, so
you can imagine the terrific burden on Japan''s social services
down the road...let alone the fact that today, corporate pension
programs are already deemed to be woefully underfunded.

Howard French of the New York Times commented that "The
most basic raw ingredient in economic power - people
themselves - is probably Japan''s biggest vulnerability."

And this fact. Less than one percent of Japan''s population is
foreign-born. No immigration issue there.

So these are just some of the issues facing Prime Minister
Koizumi, who still maintains wide approval among the Japanese
people even though his reform program would undoubtedly
result in great pain. For example, it is estimated that were the
banks to truly write off their problem loans, which would in turn
cause a massive wave of bankruptcies and factory closings, at
least 100,000 would be thrown out of work overnight, and the
figure is most likely far higher. Koizumi has to convince the
banks, through government threats and dictates, that they can not
continue to lend money to companies that have zero prospect of
ever paying it back.

On July 29, Japan holds upper-house elections and it is hoped
that Koizumi will win a mandate for his reform measures. Next
week, we''ll take a detailed look at one of the big issues,
privatizing the nation''s postal services...which don''t just deliver
mail, but also act as a main repository for investors'' savings.

Sources:

New York Times, Washington Post, USA Today, U.S. News,
Business Week, wire services.

Brian Trumbore




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07/12/2001

Update: Japan, Part I

This coming fall will mark 12 years since the Tokyo Nikkei
Index peaked at 39000. As of this writing the key stock market
barometer for the country now stands at 12000. For the Japanese
it''s been 12 years of despair.

I keep folders of articles and notes on various parts of the world,
ostensibly so I can put these pieces together, and I came across a
comment from Mort Zuckerman, publisher and editor-in-chief of
U.S. News, which appeared in the 9/11/00 issue. Little has
changed to alter what he labeled his "perfect storm forecast."

"Several of Tokyo''s biggest banks fail or become so shaky that
global lenders refuse to deal with them. Panic-stricken investors
pull their money out of the country. Interest rates soar. The
ensuing run on the yen leads to a collapse of the currency and the
stock market. Because there is no fiscal capacity to restimulate
the economy, it goes into free fall."

Japan has suffered over the past ten-plus years from a lack of
government vision and leadership. What was once thought by
some to be a strongpoint for Japan, total government control of
the economy, has proven to be a huge impediment for sustained
economic growth.

The biggest problem today that new Prime Minister Koizumi will
shortly be tackling in an official way is the problem of Japan''s
estimated $1 trillion + in bad bank loans.

Under Japan''s system, the government and the banks worked in
tandem to insure the common good...or so they hoped. The
government supplied the banks with political and financial
support, even those that were failing, while the banks promised
to grease the palms of the politicians by funneling funds into
industries the government deemed critical, even if prospects for
Company X were poor.

On top of this "I''ll scratch your back if you scratch mine"
philosophy was the principle between companies that did
business together, in which they would buy each other''s stock to
keep the prices up, as opposed to having to face shareholder
pressure for lackluster performance.

Three years ago, the government poured $570 million into
bailing out the banks, but the banks didn''t then take the
necessary steps; restructuring loans to troubled but viable
companies while jettisoning those that simply had no future (and
whose loans should have been written off). So we had another
failed program and all the while, the government was also laying
on one economic stimulus package after another, most geared
towards the construction industry (which funds 10% of the ruling
LDP''s war chest) and unneeded public works projects.

By this past March, with government debt equaling over 130% of
the country''s total economic output (in the U.S. the percentage is
well under 60%), with property values having fallen 65% since
their peak in 1991, and with the bad loan problem and persistent
deflation, then Finance Minister Miyazawa felt compelled to say
his government''s finances were in a "catastrophic situation...and
very near collapsing." [Imagine the panic in the U.S. if our
Treasury Secretary ever echoed similar comments.]

At the same time, a major daily in Tokyo ran a front page
editorial wherein it commented that "A crisis of pernicious
deflation, which could destroy people''s lives, is looming."

Consumer prices have dropped about 18 straight months in
Japan. And that''s also not exactly a great thing for corporate
profits.

So nothing is changing in the Land of the Setting Sun. It''s
stagnation times ten. Plus there is another dominant issue for
policymakers. The country is aging rapidly. It is estimated that
its current population of 120 million will shrink to 100 million by
2050. Japanese women give birth to 1.39 children in their
lifetime (2.1 is the "breakeven" level for population growth).
And by 2050, over one-third of the country will be over 65, so
you can imagine the terrific burden on Japan''s social services
down the road...let alone the fact that today, corporate pension
programs are already deemed to be woefully underfunded.

Howard French of the New York Times commented that "The
most basic raw ingredient in economic power - people
themselves - is probably Japan''s biggest vulnerability."

And this fact. Less than one percent of Japan''s population is
foreign-born. No immigration issue there.

So these are just some of the issues facing Prime Minister
Koizumi, who still maintains wide approval among the Japanese
people even though his reform program would undoubtedly
result in great pain. For example, it is estimated that were the
banks to truly write off their problem loans, which would in turn
cause a massive wave of bankruptcies and factory closings, at
least 100,000 would be thrown out of work overnight, and the
figure is most likely far higher. Koizumi has to convince the
banks, through government threats and dictates, that they can not
continue to lend money to companies that have zero prospect of
ever paying it back.

On July 29, Japan holds upper-house elections and it is hoped
that Koizumi will win a mandate for his reform measures. Next
week, we''ll take a detailed look at one of the big issues,
privatizing the nation''s postal services...which don''t just deliver
mail, but also act as a main repository for investors'' savings.

Sources:

New York Times, Washington Post, USA Today, U.S. News,
Business Week, wire services.

Brian Trumbore