Japan Feeling Region’s Pain, Analysts Say

TOKYO — As its “economic miracle” unfolded in the decades after World War II, a common description of Japan’s export-focused relationship to the much larger U.S. economy was that Japan would catch a cold whenever America sneezed.

This year, as currency devaluations, plunging stock markets and economic slowdowns buffeted Thailand, then the Philippines, Indonesia and Malaysia, the old joke was turned sideways: Now it is Southeast Asian pneumonia that threatens to give Japan a cold.

Indeed, Japan is already feeling sickly. The latest news is that Japan’s economy shrank by 2.9% during the April-June quarter, further heightening concerns about ripple effects from the spiraling Southeast Asian troubles, which were triggered by devaluation of the Thai baht in July.

“Looking at the fact that Japan will be exporting less to these countries, Japan’s economy is likely to slow down,” said Toshio Matsuura, an analyst at Nikko Research Center. Falling sales of Japanese-brand goods made in Southeast Asia will also cut into parent-company profits.

Southeast Asia’s problems could trim as much as 0.5% from Japanese growth during the fiscal year ending March 31, some analysts predict. Combined with the unexpectedly harsh impact of Japan’s recent tax hikes at home, that could plunge the economy into a recession.

The implications for the United States are all too clear: A weaker Japanese economy would pull in fewer U.S. products, while Japanese firms would have still-greater incentive to ship more products to the strong U.S. market. That could lead to worsening U.S.-Japan trade tensions, a process that has already started, judging from recent political rhetoric.

Japan’s merchandise trade surplus surged by a seasonally adjusted 51% in August, from July, to $9.12 billion. It was up 113.6%, from August 1996.

The region’s importance to Japan was reflected at the recent International Monetary Fund meetings in Hong Kong, when Japan enthusiastically supported a proposed $100-billion fund to assist financially troubled Asian countries. The fund would be heavily financed by Japan and would presumably protect Japan’s stake while boosting its influence in the region, partly by spurring use of the yen as a reserve currency and in international trade.

The troubles in Southeast Asia--notably banking woes and a collapsed real estate market in Thailand--are likely to add to the already massive number of bad loans burdening the Japanese banking system. The reason: Japan’s banks, seeking to expand their regional clout, have lent heavily to the once-booming “tiger” economies.

The severity of the banking problem is in dispute. Some analysts say Japanese banks’ losses in Southeast Asia are likely to be modest because most of their lending in the region is to Japanese firms and denominated in dollars or yen rather than local currency.

But others have projected that Japanese banks could face $20 billion to $30 billion in bad loans out of the $37.5 billion they have lent in Thailand alone, and perhaps an additional $10 billion to $20 billion in unrecoverable loans to neighboring countries.

In that worst-case analysis, an estimated $50 billion in bad loans would be piled on Japan’s nonperforming domestic loans--officially estimated at $233 billion, but possibly twice that much, according to some private analysts.

“Japanese banks will almost certainly have to increase their provisions for bad Asian loans--a hit that comes at a bad time, given that their domestic loan problems are still far from completely solved,” said Jesper Koll, vice president of J.P. Morgan Securities Asia Ltd.

Meanwhile, within Southeast Asia, the steep fall in currency values sharply reduces the region’s attractiveness as a market because of reduced consumer buying power. As of Tuesday, the Thai baht was down 33% from July 2, the Philippine peso was down 26%, the Indonesian rupiah was down 34%, the Malaysian ringgit was down 23% and the Singapore dollar was down 8%.

But lower local costs in dollar terms should boost competitiveness in global markets. So weaker currencies in Southeast Asia are good news for Japanese firms that export from the region to other parts of the world, Koll said. That helps ensure continued massive Japanese involvement in the area.

“Corporate Japan has targeted this region as a production base as well as a consumer market, regardless of short-term cyclical developments,” Koll noted.

But for the many companies whose Southeast Asia operations sell mainly within the region, the outlook is unfavorable because local demand “is crucial for their sales and profit,” he added.

Matsushita Electric Industrial Co., which has invested heavily in Southeast Asia over the last decade, is fairly typical of Japanese firms in the region, seeing both costs and benefits from the summer’s turmoil.

About 25% of Matsushita’s global sales are in Southeast Asia, and these had originally been expected to grow by roughly 11% in the fiscal year ending March 31, 1998, said Matsushita spokesman Yoshihiro Kitadeya. Now that forecast has been revised to zero or negative growth, which will affect the company’s profit.

Yet for the many export-oriented factories Matsushita has in the region, “obviously devaluation is an advantage,” Kitadeya said. Matsushita expects that within a few years, Southeast Asia will return to growth that will be “very steady compared with other regions,” he added. “We are not too pessimistic.”

The situation is similar for Toyota Motor Corp. In Thailand, where Toyota has a major manufacturing and sales presence, the firm’s July sales--the latest month for which figures are available--fell 33% compared with July 1996. Toyota’s Thai factories have sharply cut working hours and production, and the company’s August exports from Japan to Thailand plunged 84% compared with the same month last year.

But Toyota’s long-term plans have barely changed.

“We are still employing all our factory workers [in Thailand],” said Toyota spokesman Keith Truelove. “Basically we expect in the next one or two years things will be slow, but after that we expect a recovery. That’s why we don’t want to let any of our workers go. We would just have to train new workers. We’re just keeping them on, on reduced shifts, because we do expect the recovery to come.”

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Etsuko Kawase of The Times’ Tokyo bureau contributed to this report.

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Japan Loans

Japan’s economic ties to troubled Southeast Asia give it a huge stake in the region. Its nearly $130 billion in loans there are sure to worsen the condition of Japan’s domestic banks. Japanese bank loans outstanding as of Dec. 31, in billions of dollars:

Singapore: $58.8

Thailand: $37.5

Indonesia: $22.0

Malaysia: $8.2

Philippines: $1.6

* Source: James Capel Pacific