Japan and their Economy
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Japan Economy Japan, the world‘s second largest economy, for the last ten years has suffered from falling economic growth and lower stock market prices. The Japanese government attempted to stimulate the economy repeatedly with fiscal policies that resulted in large amounts of spending on public works. The Bank of Japan has also attempted to stimulate the economy through monetary policy by adjusting interest rates. With the interest rate now at zero for central bank lending and a large federal deficit in Japan, traditional approaches to monetary and fiscal policies appear ineffective. A new more radical approach is needed which calls for restructuring economic and political systems in Japan. The Japanese economy is characterized by a strong work ethic, high technology and a cooperative working relationship among manufacturers, suppliers, and distributors in groups called keiretsu. A large number of the labor force is also guaranteed lifetime employment. Industry is the most important sector of the economy and relies on imports of raw materials and fuels. Agriculture is a substantially smaller sector, so Japan imports 50% of its grain other than rice. Japan has one of the largest fishing fleets catching 15% of the global catch. The real economic growth for three decades prior to the 1990‘s was substantial. The 1960s marked 10% average growth, the 1970s with 5% average growth and the 1980s with 4% average growth1 In the 1990s, economic growth was much smaller due to over investment in the 1980s and contractionary government policies. In 1996, growth increased in response to expansionary fiscal and monetary policies. However, despite the temporary increase, Japan entered a recession starting in 1997. The economy began to 1 www.geographic.org 1 stabilize in 1999 as fiscal and monetary policies increased government spending and improved business confidence. However, in 2001, Japan finds itself again with a decline in industrial production, the sharpest since 1993, and an economy in recession Japanese Bubble Economy The economic slowdown in Japan and the stock market fall to a 15-year low is due to a bubble economy from the previous two decades. Unlike the U.S. bubble due to high technology stocks, the bubble in Japan was mostly due to financial asset sectors including bonds, stocks, and real estate2 . Japan continued to expand and export heavily throughout the 1990s and consumer confidence continued. A large current-account surplus began to grow in Japan. When market and asset prices began to decline in the late 1990s, foreign investors were not significantly impacted due to the closed Japanese economy. This explains why Japan did not attempt to correct any deficiencies in their banking system to attract more capital from foreign investors. This is in contrast to the U.S. who relies heavily on huge current-account deficits and foreign investments. Japan spending excesses contributing to the bubble has been debated among national economic experts. Treasury Secretary Paul H. O‘ Neill said that the Japanese government needs to help its people ―achieve a higher standard of living‖ 3 However, others claim that people in Japan are living quite well and are often paid as well as or better than Americans. According to Chalmers Johnson, president of the nonprofit Japan Policy Research Institute, ―Japan is still one huge La Jolla‖ and ―It‘s got the highest standard of living on Earth.‖4 Another expert on Japan‘s economy, Edward Lincoln, 2 Einhorn, B ―Japan‘s Leading Role in a Potential Nightmare‖www.businessweek.com, March 26, 2001. 3 Mann, J ―Trouble With Japan? U.S. Advice‖, www.latimes.com , March 22, 2001 4 Mann, J ―Trouble With Japan? U.S. Advice‖, www.latimes.com , March 22, 2001 2 notes that although people in Japan live in small houses, they spend their money on other luxury items including designer accessories and clothing. 5 Another contribution to the economic bubble in Japan is the ―land myth‖ which propagated the idea that land was the objectively most profitable investment. Land prices skyrocketed, while property tax remained unchanged. Major companies avoided taxes by using the ―hidden assets‖ in land due to the differences between the increased market value and the book value. In turn, the companies used these discrepancies as corporate value. As stock prices increased, equity financing developed in the form of convertible corporate bonds and warrants.6 The shift from indirect to direct financing was seen in industry. These funds went into land acquisition and cross-shareholding, which created a land and stock market bubble. The Japan government itself also supported the creation of the economic bubble in the 1980s and the early1990s. Japan became the greatest creditor in the world and its GDP became the second largest in the world next to the United States. Japan‘s promotional type industrial policies came under U.S. criticism due to major government subsidies for the development of technologies, low-interest loans, and tax privileges. The U.S. also criticized the cartels that were formed for increasing exports, but discouraging imports. As a result, Japanese industries such as automobiles, semiconductors and machine tools became involved in a bitter trade war with the U.S. 7 5 Mann, J ―Trouble With Japan? U.S. Advice‖, www.latimes.com , March 22, 2001 6 Sonoyama and Takahiro, W. ―The Enigma of Japanese Capitalism‖, www.jef.or.jp/en/jti, May- June 2000. 7 Tomio, T. ―Japanese Industrial Policy—Myth and Reality‖, www.jef.or.jp/en/jti, Jul-Aug 1998. 3 Burst of the Bubble Economy Japan‘s economic bubble began to shrink in the early 1990s followed by a long economic slump. The 1990s stagnation of the Japanese economy is due to some of the same factors that helped create economic growth in the prior decade. Regulations, designed to protect domestic industry, did not stimulate internal competition for high productivity with low costs.8 Consequently, Japanese manufacturing industries, which accounts for 20% of GDP, have low productivity compared to international standards. In fact, Japanese productivity plunged to less than two-thirds of that in the U.S. 9 this is despite higher wages for employees competitive with international firms. The stock indexes of Japan plummeted to 1985 levels on March 13, 2001. This was despite news that the economy had grown more than expected in the last quarter. The Nikkei index, which represents 225 companies on the Tokyo Stock Exchange, fell 456.53 or 3.6% and closed at 12,171.37.10 The U.S. stock indexes, in contrast, had only approached 1998 levels on the same day. The high-tech stocks soaring the U.S. new economy required an adjustment as with any business cycle. But, Japan is not just experiencing a ―bubble burst‖ similar to the U.S. economy. 11 Japan is suffering from overwhelming pessimism combined with regulatory and banking industry problems making a quick recovery in Japan unlikely. The Japanese government predicts that the GDP growth for the full fiscal year will be 1.2%, which is slightly better than last year, but far lower than the boom period in 8 Tomio, T. ―Japanese Industrial Policy—Myth and Reality‖, www.jef.or.jp/en/jti, Jul-Aug 1998. 9 Safire, W. ―The Sinking Sun?‖, www.nytimes.com, March 15, 2001 1 0 Zielenziger, M. ―Japan‘s stocks hit April 1985 level‖, Philadelphia Inquirer, March 13, 2001 1 1 Norris, F. ―Floyd Norris: A Tale of Two Bubbles. Could This One Be Painless?‖, www.nytimes.com, March 16, 2001 4 the late 1980s. The GDP in Japan in composed of by sector: agriculture 2%, industry 35%, and services 63%. Therefore, a slow down in consumption that makes up more than half of the country‘s GDP will have serious adverse effects on the economy. Another potential for long-term recession is falling consumer prices and falling consumer wages. Japan is in a deflationary spiral with the measure of inflation dropping 1.7% in the last quarter.12. This may create more of a signal for Japanese to save and not spend due to a belief that prices will be lower in months to come. Corporate profits may then be reduced followed by job cuts and less investment in businesses. This results in a cycle of even less spending and more deflationary prices. This cycle inhibits economic growth. Economic deflation has also affected the value of real estate and stocks. The price of commercial land in Tokyo has declined 74% since its peak. The land value in Tokyo is significant because it is the basis for the value of the loan portfolios in Japan‘s commercial banks. In addition, the value of residential property is down 49%, which is the single most important asset of Japanese families. According to Robert Alan Feldman, Japan economist for Morgan Stanley Dean Witter, ―It‘s important to distinguish between changes in relative prices and a situation where all kinds of prices, including assets and the price of labor, fall together‖.13 This is the situation in Japan currently and a policy response to end the deflation becomes imperative. Interestingly, not all retailers are complaining about the current economic climate in Japan. Some argue that the declining prices are a healthy signal that Japanese 1 2 Zielenziger, M. ―Japan‘s stocks hit April 1985 level‖, Philadelphia Inquirer, March 13, 2001 1 3 Chandler C and Kashiwagi, A. ―Japan Becomes the Land of the Falling Price‖ www.washingtonpost.com, April 11, 2001. 5 consumers are finally benefiting from global competition. Low-cost retailers, such as Uniqlo‘s founder, Tadashi Yanai has stated, ―This whole fuss about ‗deflation – it‘s incomprehensible to me..The very use of the term ‗deflation‘ reflects Japan‘s protectionist mind set…Consumers just want good products at a reasonable price.‖ 14 These no-frills apparel chains are successful at a time when better known retailers have been forced into bankruptcy. Many of these consumer goods sold by the discount stores are imports from low-wage Chinese producers. Owners of the ―cheap chic‖ stores maintain that concerns with deflation serve as an example of the unwillingness of Japan to accept open markets and free competition. The increasing number of imports is also demonstrated by Japan‘s currently falling surplus account.15 In fact, the growth of imports is more responsible for the decline in the current-account surplus than exports. The growth of exports in the last three years has been close to zero. However, imports have been robust since the end of 1998. The explanations for this change may be due to the Bank of Japan keeping monetary policy too tight. This would push up the value of yen, while increasing imports and decreasing exports. Or, it may be consumer driven with strong demand for imports, especially those that offer good quality and are inexpensive. If some consumers are not affected and are in fact optimistic about falling prices, then the stock market collapse most adversely affected Japanese banks. In the 1990s, banks have closed on more than 70 trillion yen of non-performing loans. However, in this most recent collapse there is not even enough time to write off the loans because so many of them are defaulting so quickly. The banks have been accused of extending loans 1 4 Chandler C and Kashiwagi, A. ―Japan Becomes the Land of the Falling Price‖ www.washingtonpost.com, April 11, 2001. 1 5 Wrong or strong, www.economist.com, March 29, 2001 6 to individuals with poor credit because of past business loyalties. The banks have also relied on their equity portfolio to pay off bad-loans. Without those unrealized gains and with the recent change of accounting policy to market values, the banks‘ capital bases will suffer greatly. Some banks may be even forced into insolvency due to the portfolio losses and accounting changes. Among those at risk are Daiwa Bank and Chuo Mitsui Trust.16 Monetary and Fiscal Policy Both fiscal and monetary stabilization policies have been attempted in Japan over the last decade in order to stimulate the economy and keep up consumer confidence. Monetary policy involves changes in a country‘s money supply or changes in the rate of interest. Fiscal policy involves changes in government spending or changes in taxation. Although fiscal policy may affect aggregate demand more readily than monetary policy actions, the reality is there is a built in lag time in fiscal policy. So major fiscal policy initiatives take time to collect data, win the support of the public and politicians, and put policies into effect. Whereas, central banks which operate with some independence, such as the Bank of Japan, may execute a monetary plan almost immediately by buying or selling in an open market. The shape of the aggregate supply curve will determine the efficacy of monetary and fiscal stabilization policies. The aggregate supply curve represents the relationship between the price levels and the quantity of real GDP supplies when all other determinants of quantity supplied are constant. The aggregate supply curve slopes upward so that the quantity of output supplied rises as the price level rises. Many economists debate over whether the shape of the aggregate supply curve is flat or steep. 1 6 ―Another False Dawn?‖, www.economist.com, March 22, 2001 7 If the curve is flat, than large increases in output can be achieved with little inflation. Therefore, expansionary fiscal or monetary policy that raises the aggregate demand curve results in large gains in real GDP with low inflation. However, if the curve is steep, then prices are responsive to changes in output and expansionary fiscal or monetary policy will cause more inflation without contributing much to the real GDP. 17 Therefore, a stabilization policy is much more effective at fighting recession than inflation when the curve is flat. Many economists believe that changes in the aggregate demand will affect the output in the short run (the curve is flat) and the price in the long run (the curve is steep). The lag in stabilizing the economy is confounded by the relationship between actual and potential GDP during a business cycle.18. When a recession is recognized, policymakers will act and attempt to curb both the length and depth of recession. However, if there is too much lag time between when a recession is recognized and when policies are implemented then a policy will not contribute to stimulate the economy. In fact, it may overstimulate the economy, thus destabilizing it at a time of recovery. Japan‘s response to the stock market crash on March 13, 2001 was to quickly implement some form of monetary policy to stabilize the economy. The Central Bank of Japan either could alter the money supply or change the rate of interest. Altering the money supply would involve either open market operations, changes in reserve requirements or changes in lending policy to banks. Japan‘s central bank first chose to drop interest rates to zero on March 19, 2001 and stated they would leave them there until 1 7 Baumal, WJ and Blinder, AS Economics Principles and Practice, Orlando: Harcourt Brace and Company; 1997. 1 8 Baumal, WJ and Blinder, AS Economics Principles and Practice, Orlando: Harcourt Brace and Company; 1997 8 consumer prices stop falling. This is a reversal of their September 2000 contractionary money policy implemented after minimal growth in the economy last year. But, many have noted that lowering the interest rates is essentially a non-event. Japan‘s interest rates were close to zero at 0.15% and even then the free money did not make a difference to the economy.19 The banks cannot capitalize on the interest rates and take more risks with loans because they already deep in debt. Consumers cannot be encouraged to take on more loans because they have already overextended themselves and borrowed too much. Japan‘s central bank also made an announcement that they would abandon interest rates as the target of monetary policy and instead focus on the money supply. The central bank cannot control both the money supply and the interest rates at the same time. The main difficulty in using the supply of money as a target is that the demand for money may not be smooth and predictable from month to month. This may result in fluctuations in the interest rate that would make business decisions difficult. For these reasons, the U.S. Fed ceased to use the money supply to guide policy. However, many economists approve of Japan‘s movement toward managing the money supply because they argued for years that Japan did not pay enough attention to the growth and quantity of money. The central bank states that it will issue yen to buy assets to increase the quantity of money directly to get the price level to zero inflation. The Bank could either buy dollars with newly created yen or buy back large quantities of government bonds. Both strategies would force the yen lower. It will also target bank reserves by increasing reserves to 5 trillion yen from the present level of 4 trillion yen. The central bank 1 9 ―Another false dawn?, www.economist.com, March 22, 2001 9 promises a 20% expansionary base of money and intends to substitute inflationary for deflationary consumer attitude.20 Printing money is not inconsequential and may have a downside contributing to the economic recession. If the yen falls very low, then concerned foreign investors may rush to sell shares in Japan‘s financial system. Additionally, the Bank of Japan is concerned that if the central bank prints money to finance the government‘s deficit, then this may also affect domestic investors. These investors may take flight if bonds drop and abandon both the bonds and the yen. The focus on monetary policy during this most recent recession is in sharp contrast to fiscal policies of the last decade. Japan‘s response to prior recessions has been massive government spending and higher taxes. These fiscal policies, costing $1.1 trillion yen, were designed to increase domestic demand and help companies out of insolvency.21 Unfortunately, the years of deficit spending on questionable public works projects has left Japan‘s government debt ridden with few options to effectively manage the current economic crisis. Many of these projects were supported by the Labor Democratic Party to help its rural constituency who hold much electoral clout. 22 Banking industry reform Many recent fiscal policy reform proposals are targeted at cleaning up the banking industry. In fact, many refer to Japan‘s decade of economic difficulty as not an economic crisis, but a banking crisis. These critics maintain that no Japanese recovery is possible 2 0 ―Re Central Banking‖, The Wall Street Journal, March 21, 2001 2 1 Porter, ME. ―Japan: What went wrong‖, The Wall Street Journal, March 21, 2001 2 2 ―For Japan‘s LDP, the Party May be Over‖, www.businessweek.com 1 0 without radical reform. The reforms needed are compared to America‘s savings-and-loan rescue over a decade ago; banks must shut down or sell off their weakest affliates. 23 Japan‘s banking system is confronted with bad debt and corporate loan insolvency. In addition, they face a major accounting policy reform effective April 1, 2001 when they start valuing assets at market value. This in itself will impact the bank‘s operating profits due to the recent market decline. Many advocate the reform needed is to foreclose on deadbeat borrowers and force banks to unload bad debt, while auctioning off the real estate collateral. However, the banks have been reluctant to share this bad new with borrowers. One reason is the fear of increasing Japan‘s unemployment rate and another is the fear of alienating individuals with strong ties to the Labor Democratic Party.24 The Labor Democratic Party has also announced an emergency economic plan, which not only involves forcing banks to write off bad loans, but also limits the size of banks‘ equity portfolio relative to the value of their total capital base.25 The plan sets a two-year deadline for banks to write off loans to bankrupt borrowers. It also proposes to create a government backed ―stock buying entity‖ which would buy to bank-owned stock until the share could be sold to private investors. Critics of the plan note that the plan lacks a mechanism to ensure that the banks will write off the bad loans and fails to address consequences if they do not. Additionally, the plan does not address how the government-buying agency will get the money to buy shares of stocks from the banks. In an interview Hakuo Yanagisawa, Japan‘s top banking regulator, admitted to these 2 3 ―Reviving the Japanese Economy‖, www.nytimes.com, March 22, 2001 2 4 Chandler, C. ―Japan‘s Ailing Banks Face Mergers in Tough Year‖, www.washingtonpost.com, April 2, 2001. 2 5 Chandler, C. ―Japan Offers Plan To Resolve Bank Debt Problems‖, www.washingtonpost.com, April 7, 2001 1 1 deficiencies, ―We thought it would be meaningful to announce these two devices as a sign of the government‘s determination. But if you ask me ‗where are the details?‘ well, of course, you are right…There are many points that still have to be dealt with.‖ 26 Critics state that the root of Japan‘s banking problem is poor lending decisions. Since the 1990s banks have written down almost twice their entire capital and reserves to eliminate the bad debt. Even as parts of the economy recover, the banks will still not be helped. Corporate bankruptcies continue at an alarming rate and the economy is caught in a vicious cycle of deflation. Large companies are lowering their prices to maintain cash flow thinking that the banks will come to their rescue. This then impacts competitors who must similarly respond to be competitive in the industry. Additionally, the banks are still led by the same bosses who were involved in the 1997-1998 crisis where the government created a 70 trillion yen cushion of funds to be used in the banking system as needed. This government ―safety-net‖ is so crucial that the credit rating agency, Moody‘s, list individually banks at an E or E+, but collectively as an average credit rating of ―A‖.27 Therefore, management that once relied on government aid to solve their problems will again expect government intervention. This is why some critics argue that new policies as well as new managers should be part of the banking reform. Government Reform Not everyone is embracing the emergency economic plan to reform the banking industry. Some note that the program is political and once again designed to protect the construction, real estate, retail and property companies who are large contributors to the 2 6 Chandler, C. ―Japan Offers Plan To Resolve Bank Debt Problems‖, www.washingtonpost.com, April 7, 2001 2 7 ―Fiddling While Marunouchi Burns‖, www.economist.com, Jan 25, 2001 1 2 ruling Liberal Democratic Party. According to Atsuto Sawakami, a broker, ―This is vintage Japan…Avoid drastic change. If shares don‘t rise, make taxpayers foot the bill.‖28 Other Western analysts have supported these claims and noted that Japan banks have chosen to set aside more money for bad loans rather than improve the creditworthiness of their loan portfolios. ―Vintage Japan‖ is Japan‘s Liberal Democratic Party, which ruled Japan since the mid-1950s with the exception of just one year (1993). The party has come to symbolize over the past 10 years, corruption and bureaucratic paralysis. The party represents the ―Old Japan‖ which includes the farming interests, construction industry, retailers, distributors, and midlevel manufacturers and suppliers. These are exactly the interest groups who for years the government was trying to protect with their fiscal spending policies The Prime Minister, Yoshiro Mori, formally announced that he would step down as head of the Liberal Democratic Party on April 24 in the midst of a public approval rating as low as 6.5%. According to his Chief Cabinet Secretary, Mori stated, ―I made up my mind to resign because I think it is necessary to tackle mounting issues both at home and abroad under a new administration.‖ 29 One of the contenders for the job is Junichiro Koizumi who is known for his more outspoken radical manner. He campaigned with promises to reform both politics and the economy. He promised to address the bad bank loans and is willing to do so despite the fact that Japan may incur negative growth for the 2 8 Chandler, C. ―Japan Offers Plan To Resolve Bank Debt Problems‖, www.washingtonpost.com, April 25, 2001 2 9 Schmetzer, U. ―New Leader Needed, But No One Bites‖, chicagotribune.com, April 13, 2001 1 3 next several years.30 Koizumi‘s record includes more than three decades with the Liberal Democratic Party in various positions and two cabinet-level ministerial posts. The other leading contender is Ryutaro Hashimoto, a former Prime Minister, who would like another opportunity to reform Japan. Japan and the World Economy The recent events in Japan have not gone unnoticed in the United States. The U.S. is very concerned with the banking crisis in Japan and the who will be the next leader of the world‘s second largest economy. It is also interested in Japan‘s strategy for climbing out of recession. This is because if the yen falls against the dollar, Japanese goods will be made cheaper and more competitive than U.S. products. Maureen Smith from the American Forest and Paper Association made the following statement, ―The Japanese make no bones about why they‘re doing a lot of this stuff—it‘s to keep the yen at an export-competitive level‖.31 Finance Minister Kiichi Miyazawa of Japan denies a plan to actively weakening the yen, although he did not oppose a natural decline. 32 A weakening yen will also affect other nation‘s currencies and the corresponding strength of the dollar.33 This may set off a series of devaluations everywhere including China, Brazil, Argentina and Mexico. These countries would devalue their money in order to compete with Japanese products. With falling global currencies, the U.S. would become an even more major importer of the world‘s goods and services. 34 This would occur at a time when the U.S. economy‘s demand for imports is reduced due to their own 3 0 Struck, D, ―Japan‘s Likely Prime Minister Brings a New Style of Politics‖, www.washingtonpost.com, April 23, 2001 3 1 Blustein, P ―Japan‘s Economic Plan Could Hurt U.S. Companies‖, March 21, 2001 3 2 ―Official‘s Remarks Depress Yen‖, www.nytimes.com, March 8, 2001 3 3 Williams, M, ―Japan Starts to Sweat the Yen‘s Slide‖, The Wall Street Journal, April 3, 2001 3 4 Flanigan, J ―Japan‘s Changes Will Affect World‘s Economies‖, www.latimes.com, March 18, 2001 1 4 economic slowdown. Additionally, a sharp fall in currency could set off devaluations like those that resulted in the Asian financial crisis of 1997-1998. Steve Roach, an economist with Morgan Stanley Dean Witter, notes that Japan‘s devaluation game is a ―lethal force on the rest of the world‖ and a ―final straw for non-Japan Asia and for the global economy at large.‖35 Another concern for a weak yen is the potential impact on investor activities. As the yen depreciates, consumer confidence in the yen may lessen and many may chose to shift money outside Japanese stocks and bonds. This action would further depress the Japanese economy. Additionally, Japanese households who have an estimated $1.1 trillion in savings may further increase savings rather than risk their money in the domestic or international stock markets.36 According to Kermit Schoenholtz , a chief economist with Citibank, Japan is the biggest owner of foreign financial assets in the world. If they would begin selling off their foreign holdings, it would disrupt the financial markets around the world.37 A final consideration is that Japan will use this opportunity to encourage other world banks to rebalance their foreign holdings away from dollars and into more yen and euros. Yoshimasa Hayashi, state secretary for Japan‘s Finance Ministry, is quietly seeking out Singapore, Thailand, Indonesia, and the Philippines to have more yen in the 3 5 Bremner, B, ―Follow That Goose—Right into the Fire‖, www.businessweek.com, March 13, 2001 3 6 Matsushita, Y, ―Japan unveils Bank Plan‖, www.washingtonpost.com, April 4, 2001 3 7 Gosselin, PG and Mulligan TS, ―U.S., Japan Economic Woes Echo Worldwide‖, www.latimes.com, March 15, 2001 38 Bremner, B, ―Why Japan‘s Big Yen Push Could Affect You-Yes, You, www.businessweek.com, March 27, 2001 1 5 world economies. 38 In return, these Asian communities are asking for more open trade with Japan. Japan must become an import superpower as well as an export superpower to give these central banks a good reason for holding on to more yen. If foreign assets became more dependent on yen and less on dollars, American interest rates could change greatly resulting in less foreign investors buying U.S. Treasuries or U.S. stocks. Investing in Japan Investing in abroad has trailed U.S. domestic stock returns over the past decade. An example is the Wilshire 5000 Index, which returned an average of 17.5% compared to the key foreign-stock index, which returned only 5%.39 Richard Foulkes, Manager of Vanguard International Growth Fund, has been successful at beating its foreign-stock benchmark by an annual average of 4.4%. Foulkes states that he has a strong bias toward Continental Europe including the U.K. He predicted that in 1999, the yen would weaken because the Japanese would need to monetize their debt. At that time, Foulkes had about a 12% investment in Japan and he did not have intentions of expanding Japanese holdings at that time. His biggest position is with Fuji Photo and has smaller positions in a pharmaceutical drug company, Takeda and Murata, a company that makes components for mobile telephones. Matsushita Electric Industries also claims some of the portfolio holdings, and is noted by Foulkes to be a stock to buy once the economy grows and domestic consumption increases. Today, Vanguard International Growth has a 12.8% investment in Japan. 3 3 9 Barker, ―Vanguard‘s Richard Foulkes: How to Win—Cautiously—in Asia, www.businessweek.com, March 19, 1999 1 6 Templeton Institutional Group Chief Investment Officer, Gary Motyl, commented that in terms of equity weightings in portfolios, Japan has moved from the low single digits to the high single digits. He noted that the majority of stocks in Japan are still expensive on a price-to-earnings ratio.40 He also claimed that they are expensive on a price-to-adjusted book value basis. Motyl wants to see some serious reforms and deregulation before the firm would become more positive about investing in Japan. The companies that he presently feels positive about include Komatsu, the world‘s second- largest producer of construction equipment. Motyl also notes that Toyota Moter Company and Sony are also well-run operations with good management and high-level technology. Conclusion Japan‘s current economic crunch is the culmination of over a decade of low growth, low inflation, and huge amount of government spending. The economic ―bubble‖ which shrunk over the last decade in Japan was a result of lower stock values due to lower financial asset values and lower real estate values. Japan‘s central bank responded with essentially a nonevent change in the interest rate to O, followed by policy plans to increase the money supply. This movement toward an expansionary policy is a reversal of the contractionary policy that Japan implemented this past September 2000. The deflation that is plaguing Japan is due to falling consumer prices along with falling stock market prices. On March 13, 2001, Japan‘s Nikkei index fell 3.6% and approached 1985 levels. In response to the recession, the Liberal Democratic Party pledged to ensure banking industry reform by having banks write off bad debt within the next two years. Unfortunately, the plan was presented without a mechanism to enforce 4 0 Gilpin, KN, ―Is Japan digging Out, or Falling Deeper?‖, The New York Times, March 25, 2001. 1 7 banking reform and was perceived by many as a political movement to gain votes for the Liberal Democratic Party, which is ailing in public support. The resignation of the Prime Minister, Yoshiro Mori, leaves a vacancy for a new candidate to step in with aggressive reform. The two most viable candidates, Ryutar Hashimoto and Junichiro Koizumi do not differ too much among their solutions to the issues confronting Japan. Both are vowing to reduce Japan‘s budget deficit, revive the economy with deregulation and get bad loans off the books. However, they do have a fundamental difference, their hairstyle. While many Japanese men have favored slicked- back hair, Koizumi keeps his locks in a ―Beethovenian‖ wave. At least one housewife approves and notes, ―I hate that slicked-back style…those old guys should retire, or Japan won‘t change.‖41 If it is true and hairstyles can predict a leader who is better at reform and revolutionary policy, than lets just hope that Mr. Koizumi has very few bad hair days! 4 1 Ono, Y and Landers, P, ―To Win Japanese Vote, Use Your Head‖, The Wall Street Journal, April 20, 2001 1 8