Japan and their Economy by Richard_Cataman

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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


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,

        Einhorn, B ―Japan‘s Leading Role in a Potential Nightmare‖www.businessweek.com, March 26,
        Mann, J ―Trouble With Japan? U.S. Advice‖, www.latimes.com , March 22, 2001
        Mann, J ―Trouble With Japan? U.S. Advice‖, www.latimes.com , March 22, 2001

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

         Mann, J ―Trouble With Japan? U.S. Advice‖, www.latimes.com , March 22, 2001
         Sonoyama and Takahiro, W. ―The Enigma of Japanese Capitalism‖, www.jef.or.jp/en/jti, May-
June 2000.
         Tomio, T. ―Japanese Industrial Policy—Myth and Reality‖, www.jef.or.jp/en/jti, Jul-Aug 1998.

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

        Tomio, T. ―Japanese Industrial Policy—Myth and Reality‖, www.jef.or.jp/en/jti, Jul-Aug 1998.
        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

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


        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.

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

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


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

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


          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

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


        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

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

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


           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

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


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

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


        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

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,

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,
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
           Bremner, B, ―Why Japan‘s Big Yen Push Could Affect You-Yes, You,
         March 27, 2001

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      9
        Barker, ―Vanguard‘s Richard Foulkes: How to Win—Cautiously—in Asia,
www.businessweek.com, March 19, 1999

       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



       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.

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


4           1
                Ono, Y and Landers, P, ―To Win Japanese Vote, Use Your Head‖, The Wall Street Journal,
April 20,


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