Japan plummeted into recession in this year's first quarter, heightening the likelihood that the economic maladies of Asia will infect the economy here in the United States, analysts said yesterday.
The Japanese government yesterday said economic growth shrank at an annualized rate of 5.3 percent during the January-to-March quarter, an alarming revelation that exceeded even the direst predictions. Viewed in tandem with the annualized drop of 1.5 percent seen in last year's final quarter, Japan has experienced two consecutive quarters of economic decline. That's the technical definition of a recession, though Japanese officials would not label it as such.
Many economists said Japan's malaise will exacerbate the economic ills of countries such as Thailand, Indonesia and South Korea, and could even hurt healthy ones such as China. That in turn could crimp the earnings of U.S. companies, perhaps delivering a knockout punch to a volatile stock market that many believe is overvalued.
"The bottom line is that we can see the end of the bull market coming out of the Asian" meltdown, said Steve H. Hanke, professor of applied economics at the Johns Hopkins University.
Simply put, the bears might be on the horizon.
Although Japan has been in a slump since its bubble-economy burst in the early 1990s, most Japan-watchers say this isthe first time in two decades that this linchpin of Southeast Asia has experienced recession. The disclosure is likely to heighten pessimism in a region where the outlook has been bleak since Thailand devalued its currency about a year ago, setting off a series of economic implosions known as the "Asian contagion."
"Japan is seeing actual deflation like we did back in the 1930s" after the stock market's Great Crash, said Lacy H. Hunt, an economist with Hoisington Investment Management Co. in Austin, Texas. Hunt and others are worried that Japan will export that deflation -- a ruinous downward spiral in prices -- to the rest of Asia, and ultimately to the United States. Deflation is dangerous because people, companies and countries who borrow money in another currency get that money when it's cheap and have to pay it back after their own currency has been devalued -- meaning they have to come up with more of their own currency to repay the loan. More often, these borrowers default, which puts a tremendous strain on the big banks that made the loan and sometimes even causes the lenders to fail.
Because of the trouble in Asia, investors have traded their currencies for safer, dollar-denominated assets such as U.S. government bonds or U.S. blue chip stocks. In effect, these investors "sold" their currencies and "bought" dollars. When a currency sees rampant selling, its value falls; when it's bought, its price rises. That's what's happened with the Japanese yen and the U.S. dollar. Eroding confidence in Japan has prompted a flight away from yen and to dollar-denominated assets, causing the yen to fall and the dollar to rise.
After topping out at 80 to the dollar a few years ago, the yen has weakened so that it now takes 144 yen to buy one dollar. That has major implications for international trade.
Because a dollar can buy more yen, goods such as electronics exported out of Japan and into the United States become cheaper for U.S. consumers to buy. Indeed, those goods become cheaper all over the world, putting U.S. producers at a disadvantage that crimps profits, erodes market share and can spawn the kind of price- and cost-cutting that can cause U.S. workers to lose their jobs.
In an interview yesterday, Bethlehem Steel Corp. Chairman and Chief Executive Curtis H. Barnette said the company has concerns about how the cheap yen will affect its third and fourth quarters this year.
"It makes Japanese goods less expensive, less costly," Barnette said. "This not only has an effect on Sparrows Point and the Bethlehem Steel Corp it also affects our customers, customers who use our steel to export their products into international markets."
Worse, Asian countries are looking to export their way out of their recessions, and Japan is one of their biggest markets.
But with Japan undergoing what many U.S. officials say is less-than-effective triage -- and being a market that's regarded as generally hostile to imports -- the Japanese market might not be available, unless these Asian countries devalue their currencies again to make their wares more price-competitive. That could give U.S. firms more trouble.
Engine of growth faltering
"Basically, what you've got going on is that the engine of economic growth in Southeast Asia is faltering badly," said James E. Annable, chief economist for First Chicago NBD.
However, Annable doesn't think the Asian flu will infect the U.S. market. Exporters of big capital goods such as airplanes will get squeezed, but foreign investors are buying U.S. bonds, which drives up the bonds' prices and drives down their yields, or interest rates. Low interest rates will jump-start other parts of the U.S. economy -- homebuilders and mortgage lenders, for instance.
Those low rates could be the saving factor for stock prices, as stocks will seem more attractive than bonds or certificates of deposit. And with lower interest rates, homeowners will refinance their houses, slashing their payments and putting more money in their pockets, Annable said. Thus, the dollars that had been flowing into the economy from U.S. goods sold abroad will be replaced by spending here at home.
But Johns Hopkins' Hanke isn't buying any of these bullish arguments. He believes the United States has for years berated the Japanese government into keeping the yen strong, which meant Japan didn't print enough money to make sure its home economy could grow.
In essence, Hanke contends, that makes much of this crisis the United States' fault. Predicting the yen will fall to 170 to the dollar, Hanke said our country will pay for its imperialist transgressions as U.S. stock prices fall.
"This will bring a few of the bears out on Wall Street," he said.
Pub Date: 6/13/98