Japan's embarrassment of riches could bring problems in the future

LIKE Saudi Arabia in the last half of the 1970s, Japan has so much money it doesn't quite know what to do with it all. ``It's an enormous problem,'' says Robert D. Hormats, a vice-president of Goldman, Sachs & Co., a major investment banking firm.

The Saudis and some other oil exporters put most of their new wealth into short-term investments in the commercial banks of the industrial nations. These banks in turn loaned much of that money to the less-developed countries; this eventually resulted in the international debt crisis.

Nowadays it is Japan whose purse is bulging. Its international payments surplus in the Japanese fiscal year ending March 31 was $93.7 billion. Japan must find an investment home for that money.

In addition, Japanese banks have been borrowing abroad on a net basis. That money, too, must be invested. Altogether, the net capital outflow from Japan in 1986 was $145 billion.

Some Japanese investors have turned away from the United States because they expect the dollar to drop further against the yen, notes Toshihide Mizuno, an economist with Sanwa Bank's New York branch.

Whenever the dollar declines 5 percent in value against the yen, the worth to the Japanese of American bonds or other investments drops 5 percent. That is offset to some degree by an interest rate about 6 percent higher on US bonds than what Japanese investors can get at home.

What else can the Japanese do with their earnings from the sale of Toyotas, video cameras, etc. abroad?

One thing is to build up reserves of the Bank of Japan. At the end of 1985, Japanese reserves of foreign exchange were $24.3 billion. By the end of February, they were $40.9 billion, according to the International Monetary Fund. By now, they probably exceed $50 billion.

The Japanese add to these reserves when they buy US dollars on the foreign exchange markets in order to prop up its value. The Japanese don't want the yen to strengthen further because it makes it more difficult for their companies to export.

Those foreign exchange reserves must then be invested by the Bank of Japan, probably mostly in US Treasury instruments.

The Japanese have also been using their money to buy foreign plant and equipment. They invested $14 billion abroad last year, up from $3.6 billion in 1983.

They bought some $93 billion of foreign bonds, compared with $12 billion in 1983. But net purchases in the US bond market plunged to $3.8 billion in 1986 from the $17.9 billion scored in 1985. They may have been net sellers of these dollar bonds in March.

The Japanese also purchased $7 billion in stocks abroad last year, just under 50 percent in the US.

``They have been placing their money all over the place,'' says Mr. Hormats.

Japanese insurance companies, he notes, have been buying Australian dollar bonds and British gilts (government bonds). They tend to seek investments with a high yield that can be used to pay insurance claims and are less concerned about whether foreign exchange or interest rate shifts hurt their capital.

Jan Vanous, editor of PlanEcon Report, notes that Hungary borrowed as much as $4 billion from Japanese commercial banks over the past two years, using some of the money to prepay more expensive debt owed West European and American banks.

Mr. Vanous, an economist, questions the wisdom of this investment. The money, he says, has enabled Hungary to avoid ``needed substantive economic adjustment'' and created ``an illusion'' that Hungary is a very creditworthy sovereign borrower.

The undeveloped member nations of the Organization of Petroleum Exporting Countries lacked breadth in sophisticated managerial or financial manpower. So they mostly left it to foreign financial institutions to invest their money. And, it must be said, they are not stuck with the less-developed country debts. The Japanese have an abundance of sophisticated manpower. Whether they will get a better return from their money in the long run by investing it directly themselves than have the Saudis, the Kuwaitis, and other oil exporters remains to be seen.

Certainly the Japanese are stacking up the investments. John Calverley, an economist with the American Express Bank in London, calculates that even if there is a rapid diminution of Japan's trade surplus over the next three or four years, Japanese net assets abroad still will double to $413 billion by 1990. Those assets would earn them net something like $27 billion, he figures.

The Japanese, it is clear, will not soon escape the problems of wealth - which they undoubtedly prefer to those of poverty.

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