Global Reccesion, Japan Inc.

Even though a baritone chorus of snuffles and grunts rattles his hog shed roofs, all is not well on the Iowa farm of John McNutt. His hog farm is tied more closely than ever to a global economy that is faltering in large part because of a downturn in Japan, the world's second-biggest economy.

Japan's decade-long slump holds back a recovery in the depressed economies of East Asia. More broadly, it raises the odds that recession might spread worldwide to Europe and the United States.

Mr. McNutt already feels the slowdown. He and most other American farmers in recent years have relied more than ever on swelling exports and richer Asian diets to help them bring home the profit that often eludes United States farms. Japan is the top importer of US pork.

But in recent months, consumers from Seoul to Santiago have let down McNutt and other US farmers.

Worldwide demand and prices have slumped. A creeping global recession that began in East Asia a year ago will contribute to an estimated 13 percent plunge in farm income this year. Already, McNutt and many other hog farmers are running at a loss.

"It's very painful operating in the red," McNutt says. "We've got to find a way to stabilize Japan's demand."

McNutt's predicament highlights how foreign markets hit American pocketbooks, profits, and portfolios harder today than during any other peacetime era.

Welcome to "globalization." The steady surge in worldwide trade and capital flows has brought unprecedented riches and risks, making it costlier than ever for Americans to ignore what happens overseas.

Ground zero in the slowdown hurting McNutt and the broad US economy is Tokyo's banking district.

In the 1980s, the area's hulking institutions made Japan by far the world's No. 1 creditor - a fountainhead of $2 trillion in invigorating cash for poor and prosperous countries alike.

But today, these same Japanese banks - and banking officials - have made Tokyo the world's No. 1 polecat in the hushed, wood-paneled halls of world finance.

Much of East Asia is in a deep slump because Japanese and other Asian banks in the '80s staged a spree of - what seems in retrospect - foolish lending to overextended and often corrupt Asian businesses.

In Japan, inane lending pumped up a speculative bubble in real estate that popped early this decade. Since then, Tokyo has propped up the troubled banks who made the loans rather than let them fail.

Touting what it called a "convoy system," it spread losses throughout the banking sector and badly tainted sound banks.

Now, estimated bad debt exceeds $1 trillion. Debt-soaked Japanese banks have all but shut down credit, an economy's lifeblood. Tight credit chokes most of East Asia; Japan's banking problem is now the world's, too.

"Japan's banking problems have exacerbated the whole Asian financial crisis, and now you can see it spill over to Wall Street," says Judith Lee, international trade expert with Gibson, Dunn, and Crutcher, a Washington law firm.

US industries smarting

The downturn in Japan and most of East Asia has especially hit the West Coast and industries dependent on exports across the Pacific. For example, sales of software and computer equipment fell 12 percent during the first six months of the year, according to the American Electronics Association in Washington.

World finance ministers at the recent meetings for the International Monetary Fund in Washington pointed to Japan as the pivot point for reversing the meltdown in world markets and an emerging global recession. Japan, they said sharply, must revive its slumping economy and shake up its banks. A Tokyo turnaround would energize the East Asia malaise, calm world financial tumult, and buoy suffering commodity producers like McNutt.

"I do not see how the Asian debt crisis can get solved without an improvement in Japan," says Robert Dunn, an economics professor and specialist in international finance at George Washington University in Washington.

As it tumbles deeper into recession, Japan denies the rest of Asia a huge engine for growth.

A revived Japan would energize the economies of East Asia and much of the world. Japan would import more from Asian nations desperate to reverse rising bankruptcy and job losses. Japanese banks would eventually begin lending again, helping to ease a credit squeeze that has throttled profit and growth in struggling Asian companies.

The stimulus would flow worldwide, reinforcing growth in the United States and Europe. Hard hit US exporters - farmers like McNutt, manufacturers like Boeing, and high-tech firms like Compaq - would see overseas revenue rebound.

Also, a renewed Japanese economy would calm the volatility in world bond and equity markets. Firmer stock prices would support consumer spending, the linchpin of US economic growth.

But a downturn is deeply rooted in Japan. Unemployment this year will reach a record high 4.2 percent, and the broad economy will shrink by 1.8 percent, according to official estimates.

Reform money

The government has promised to spend 27 trillion yen (about $225 billion) to stimulate the economy. And the ruling Liberal Democratic Party (LDP) has pushed through parliament a bill that would inject hundreds of billions of dollars of public money into ailing banks as part of a system-wide reform.

But the LDP has lost credibility as factionalism and opposition-party resistance have produced months of political gridlock. And its past efforts to spur the economy have proven to be too little, too late.

The next several weeks are crucial for Japan, analysts say. Discussions beginning this week between banks and the Finance Ministry over midyear balance sheets could reveal some institutions to be insolvent.

Many banks confront huge losses because they list equities as assets. Such holdings have plummeted in value during the stock market's meltdown. Unconfirmed reports from Tokyo say Long Term Credit Bank will report itself insolvent within the next two weeks. A bank failure could trigger a run on banks that would worsen the nation's credit crunch, say analysts.

The slump in Japan leaves McNutt and other US farmers sitting on huge stores of the world's highest value, most efficiently produced food.

"The situation now is alarming," says Nick Giordano, an international trade expert with the National Pork Producers Council. "If it continues, and foreign demand doesn't pick up, there will be a lot of blood in this industry."

As it goes for US farmers like McNutt, so it goes for most Americans. Over the decades, producers of food and other commodities have often been the bellwether for hard times.

McNutt can operate his 900-acre hog farm in the red for several more months.

After that, the horizon is gray.

"My family's had the farm for about 100 years," he says: "I'd like my kids to do it, too."


* Japan has the second largest economy in the world with $2.7 trillion in gross domestic product, behind the US at $7.3 trillion.

* Japan's economy is 10 times larger than China's and twice the size of all other Asian economies combined.

* Japan is the United States' second-largest trading partner. Of US exports, 10.8 percent ($68 billion) go to Japan, and 14.5 percent of US imports ($115 million) come from Japan.

* Japan holds more US Treasuries - $267 billion - than any other nation.

* Japan is the world's No. 1 creditor nation, extending $2 trillion in foreign loans to poor and wealthy nations alike.

* Japan's 126 million people have $10 trillion in personal and family savings accounts, compared with $23.3 billion for America's 267 million people.

* The Japanese government holds $220 billion in foreign currency reserves.

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