In recent mouths, similar pledges had been ineffectual, shrugged off by Japan’s fierce stock-market bears; this time was different. To the astonishment of still-gloomy analysts, the Nikkei responded, soaring 617 points on Thursday and then a stunning 949 points to close the week. The immediate sense of relief in Tokyo was palpable, but the critical questions Japan faces were still unanswered: with its markets in their “worst crisis since the war,” as Hata himself put it, was Japan a mortally wounded economy*. Had the rolling stock crash-since December 1989 the Nikkei has been down nearly 60 percent-revealed fundamental flaws in what so recently had seemed an indomitable economic machine? Or had the government actually turned back the clock, preventing, in the nick of time, a further speculative sell-off that otherwise could cripple a fundamentally sound economy.?
Amid the turbulence last week, Japanese officials privately were arguing that they had effectively staved off collapse. They insisted their intention had been not to resuscitate a critically ill patient but to reassure increasingly panicky investors at home and abroad that the ministry was not asleep at the switch. “This was a direct signal to the markets after Tuesday’s decline that we are simply not going to let the Japanese financial system collapse. The signal was more important than the content,” one ministry official said last week.
In fact, contrary to initial press reports, there was less to the government salvage job than met the eye. One step was simple bookkeeping chicanery that allows banks and other financial institutions to refrain from reporting losses on their stock portfolios in midyear fiscal reports. The other move-repealing a regulation that will allow financial institutions to pay dividends to their shareholders without divesting further from their massive stock portfolios-was more substantive, hardly enough, analysts believe, to change the dark mood in Tokyo. “We are not suddenly into a bull market,” insisted Jeff Bahrenburg, chief strategist in Merrill Lynch’s Tokyo office. True enough, Finance Ministry sources say, but that was never the intention. “They injected some confidence into the system,” said one senior banking executive last week, “and that was important.”
Government officials in Tokyo say not to make too much of the nation’s slump. That’s predictable, but it’s also probably correct. For all its current problems, the economy is still in better shape than that of either the United States or Germany, its two main economic rivals. The cyclical slump drags on. Last week the government announced that household spending in June had plunged 3.2 percent from a year earlier. That means it’s likely to take longer for industry to work off inventories that built up during the boom producing years that ended a year ago. But Washington and Japan’s corporate competitors worldwide have already noticed that Tokyo’s exports are beginning to pick up smartly. This year, in fact, Tokyo will post a record trade surplus-in the range of $135 billion.
That, not the Nikkei’s slide, is a fairer gauge of how competitive the Japanese economy remains. Moreover, an emergency spending package of public-works programs due out in one week will likely provide enough stimulus to keep growth moving in Japan at a moderate pace until Japanese companies begin to increase production again. That’s a luxury the United States wishes it had: Japan’s minimal rate of inflation and relative fiscal health allow a good deal of policy flexibility.
Make no mistake: after last week’s two-day euphoria the Tokyo market is likely to face new tests. The real-estate market is teetering badly, and that is plaguing Japan’s banks. Press reports in Tokyo late last week suggest that Tokyo’s central bank and the Finance Ministry will help fund a new organization that will take debt-ridden properties off the banks’ hands and then resell them methodically, rather than in a panicked rush. Once the market finds out how many bad property loans there are, further declines are likely, probably to new lows. But to confuse the turmoil in the Nikkei with the underlying strength of Japan is, almost certainly, a mistake its competitors will live to regret.
