Turmoil May Dispel Japanese Myths

What’s behind the turmoil in the Tokyo stock market?

Something most Americans don’t associate with the Japanese economy: A long-term pattern of speculation that has taken Japanese real estate and stock prices to ridiculous heights.

In recent years Americans have become familiar with weird claims and statistics coming out of Japan: that one square mile of Tokyo real estate was worth more than all of California, for example, or that 60% of Japanese stocks never trade because companies and banks hold each other’s shares--and therefore the Tokyo market can never decline too rapidly.

Other statistics have been cited in much comment on Japan’s stability and growing economic power: that the world’s 10 largest banks are Japanese, or that the value of companies traded on Japan’s stock exchange--at more than $4 trillion--is greater than the value of all U.S. companies.

But such comment has been superficial and, as we’re seeing now, wrong. The Tokyo market has been tumbling and, despite a rebound on Tuesday, say experts, is likely to fall some more.

The truth, of course, is that the weird statistics are not signs of strength but of speculation out of control. A square mile of Tokyo, whatever its price at the moment, cannot be as productive as the state of California and therefore cannot be as inherently valuable.

More important, high land prices in Japan are not a boon but a problem. “Real estate is to Japan as the defense budget is to the American economy,� remarks a Japanese banker in a wry comment. “Both absorb an enormous amount of resources.�

Because of high land prices, housing is scarce in Japan, and a single room, two hours by commuter train from Tokyo can rent for $2,000 a month. Companies help to pay employees’ rent but that doesn’t solve what many see as an emerging social problem. “There is unhappiness among the common people, and worries about Japan becoming a society of haves and have-nots,� says Yukuo Takenaka, a consultant to Japanese and U.S. business.

The problem doesn’t stop with real estate. Rising land prices are just the base of a speculative funnel cloud at the center of the Japanese economy. Companies are valued by stock investors on the basis of their holdings of land and buildings, which in recent years has meant that rising land prices boosted stock prices--and Japanese banks loaned money on the increased value of both.

Many of those loans have financed further speculation in real estate and stocks. Fully 15% of the Tokyo stock market’s annual volume is accounted for by companies trading in each other’s shares in order to fatten their profit statements. Major companies often earn more from such stock trading, called zaiteku or financial engineering, than from operations. Nissan Motor Co., for example, made $500 million or two-thirds of its profit last year from zaiteku , and Matsushita Electrical made almost $1 billion the same way.

But now companies that borrowed to speculate in stocks are losing money because Japanese interest rates are going up and stocks are coming down--the Tokyo market’s Nikkei index is off 14% since the end of last year.

Why? Because the governor of the Bank of Japan, Yasushi Mieno--Japan’s equivalent of Federal Reserve Board Chairman Alan Greenspan--is trying to curb land speculation by raising interest rates and cutting back on growth of the money supply. It’s a dangerous move because falling stock prices could trigger difficulties with bank loans and corporate finances--as we’ve seen. But to let speculation go on as it has in the last year ultimately could be more dangerous.

“The move is overdue,� says Peter Davies, investment expert with Nomura Securities in New York. “The money supply has been growing 11% a year, far more than the overall economy, and that has fueled speculation.�

The money supply in 1989 and early 1990 was growing for political, not economic reasons: The ruling Liberal Democratic Party was running for reelection and so kept money loose and interest rates low--a political tactic that’s practiced in the United States and every other country.

But that’s just the point: Japan is like every other country, with imperfections as well as strong points. Far from becoming an all-conquering economic superpower, it’s in for some tough times as speculation unwinds. “You have interest rates rising, and energy prices, too, which is very scary for Japan,� notes Peter Rona, president of IBJ Schroder, the Industrial Bank of Japan’s New York investment company.

But ultimately, reducing the obstruction that high real estate prices have become will be healthy for the Japanese economy.

And for America? The best thing the Tokyo market’s decline could do is lend perspective and dispel myths about Japan. For instance, it is not about to buy up America--or even California. On the contrary, it may be lucky in the next year or so if some of its banks don’t need a bailout from sick real estate loans. How do you say S&L; in Japanese?