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A Disaster, Yes. A Crippling Blow, No (Int'l. Edition)


Business Week International International Business: Japan

A DISASTER, YES. A CRIPPLING BLOW, NO (int'l. edition)

By many measures, Takaaki Hashizume is a ruined man. The earthquake that hit Kobe on Jan. 17 destroyed his rented house and a restaurant he had built on the first floor. Hashizume, 46, wasn't insured against a quake and has minimal savings. But down in the mouth? Hardly. As they cook dinner over scavenged wood, Hashizume and his family are quick to offer some rice gruel to a curious reporter. "We're having a great time," he says with a grin. "If we think about the future too much instead of eating what we have, we'll just lose spirit." He plans on opening another restaurant when the rubble clears.

With that kind of pluck, Japan may be able to continue and even accelerate the halting economic recovery that began early last year. Despite the market's delayed but nervous reaction to the quake on Jan. 23, when the Nikkei stock index plunged by 5.6%, many economists and chief executives remain fundamentally sanguine about Japan's economic prospects. There will be pain, they say, but it is unlikely to reverse upward trends in both consumer spending and industrial growth. Even more bullish is Chris Calderwood, an economist at Barclays de Zoete Wedd Research Ltd. in Tokyo: "We expect a significant acceleration in growth." He's predicting 2.5% for this year (chart).

BUSY LOTS. A key reason for the optimism is consumer spending. It has been rising for several months as a stronger yen, deregulation, and bargain-hunting have brought prices down and consumers back to stores. Except for a short-term jolt to consumer confidence after the quake, spending is likely to continue--especially if worker bonuses start rising this summer, as many expect. Sinking real estate values and expanded government subsidies had bolstered demand for new homes even before the temblor. Moreover, a $55 billion income-tax cut and a plateauing of unemployment at 3% give an added kick to consumer sentiment. At Tokyo Mitsubishi Motor Sales, a big dealership, President Akira Kawakami expects to sell 5% to 8% more cars this year than last. "Things are finally picking up again," he says.

There are other pockets of strength. Industrial production rose for the fourth straight quarter from October through December, according to the Bank of Japan. Corporate profits will likely surge up to 60% in the coming year, as manufacturers see the benefits of their aggressive restructuring and cost-cutting during Japan's recent long recession. "During the past two years, we have completely reshaped our cost structure," says Tatsuro Toyoda, president of Toyota Motor Corp. "But we have just begun. Costs will continue to come down." The company says that in its fiscal year ended last July, it cut costs by $1.5 billion.

With $20 billion in the bank, Toyota isn't the only Japanese company flush with cash. And these full pockets plus growing demand may produce a modest resurgence in capital spending. Such expenditures declined for 11 straight quarters until a 0.5% rise in the third quarter of last year. Barclays de Zoete Wedd predicts a 1.7% gain this year and 3.2% next year. NEC Corp., for example, has budgeted more than $1 billion to start refurbishing its Kumamoto semiconductor plant. Other companies such as Seiko Epson Corp. plan investments in lower-cost, faster-growth parts of Asia. This "will leave Japan better positioned to meet the challenge of future global competition," says Calderwood.

Although economists expect Japan's recovery to continue, it's likely to be modest compared with its previous dramatic turnarounds. Why? "Japan has joined the club of mature economies," says Dick Beason, senior economist at James Capel Pacific Inc. in Tokyo. He says that means Japan has already squeezed most of the productivity gains it can expect from its manufacturing sector. Also, within the past year, its number of service employees exceeded those in manufacturing for the first time. Improving productivity in services is harder than in manufacturing.

WILD CARD. What about the yen? The jury is still out. It has moved little since the quake. Some observers think repatriation of funds from overseas to pay for damage or bolster insurers' coffers could strengthen the yen. But others, probably in the majority, think a rise in imports to cover production and delivery gaps and to help with reconstruction could boost imports and presumably weaken the yen.

In the meantime, companies and consumers will have to cope with the short-term economic pain of the quake's aftermath. Lost production and shipments from the quake area, which accounts for about 12% of gross national product, could pull down first-quarter growth by 0.9 percentage points, to 1.3%, says Peter Morgan, chief economist at Merrill Lynch Japan Inc.

This could be exacerbated by a propensity of frightened Japanese to save more and spend less. The trend is already showing up in sales in several Tokyo department stores, which have dropped by 7% to 11% since the quake. But Morgan thinks this is temporary and doubts that savings will grow enough to hamper consumption's contribution to growth.

Most economists expect a brief setback followed by extra spending for replacement of the possibly $200 billion in earthquake-related damage, adding somewhere between 0.3% and 1.5% to 1995 GNP growth. "We can estimate conservatively that the net effect will be stimulative, adding perhaps five percentage points to Japan's GDP growth rate over the next five years," says Tod Wood, an economist at Baring Securities (Japan) Ltd.

Some experts worry that supply disruptions could fuel inflation and that new demand for capital could push interest rates up. But most think inflationary pressure will be localized and that the Bank of Japan will be cautious about tightening the money supply, which is growing. What's more, Japan is in relatively good fiscal shape. "Japan has the confidence of the world's major economies and a relatively low level of debt compared to GNP," says Wood. "They will be able to finance this."

There may be an aftershock that could shake confidence. "The issue is when the rebuilding stops and people realize the country is relatively poorer," says Masaru Kakutani, a managing director at Moody's Japan. But so would be any country that suffers a disaster of this size. Japan is lucky that its economy can more or less afford it.By Robert Neff in Tokyo, with Larry Holyoke in Kobe


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