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A Lesson from Japan...


With consumer spending strong and productivity soaring, the U.S. seems to have escaped the worst effects of the popping of the stock market bubble. But history suggests it may be too soon to relax, since it can take considerable time for even a steep market decline to be felt in the real economy.

Consider Japan, where the stock market plummeted by 35% from the end of 1989 to August, 1990. Nevertheless, Japanese consumer spending, productivity growth, output growth, and business investment stayed strong well into 1991. It was only then--about 18 months after the financial collapse started--that the economy slowed sharply.

For example, in the boom years of 1988 and 1989, Japanese consumer spending rose at a nearly 5% rate. In the 18 months after the bubble popped, consumer spending continued to rise at a 3.5% rate--slower, but still impressive (table). Growth of gross domestic product was also quite good, averaging 4.2% over the same period.

Moreover, Japanese productivity, measured as output per worker, rose at a decent 2.2% clip between the end of 1989 and the middle of 1991. Output per hour, the productivity measure the U.S. uses, likely rose at an even faster rate, since hours worked per person fell sharply in this period.

Surprisingly, Japanese economic performance in this post-bubble period was actually better than the U.S. has shown recently. For example, since the Standard & Poor's 500-stock index started decisively downward in the summer of 2000, U.S. productivity has risen at a 1.8% rate, slower than the Japanese productivity growth in the early 1990s.

That doesn't mean the U.S. is going to fall into a Japan-like stagnation. But the Japanese example is cautionary: After a bubble pops, good macro numbers are no guarantee of future performance. Japan's latest strategy in its long struggle to revive its economy is to weaken the yen. Since late last spring, the Japanese currency has slid 10% against the dollar. If that continues, it's bad news for Japan's smaller neighbors.

Already, Japan's imports from Southeast Asia are down sharply, falling 7% last year, compared with just a 4% drop for imports from the U.S. More developed Asian countries such as South Korea, Singapore, and Taiwan, which have electronics industries that compete directly with Japan, are likely to suffer. Korea is especially vulnerable, with about 60% of its exports overlapping with Japan, says Andy Xie, a Morgan Stanley economist based in Hong Kong.

And while the South Korean won, the Singapore dollar, and Taiwan's dollar have fallen also, Japan's neighbors will be hard-pressed to match the yen's slide. That's because they're more vulnerable to imported inflation, because imports of foreign oil are a bigger percentage of their economies.

The country positioned best to withstand the yen's slide is China. Despite the weakening Japanese currency, China still enjoyed a 15% increase in exports to Japan in 2001. Nevertheless, while China's currency is loosely pegged to the U.S. dollar, Chinese officials have started hinting that they might have to devalue should the yen continue to fall.

Marshall Gittler, currency strategist with Bank of America in Tokyo, says such talk has as much to do with political concerns as with economic ones. With some Japanese critics of China calling for Tokyo to reduce its aid to Beijing--which amounted to $770 million in 2000--Chinese grumbling about the yen may be aimed toward ensuring a continuation of Japanese largesse to China. Most studies show that 60% to 70% of takeovers do not pay off, at least when gauged by the share price of the dealmakers vs. their peers or market benchmarks. But a new study finds that some transactions are more likely to succeed: transatlantic mergers.

The research, by Mercer Consulting Group, examined 152 deals valued at $500 million or more from 1994 through mid-1999 in which a European company purchased a U.S. business or vice versa. The consultants tracked the share price of the buyer from a month before the transaction was announced to 24 months later. They then compared it with the share prices of their competitors over the same 25-month period. By this measure, 82 of the companies making an acquisition, or 54%, outperformed their rivals, far better than the usual success ratio of U.S. domestic or intra-European deals.

One reason transatlantic buyers beat the odds, says lead author Michael L. Lovdal of Mercer Management Consulting, is because many such deals were designed to expand geographic reach. As a result, there was less need for emphasis on cutting costs by merging overlapping operations, which can be disruptive and often hurts domestic takeovers. In addition, because there were so many parties scrutinizing the transactions--from antitrust regulators on both sides of the ocean to government and union shareholders in Europe--managers pursued only the most promising purchases. And finally, buyers worked much harder to integrate their new units, knowing in advance the culture clashes inherent in cross-border deals.

Of course, some transatlantic deals, such as the merger of Daimler and Chrysler, have turned out to have problems. But for every DaimlerChrysler, there were even more success stories that enriched shareholders.


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