Japan stocks signal economic trouble

Electronic News, Nov 3, 1997 by Lewis H. Young

On Friday, the Nikkei stock average that reflects the performance of Japanese company stocks hit 16,458.94, up slightly on the day, but down over 900 points in nearly two weeks. But it is getting perilously close to the 15,000 level that will mean serious trouble for Japanese banks.

Because Japanese banks are allowed to include common stocks as part of their capital, when the value of stocks drops as much as it has in the past two weeks, many banks come close to not meeting the international requirements for capital. In addition, Japanese banks are required to report the market value of their stock portfolios in their semiannual reports and losses show up on the P&L. To offset these losses, the banks sell stocks in which they still have a profit--forcing the stock market lower.

But the performance of the Japanese stock market is not only mirroring the financial problems that have hit Southeast Asia, it shows some serious economic difficulties that beset Japan.

PC Business In A Slump

Take the PC business. After growing over 20 percent last year, sales have been flat this year. In fact, PC sales to consumers have been so bad that computer stores are closing in Akihabara, the consumer electronics retail outlet in Tokyo. Sales at some stores are running just half of what they did last year.

Behind the slump are economic and product problems.

In April the government increased the consumption tax 67 percent, raising it from 3 percent to 5 percent. In June, the government ended an income tax rebate it had instituted two years ago to stimulate the stagnant Japanese economy. The double tax increase has dented consumer spending.

In addition, consumers are turning thumbs down on the new PC designs. In 1995, Fujitsu cut the price of PCs sharply to gain market share and it tripled its portion of the Japanese market. Last year it ended the discounts. But this year, it increased prices of its new models by 33 percent, from 200,000 yen ($1,667) to 270,000 yen.

As PC makers added performance to their machines they introduced models with towers. Customers think the tower is too big for Japanese homes and even too big to install on the desks in most Japanese offices.

To make up for the shortfall, Japanese computer makers are targeting export markets, particularly the U.S. Mitsubishi Electric, for example, established a Mobile Computing Division in Cypress, Calif., to import notebook computers, the first time the company has imported PCs into the U.S. since 1990. Both Fujitsu and Hitachi are doubling the export of motherboards or semifinished notebooks into the U.S. this year so that each can boost sales to notebooks to 200,000 a year.

Catching Asian Flu

Adding to Japan's woes are the financial problems of Southeast Asian countries that have been among Japan's best customers. In Malaysia, for example, the government has cancelled its plans to build the $6 billion Bakun Dam, slowed down the construction of a new capital city, and postponed the construction of a multimedia corridor that was to build a Silicon valley in that country and a new airport for the capital city.

In Thailand, the country, battered by a declining value of its currency and a collapsing stock market, has also shelved infrastructure plans.

Japanese companies had expected to supply much of the construction equipment these giant projects would require. Now they will not get those orders. Finally, the Asian automobile business is swamped with capacity. In South Korea, production capacity tops 2 million cars a year; the market is only 1 million a year. In Thailand, capacity is 1 million cars a year; demand is only 500,000. Meanwhile...

The root problem in Southeast Asia and Japan lies in the inadequate supervision of banks. All the countries are awash in bad loans. Until those are cleared up, Asia's economies will continue to falter and their stock markets will continue to be volatile.