Elusive Solution Japan looks for a way out

TOKYO - Bleak, bleaker, bleakest is an apt description of the Japanese economy these days, and automakers here are hurting, some more than others.

After a disappointing 1997, vehicle producers expect declines or only minor gains at best in domestic sales this year and 1999 looks no better. You'll find few optimists here, and even those peering through rose-colored glasses don't see a turnaround starting much before the year 2000.

How seriously automakers are hurt, and for how long, will depend in large measure on how much longer Japan's political leaders postpone economic reforms needed to put the nation back on track. So far, by substituting talk for action, they have let the country drift sideways since the "economic bubble" burst eight years ago.

"There's a crisis of leadership and confidence, an inability to address problems," says David Blume, president of Rover Group Japan.

"A big meltdown in Japan is our biggest single nightmare," warns a senior U. S. official.

The world's second most powerful industrial nation is suffering its worst recession in 50 years. Economic decline as much as 2.5% is forecast for 1998, the second negative growth year in a row, with a third negative looming in 1999. The stock market is hitting 12-year lows, bankruptcies were up 28% in the first seven months of 1998, unemployment has risen to a record 4.3% and consumer confidence is plummeting.

"Demand is collapsing virtually across the board, and deflation is already happening. It's hard to get people to spend if they anticipate lower prices, " says Robert Feldman, managing director of Morgan Stanley Japan Ltd.

Among the few companies doing well these days are floor safe manufacturers, enjoying brisk sales as the Japanese lose confidence in their banks, which have managed to burden themselves with debt estimated as high as $1 trillion.

What's desperately needed, experts say, is not only banking reform but economic restructuring, market deregulation and meaningful tax cuts. But strong measures are not forthcoming: Leaders here are accused of applying Band Aids to an economy badly in need of major surgery.

"Taking the kind of measures needed would be political suicide - not something politicians will consider - so they wait and wait," explains Mr. Feldman.

One victim of the indecision is a bruised auto industry.

In the domestic market, total vehicle sales declined in September for the 18th month in a row and were off 14% in the first nine months of 1998, despite heavy discounts, with a drop of 10% to 15% likely for the calendar year.

Trucks have taken the biggest hit, with production running at the lowest levels since 1966. Sales are off 20% and headed lower.

Demand for imported cars is evaporating as well, with sales down in September for the 18th month in a row and nine-month sales off 25.7%. New model introductions may provide a boost in the remaining months but a decline of 18% to 20% is expected for calendar 1998.

"Consumption is frozen, and pent-up demand for cars is declining as incomes go down. People don't care about discounts and continue to defer purchases," explains Kaoru Kurata, Vice President, Goldman Sachs (Japan) Ltd.

Next year?

"There's no evidence of economic recovery here, and things may get worse," says Christopher Richter, an industry analyst with HSBC Securities Japan Ltd.

Few bright spots pierce the domestic gloom.

Automotive exports totaled 2.9 million vehicles in 1998's first eight months - 44.9% of all domestic output - even though offshore production continues to rise. Yet exports declined in August for the fourth month in a row, and the financial benefits from a weak yen tend to be offset by the drop in domestic sales.

Salvation so far for several Japanese automakers has been brisk sales in the U.S., a market second in size for them only to Japan, but a slowdown next year is now a concern. European demand should remain solid and satisfying. However, Southeast Asia, where Japanese automakers arrived early and stayed to monopolize markets, is a disaster area.

While Tokyo denies responsibility for the meltdown and malaise there, the doldrums in Japan, which represents roughly 70% of Asian output, is a contributing factor making Japan what one wit calls "an accomplice."

In Indonesia, Thailand, Malaysia and the Philippines, the International Monetary Fund forecasts negative growth of -10.4% this year and -0.1% in 1999. One regional expert fears the standard of living of an entire generation is in jeopardy.

Some automakers here are weathering the economic storm better than others. Among the Big Five, Toyota Motor Corp. and Honda Motor Co. Ltd., strong in the U.S. and Europe, expect a profitable 1998. But Nissan Motor Co. Ltd. and Mitsubishi Motors Corp., both deep in debt and short of attractive products, are in serious trouble, their long-term survival questioned by some experts. Mazda Motor Corp., strengthened by Ford and shed of much debt, is looking healthier: "Out of intensive care but still in the hospital," says Mr. Richter.

The plight of the smaller players is mixed as well.

Fuji Heavy Industries Ltd., maker of Subaru, is generating a return of nearly 14% on investment capital, highest of any Japanese automaker. Daihatsu Motor Co. Ltd. recently moved deeper under the Toyota umbrella, and Suzuki Motor Corp. expects to profit from stronger ties with General Motors Corp.

But Hino Motors Ltd., Isuzu Motors Ltd., and Nissan Diesel are suffering from the declining demand for trucks.

Japanese vehicle makers are burdened with excess capacity, 20% or more for the industry as a whole. Yet dieting is difficult.

"Some assembly lines have been shut down, but no plant closures are apparently planned, and automakers find it difficult to lay off employees," says Chikao Masuzawa, an industry analyst with ING Baring Securities (Japan) Ltd.

While changes in the way business is done here are under way, the consensus system does not permit anything rapid or radical. Cracks in the keiretsu system that ties producers together in industrial groups, for example, are permitting non-members to pick up group business, but the system is being modified, not dismantled.

Despite the pyramid of problems, however, few people underestimate Japan's basic strength, ranging from superb production engineers to superlative export manufacturers. Yet experts agree that the current state of economic affairs is too complex and serious for a "jump start," and no tidy solutions are in sight.

Some believe Japanese leaders hope that somehow the passage of time will lead eventually to an economic upturn. Others wonder whether gaiatsu - external pressure - may finally move them to act decisively, because this permits blame to fall on outsiders if things go wrong. So far, however, Tokyo has stolidly resisted the pleas and arm-twisting of trading partners.

Consequently, the situation is worrisome and the outlook grim.

"We're in for a very slow three to five years of recovery here," says Peter J. Woods, chairman of the Council of the European Business Community in Tokyo.

Or maybe longer, should Tokyo policy makers continue to dither. A banking reform bill introduced in early October strengthened the yen and gave the Tokyo stock market a boost, but it is not certain when - or if - it will be enacted.