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Japan, Not Tiger Turmoil, Is Key to Asia

Region's growth slows, but how much depends on reform of Japanese banks

It took the United States and Britain 50 or 60 years to double per capita incomes of their people. Since the early 1970s, the nations of Southeast Asia have accomplished this feat every 10 years.

That's why the phrase "the Asian miracle" came into play.

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But the financial crisis sweeping through the region promises to brake growth in the Asian tigers - South Korea, Taiwan, Hong Kong, and Singapore - and later wonder-nations Thailand, Indonesia, and the Philippines. It will shrink people's incomes for a while in some of these nations.

"This is going to be long and painful," predicts Harald Malmgren, a Washington economic consultant.

Asia's No. 1 problem is Japan, its earliest economic "miracle" and the second-largest economy in the world. Japan must stimulate its domestic economy and revive its banks, Foreign politicians and economists agree. Growth has averaged less than 1 percent a year since 1992, as the nation digs out from stock market and real estate crashes.

A thriving Japanese economy would do much to lift Asia as a whole.

But how?

The region's troubles are likely to slow recovery in Japan.

And it's far from clear whether Japan's government will muster the courage to present a credible economic package.

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"They have been stalling on tackling the bank problems for five years," says Peter Kenen, a Princeton University economist.

Global impact

Economists are still sorting out the impact of the Asian mess. But it promises to slow the world economy in 1998.

That will certainly be true, Mr. Malmgren says, if the financial shake-up brings Japan into serious recession.

Just back from a trip to Asia, he predicts it will take Thailand - "the worst case" - as long as five years to come back. Malaysia and Indonesia will be flat for "longer than a year," then improve slowly.

Oddly enough, the crisis could lower interest rates in the United States, thereby pumping up bond prices, as Asian money flees to more secure markets, Malmgren says. And once the excitement diffuses, it could boost American stock prices.

But in Asia the outlook has worsened.

Just two or so weeks ago, Standard & Poor's/DRI had said the region's 8 to 10 percent growth rate would fall to the 5 to 7 percent range. Now those numbers are being marked down again.

Japan's banking troubles are one big factor.

Some senior Japanese officials have hoped European or American banks would buy all or part of troubled Japanese banks and put them in shape. It would be a kind of "fire sale" to foreigners, Malmgren says.

Foreign financial institutions - such powerhouses as J.P. Morgan, Morgan Stanley, and Goldman Sachs - would love to get into the lucrative money management business in Japan. Household savings amount to $10 trillion.

"Every mutual-fund group and asset manager wants to get some of that," Malmgren says.

But foreign institutions are reluctant to get into the bank lending business in Japan, he says. It is too risky. The banks are in too much trouble.

Malmgren suspects Japan's Ministry of Finance in the coming months will call in bank executives and ask what they are doing to clean up the mess. Top bank executives may lose their jobs. More banks and brokerage firms may be merged or closed.

Douglas Ostrom, an economist at the Japan Economic Institute, agrees. "Several other major institutions could fail," he says. "This has been a disaster waiting to happen for most of the 1990s."

Last Wednesday, though, Finance Minister Hiroshi Mitsuzuka and Bank of Japan governor Yasuo Matsushita appealed for calm. They promised that there would be no more major bankruptcies among financial institutions.

Beside suffering from the burst bubble in stock and real estate prices, Japan's major banks did a poor job handling increased freedom to lend money abroad. With interest rates at home so low, many banks loaned large sums into the bustling Southeast Asian economies on a short-term basis. Some of that money has been withdrawn, worsening the Asian crisis. Some loans have gone bad.

Big Bang coming

Now, people in Japan are awaiting the so-called Big Bang on April 1, 1998, when financial reforms will open up the books of Japanese banks, among other changes.

"Everybody is going to say, 'Yuck!' " Malmgren says. He expects further revelations of hidden losses, such as those linked to the recent collapse of Yamaichi Securities Co. and earlier bank failures.

Already, banks in Japan can't meet the public demand for safe-deposit boxes, as people stuff them with cash as an insurance against banking troubles.

How the government plans to rescue the banks remains unclear. Liberal Democratic Party officials say they won't have a plan until Dec. 10 or so. One party group favors using government funds merely to guarantee individual deposits. Another group wants to save the institutions as well, reports from Japan suggest.

"The banks need recapitalization," Mr. Ostrom says, "that is, to start over."

Unlike smaller Asian countries, Japan has a huge surplus in its international balance of payments and massive reserves of dollars and other foreign currencies. It can't be forced into the arms of the International Monetary Fund and its reforms.

"It is not beyond the capability of man to manage this crisis," says Malmgren. "But it is going to look scary."

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