By Sandra Sugawara
Washington Post Foreign Service
Friday, December 25, 1998; Page B09
A gleaming mass of pipes and towers looms over the waterfront, where Wakayama Petroleum Refining Co. converts crude oil into heavy fuel oils and lubricants. Down the road, Sumitomo Metals Industry Co. produces steel sheets and bars. Once oil and steel were major engines of growth here. But now, with demand slumping and prices tumbling, the steel mill has scaled back production and there is talk of shuttering the refinery.
Japan, along with the rest of the world, has too many steel mills and oil refineries.
Japan has a staggering overcapacity in a vast array of industries, dotting the landscape with more bank branches, gas stations, construction companies and automakers than the nation and its global customers can support profitably.
This excess is, in part, the legacy of the nation's once successful export-driven strategy to become a global economic powerhouse. But since the end of the Cold War, Japanese exporters have had to face a host of new competitors as many developing nations have pursued export-led economic growth strategies.
Meanwhile, demand for Japanese exports has shriveled for more than a year because of the continuing economic crisis afflicting several Asian nations.
As a result, the Japanese economy continues to shrink, depriving other Asian economies of a critical market for their exports, prolonging the financial turmoil in the region and threatening the global economy.
Elsewhere, worldwide overcapacity in a variety of industries is driving global corporations to merge at a furious rate with the aim of cutting costs and becoming more competitive. This is the motivation behind the planned merger of Exxon Corp. and Mobil Corp., NationsBank's purchase of BankAmerica, and Daimler-Benz AG's acquisition of Chrysler Corp.
But Japanese executives and government leaders remain paralyzed, in part because their economic system also is designed to preserve jobs and prevent corporate bankruptcies. They appear incapable of abandoning the strategies of the past, such as trying to stimulate economic activity by building unneeded bridges and repaving underused roads.
In Wakayama, for example, the nation's year-long recession is evident in the empty shops and pubs. "Even the bars are hurting. People don't drink as much," said Katsumi Ogawa, a 64-year-old taxi driver.
But city officials have only one plan on the drawing board -- construction of a 6.9-mile bridge that would link Wakayama with Shikoku, a sparsely populated island, at a cost of more than $4 billion. That's equal to the combined budgets of Montgomery and Fairfax counties, and it's unclear what kind of businesses might be lured to Wakayama as a result of the bridge.
"Perhaps tourism?" one city official said vaguely.
But 64-year-old Atsuko Maruyama doubts the bridge will bring more tourists to her jewelry store in Wakayama. "I think the government is wasting so much money," Maruyama said, shaking her head.
Up-and-Down Town
Underlying Japan's economy is a colossal economic structure designed to supply the world. Its benefits and perils are well illustrated in the coastal city of Hitachi-town, home of Hitachi Ltd., the nation's largest maker of electronic equipment. The town's ups and downs have followed those of the global company, which has 975 subsidiaries that produce televisions, automotive equipment, semiconductors, computers and a variety of other goods.
Hitachi has been a highly respected symbol of traditional Japan, embodying the culture of lifetime employment and export-led growth. So the recent announcement that it expected an annual loss of about $2 billion, its first in 48 years, shook the country and reverberated loudest in Hitachi-town.
The town's port bustles with huge cargo ships, loading and unloading supplies for the sprawling Hitachi plants there. About 80 percent of the 700 independent companies in town depend on work from Hitachi. Many were started by former Hitachi employees such as Minoru Tomita. He went to a technical high school operated by Hitachi and then worked for the company. After a few years, he started a business supplying parts to Hitachi. That was 44 years ago.
"This is the worst things have ever been. Orders from Hitachi are shrinking," Tomita, 74, said.
If Hitachi's business recovers, Hitachi-town probably will thrive again. But if the world no longer wants all those products, what will the town do? That's the question now facing all of Japan.
The nation has two choices. The first, the course advocated by many international economists, is to close unneeded factories, allow inefficient companies to go bankrupt, deregulate the economy, open its markets and hope that out of the ashes of this collapse will spring new business. Nikko Securities Co. estimates that Japanese companies have an excess of 2.55 million workers, so such a crash could send unemployment surging to 7.9 percent. Many more banks would probably collapse, because most of the excess investment was funded by bank loans.
Economists say the crash could be followed by creation of new jobs if workers and capital are freed to flow to sectors where there is demand. For example, Japan's birthrate is plunging, but its elderly population is growing. So, one economist suggested, resources should be flowing to the growing elderly market instead of into new housing.
Japan's second option is to use public funds to try to keep struggling companies and banks alive in the hope that robust global growth will revive Japan's export machine.
Japanese authorities have chosen the second route.
The government plans to spend $495 billion to bail out its banks and is pressuring them to extend more loans to shaky construction firms, retailers and manufacturers. It is planning to spend $196 billion for public works and tax cuts, to boost construction work and spur consumer spending.
The Bank of Japan also is buying commercial paper from companies that cannot get short-term loans from banks. The central bank now holds more than 40 percent of the commercial paper issued in Japan. The government-owned Japan Development Bank has been authorized to expand its lending activities as well.
Merrill Lynch & Co., in a recent report, has dubbed these efforts a "safety net for all companies." The fear among economists and investors is that it will create a welfare mentality among corporations, reducing incentives for them to take tough actions such as closing plants, slashing costs or cutting jobs.
The Japanese government has pursued this strategy for eight years, and yet the economy continues to weaken. Tadashi Nakamae, president of Nakamae International Economic Research, is skeptical the government can spend enough money quickly enough to counteract the unprecedented, sharp cuts in investments by business now underway.
Kazuo Mizuno, an economist with Kokusai Securities Co., agrees, and thus he believes that Obuchi's stimulus plan "will do little more than keep the Japanese economy propped up a little while longer."
Economists warn that the government would have to increase the spending stimulus and tax cuts each year just to stand still. It's doubtful Japan can afford to do that, with the national and local government's debt now exceeding the nation's gross domestic product.
Analysts also caution that the banking system is too frail to continue to support these weak companies. Mizuno said that the process that people call "credit crunch" is really just a reflection of the fact that the banks have adopted more internationally accepted -- that is, tougher -- lending practices. "Encouraging banks to lend to borrowers who will be unable to repay their debts is no way to improve the banking system," London economist Andrew Smithers wrote in a recent report on Japan.
The Japanese government asserts that the economy has hit bottom and will begin growing next year. In contrast, the Japan Center for Economic Research predicts the economy will continue to contract through 2001 and then gradually recover.
Nakamae says he's an "optimist." He predicts that deflation -- with its plunging prices, profits and demand -- will force the economy to crash so hard next year as companies trim payrolls and cut spending, that a panicked government will finally relinquish control over the economy by cutting taxes and deregulating. By 2000, Nakamae predicts, Japan's economy will again be booming.
Too Much for Too Few
By most estimates, Japan needs about half the 58,000 gasoline stations it has. So why are there so many stations? Indeed, why does Japan, a nation a little smaller in size than California, have 44 electric-furnace steel mills, 11 car companies, and 142 banks with too many branches and too many employees?
For each industry, the reason is slightly different. But undergirding them all is a culture and economic system dedicated to ensuring lifetime employment and preventing business failures.
In the United States, executives are judged on their ability to maximize profits. Thus if an American oil company can double its profit margins by closing two divisions and laying off 20 percent of its employees, it probably will.
But Japanese executives are judged more by their ability to protect their employees' jobs, and banks are considered strong if they can protect their major clients during tough times.
So while many Japanese companies have announced restructuring plans, it's unclear if these efforts will shrink overcapacity here.
For example, Nippon Oil Co. and Mitsubishi Oil Co. are merging to create Japan's largest oil company, although U.S.-style layoffs and plant closings are not expected. In contrast, when Exxon and Mobil announced their intended merger, they included plans to cut 9,000 jobs.
Or consider the case of money-losing Toa Steel Co., an electric-furnace steelmaker that had accumulated $2 billion in debt.
Japan has about twice as many electric-furnace mills as it needs, in part because of past government policies to foster cooperation within industries to bolster prices and prevent bankruptcies. In the 1970s, for example, the government encouraged the industry to set up a cartel to prevent mills from going bust.
But when NKK Corp. announced in September that it would take over Toa's operations, NKK said it would hire most of Toa's employees, meaning no reduction in capacity.
NKK insists Toa will be profitable next business year, but analysts don't buy it. "Impossible," said Atsushi Yamaguchi, an analyst with Jardine Fleming Securities.
In any case, NKK had little alternative because it had a responsibility to Toa's employees and customers, said an NKK spokesman.
Ken Tanaka, a Toa union leader, agreed. But he has also acknowledged the apparent contradiction in all of this.
"I'm 47, and I think the myth of Japan has broken down," Tanaka said. "In any manufacturing company, the president or management was born during or before the 1940s. I don't mean to be disrespectful, but they still believe in the myth that somehow the Japanese way is supreme. But Japanese companies are heavily in debt. That's because they borrowed, believing in the myth that Japan exports would always grow and the economy would always grow.
"But the reality was different."
Special correspondent Akiko Kashiwagi contributed to this report.
Overdoing It
Auto, steel and oil are just three industries in which Japan continues to overproduce.
Automobiles (11 car manufacturers), number of vehicles
Total capacity -- 13 million
Sales, fiscal '97 -- 6.3 million
Sales, fiscal '98* -- 5.8 million
*projected
Steel, in tons
Total capacity -- 150 million
Sales, fiscal '97 -- 102.8million
Sales, fiscal '98* -- 93.5 million
*projected
Oil (refined petroleum), barrels per day
Total capacity -- 5.3 million
Current demand (estimate) -- 4.0 million
SOURCES: Nikko Research Center, Ministry of International Trade and Industry, Nihon Keizai Shimbun
© Copyright 1998 The Washington Post Company
Return to our 
Page
Back to Japan 