Japan wonders if Asian investment backfired

Japan wonders if Asian investment backfired

By Miwa Suzuki

TOKYO (AFP): An extensive network of factories and joint ventures in Southeast Asia makes it very difficult for Japan to reduce its exposure to the regional financial crisis, analysts say.

Unlike the United States, which has much of its money in liquid securities, Japanese corporates are bracing for the long- haul impact as Thailand, Indonesia, Malaysia and others extricate themselves from crisis.

"Active direct investment by Japanese companies in Asia could weigh against them if economic recovery there is delayed," said Masayuki Kichikawa, senior researcher at Nomura Research Institute.

"They cannot easily flee like securities investors," he said.

The OECD said last Friday the Southeast Asian crisis, triggered by the flotation of the Thai baht on July 2, would cut economic growth in even the major industrialized countries from earlier forecasts, with Japanese growth disproportionately lower.

The crisis is expected to shave 0.1-to-0.2 percentage points off growth rates in the European Union and the United States this year, "twice that in Japan," the Organization for Economic Cooperation and Development's (OECD) chief economist, Ignazio Visco, told a news conference in Paris.

The OECD had forecast in June that Japan's gross domestic product (GDP) would grow 2.3 percent in 1997, and 2.9 percent for 1998.

That was before the Thai crisis.

Japanese car giant Toyota Motor Corp. said recently it would halt production lines at its two main plants in Thailand, putting thousands of workers on to other duties at minimum pay, as it joined a growing band of auto makers hit by the sharp economic downturn in that country.

Capital flows to Asia totaled US$156.8 billion in 1996, according to Nomura Research Institute, based on data from the International Monetary Fund, the Bank of Japan and the US Commerce Department.

The 1996 figure was 1.6 times that of 1993 and 3.6 times that of 1990.

Japan and the United States accounted for about a quarter each of the total capital flows to Asia between 1990 and 1996, but Japanese investment was noticeably focused on direct investment. That accounted for half of Japanese capital flows to the Asian region in 1996, with securities investment coming to 36.4 percent, and loans, deposits and other forms of investment to 13.5 percent.

On the other hand, 45.2 percent of U.S. investment was in securities -- direct investment accounted for 22.0 percent, with other forms at 32.8 percent.

"It may take one or two years for Asia to come out of its bad debt problems and political confusion, but (Japanese) companies can still reap big profits there in the medium-term period," Kichikawa noted.

"Japanese companies may face the need for withdrawal, or plant shutdowns in the worst case," he said, but he added that the gloomiest scenario was "unrealistic" at this stage.

Shigeki Higashi, researcher at Asian Economies Research Institute, said: "It is the long-term strategy of Japanese companies to build production bases in the region.

"Lower demand may hit the Japanese firms over a short period of time but they would benefit in the long term," Higashi said.

As the yen shot up to all-time highs against the dollar in 1995, seriously eroding competitiveness, Japanese companies earnestly pushed factory construction and other direct investment in Asia.

According to figures from Thailand's central bank, Japanese net direct investment in the country came to 13.8 billion baht ($363 million) in 1995, far surpassing 6.5 billion baht by the United States.

Masaki Shiroyama, researcher at Nikko Research Center, said U.S. investment focused on financial sectors, largely because U.S. firms were latecomers in setting up manufacturing bases in Asia.

But luck now will depend on which manufacturing sector companies are operating in, he said.

"Automakers and some other Japanese manufacturers that aim at sales in Asia will suffer more than others, such as electrical machinery makers which export products for European and U.S. consumption," Shiroyama said.