Sogo and Rockefeller Center: Signs of Japan's times

By Alan Wheatley

TOKYO (Reuters): New York's Rockefeller Center would seem to have little in common with Japan's Sogo department store chain.

But in their different ways, they make bookends to a decade of lost growth in Japan that Prime Minister Yoshiro Mori, as he plays host to this week's Group of Eight summit, fervently hopes is well and truly over.

He may be right, but economists are more certain of one other thing: Japan will have to suffer a lot more pain before it can close the final chapter of the "bubble era" symbolized by the purchase, in 1991, of the Rockefeller Center and other trophy assets including Hollywood studios and Old Masters.

"Eventually this decade will be one of prosperity, but probably first there's going to be some sort of crisis that acts as a catalyst to instituting a medium-term policy framework," said Brendan Brown, head of research at Tokyo-Mitsubishi International in London.

Brown said politicians might not be shocked into action until faced by some sort of financial crisis, perhaps a bond market slump that drags the stock market down with it.

"It's not going to be a smooth landing," he said.

When Japan Inc was buying up America, the 284 acres on which the Imperial Palace in Tokyo stands was calculated to be worth as much as all the property in California.

From that giddy peak, property prices have fallen more than 60 percent as the irrational exuberance of overinflated assets has given way to savage deflation and wealth destruction.

A few figures show what a difference a decade or so can make:

* In 1992, the U.S. general budget deficit was 6.0 percent of GDP, while Japan ran a surplus of 1.5 percent. This year, the International Monetary Fund expects Washington to boast a surplus of one percent of GDP while Tokyo posts a deficit of 8.4 percent.

* For 1992-2001, annual U.S. growth will average 3.6 percent a year, according to the IMF, against just 1.0 percent for Japan.

* Japan's stock market, meanwhile, is still 55 percent below its end-1989 peak while the S&P 500, a broad gauge of Wall Street, has risen more than fourfold over the same period.

Past results are no guide to future returns, as investment advisers are quick to point out, and it is the very divergence in performance over the 1990s that prompts some economists to assume that, surely, Japan's luck is about to turn.

"As an economist, I would be optimistic about equilibrium tendencies reasserting themselves," Brown said.

"There's no reason why Japan can't replicate what's been happening in the United States over the next 10 or 20 years."

This is where Sogo comes in.

Optimists interpret the government's refusal last week to bail out the retailer, burdened by US$17.3 billion in debt, as a sign that ministers finally recognize the need to chop down Japan's dead wood to let new green shoots flourish.

The significance of Sogo's failure, Japan's second-largest bankruptcy, cannot be underestimated.

The Bank of Japan on Monday cited the uncertainties created by the department store's collapse as the main reason for not raising interest rates for the first time since August 1990 -- another pair of bookends of sorts to the past lost decade.

The fact that the rumored buyers for Sogo include an aggressive U.S. workout fund merely underscores the reversal of fortunes in recent years -- as does the irony that Sogo went under because the hard-nosed new U.S. owners of Shinsei bank, formerly known as Long Term Credit Bank, bulked at a bailout.

Unfortunately, even if the Sogo saga does mark a conversion to market realities on the part of Mori's ruling Liberal Democrats, rather than an opportunistic cave-in to aggrieved urban taxpayers, economists say Japan will take years to erase the traces of boom-and-bust.

"The worst is yet to come for Japan. They've got their pension problem, their debt problem, their aging problem, their structural problems: the next five years are going to be very difficult for Japan," said Marshall Gittler, head of global currency risk at Bank of America in Tokyo.

Gittler, like Brown, speculated that the catalyst for change will be Japan's mountain of government borrowing.

While Washington is busily paying off debt using budget surpluses that Congressional experts on Monday estimated will total $2.174 trillion over the next decade, Japan has become the largest government debtor in the industrial world. It earmarks 65 percent of central tax revenues just to service its loans.

"Once they've got over that, maybe there's a lot more upside potential. Japan might be compared to where the U.S. was in the early nineties: after it goes through a rationalization period, 10 years from now it could come out a lot better," Gittler said.

What are the chances that, in another decade, Japan will look relatively good not through its own efforts but because the United States has stumbled?

The biggest threat to the unprecedented U.S. expansion is probably a build-up of private-sector debt, reflected in a record current account deficit that exceeds four percent of GDP and that must be financed by foreign inflows of cash and capital.

But Ed McKelvey of Goldman Sachs in New York argues that debt levels can look misleadingly worrisome. He says debt service is a much better measure and it does not appear onerous at the moment.

Although liabilities of U.S. non-financial firms have risen 39 percent in the past five years, the ratio of their net interest expense to pretax profits plus interest and dividend income has actually fallen over the same period.

Likewise, data for households do not set alarm bells ringing.

Writing in Goldman's latest Global Economics Weekly, McKelvey said self-imposed debt reductions by companies and consumers have rarely, if ever, triggered an economic downturn. Once a recession is under way, however, high debt burdens can make matters worse.

"The bottom line: we see no immediate threat to the expansion from the current debt position of U.S. consumers and companies. However, the rapid growth in debt does suggest that, should the economy falter for some other reason, it is increasingly vulnerable to a protracted debt workout," he said.

So where should you put your money for the next decade?

"Right now, the track record of the U.S. is good so you'd really be a contrarian to say you'd choose the Japanese approach over the U.S. approach. I'm not prepared to do that myself," said Ron Bevacqua, chief economist at Commerz Securities in Tokyo.