A Global Money Machine

Japan has long been renowned for its procession of bestselling products: cars and cameras, radios and record players, steel and semiconductors. In the future it will also be an important source of a more basic commodity: money. As Japan’s trade surplus mushrooms, the country is raking in much more money than it spends at home. As a result, the Japanese are sending the funds back overseas by making loans, buying foreign stocks and bonds, and building factories in countries around the globe. Once merely a master manufacturer, Japan is on the way to becoming the world’s premier investor and creditor. Its economic and financial clout could eventually rival the power held by Britain in the 19th century and the U.S. after World War II.

In 1984, Japan ran a trade surplus of about $44 billion, up from $20 billion in 1981. In trade with the U.S. alone last year, Japan had a $30 billion surplus. One reason for that startling imbalance is the lofty value of the U.S. dollar. Partly because of high American interest rates, the dollar has risen 30% against the yen since 1978. That has made Japanese imports cheaper for U.S. shoppers, and American exports more expensive in Japan. Economists think the dollar may decline a bit over the next year or two, but not nearly enough to erase Japan’s surplus. In fact, some Japanese trade experts predict that their country’s favorable balance of trade with the U.S. could balloon to $75 billion by 1990.

Japanese holdings overseas are now worth about $70 billion more than the investments that foreigners have made in Japan. That total should reach $100 billion this year, moving Japan past the U.S. ($95 billion) and Britain ($81 billion) into the top spot among international investors. Nobumitsu Kagami, chief economist of Nomura Investment Management in Tokyo, projects that Japan’s overseas investment surplus will rise to $500 billion by 1992. Says Hiroshi Takeuchi, a managing director of Japan’s Long-Term Credit Bank: “Our country could become a permanent capital exporter.”

The U.S. is already hooked on Japanese capital. Enticed by steep American interest rates, Japanese investors poured about $25 billion last year into U.S. Government securities. That windfall financed a sizable chunk of the $175 billion federal budget deficit. Without Japanese money, interest rates on Treasury securities, which now range to 11.66% on a 30-year bond, would be even higher.

Japan also exports capital in the form of loans and grants to its neighbors in the Pacific region. The Philippines, staggering under a $26 billion foreign debt and deep in recession, received a grant of about $240 million from the Japanese government three months ago. Last July the Japanese government gave Thailand loans and grants worth about $300 million. Japan hopes that economic aid will strengthen its neighbors and increase trade and prosperity throughout the whole Pacific region.

The Japanese are not content, however, merely to buy foreign bonds and make loans. They are also constantly searching the world for opportunities to buy companies, form partnerships and build businesses from scratch. Such direct foreign investments by Japan have doubled since 1979, to $28 billion. Many Japanese companies have spread as far and wide as IBM or Exxon. YKK, the Japanese zipper manufacturer, has plants from The Netherlands to New Zealand and from Honduras to Egypt. Toshiba makes advanced computer chips in the U.S., West Germany, Malaysia and Mexico.

The U.S., in particular, has become a mecca for Japanese manufacturers. Matsushita turns out Panasonic electronic products near Chicago. Toyota is building cars in Fremont, Calif., in partnership with General Motors. Nippon Kokan last year paid almost $300 million to buy half of National Steel. According to the latest count by the Japan Economic Institute in Washington, 309 Japanese companies are operating 479 plants in the U.S.

All this activity may be only the beginning. Within the past two months, several major new Japanese investments in the U.S. have been announced. Mazda Motor said in late November that it would build a $450 million auto-assembly plant in Flat Rock, Mich. In December, Toshiba and Westinghouse Electric revealed plans for a joint venture in which they will put up a $100 million factory in Horseheads, N.Y., to produce tubes for computer monitors and color television sets.

Japanese companies have compelling reasons for building plants on American soil. The U.S. is the biggest foreign market for Japan’s products, absorbing about one-third of its exports. But those shipments are threatened by American protectionism. Already the U.S. Government has forced Japan to limit exports of autos and steel. In addition, American politicians are demanding that Japan build factories in the U.S. to restore jobs that its exports have destroyed. Executives of Japanese firms, including Honda and Nippon Kokan, have admitted that fears of trade friction helped persuade them to invest in the U.S.

Japan’s new ventures will provide paychecks for thousands of Americans. The proposed Mazda plant, for example, is expected to employ 3,500 people and support 3,500 additional jobs in auto-supply industries. Michigan Governor James Blanchard calls the Mazda deal “a milestone in U.S.-Japanese relations.”

Most areas of the U.S. are eager to have Japanese factories. In fact, 17 states, including Alabama, Ohio and Alaska, have opened offices in Tokyo to recruit investments. Cities and towns offer the Japanese tax breaks and choice industrial sites. One of the most ardent suitors is Battle Creek, Mich. The city already has factories set up by three Japanese companies: Hi-Lex, which makes cable systems for cars, snowmobiles and motorcycles; Lotte, a chewing gum manufacturer; and Musashi Seimitsu, a producer of auto- motive equipment. In addition, Nippon Denso announced in August that it would build a $100 million plant in Battle Creek to make parts for auto air conditioners.

To help attract such investments, Battle Creek Unlimited, a group of local business promoters, has set up a special school where the children of Japanese managers are taught in their native language. The city has sponsored exhibitions of art from Japan and invited the Japanese national hockey team to play in a Christmas tournament last year. “We make the Japanese feel welcome here,” says James Hettinger, executive director of Battle Creek Unlimited. Hettinger says his organization is currently talking with 20 more Japanese companies about coming to Battle Creek.

Labor unions are ambivalent about the Japanese invasion. They welcome the new jobs, but have had trouble organizing workers at some Japanese plants. Not one of the 1,500 employees at the Nissan truck factory in Smyrna, Tenn. (pop. 8,800), has joined the United Auto Workers. Nonetheless, the threat of unionization has encouraged Nissan to pay wages that are very close to the $12-an-hour base rate for a typical U.A.W. member in Tennessee. Says Walter Whittemore, president of U.A.W. Local 737 in Nashville: “It will be up to the people who work for Nissan to join the union, and we believe they eventually will.”

Although the U.S. has put out a big welcome mat for Japan, some economists think that a backlash may develop in the future. As the Japanese presence and power grow, opposition could come from competing American-owned corporations. Warns Roger Shields, the chief international economist for New York City’s Chemical Bank: “There may be calls for protection against Japanese investments. Our companies will want to remain dominant on their own turf.”

Besides setting its sights on the U.S., Japan has invested most heavily in the economies of its Asian neighbors. In Hong Kong, Japanese factories churn out such products as Yashica cameras and Seiko watches. Toyota, Nippon Steel, Toshiba and Nissan are important players in the Philippine economy. In Indonesia, Japan has invested in auto manufacturing, oilfields, coal mines and hydroelectric dams. Japanese companies are responsible for 25% of all construction in Malaysia.

Japan has established an especially close relationship with Singapore, which encourages foreign investments by giving tax breaks and providing a highly educated work force. Most major Japanese appliance manufacturers, including Toshiba, Sanyo and Hitachi, have plants in Singapore. Japanese companies have also gained strong footholds in the construction and shipbuilding industries. Says Katsushige Fukino, managing director of Nippon Electric’s Singapore operations: “There is enthusiasm here for high technology and an active desire to become an industrially advanced state.”

One of Singapore’s attractions is that English, the first foreign language for most Japanese business people, is widely spoken. Because much computer software is based on English, Singapore could become a major force in that important segment of the electronics field. Japan’s government has helped set up and finance the Japan-Singapore Institute of Software Technology to train local computer technicians.

The only major Pacific nation in which Japan has been slow to invest is China. The two countries have 19 joint ventures, including factories in south China that make television sets and cassette tape players, but the total value of Japan’s investments is only about $80 million. Japanese companies have many reasons to be skittish about China: uncomfortable living conditions, a complex government bureaucracy, lack of control over labor relations, the difficulty of repatriating profits, and unreliable power supplies. But as the business climate slowly improves, the Japanese will become more interested in what is potentially the world’s largest market.

The Japanese have stirred some resentment in several Asian countries. Says Alunan Glang, a Filipino historian: “If we don’t watch out, we Filipinos will no longer be known as ‘little brown Americans,’ but as ‘little brown Japanese,’ and God knows which is the lesser evil.” In a speech last August, Malaysian Prime Minister Mahathir Mohamed accused the Japanese of practicing “economic colonialism.”

One charge leveled at Japan is that it uses cheap labor in other Asian countries but is unwilling to share technology. Says C.C. Chen, senior vice president of the International Commercial Bank of China in Taiwan: “What we need from foreign investment is not so much capital as access to technology. But the Japanese are not going to divulge any trade secrets, even to their joint-venture partners.” When South Korea’s President Chun Doo Hwan visited Tokyo last fall, he brought a shopping list of 47 technologies in industries ranging from textiles to computers. So far, Japanese companies have refused to license any of these techniques to the Koreans.

Asian countries, along with the U.S. and Western Europe, complain bitterly that Japan does not buy enough of their products. The Japanese piled up trade surpluses last year of about $1.7 billion with Thailand and $6 billion with Singapore. Student protesters in Thailand have circulated letters to their countrymen with a blunt warning: “Do not be a slave to Japanese goods.” In his August speech, Malaysia’s Mahathir noted that 84% of his nation’s exports to Japan consisted of oil, wood, tin and other raw materials. Said he: “We cannot and will not remain merely hewers of wood and drawers of water.” Japanese businessmen and farmers press for protection from imports just as hard as their counterparts in the U.S. Although Japan’s tariffs are generally low, critics point out that the country has long maintained a maze of product standards, inspection procedures and testing requirements that effectively exclude many foreign goods. The government is sensitive to this charge, and since 1981 it has been dismantling such import barriers. No longer, for example, are all aerosol cans imported into Japan required to have precisely the same thickness.

But the roots of Japan’s import phobia run deeper than its regulations. The Japanese are picky and often do not trust the quality of American products, much less Asian imports. Says Eric Hayden, an economist and a director of the Bank of America in Tokyo: “The Japanese are not going to take South Korean machine tools or Malaysian cars or Indonesian airplanes. Japan doesn’t import that kind of stuff. The Japanese produce it, and better than any of these countries can.”

Japan’s leaders recognize the need to open up their economy to more foreign goods. The process, though, will be gradual. In the meantime, the Japanese will continue to accumulate trade surpluses and scout around the world for ways to invest their treasure trove both productively and profitably.