Down and out in Asia

It's official: Japan is in recession. The government announced in mid-June that the economy shrank 0.7% in the fiscal year through March 1998, including a 5.3% contraction in the last quarter.

The timing couldn't have been worse. While a lot of Asian nations seek a lifesaver for their manufactured goods, Japan's consumer spending is down, and local electronics companies are scaling back product development plans and cutting capital spending.

"[There was] weakness in telecom, a slowdown in PCs, very bad results in semiconductors as a result of continuing overinvestment and overcapacity in the industry," says Peter Wolff, electronics analyst at ING Barings Securities (Japan) Ltd. in Tokyo. The industry is in such dire shape that the Japan Electrical Manufacturers Association has applied to the Labor Ministry for subsidies for idle workers.

What's more, the weakening yen is making Japanese goods hard to beat in markets around the world. That trend helped push Japan's 1997 trade surplus up 55% over the previous year to $100.7 billion. Imports were basically flat, up just 0.6% from the previous year to $268.9 billion while exports surged 11.3% to $369.6 billion.

These trends are reflected in corporate bottom lines. The major vertically integrated electronics firms, which depend on the domestic market for a large portion of sales and which all have previously depended on DRAMs for a good part of their profits, all saw earnings decline in their latest fiscal year. A prime example is Toshiba Corp., Tokyo, whose group net income sank 89% to $543.7 million on a 1.1% decline in group sales. On the other hand, Tokyo's Sony Corp., which has an extraordinarily high export ratio, reported record earnings of $1.66 billion on revenue of $51.3 billion for the year through March 1998. Sony President Nobuyuki Idei attributed a large part of the success to exchange rate trends. "The weak yen is a favorable tailwind for Sony," he says.

For 1998, there are few bright spots. Demand for personal computers is likely to rise as much as 7%, says Katsushi Shiga, senior PC industry analyst for Gartner Group Japan KK in Tokyo. But in other sectors, analysts and executives agree that it's hard to see anything to get excited about. "We're poised for a very, very severe 1998," says Sony's Idei.

The pessimism of the industry is reflected in capital spending cutbacks. Mitsubishi Electric Corp., Tokyo, has reduced production at a U.S. chip subsidiary in North Carolina, slashing 200 jobs. Toshiba has postponed construction of a U.S. chip plant. Hitachi Ltd., Tokyo, and Texas Instruments Inc., Dallas, shuttered their joint venture, Twinstar Semiconductor Inc., at the end of March. Meanwhile, no one in Tokyo expects any halt in the slide of the yen.

A recent study by Korea's LG Economic Research Institute found that at 150 yen to the U.S. dollar, the price competitiveness of Korean goods versus Japanese products would be eroded almost completely.

--Dennis Normile