How business, doctors and journalists prey on your food anxieties I

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FINANCIAL STRATEGY
ja an's virulent
de ation
A . Cary Shilling Is
presidentof A . Gary
Shi7ing & ~o ., ecanomic
consultants <strong>and</strong>
rvestrrent adv :ser .
His firm publ'ehes
ins,f~5t a mi
newsletter covering the
<strong>business</strong> outlooi <strong>and</strong>
nvest¢ent strategy .
THE \t[cKL[ has rallied recendv, <strong>and</strong> some
investors think Japanese stocks are screaming
L uvs . In relation to cash flo%a <strong>and</strong> book ralue
they are as cheap as they've beer. in the poi
era . The Japanese faced do« n Clinton in the
auto trade talks . The recession there is o~er three
vears old <strong>and</strong> can't last forever .
But think nrice before eou leap into Japanese
equities . There is !nore bad ne,rs to come .
As ~tith the U .S . in the 1930s, Japan's basic
problem is the inabili7y to deal with self-feeding
deflation . Prices of goods are falling, so consumers
are delaying purchases in anticipation of
still lm~'er costs . This curtails production,
The widespread deflation
in Japan has
exalted the yen,
not the reverse .
hikes unemplovment <strong>and</strong> scares even those Japanese
%cith lifetime emplotntent into further
retrenchment . The 50% deciine irn real estate
prices <strong>and</strong> the 60ib tall in stocks have compounded
tlte problem .
The Japanese banks are bv no means out of
the %roods . Propern' <strong>and</strong> stocks arc the collateral
for manv loans in Japan, <strong>and</strong> the value of this
collateral is shrinking . The Japanese banks are in
naice as bad a position as the U .S . savings <strong>and</strong>
loans were half a decade ago .
Here's the nub of the problem : W'ith detlation,
real interest rates :u-e high, O2n though
nominal short rates are about 14?~ . So there
isn't nmch room to cut rates further . Falling
corporate earnings <strong>and</strong> gobs of excess capacity
mean that the solid companies to which banks
want to lend aren't borrowing for capital
spending . S-Seamehile, the go% ernment is too
Weak to otercome the bureaucrats' abhor
rcnce of rising deficits . This makes it tough to
push through tiie big tax cuts <strong>and</strong> deficit
spending needed to check the detlation
. The Japanese deflation has helped drive the
ven to levels where it is hard for Japanese exports
to compete . Wcak companies have been selling
foreign assets <strong>and</strong> concerting the proceeds
to ycn to shore up their balance sheers at
:iome, ,thich means thec sell dollars <strong>and</strong> buc
ven . Japanese deflation has exalted the yen,
not the recerse . The neaker ven against the
dollar that we continue to foresee mathelp
exporters <strong>and</strong> spur stocks, but onhbrietlc .
Much more v~'ill he needed to solve Japan's
basic «oc