Thursday, February 4, 1999

Y2K bug will
likely catch Japan
off guard

Japan's preoccupation with
its economic crisis has left it,
and Hawaii, vulnerable

Hawaii stays ahead

By Christine Donnelly


A leading global economist warns that Hawaii should "hunker down" for prolonged economic recession in Japan, which he predicts will pay dearly for underestimating the so-called Y2K computer bug.

"Japan is already in its worst recession in 50 years and now it's very vulnerable to Y2K. That's a bad combination," Edward Yardeni, chief economist and global investment strategist at Deutsche Bank Securities, said in a telephone interview from his New York office.

Yardeni, whose work includes "Global Economic Analysis" and "Y2K Reporter," said Japan's government and business leaders were so preoccupied trying to spur the stagnant economy they were late recognizing the urgency of preventing computer failures at the turn of the century.

Hawaii, so dependent on Japanese tourism for its own economic health, should "get set to hunker down for a while," Yardeni said, predicting Y2K could slow Japan's economic recovery by six to 12 months after the year 2000 dawns.

However, another influential analyst said it was impossible to determine whether Y2K-related losses alone could cause further recession in the world's second-largest economy. Furthermore, while Japan does lag behind the United States in Y2K readiness, it has improved its efforts recently, said Lou Marcoccio, director of Year 2000 Research for the information technology company GartnerGroup.

"It took a while for them to get past the denial stage," said Marcoccio, whose firm advises tens of thousands clients worldwide, including governments of more than 80 countries. "But just three months ago they were even further behind. They've gained a lot of ground quickly."

Endless possibilities

The Y2K bug, also commonly known as the millennium bug, refers to problems associated with the use of two digits to signify the year in the dating systems of many older computers and software programs, such as 99 for 1999. When confronted with information dated 2000, those systems may misinterpret the year as 1900 and shut down or spew incorrect data. With everything from auto assembly plants to traffic lights computerized these days, the possibilities for disruption are endless -- depending on a region's state of readiness.

The errant computer code can be rewritten, or in the case of tiny embedded microchips, replaced. But assessing, testing and fixing the myriad problems is costly and time-consuming. For example, the U.S. Social Security Administration -- which in December 1998 became the first, and so far only, fully compliant U.S. agency -- began its work in 1989.

Marcoccio said his latest global Y2K risk assessment -- to be released next week -- predicts that up to 33 percent of all companies in Japan will suffer at least one "mission critical" computer system failure. That's down from the 50 percent he reported in October 1998. In contrast, 10 percent to 15 percent of U.S. companies face such a failure.

The report will say Japan still risks disruption to imports and exports, air transportation, government services, the oil supply and other essentials, but in every case the risk is lower than it was three months ago, Marcoccio said.

"So, yes, there are problems, but they won't necessarily have catastrophic consequences on the economy," he said in a telephone interview from his office in Westborough, Mass. He acknowledged, however, that even given Japan's recent actions, it was too late for the country to reach full compliance by year's end.

Marcoccio's report is based on data provided by clients worldwide. Recent Japanese news reports, meanwhile, citing government surveys, said about 70 percent of companies in five key industries -- finance, transportation, energy, telecommunications and medicine -- had already identified and fixed problems. But more than 20 other major industries were far behind, having failed even to test whether their computers would function next year.

Hidden problems?

While many prominent U.S. analysts and government officials have expressed doubts about Japan's Y2K readiness, few have been as outspoken as Yardeni, the global economist from Deutsche Bank. He also fears that Japanese government and industry officials may understate Y2K risks the way the country's financial distress was downplayed earlier this decade until some banks were on the verge of collapse.

"There is a culture of not wanting to bring bad news. The history with the financial crisis makes me concerned that there might be a lot of hidden Y2K problems as well," he said.

But Japan's consul general in Hawaii disputed that, saying he was confident his country could avert major computer failures and avoid an economic downturn that could further reduce the already shrinking number of Japanese tourists to Hawaii. Japanese visitors to Hawaii account for about one-third of all tourist arrivals to the state and about one-half of all tourist spending.

"We are working, including our government, very hard on this problem. We take it extremely seriously," said Gotaro Ogawa, adding that he had checked with one large Japanese company with close ties to Hawaii -- the Japan Travel Bureau Inc., the country's largest travel agency -- and been assured it was well along in assessing, testing and correcting its computer systems.

Ogawa said Japanese Prime Minister Keizo Obuchi himself heads a special panel aimed at encouraging Y2K compliance among government agencies and private businesses. The panel created an "action plan" in September 1998 that includes offering government help to the small- and medium-sized businesses considered least able to cope on their own, Ogawa said.

A more complete picture of Japan's readiness should emerge after June, the deadline for government agencies to finish testing their computer systems. For now, predicting how much Hawaii will suffer if Japan copes poorly with Y2K has generated little research among local economists. However, several said that would change when more information is available.

With Japanese tourism to Hawaii down in 1998 and expected to fall again this year, "Y2K failures definitely won't help. We just don't know yet if it could make it a little bit worse or a lot worse," said Leroy Laney, a Hawaii Pacific University economics professor and vice chairman of the Hawaii Council on Revenues, which makes economic projections the state government uses to form its budget.

Michael A. Sklarz, the council's chairman, said that while Yardeni is an excellent economist and "highly successful" forecaster who has done extensive research into Y2K issues, "I also think he's purposely taking an alarmist view (on Y2K) to prompt action."

"Still, if he's saying Japan has a problem, they probably do," said Sklarz. "And it's something we'll have to take into consideration."

Hawaii staying ahead
of millennium bug

By Christine Donnelly


"Hawaii: We may have cockroaches, but not Y2K bugs!"

That's not the catchiest marketing slogan ever, but one University of Hawaii professor says the local tourism industry should use something like it to lure visitors here at the dawn of the year 2000.

"If we can provide some assurances that taking a vacation in Hawaii is no risk, our planes will be flying, our elevators will be running, it could actually attract people" worried about traveling near the end of the year, said Tung Bui, Matson Navigation Company Distinguished Professor of Global Business at the University of Hawaii-Manoa College of Business.

"It's sort of the bright side of having the rest of the world fall behind the United States" on Y2K compliance, he said.

Just last week, the U.S. State Department warned Americans to take care traveling to foreign countries as 1999 ends because many other countries face serious computer failures. The notice issued worldwide did not identify specific countries. The State Department promised to provide more specifics as the global outlook becomes clearer.

The advisory did say financial services, utilities, telecommunications, transportation and other vital services could be affected. For example, credit cards and ATM machines may malfunction, and transportation and medical services could be disrupted, it said.

Because many computers and software programs use only the last two digits to signify the year in dates, they may misinterpret the change from 1999 to 2000 as a reversion to 1900, potentially disrupting a variety of services. Fixing the problem -- known as the Y2K or millennium bug -- is costly and time-consuming.

The United States is ahead of the rest of the world in remediation efforts. In Hawaii, state and county officials and many business executives have said their enterprises are hard at work on the problem and they expect no major problems, although they cannot guarantee there will be no glitches.

Asia and Y2K

The Asian financial crisis has drained attention and money away from the region's Y2K preparations. Although Japan provides the region's most crucial link to Hawaii's economy, other countries also play important parts. Here's how some are faring on Y2K readiness, according to a global survey by the GartnerGroup, a worldwide business and information technology advisory company:

bullet China: Among the worst-prepared of any country in the world, with two-thirds of all companies and government agencies facing at least one "mission critical" computer failure. Among other problems, China faces widespread disruption to government services, air transportation, the power supply and telecommunications, and moderate disruption to imports and exports, the survey said. Analysts say the risks are compounded by the rampant use of pirated computer software, which leaves technicians unable to consult manufacturers for help. The government has ordered Y2K compliance, but done little to help reach that goal.

bullet Singapore, South Korea and Taiwan: Best prepared in Asia, but still lag behind the United States and therefore face moderate interruptions to government services and more isolated disruptions to air transportation and the power supply. Disruptions to imports and exports should be isolated, but also severe, the survey said. bullet North Korea, Malaysia and Sri Lanka: Although better prepared than China and other countries at the bottom of the pack, this group lags behind the region's leaders. Up to half of all government agencies and companies may suffer at least one "mission critical" computer failure and there may be moderate disruptions to air transportation, government services, power and telephone service. The impact on imports and exports is predicted to be isolated but severe.

bullet Philippines, Cambodia, Indonesia, Laos, Thailand and Vietnam: Ill-prepared, like China, according to the survey, and all face widespread disruption to government services, air transportation, the power supply and telecommunications, and moderate disruption to imports and exports. However, some analysts hope the effects could be mitigated by the fact that these emerging economies are less computerized than richer countries.

More danger signs

Besides Japan's late start addressing the problem and what some experts see as a lack of disclosure on progress made, experts say there are other worrisome signs:

bullet The level of Y2K awareness is not high enough, in the government or the general population. U.S. Rep. Constance Morella, R-Maryland, said that when she asked during a recent trip to Japan what was being done about the Year 2000 computer problem "...members of the Japanese Diet (congress) didn't even know what Y2K was." Morella made her comments during a a Y2K hearing last month in Washington.

bullet Japan has an especially high density of embedded computer chips, among the most time-consuming of Y2K problems to solve because they must be physically tracked down and replaced if faulty. "Not all those chips will fail, but some will, and that could be a major headache just because they have so many," said Tung Bui, Matson Navigation Company Distinguished Professor of Global Business at the University of Hawaii-Manoa.

But other factors make people optimistic about Japan's ability to overcome its Y2K risks:

bullet With Japan's "jobs for life" corporate philosophy, older programmers who wrote the original computer code are more likely to still be working, and available to quickly detect the bugs and fix them, according to global economist Edward Yardeni. That is not the case in the United States, where knowledgeable programmers are at a premium.

bullet Japan could benefit by following the Y2K compliance trail blazed by the United States. "Sometimes it's easier to be the follower. They let the U.S. work out the kinks and learn our lessons. So by doing the Y2K work after us they get better tools, cheaper tools to fix their Y2K problems," Bui said. Plus, he said, there is a large pool of inexpensive labor in Asia to help complete the task.

bullet Some Japanese computers' internal clocks are not based on a Western standard, but on one related to the emperor's reign and therefore will have no trouble switching to the Year 2000. But this is small comfort to Yardeni and other who say that even those computers not timed to the Western standard are linked to ones that are, making both vulnerable.

Japan on the 'Net

Here are some Internet sites where readers can learn more about how Japan is coping with the risk of Y2K computer failures:

bullet (global economist Edward Yardeni's Web site.)

bullet (The GartnerGroup consulting firm's global Y2K report)

bullet (The English version of the Japanese newspaper Nihon Keizai Shimbun's online Y2K news.)

bullet (The Japanese prime minister's Web site, with a link to the country's Y2K action plan. Choose English or Japanese language once you reach the site.)

bullet (The site of the Global 2000 Coordinating Group, which includes more than 230 institutions from 46 countries.)


(Y2K information in English from Japan's bankers associations.)

bullet (the Web site of an association of Japanese computer and software companies. Choose English or Japanese once you get there, and look for surveys on Y2K.)

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