CRAIG T. KOJIMA / CKOJIMA@STARBULLETIN.COM Richard Koo, chief economist for Nomura Research Institute, says Japan's economy is not yet focused on growth. He was speaking at the First Hawaiian Bank Business Outlook Forum today at the Hawaii Convention Center.

2003 looks bright

Hawaii's recovery is further along
than those of the U.S. mainland
and Japan, 2 economists say

---

By Dave Segal
dsegal@starbulletin.com

Visitor arrivals could grow as much as 5 percent next year as Hawaii puts the finishing touches on its recovery, but the mainland U.S. and Japan still have some work to do before getting back on track.

Those were the assessments of Leroy Laney, economic consultant to First Hawaiian Bank, and Richard Koo, chief economist for the Nomura Research Institute in Tokyo, at First Hawaiian's 33rd annual Business Outlook Forum today at the Hawaii Convention Center.

Laney, who forecast that Hawaii will rebound to pre-Sept. 11 levels in all sectors by the second half of 2003, noted that weakness remains in the Japanese market, whose visitor arrivals are down 20 percent from prior to Sept. 11. However, Laney said it is encouraging that Hawaii's recession was mostly contained to the tourism sector, primarily on Oahu. He said low interest rates benefited home and auto sales, with mortgage refinancing putting money in consumers' pockets.

Laney, a professor of economics and finance at Hawaii Pacific University, said he expected job growth to resume as the visitor industry regains its footing and business confidence and hiring improves. He forecast jobs to grow 1.5 percent in 2003 compared with an estimated contraction of 1 percent this year.

He also said inflation will stay muted and rise to 1.5 percent from an estimated 1.1 percent this year. Laney forecast real personal income growth to rise to 3 percent from 2.5 percent and real gross state product to grow to 2.8 percent, compared with 2.2 percent this year.

"Our state recession turned out to be not quite as deep or as pervasive as we feared this time last year," Laney said. "The Hawaii economy has made impressive progress in overcoming the recession that did occur."

Japan, mainland lag

The recovery isn't as evident, though, in Japan and the U.S. mainland as corporations continue to pay down debt.

"Companies are no longer maximizing profits," Koo said. "They're minimizing debt."

Both the U.S. and Japan economies will find it difficult to grow under those circumstances, he said.

"A lot of people say Japan has a structural problem," Koo said. "But my view of the Japanese economy is that it's not structural, it's balance sheet in the sense that commercial real estate prices in Japan fell 85 percent from the peak national average. If you see this kind of asset price decline, and a lot of people bought these assets with borrowed money, you can imagine what kind of balance sheets these people have."

Koo said in most cases that Japan companies' mainland businesses are providing the cash flow to pay down debt. That can be seen in the country's big trade surplus that indicates Japan's products are still very much in demand.

"Their balance sheets are out of whack," Koo said. "When everybody pays down debt at the same time, what happens to the economy? It shrinks like crazy because the household sector is still saving money and the corporate sector, which used to borrow money, is no longer doing it."

What that means, Koo said, is that Japan companies are paying down debt by about $150 billion a year. That translates to 4 percent of the country's gross domestic product.

"So the corporate sector is a net supplier of credit to the banking sector," said Koo, adding that 70 percent to 80 percent of Japan companies have balance sheet problems.

Stimulus needed

Koo said for Japan to enter sustained growth that Prime Minister Junichiro Koizumi will need to use fiscal stimulus.

"Mr. Koizumi is not making life easy for corporations," Koo said. "He's dead-set on structural reform instead of helping the companies repay their balance sheets. That's why the economy is sinking and the stock market is doing very poorly."

Koo said that once Koizumi shifts gears, the economy will stabilize and then gradually begin to improve.

Koo said the United States is starting to take on a Japan-like scenario following 12 interest-rate cuts that has brought the federal funds rate down to 1.25 percent. Japan's short-term rate is zero. He said U.S. corporations are taking advantage of the opportunity to pay down debt.

"I think top management seems to understand there is a danger that the U.S. could fall into a Japan-like trap and is doing everything it can to put stimulus in place," Koo said.

Koo said Federal Reserve Chairman Alan Greenspan and his fellow policy-makers have retained a wealth effect by replacing the stock market bubble with a housing bubble.

"That's one sector in the economy that is still responding to monetary stimulus whereas in Japan, the Bank of Japan was under orders to destroy the housing bubble in 1990," Koo said. "The Bank of Japan was under orders to destroy the housing bubble in 1990 even after the (Japan) stock market collapsed. The BOJ keep raising rates until it was absolutely sure that land prices began collapsing. But then it was too late. There was nothing left to respond to monetary stimulus whereas in the U.S., Greenspan lowered rates as soon as the stock market started collapsing."