Isles missing out on Japan's recovery

It will be a while before Hawaii sees major increases in visitor arrivals, Leroy Laney says

A leading economist from Japan told Hawaii business leaders yesterday that this time Japan's economic recovery is real and here to stay.

Richard Koo, chief economist of Nomura Research Institute in Tokyo, said Japan's 15 years of struggles defied description because the situation was not covered in any economic or business textbook anywhere in the world.

"How else would you describe an economy where, even with zero percent interest rates, companies are all paying down debt?" Koo said at First Hawaiian Bank's 37th annual business outlook forum yesterday. "That's what really caused the problem in Japan."

During that time, total capital losses on stock market shares and land reached 1.5 quadrillion yen, three years worth of Japan's gross domestic product -- "the largest loss of wealth in human history during peacetime," Koo said.

Koo said Japan's economy is back now because the debt repayment has stopped and corporate balance sheets are clear.

But despite Japan's recovery, Hawaii is unlikely to see any immediate impact, according to First Hawaiian Bank consultant Leroy Laney, who shared the podium with Koo yesterday.

Japanese visitor arrivals in Hawaii are down 9.2 percent from a year ago through the first nine months of this year, and Laney said places other than Hawaii may be more in vogue now for Japanese tourists.

"Even though there have been some increases recently, we're not nearly up to (the level of the peak in arrivals) in '97. So I think it would take the Japanese recovering for a while before we would see any palpable increases in Japanese tourism here," Laney said after yesterday's presentation.

Laney, a professor of economics and finance at Hawaii Pacific University, also said not to expect an increase in Japanese investment in Hawaii anytime soon.

"Their financial system has got to improve a little more before we're likely to see anything compared to the experience we saw in the late 1980s," he said. "If you look at GDP and other measures of macro economy in Japan, yes, it has been improving, but for Hawaii to feel any real benefits, it will be several years at least."

Still, Laney told several hundred business leaders yesterday that he projected Hawaii's overall visitor arrivals to rise 2.4 percent in 2007, up from an estimated 0.5 percent gain in 2006 over 2005.

"A somewhat slower mainland economy, with a turn in the real estate market there as well as other factors, could curb Hawaii tourism growth a little more (in 2006) than might otherwise be the case," Laney said. "But barring unforeseen noneconomic developments, there is no reason to project a drop-off in visitors in 2007."

Laney, one of the state's top economists, said Hawaii's cooling economic expansion should extend into an 11th year in 2007 but that the state's housing boom is "about over."

He said inflation has gotten considerably worse over the past year but he forecasts inflation-adjusted personal income to continue to grow 2 percent next year over 2006.

"Our expansion may be in a maturing phase, but the outlook is still rather upbeat," Laney said.

He said most of the speculation has been squeezed out of the housing market due to the high valuations, and that buyers just wanting a house to live in are sitting on the sidelines and monitoring prices. That has resulted in a drop in sales of single-family homes and a slower rate of appreciation of median prices, he said.

Laney said relief from rising home prices actually is good news for the economy over the long term, because unaffordable shelter makes it hard for people to live and work in Hawaii, encouraging people to leave the state and discouraging others from moving here.

"The combined trend of flattening home prices and some continued growth in incomes in Hawaii will help home affordability," Laney said. But such relief would take several years, the same way that price increases of the 1980s were followed by five or six years of leveling off.

"The simple fact is that we cannot have it both ways -- a strong housing market as well as affordable housing," he said. "Hawaii likely will always face this trade-off."

Laney also predicted a deceleration of job growth to 2 percent in 2007 from an estimated 2.5 percent in 2006 due to a labor shortage. He expects inflation to remain high at 4.5 percent in 2007, down from an estimated 5 percent in 2006.

"(Inflation) will remain high because it takes time for some of the recent price increases, especially in housing and energy, to be reflected fully in the broader index," Laney added. "If most of the price shocks dissipate a little, maybe some deceleration to 4.5 percent next year is plausible, but that's still a pretty high inflation rate."