Get Rich Quick

By JOSHUA COOPER RAMO

Oh, what a wild ride! You would think, perhaps, that the Japanese would be used to it. After all, this is the nation that saw a helium-pumped stock market rise 500% in the 1980s, the country that experienced some of the world's fastest economic growth from 1949 to 1991, the land where "better, faster, cooler" products are a national obsession. But frankly, the Japanese are not enjoying the financial ride they are on at this moment. Since the start of the year, Japan's Nikkei index has gone up nearly 30%. (In the U.S., the Dow has risen 19%.) The country's economy, which had been given up for dead by most of the world's leading economists, astonished analysts with a first-quarter annualized growth rate--nearly 8%--that is almost three times what the U.S. will likely manage in this fairly sizzling year. And global investors, feeling some drag in American markets, are looking to Japan for the next big ride. "The jump in the Nikkei is very real," says Chuck Clough, chief investment strategist at Merrill Lynch. "I believe it could reach 36,000 in two years." That greedy mantra--a 100% return in two years!--has sent billions of dollars and euros thundering into Tokyo. And it is freaking out the Japanese.

To some extent, you can think of this as the Minnesota Lottery Effect. You are a factory worker in, say, a St. Paul milling plant. You know your job is probably not the most secure in the world. You know you need to get some new skills. And then one day you win the lottery. Life is suddenly a whole lot better. Money, it seems, cures everything. The problem in Japan is that even though having the new Nikkei riches may seem like winning the lottery, it's not. In fact, the money could disappear tomorrow, leaving Japan with a still troubled economy. A rising Nikkei may seem to tell the world that Japan is back, but the Japanese--and some wary foreigners--insist it is not. Says Andrew Shipley, senior economist at Schroders Japan Ltd. in Tokyo: "This is a temporary respite from severe and chronic deflationary pressure."

The Nikkei rocket has been fueled almost entirely by foreign cash. In the last month foreigners have bought $1.8 billion of Japanese equities on average each week, according to Bridgewater Associates, a money-management firm based in Wilton, Conn. At the same time, locals have sold more than $2 billion worth each week. Cashing out? You bet. That imbalance between sellers and buyers finally caught up with the market last week, which ended in a 4% dive.

The investing invasion is also playing havoc with Tokyo's economic plans. It has, for instance, jacked foreign demand for the yen to dangerous levels. The Japanese central bank has spent $25 billion this summer to stem the yen's rise, but the exchange-rate creep could strangle a recovery before it starts.

Despite the 7.9% annual GDP growth rate during the first quarter, Japan's economy remains a bloated, uncertain thing. Insiders say the spring growth blip was a one-time phenomenon--possibly even a result of inaccurate accounting--fueled by high government spending. The primary problem is that Japan's financial structure--everything from the way companies are managed to the amount of government debt--remains badly out of sync. Many Japanese companies are still chugging along as if it were 1981, complete with overweight overheads, inefficient manufacturing systems and "jobs for life." Japan's banks, long loaded with bad debt, have yet to write off many loans they know will never be repaid. And the nation's public finances--badly strained by years of gigantic "stimulus" packages--are also in a worrisome state. The government is borrowing at a feverish pace, adding $1.5 billion in debt each day. But in the minds of investors, these arguments, solid as they may be, are old. More often than not, the world's speed investors are entranced not by true ideas, but by new ones.

And there are plenty of new views about Japan. The most popular is that the country finally has the kind of policy guidance it needs to get turned around. That leadership takes a variety of forms. The Bank of Japan, for instance, has been telegraphing with very un-Greenspan-like candor that it intends to keep short-term interest rates near zero. At the same time, an encouraging amount of "micro-reform" is under way in Japan--tiny revolutions in entrepreneurial companies that may forge a Japan built for the Internet age. As some Japanese like to observe, they spent 40 years building the world's best industrial economy. What you're seeing, they insist, is the agony of a nation trying to enter the world's fast-growing information-age economy.

Inside Japan, business leaders who believe the economy is snapping back propose a kind of pincer movement for national regeneration. According to this theory, the government--led by economics friendly Prime Minister Keizo Obuchi--spends lavishly to stimulate a small amount of economic growth. By putting trillions of yen in the hands of consumers, Obuchi's program saves the economy (to say nothing of his political career) and gets consumers to finally start spending. In time, that growth encourages Japan's out-of-date manufacturing firms to begin a difficult restructuring. The result is a top-down, bottom-up postindustrial revolution. And though the government has to go into hock to pay for the resuscitation, it eventually repays its deficit on the back of a newly resurgent Japan.

If the model sounds familiar, there's a reason: it's very like what the U.S. did in the 1990s. That was the decade in which the U.S. had to dramatically restructure its economy for a new, postindustrial age after the violent recessions of the 1970s and early '80s. And the revolution was accomplished with the help of lavish federal deficits (which are only now being paid down), tax cuts and extensive, bottom-up restructuring that transformed dinosaurs like Ford into world-class competitors. Ever since the Meiji era, when the nation ended centuries of isolation, Japan has proved expert at adopting American ideas to its own revolutionary needs. In the eyes of investors, at least, that would suggest that the Nikkei may indeed be the next Dow.

--With reporting by Bernard Baumohl/New York, Tim Larimer/Tokyo and Adam Zagorin/Washington

With reporting by Bernard Baumohl/ New York, Tim Larimer/Tokyo and Adam Zagorin/Washington