Will Japan's Slump Stifle a U.S. Recovery?

Ever so slowly, the U.S. economy is reviving. The most recent sign came last week when the government reported that retail sales surged in January and February by 2.1% and 1.3% respectively -- the first back-to-back increases of more than 1% since 1985.

But will the stall in Japan spell trouble for the fragile American economy? Last year American companies shipped $48.1 billion worth of goods to Japan, making it the second largest U.S. export market. A recession in Japan could hurt the recovery by slowing demand for American products. In addition, Japanese businesses could try to bolster sagging domestic profits by aggressively selling more products overseas, an action that would surely worsen trade tensions. Finally, since Japan helps finance the U.S. budget deficit, some fear that a significant curtailment of Japanese investments in the U.S. could drive interest rates higher.

It won't happen, say experts. "The slowdown in the Japanese economy will not hurt the U.S. very much," observes Robert Wescott, senior international economist at the WEFA Group, an economic forecasting firm. "For political and economic reasons, Japan wants to maintain a solid relationship with this country. They will try to keep up imports from the U.S." The brunt of the Japanese recession will be felt in Asia and Europe.

Though Japan has been buying less from the world market over the past year, imports from the U.S. remain firm. And there is no evidence that Tokyo intends to unload goods on the American market as a way to offset slumping sales at home. The Big Three, for example, are relieved to see that Japanese automakers plan to raise prices on cars sold in the U.S. in order to boost profits.

Fear of a massive retrenchment from the U.S. market by Japanese investors is also unfounded. Japan has been earning huge trade surpluses lately by buying less abroad and keeping exports high. In February it sold $10.23 billion more goods overseas than it bought, the biggest monthly surplus in history. Much of that excess capital should flow right back into the U.S. through purchases of stocks and bonds and by other forms of investments. Last week, for example, Sony began hiring for a TV-assembly plant it is opening this summer outside Pittsburgh that will eventually employ 1,000 people.

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CREDIT: TIME Graphic

[TMFONT 1 d #666666 d {Source: U.S. Commerce Department, Blue Chip Economic Indicators, National Economic Agency}]CAPTION: Japan real GNP

U.S. real GDP