TOKYO -- If Japan's spectacularly inflated land prices should collapse, some analysts say, the world financial system could follow them.
That's because Japan's banks, which in the 1980s became to global supplies of capital what the Gulf emirates were to crude oil resources, are up to their elbows in real estate loans endangered by falling property prices.
The United States would suffer because Japanese banks have been active buyers of U.S. Treasury bonds and big lenders to U.S. businesses. Already, tightening credit has caused noticeable repatriation of Japanese funds.
Major Japanese corporations have been planting their excess cash in land at a furious rate since the mid-1980s, driving prices so high that the real estate value of Tokyo alone exceeds that of the entire United States.
The National Land Agency says prices are going up as fast as ever. But so was the stock market until December, when stock prices nosed into a 45 percent plunge. Now there are signs land prices may also take a dive.
One indication is the price of golf club memberships, which the Japanese used as an indirect real estate investment. Japan's leading economic journal, the Nihon Keizai Shimbun, noted their resale price has fallen off.
That is an early warning sign of slipping real estate prices, said an analyst with a major Japanese bank, who asked not to be identified.
More telling, but harder to pin down is the price of small, secondary parcels of land and condominium units. Experts like Izumi Hiraide, head of real estate research for Yasuda Trust Bank, believe the downturn has begun.
Hiraide said prices of lots in the west of Japan have declined 20-30 percent. Even in Tokyo, where demand far outstrips supply, there is some softening in prices in out-of-the-way sites, he said.
The decline in property prices could accelerate if the Persian Gulf crisis runs on, said energy economist Tsutomu Toichi. The nation would have to divert more and more of its wealth to meet higher oil costs.
But rising interest rates pose a more immediate threat to land prices. During the 1980s, Japan's not-so-secret economic weapon was the lowest borrowing cost in the developed world. But its edge has since been blunted.
Concerned by inflationary pressures, the Bank of Japan over the past year has been steadily raising its official discount rate, the interest rate it sets on loans to commercial banks. The rate stood at just 2.5 percent in May 1989, but following the most recent rise Aug. 30, reached 6 percent.
'It's been like a body blow,' Hiraide remarked.
The Tokyo Stock Exchange has had the wind knocked out of it, tumbling from a December reading of nearly 39,0000 on its Nikkei index of 225 leading stocks, to less than 24,000 this week. Land prices have fared better -- so far.
In late September, the National Land Agency said real estate prices had risen 13.7 percent during the 12-month period ended June 30.
Land in Tokyo reached an average of $582 a square foot. In the glitzy Ginza district, a $100 bill laid on the ground would only be worth about one-fourth of the ground under it, according to figures from the agency.
Supporting values is the fact that while Japanese investors freely wheel and deal in stocks, they cling to property, said economist Kermit Schoenholtz of Salomon Brothers (Asia). 'Land trades very infrequently, ' he said.
Thus bid ever higher, the nominal value of Japan's land is four times greater than that of the entire United States, said Edward Yardeni, Prudential-Bache Securities Inc.'s New York-based chief economist.
But America's land mass is 25 times larger than Japan's. What's more, most of Japan's land is unbuildable mountainside property. Only 20 percent of the land lies in the plains between craggy volcanic peaks.
Such disporportionate land prices led Yardeni recently to conclude, 'The odds of a serious decline in property values are quite high.'
Japanese banks are very secretive, but analysts think real estate loans make up between 14 percent and 23 percent of their lending portfolios. Authorities were concerned enough this year to limit such lending.
Even the biggest banks felt were hurt by the stock market decline, for they had been allowed to count part of their paper stock gains as capital -- their permanent funding base. Capital foundations could similarly be eroded to below required levels by heavy property loan writeoffs.
This could trigger an even more severe credit crunch in Japan that the impact would be felt around the world as investors who borrowed heavily on their land holdings to invest abroad pulled their money back, analysts say. In the worst case scenario, world financial markets could be devastated.
'Japan is in big trouble,' said Maddis Senner, president of SunRay Securities Inc., a New York-based global money management company. He is among those who see Japan as a financial house of cards set to come apart.NEWLN: more
