From Standstill to Flank Speed

By Barry Hillenbrand/Tokyo

At Elm Industry, a factory situated in a grim industrial district of Tokyo, a startling transformation has taken place. The rhythmic clanging of the drill presses is gone, replaced by pulsing songs like the Supremes' Stop! in the Name of Love. Where women in green coveralls once toiled on an assembly line, homemakers in pink and black leotards now bend and stretch in an exercise class. Like thousands of other Japanese companies, Elm Industry, a manufacturer of office supplies, is showing a remarkable ability to adapt to the country's biggest challenge in years: endaka, the strong yen. When endaka began eroding the profits on Elm Industry's export sales, the company moved its assembly lines from the Tokyo site to a lower-cost region of Japan. Then it converted the old factory into a multilevel fitness club, complete with pool and 14 Nautilus machines. "Endaka caused severe problems," says Shintaro Tanigami, company president. But now "our outlook is bright."

Only about 18 months ago, Japan's economy was at a standstill. The strong yen, which has doubled in value against the dollar from 1985 to 1988, was paralyzing the country's export business by making its goods too expensive and less profitable in the global marketplace. But Japan reached a national consensus to make drastic changes that ranged from corporate streamlining to a consumer shopping spree. The remedies promptly took hold, giving Japan a growth rate of more than 4% during 1987. "The Japanese economy is showing a very robust upturn, and we can expect this to continue," says Takeshi Ohta, deputy governor of Japan's central bank.

Though U.S.-Japanese trade tension flared up last week in a dispute over whale hunting, Japan's economic recovery is likely to benefit America as well. Japan's new method for stimulating its economy -- by relying more on domestic consumption and less on export sales -- has reduced the country's need to sell an ever expanding volume of goods abroad. At the same time, the resurgent Japan will be in a position to buy more Western-made products. In fact, the Commerce Department said last week that an increase in American exports narrowed the overall U.S. trade deficit to $12.2 billion in December, compared with $13.2 billion for the previous month. While the U.S. trade deficit with Japan remained stuck at about $4.8 billion in December, the gap has been closing.

Japan's rebound was hard work. The country's corporations restored profits by cutting costs and shifting some production overseas to plants in lower-wage countries. During one six-month period last year, Nissan managed to trim its operating expenses by $657 million. Nissan's executives, but not its factory workers, took cuts in salary and bonuses. Result: after suffering a $123 million April-through-September loss in 1986, Nissan posted a $163 million profit for the same period in 1987.

! To avoid the high relative cost of manufacturing in a country with such a strong currency, Japanese companies are moving their manufacturing operations to Europe and North America, as well as other Asian countries. Toshiba has opened plants in Thailand to produce color TV sets and refrigerators. Microwave ovens that Toshiba manufactures in Lebanon, Tenn., are now being shipped back to Japan for sale.

Yet for all their adjustments, Japanese manufacturers have not been the impetus for the country's comeback. Instead, a cut in Japanese interest rates in late 1986, though it failed in its goal of keeping the dollar from falling, succeeded in another way by setting off a construction boom. Housing starts during 1987 reached 1.7 million, the highest total since 1973. A former factory site near Tokyo Bay has sprouted the mammoth River City 21, a 14- building, 2,500-unit residential complex. Its two 40-story towers will rank as the tallest apartment buildings in the city. The Japanese government helped fuel the construction comeback by pouring money into public-works projects, part of a $35 billion spending package that was passed last June.

With encouragement from the government, Japanese consumers are flocking to buy the latest in technology: not just refrigerators and washing machines for all those new houses, but bread-baking machines at $275 and advanced TV sets with 37-in. screens at $4,500. Though the U.S. has boosted sales of such products as food, chemicals and paper, Japanese shoppers are still lukewarm at best toward American-made consumer goods. Not enough U.S. companies are making the effort to sell in Japan. A recent multimillion-dollar Tokyo construction project attracted bids from 25 foreign companies, but received just two from U.S. firms. And last year U.S. automakers shipped the Japanese only 4,006 cars, far fewer than the 74,289 that the West Germans managed to sell. Japan's boom will be a healthy opportunity, but not for the complacent.