As the turn of the century approaches, the U.S. economy is running like a well-oiled machine. But there are some threatening clouds in the distance.
Economic troubles in Japan, the looming year-2000 computer problem, and the coming European Monetary Union all worry Norwest Corp. chief economist Sung Won Sohn.
"Japan needs life support," he said last week in a letter to clients. Massive Japanese bank-loan problems could undermine the economies of Asia and disrupt the international banking system, he said.
Meanwhile, many banks around the world, particularly in Japan and elsewhere in Asia, will probably not have their computer systems refitted for the millennium. Only half of 400 banks in a recent worldwide survey by eBanker magazine said they thought they would be 100% ready by Jan. 1, 2000.
Before that, however, the European Monetary Union will go into business next January. While the potential economic benefits are well-known, Mr. Sohn said, "the costs in terms of economic disturbances and converting accounting and computer systems to the new format will be very high."
The Norwest economist is by no means the only one fretting about all this.
Japan's economy has fallen into a serious recession, and the central bank, the Bank of Japan, "has been rendered impotent by a debt-deflation liquidity trap that is both present and worsening in that country," according to Paul A. McCulley, chief economist at UBS Securities, New York.
Since Japan's economic bubble burst seven years ago, Tokyo real estate values have plunged 70%, Mr. Sohn said. Japanese banks have a huge $580 billion of bad real estate loans on their books.
The bad-loan data might be even worse, he said, "if bank examination meetings had not been conducted by corrupt officials at restaurants and casinos."
Not surprisingly, lending by Japanese banks has plunged. That threatens the rest of Asia as well as Japan, he said, "since economic growth is not possible without bank lending." Meanwhile, fixing the year-2000 bug "has not been on the front burner" for Asian banks.
Of the year-2000 question, banking analysts at Salomon Smith Barney said in a report: "We know two things for sure. One, year-2000 is coming in less than two years. Two, even with all the testing and preparation, we won't know what is going to happen until after Jan. 1, 2000."
More business bankruptcies are likely to result in the United States and Canada, with consequences for banks, according to a recent report prepared for Canadian Minister of Industry John Manley. It said: "There is little doubt that some firms will go out of business because they will have waited too long to start repair work or because they will have been unable to allocate sufficient funds."
As for Europe, Mr. Sohn noted that European interest rates have been converging toward German levels. That has been a boon to some southern European countries, notably Italy, Spain, and Portugal - but could also lead to overheated business conditions.
"Economic difficulties in a large country, such as Italy, could lead to serious policy conflicts and a possible breakup of the EMU," the Norwest economist said. Analyst Bill Gaynes of Advest Inc. said, "With one monetary policy for one and all, any move, for example, to curb inflation in the southern countries, could cause recessions in the north."
