The reluctance to borrow and spend of companies

The last time Masao Namiki bought machinery for his company, Emperor Hirohito had just died, Japanese investors took the Rockefeller Center as a trophy, and a new central bank chief was about to prick the bubble economy. It was 1989.

The $1 million Namiki borrowed to outfit his workshop with computerized lathes and drills almost bankrupted him as orders from clients Canon Inc., Panasonic Inc. and NEC Corp. evaporated. As interest rates cranked up to 6 percent, Home energy monitor crashing stock and land prices wiped out $15 trillion in wealth and triggered an economic malaise that still drags on.

The bubble, and the five recessions since, help explain why business owners like Namiki aren’t buying into investor euphoria over new Prime Minister Shinzo Abe’s campaign to end deflation. Even after the steepest five-month slide in the yen for 18 years made global companies like Toyota Motor Corp (7203). more competitive and Japan the world’s best-performing major stock market, Namiki said he’s still not ready to invest.

“If we had the orders I’d think about adding equipment, but right now the work’s just not there,” the 72-year-old said at his small factory in Tokyo’s Ota district, where he and a handful of employees have made thousands of steel molds for phones, Home energy management stereos, and keyboards. “The manufacturers are still in wait-and-see mode.”

The reluctance to borrow and spend of companies like Namiki’s that don’t operate abroad and make up the bulk of Japan’s economy is the biggest threat to Abe’s plans, said Nomura Research Institute Chief Economist Richard Koo.

“The greatest bottleneck in the private-sector economy today is the lack of private-sector borrowers,” said Koo. “That comes from the fact that they went through this balance- sheet correction for the last 20 years. Americans went through the same thing in the 1930s, and many who lived through the Great Depression never borrowed again.”

Japan’s trauma was greater still, Koo said. The wealth lost was three times gross domestic product. The U.S. crash cost a year of 1929 GDP. And just when Japan was showing signs of recovery, the 2009 global financial crisis hit. Then came the 2011 tsunami. After all that, Power monitor the Nikkei 225 Stock Average is two-thirds off its 1989 peak. Land is cheaper than in 1981.

To jump start investment, Abe and his handpicked Bank of Japan governor, Haruhiko Kuroda, said they will double the money circulating in the economy to drive inflation to 2 percent within two years, remove structural barriers to growth and add fiscal stimulus with tax cuts and other incentives.

Since mid-November, when it became clear Abe would win power, the yen has weakened about 20 percent, the steepest five-month decline since 1995. The currency had been trading close to a post World War II high, so the slide has been relief for companies like Toyota that get most of their revenue in other currencies.

Shares of Toyota have surged 79 percent. Mazda Motor Corp. (7261), which makes 77 percent of its sales internationally, has tripled. Sony Corp. will probably snap four years of losses partly thanks to the yen; its shares have jumped 87 percent.

Foreign investors who account for about 70 percent of the volume on Tokyo’s stock exchange haven’t just driven up exporters. The biggest gains so far have been in brokerages and real estate companies, which stand to benefit from higher asset prices. The Topix gauge of securities firms is up 166 percent, with largest member Nomura Holdings Inc. more than doubling. The index tracking real estate firms has also more than doubled.

The advance has added $844 billion to Japanese stocks -- or about half the value of France’s market. The Topix Index, Japan’s broadest gauge, has jumped 56 percent since Nov. 15, the top performer among the world’s 10 biggest markets. All 33 industry groups have gained.