Into The Deep

SEIICHI TANIGASHIRA LEFT NO note. Nor did he give a warning. Perhaps the 40-year-old investment manager believed there was no need to explain what he was about to do. At 8 a.m. last Thursday--an hour when, in months past, he would have been bent eagerly over the phone, selling stocks for an affiliate of Yamaichi Securities--Tanigashira went to the roof of a seven-story Osaka office building, stepped up to the ledge and jumped off. Only days before, his corporate parent, Yamaichi, announced it would fold in Japan's biggest postwar bankruptcy. Its president broke down and bawled before the cameras--an astonishing paroxysm of shame that officials later learned was well justified. For hidden in Yamaichi's books was a nightmare for regulators and investors alike: evidence of huge losses secreted in the Cayman Islands, $2.1 billion in tobashi, or illegal compensation paid to customers, and other irregularities. The giant brokerage's books were so riddled with hidden losses that some fear the entire Japanese financial system is rotten with them. On Friday the Bank of Japan injected $29 billion into the system--a quick fix that might not last.

No one knows what secrets Tanigashira knew, or why he killed himself. At least he, however desperately, reached bottom. The crisis for Japan and South Korea today--and for the world economy, too--is that no one else out there really knows where the bottom is. Investors don't know how many of Japan's bad-debt-clotted banks, or Korea's imploding chaebol conglomerates, will fail. Governments don't know whether these failures in turn will bring down some of the world's biggest emerging markets, like China and Russia, which today seem to teeter on a razor's edge of uncertainty. All of it could mean that U.S. investors may not have seen the last of major market reverses like the ""Blue Monday'' dive of Oct. 27.

We probably won't know if we face a worldwide financial crisis until it's upon us. The world's top policymakers grip hands and grin confidently for the cameras--they have to. But in private many say they have never before seen anything like Asia's financial contagion, which has claimed more victims and gone on longer than anyone would have predicted five months ago, when it started in Thailand. Governments are simply not sure how to react. ""I think we are in totally uncharted territory,'' says economist David Hale of Zurich Kemper Investments. He says many of the noted financial trends in recent years--the trillions traded in derivatives (hedges), the constant wash of borderless ""hot money'' and the globalization of companies--are now linking up in unforeseen, volatile ways. ""What we've created with this new global financing system,'' says Hale, ""is a world we don't understand.'' Even Federal Reserve Chairman Alan Greenspan, a confirmed free marketer, has begun to question whether ""the cost of trading is too low'' worldwide. Has it gotten too easy to funnel money across borders? Should we perhaps tax it a bit--destroy some of the capitalist system in order to save it?

Your guess. The more immediate question is whether the world economy is about to drop off a ledge. Some fear there will be a worldwide chain of banking collapses, beginning with Japan, which governments might have neither the ready money nor the political will to stem. That would be followed, inevitably, by global recession. Such an outcome is still unlikely, but U.S. investors can expect that American corporate profits will suffer a worse hit than we've seen so far. China recently released figures that showed it, too, may be sliding into deflation--often a prelude to recession--thanks to oversupply and slackening demand.

In Russia last week, First Deputy Prime Minister Anatoly Chubais revealed the government is preparing measures to defend its Treasuries market, which has plunged as big buyers like Korean banks retrench. Chubais refused to confirm reports that Moscow was asking for $5 billion more from the International Monetary Fund, which is also negotiating a package of $50 billion to $60 billion with Korea. But a Western banker tells NEWSWEEK he believes some smaller Russian banks are ""on the rocks.'' ""The crisis is in fact spreading to other regions,'' says a U.S. Federal Reserve governor. ""We haven't yet reached the containment stage in this.'' Adds Peter Cornelius, a Deutsche Bank analyst in Frankfurt, ""With Japan involved, it's become global.''

That used to be a good word, global. Not at the moment. The last time governments were this clueless about a worldwide financial crisis was the 1930s. And it's useful to remember that the policy wonks really botched things back then, turning a serious recession into the decade-long Great Depression by doing exactly the wrong things: withholding liquidity from banks and markets when they should have opened the taps, raising tariffs when they should have lowered them and zealously trying to balance their budgets when they should have been spending their way out of the abyss.

Certainly governments are smarter now than in the '30s. And they're a whole lot better equipped. First, they've got a much stronger world economy to work with. America and Europe have barely caught the sniffles yet, and banks in the United States are flush with cash. Then there are solid international agencies like the IMF, which acts like a financial paramedic unit, and the World Trade Organization, which fights protectionism.

The wild card, unfortunately, is Japan. Tokyo, contrary to many hopes, is showing little sign of casting off its ""neomercantilist'' selfishness and acting responsibly at precisely the moment it needs to, officials say. ""It would help a lot if the Japanese would stop messing around and finally reform and stimulate their economy,'' says the Fed governor. ""They're a black hole in world trade.'' Why is Japan's role so crucial? Because the roots of the current crisis lie in its reckless use of the world's capital, which it has accumulated in staggering amounts. In the '70s and '80s Japan was merely annoying with its relentless strategy of seizing market share by ""dumping'' cut-priced products abroad, financed by supercheap bank capital (the banks earned little on it, contributing to their current mess). Such practices brought Tokyo huge trade surpluses, causing ripples of anger in Washington but not much more. The lesson of the current crisis is that those practices may have become truly dangerous. Now Japan owns a huge portion of the world's investible savings, and much of it has been wasted in bad loans with little government oversight.

Which brings us to Asia's problems. They really began with Japan's high-flying ""bubble'' economy of the '80s. The banks of Tokyo and Osaka helped create the big current-account deficits of Asia's collapsing tigers by lending on easy terms to fuel their conspicuous construction--hotels, factories, highways. Infatuated Western investors then threw billions more into the pot. Now it's payback time for everybody. Strapped Japanese banks are in the hole for billions to Korea's imploding financial houses. The Koreans, in turn, bought vast amounts of Russian Treasury bills, more than 15 percent of the total. Japanese banks and other financial houses also purchased billions in U.S. Treasuries, which may be sold off if Tokyo tanks.

To stem the panic Tokyo will likely announce a major public rescue of the banking system by Dec. 10, or perhaps as early as this week. Far more is needed: a package to stimulate domestic demand and help pull the region out of impending recession. But ""the Japanese seem incapable of goosing their economy,'' says a senior U.S. administration official. Instead, last spring the government choked off recovery with an abysmally timed tax increase. And on Friday, the Diet's Upper House passed--shades of the '30s!--a new fiscal-austerity program. ""The incompetence shown by the Japanese authorities during the 1990s,'' pundit Martin Wolf wrote in the Financial Times last week, ""is a luxury the world can afford no longer.'' Suspicions are growing that Japan is again trying to export its way out of its troubles rather than admitting that its economy is just too big for that.

Washington's politicians can be as benighted as Tokyo's, of course: Congress has picked a terrible time to fight the Clinton administration over free trade and IMF dues. But in the end, the United States will have to step into the vacuum, most observers believe. On the Korea rescue, NEWSWEEK has learned that U.S. Treasury Department officials called in IMF chief Michel Camdessus last week to insist that he be firm in demanding major financial reforms of Seoul. ""Alan Greenspan and [Treasury Secretary Robert] Rubin,'' says one Moscow-based Western banker, ""have nothing less than the future of capitalism in the world on their shoulders right now.'' Heavy burden. If only Tokyo would share more of it.