NEWS ANALYSIS : Government Action Helps Japan’s Outlook : Asia: In recent months, officials have done what would normally take them several years. Investors demonstrate renewed faith.

They sat optimistic and largely unmoved through almost five years of Japan’s worst post-World War II economic slump, waiting for routine measures to show results the way they always had.

But a string of financial disasters--the Daiwa Bank bond loss scandal, bankrupt credit unions and a mountain of bad bank debt that won’t go away--at long last jolted Japanese bureaucrats and policymakers from their stupor. In recent weeks, the Ministry of Finance has announced a $6.8-billion bailout plan for failing housing finance firms, establishment of a Japanese version of the U.S. Resolution Trust Corp. to dispose of bankrupt credit unions and a radical overhaul of the nation’s banking supervision system.

These responses--unusually rapid-fire by Japanese standards--have restored faith in Japan’s stock market at home and abroad. The yen has stabilized, corporate profits are recovering and, as a result, the outlook for Japan’s moribund economy has improved, analysts and business leaders say.

“In July of this year, the government finally became aware that this was a real crisis situation,” said Kazuhiro Miyake, chief analyst of investment research at Nikko Securities Research Center. “In these recent months, the Japanese authorities have done what would normally take them three years. That alone is a huge change in policy for the Japanese government.”

By laying out clear policies to deal with the housing finance firms--which are at the center of interlinked bad loans involving major banks and rural agricultural cooperatives--and by stabilizing what had seemed to be an ever-strengthening yen, authorities have dissipated the cloud of gloom that had threatened to suffocate the Japanese economy.

“In 1996, the Japanese economy looks like it’s going to break out of the standstill that’s continued since the spring of 1995,” Bank of Japan Gov. Yasuo Matsushita predicted recently.

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As a dramatic statement of this new optimism, investors on Wednesday drove the widely watched Nikkei index of 225 stocks above 20,000 points for the first time in 14 months.

“The strong yen and bad loans were riding on the economy like paperweights,” Miyake said. “But now they have both been lifted off and stocks have reverted to their proper value.”

While Tokyo stocks have done well in recent months, blue-chip stocks on Wall Street are up more than 30% for the year. Many investors think U.S. stocks may not be a bargain anymore. So where are stocks still cheap? For many, the answer is Japan.

Foreigners are pouring into the Tokyo exchange. Compared with April, in dollar terms, Japanese stocks haven’t risen at all. Many investors think they now look downright cheap next to U.S. stocks.

One manager of an American mutual fund said that after recent announcements by the Ministry of Finance, that firm has rushed back to buying stocks in Japan--in construction, real estate, department stores, banks and securities houses.

For Japanese investors as well, stocks, compared with alternative investments, in some ways are looking more attractive than they have in 30 years. Interest rates for postal savings accounts--long the investment of choice for many small Japanese savers--are hovering at a fraction of a percent. Miyake estimates that in 1996, 80% of the shares listed on the Tokyo stock market will have a higher yield than interest on a regular postal savings account. Ordinary Japanese are flocking back to the stock market after a long vacation.

On Thursday, the penultimate day of trading for 1995, the Nikkei index closed at 19,873.13, down 138.63 points, or 0.69%. In early trading today, the Nikkei-225 was off 46.34 points at 19,826.79.

Besides the Nikkei’s recent surge, there have been other positive signs for Japan’s economy. Industrial output rose 1.3% in November, and an index of leading indicators released this week that predicts movements of the economy in coming months rose for the first time in half a year.

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But dramatic as the ambitious new policies laid out by the Ministry of Finance may be--at least by Japanese standards--many criticize the efforts as cosmetic solutions that are insufficient to correct the economy’s deep structural problems.

Alicia Ogawa, a financial analyst at Salomon Bros., said of the recent bailout plan for the housing finance companies: “The workout scheme serves--intentionally or unintentionally--both to postpone realizing losses on loans to the jusen [firms] and to blur the costs and benefits to individual banks.”

In her eyes, the recent rally in stocks also “has everything to do with anticipation of a jusen resolution and nothing to do with underlying fundamentals.”

Aside from the computer industry, where there is real growth, most improvements in company profits in the last year have resulted from painful corporate restructuring rather than increased sales. Unemployment reached a postwar high of 3.4% this week, and analysts expect that figure to climb higher in the new year.

And Japan’s banks are still being hit by foreign worries about their stability. Last Friday, citing concerns about the “length and severity” of Japan’s banking crisis, Standard & Poor’s Corp. lowered the credit rating on four of Japan’s largest commercial banks. Then on Thursday, S&P; cut its credit rating on Fuji Bank’s debt and slapped a “negative” outlook on long-term debt of the Industrial Bank of Japan and Sakura Bank.

Apparently triggered by the S&P; ratings, the “Japan Premium” has bounced back up again. Because of international concern about Japan’s financial institutions, Japanese banks must pay extra to borrow money abroad. After dropping last week to 0.09 percentage point on dollar loans and 0.16 percentage point on yen loans, it rose Thursday to 0.23 percentage point on dollar and three-month yen loans.

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Another potential worry is the growing burden of national debt. It amounts to 28% of the planned 1996 national budget.

And the benefits of a booming stock market have yet to trickle down to the average person.

Rob Wood of Barings Securities said the growing amount of savings earning virtually no return has diminished the sense of wealth in Japanese households. Employees still worry about their jobs, and local store owners say the situation is as grim as ever.

Long gone is the carnival-like atmosphere that pervaded Ginza, one of Tokyo’s hottest nightspots for businessmen in the heady “bubble” days of the late 1980s. Profits may be flowing again, but company expense accounts have dried up. Empty taxis cruise for customers. Chain restaurants and pachinko parlors for pinball gamblers are filling in holes left by bankrupt luxury restaurant establishments.

Rumiko Onbe runs an intimate drinking spot in Kichijoji, a lively section of Tokyo. In the bubble days, her bar was packed every night with businessmen and their customers fighting to pick up the bill. Now the place is often empty, and some days no customers come in at all.

“When I call to invite old friends, they make excuses, saying they are busy,” Onbe said. But she knows better. “Company budgets are still tight, and salarymen don’t want to spend their own pocket money to take out customers.”

Megumi Shimizu of The Times’ Tokyo bureau contributed to this report.

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Japan’s Bull Market?

The widely watched Nikkei index of 225 stocks closed above 20,000 points for the first time in 14 months Wednesday in response to a government effort to pull Japan’s economy out of its economic slump. Monthly highs on the Nikkei since October 1994:

Dec. 27: 20,011.8

Source: Bloomberg Business News