When the United States was hit by terrorist attacks nearly a year ago, the economic fallout was predicted to be a nightmare.

The U.S. economy, already suffering from the burst of the information technology bubble, threatened to dip further and drag down Japan, itself long mired in a slump.

In retrospect, the impact from the attacks on the U.S. economy was temporary and relatively small. As hope grew for a quick and robust recovery in the U.S., optimism also spread to Japan earlier this year for an export-led upturn.

As the first anniversary of the tragedy draws near, however, such hopes appear to have waned. Uncertainty has again set in over the U.S. economy as corporate America, which soared during the IT revolution of the 1990s, was brought sharply down to Earth with scandals such as those of Enron Corp. and WorldCom Inc.

On the day after the terrorist attacks, the Nikkei average on the Tokyo Stock Exchange plunged below 10,000, a level not seen for 17 years. On Wednesday, the index briefly dipped below 9,000 to hit a 19-year low, following an overnight 355-point fall of the Dow Jones industrial average in New York to 8,308.05.

Some economists and business leaders say Japan should quickly deal with its own problems, which include deflation and bad loans, and stop relying on the U.S. as the engine for its recovery.

Nobuo Tateishi, chairman of electronics maker Omron Corp., has not lost confidence in the U.S., however. “Corporate scandals happen in any country,” he said.

“(But) as there is a possibility of a double-dip recession (in the U.S.), Japan may not be able to count on an export-led economic recovery. We should change our economic structure, which still relies too much on external demand.”

U.S. resilience

Given the initial shock from the terrorist attacks — the Dow Jones average plummeted 14 percent in the following week — the U.S. economy’s subsequent rebound was dramatic, and supported in large part by robust spending by American consumers.

The public and private sectors acted to lift consumer sentiment. The Fed eased monetary policy and carmakers offered loan incentives to car buyers.

As inventory adjustments ended in most sectors by year’s end, the U.S. gross domestic product grew 5 percent during the January-March period, following 2.7 percent October-December growth and a 0.3 July-September contraction.

The quick U.S. economic rebound, plus the yen’s depreciation against the dollar early this year, helped Japanese carmakers with heavy exposure to the U.S. market improve their performance.

Toyota Motor Corp. saw its vehicle sales in North America in fiscal 2001 through March increase by 9.7 percent from the previous year to 1.78 million units. Exports account for 40 percent of Toyota’s U.S. sales, with the rest covered by local production.

Toyota’s North American operations accounted for 23.6 percent of the group’s overall operating profits of 1.12 trillion yen for fiscal 2001. Its consolidated April-June sales in North America hit 1.7 trillion yen, up 22.7 percent from the same quarter last year.

High-tech manufacturers struggling with the global IT-sector slump also benefited. Sony Corp. saw unexpectedly brisk sales of its PlayStation2 computer game consoles and Vaio personal computers in the U.S. during the Christmas season, Sony spokesman Hiroshi Okubo said.

According to Sony Computer Entertainment Inc., about 2 million PS2 consoles were sold in December in the U.S., up 243 percent over the same period of 2000. Sony’s April-June revenues from its U.S. operations rose 11 percent to 558.21 billion yen.

One exception was tourism. Travelers apparently had yet to overcome the shock of the Sept. 11 tragedies.

Amid the slump in passengers, US Airways went under in August and United Airlines the same month warned of a possible bankruptcy.

The volume of Japan-U.S. air traffic has not yet recovered to the pre-Sept. 11 level. The number of passengers taking Japan Airlines flights to North America, which plummeted 49 percent in October from a year earlier, was still down 14 percent in July on a year-on-year basis.

JAL cut the number of its weekly flights to the U.S. to 55 in August from 69 last September, and is now increasing services linking Japan with other parts of Asia.

The effects of the terrorist attacks was part of the reason why JAL sped up merger talks with Japan Air System, the nation’s No. 3 carrier.

Then came the scandals

The upbeat trend in the United States in the first quarter of this year soured in subsequent months as insider trading and accounting scandals broke, involving executives at major corporations.

When WorldCom filed for bankruptcy on July 22, the Dow sunk to 7,784.58, a 25-percent drop from its January 2000 peak. The tech-heavy Nasdaq index dived to 1,282.65 the same day, about one-forth its peak in March 2000.

Analysts say the U.S. stock market is now in a major correction phase from the boom of the late 1990s. Although share prices have seen ups and downs since Sept. 11, the incident added weight to the negative sentiment in the market, they added.

The Dow, which dipped below 10,000 near the end of August 2001, accelerated its downtrend after Sept. 11, although it regained the 10,000 level by early December.

“(Before Sept. 11,) people were not sure whether the IT revolution-induced boom was a bubble or real,” said economics professor Motoshige Ito of the University of Tokyo. “The terrorism accelerated the share price decline, and exposed the weak side of the U.S. economy.”

U.S. still the main event

Despite the growing uncertainty over its future course, the U.S. continues to be the most important market for many Japanese businesses as domestic demand remains mired in a slump.

According to the Finance Ministry, Japan’s exports to the U.S. accounted for 30.04 percent of total exports in value terms in 2001. About one-third of Sony’s group sales, for example, in 2001 came from its U.S. operations.

Toyota President Fujio Cho said the U.S. auto market is still strong and has future potential due to the nation’s expanding population.

“The U.S. quickly takes measures (to rectify economic and corporate problems), so I think the damage will be smaller than we anticipate,” Cho said. “The Japanese and U.S. economies will continue to rely on each other as long as Japan can provide quality products to meet American consumer needs.”

Others are not so sure about the course of the U.S. economy, which grew 1.1 percent during the April-June period — far short of economists’ forecasts of more than 2 percent.

Since the IT bubble that kept stock prices high burst in 2000, the housing boom backed by low mortgage rates has supported the U.S. economy, analysts said.

But Akio Makabe, a senior economist at Mizuho Research Institute, said that boom cannot be sustained. U.S. consumers who borrowed heavily to buy houses and cars have to repay their debts.

Some corporate executives are also voicing growing worries about the U.S. economy.

“As more capital investment is made in Asian (manufacturing bases) such as China, it will be difficult to increase employment in the U.S.,” said Fujio Mitarai, president of Canon Inc. “So a sustainable and dramatic (U.S.) recovery is unlikely to occur.”

As uncertainty lingers over the U.S. economy, Japan, which has been pegging its recovery to an export boom, faces the urgent task of solving its domestic problems and revitalizing itself from within.

But Koichi Haji, a chief economist at NLI Research Institute, said the way to revive the nation’s economy is to stimulate domestic demand as well as to shift the focus of business to Europe and other parts of Asia.

“I think the attacks pushed us to take a second look at globalization with only the U.S. at the center,” he said. “The U.S. remains a very important market, but more business activities should shift to Europe and China.”

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