The New York Times carried an alarming article on Japan’s
deepening banking crises. American as well as the estimates of others
who have been evaluating that country's bad debts indicate that they are
nearly double what was previously thought. These estimates, which are
still very preliminary, indicate that the total could approach one
trillion dollars and could cost Japanese taxpayers far more than the
$200 billion that has already been calculated. This crises has all but
halted Japanese lending both in the domestic economy and
internationally. New Japanese investment in the CNMI has all but dried
up. One of the problems appears to be that for years banks continued to
lend money to firms that were insolvent. Another problem concerned the
failure of banks to report the true condition of their portfolios with
the result that in many cases their balance sheets did not reflect
accurate information. The problem was kept hidden for long periods of
time. Unlike the United States where banks are subjected to strict
audits by some 7,000 inspectors, Japan has less than 500 examiners
according to the New York Times’ article.
      Money spent to recover from Japan’s banking debacle will not be
available for financing the nation’s infrastructure improvements. It
will strap the Japanese taxpayer, limit loans to Japanese consumers and
businesses and will reduce the amount of imports purchased from America
and elsewhere. Already, exporters in California are feeling the impact
of declining exports to Japan and other Asian nations.
      The Asian credit squeeze, caused largely by Japan's financial
catastrophe will continue,  causing an increase in unemployment and
corporate bankruptcies as Asia's recession deepens. The Federal Reserve
Board chairman, Alan Greenspan, sounded the alarm several days ago in
testimony before Congress when he stated that a number of Asian
economies continue to weaken and there is no clear indication of when
they will begin to recover.
      What this means to the Commonwealth is dramatic. The islands can
expect very little, if any, new Japanese investment of substantial size
and fewer visitors as many Japanese will tend to carefully monitor their
discretionary expenditures - money that might otherwise be used for
vacations in the Marianas and elsewhere. The possibility of a promised
tax reduction in Japan could ease the pressure on the consumer’s pocket.
We will have to wait and see.
      The enormity of the estimated trillion dollar Japanese bailout is
almost impossible for the average person to conceive. It is a thousand
billions, ($1,000,000,000,000) or more than 1,750 times larger than the
Commonwealth’s entire estimated 1996 gross island product and 5,100
times the total annual ‘96 internally generated resources of the
Northern Mariana Islands, (calculated from the best year). Stated
another way, the amount is equal to about $16.1 million for every man,
women and child in the Commonwealth including all the nonresident
workers. According to the Sizesaurus, a book concerned with large
numbers, if you can think of one dollar as one second, then one part per
trillion is equal to one second in almost 32,000 years. The sum is about
equal to all the household savings in Japan or about $8,000 (113,200
yen) for each of the 125.6 million Japanese. To provide some idea of the
scope of the crises, if the entire population of Japan could vacation in
the CNMI with an average daily expenditure of $250 per day per person
each person could  remain for 32 days. Of course, this is not practical
but it is one way to illustrate the magnitude of Japan’s problem.
      The repercussions of the banking misfortune will be felt in Japan
for years to come and in my judgment - in the islands as well.
     The United States devalued the Dollar in 1986 as related to the yen
which, at the time, appeared to provide the Japanese with a half price
sale on  real estate and other assets. The Japanese had more money than
they could absorb domestically and they went abroad to invest. It was
during this period that Japanese investment flooded the CNMI. By the
late eighties and early nineties the Japanese and many others simply
paid too much for too little for everything from an ice cream cone to a
square meter of land and in so doing distorted the pricing structure of
real estate and many other items.
     During that period, many - but not all- Japanese investors and
speculators failed to have real estate adequately appraised before its
acquisition. Others neglected to support their investment decisions with
marketing and financial feasibility projections. Aside from the Asian
financial crisis which very few could have anticipated, I venture to
state that there was no market study undertaken in the CNMI for many
Japanese financed projects. Several examples include restaurants,
construction firms and many other businesses - now defunct. An example
in Hawaii provides another interesting observation.
     A luxury hotel was constructed at a pro-rated room construction
cost of one half million dollars. An industry rule of thumb would
require that nothing less than a room rate $500 dollars per night be
charged to provide a sufficient return on the investment. Thus, in the
highly competitive Hawaiian market the above hotel’s room rate of $500
per night had to compete in an economic environment  where a nearby
hotel room  was available at $150 per night. The Japanese hotel was
later sold at a huge loss. The same thing is true of the Pebble Beach
Golf Course and other “trophy “ real estate on the United States
mainland.  As we all know the “bubble” burst in Japan and many  foreign
assets were placed on the market under “fire sale” conditions. Others
simply packed up and walked away from their investment. We have several
examples of such abandonment in the Commonwealth.
     Those that yearn for the “good times” of the late eighties to
return will have a long wait. If there was ever a time to work for
diversification of the CNMI’s economy and identify alternate tourist
markets that time is now.  Australia, Europe, North American and
mainland China markets should be evaluated as potential visitor markets.
While identifying the market is half the equation - the other half is
devising something different and unique to draw visitors from  much
greater distances. The lure has to be more than the sand, sun and sea
since that tripartite can be met at many other locations along the way.
The CNMI must devise something unique and truly different to draw
visitors from such time consuming distances. So, what could it be?
Perhaps it will have to involve “connecting” a series of dissimilar
destination links in the visitor’s “travel chain”  with the Commonwealth
as one of the links.
Some Ideas:
     Almost thirty years ago several international carriers had daily
flights around the world.  One flight traveled east to west while a
second flew in the opposite direction from west to east. They met
halfway in the Pacific. You can bet that the Asian economies will
recover and when they do the world will beat a path of jet contrails to
their door. Some carrier, someday, will re-instate that route. Indeed,
it may be just such a schedule that will contribute to a more rapid
recovery. Perhaps the time has come to suggest the concept to air
carriers with Saipan as the European or Northern American antipodal link
in a new world circumferential system.
      In terms of economic diversification the CNMI should do everything
possible to protect its  ability to export qualified manufactured
products duty free to the U. S. mainland market before U. S. trade
barriers against many countries drop in the next century as a result of
World Trade Organization, (WTO), agreements. This means resisting all
pressure from members of the U. S. Congress who threaten to withdraw or
modify Headnote 3 (a) benefits within the U. S. custom tariff schedule.
It means getting serious about encouraging commercial fishing and
farming endeavors, mariculture, animal husbandry, horticulture and light
manufacturing. All of which are capable of either substituting imports
or producing export oriented commodities.
      Of the numerous nations which are signatory to the Generalized
System of Preferences, (GSP) Australia, New Zealand and Japan are
several countries where Commonwealth located manufacturers of qualified
products can benefit from reduced import tariffs in countries that are
the recipient of their exports.  With the exception  of certain
products, tariff reductions of up to fifty percent are allowed. The
import regulations from countries  participating in the GSP  program
vary depending upon the country.  More than 2,700 product categories of
exports from developing areas are listed as being eligible under the
program. Of course, only a few would “fit” in the islands.
     Being in proximity to the vast Asian markets the Commonwealth’s
geography might also be promoted as branch sales office locations for
American export oriented firms who recognize the advantage of being
situated under the stability provided by the American flag, the U. S.
judicial and banking systems while benefiting from the CNMI’s lucrative
tax rebate advantages.
      I am quite certain that many United States’ firms are unaware that
businesses registered in the Northern Marianas and engaged in export
sales can enjoy significant tax relief from their tax obligation to the
Internal Revenue Service by establishing offices within the CNMI since a
portion of the income generated by foreign sales is exempt from U.S.
tax. This is another opportunity to attempt to diversify.
       Still another incentive for investment in the CNMI, and one
largely unknown to many U. S. firms, is section 936 of the Internal
Revenue Code which permits "qualified" U.S. corporations to operate
virtually free of federal tax on their income derived from business
activity in the Commonwealth. This particular section of the tax code
was designed to encourage employment generating corporations to
establish businesses in United States possessions and associated areas.
While technically the Commonwealth is not a possession of the United
States, if this section still applies, (I’m not certain),U.S.
corporations could qualify for this tax concession with the result that
the maximum income tax  rate would be 11.5 percent for a period up to 10
years or more if extensions are granted by the IRS.  To qualify,
corporations must have a fixed percentage of their gross income derived
from the active conduct of trade or business within the Commonwealth.
The potential of this tax provision should be investigated.
      Unfortunately, to my knowledge the U. S. Alien Entrepreneur
Program does not apply  in the Commonwealth. It could possibly - if the
U. S. law were modified. This law relates to citizens of other countries
seeking permanent resident visas in the United States (commonly referred
to as "Green Cards").  These people may apply for such status in one of
the fifty states but currently not in the Commonwealth since the
Northern Marianas administers it own immigration laws. This program is
administered by the U. S. Immigration and Naturalization Service for
those individuals that can qualify by investing at least $1 million in a
new or existing business that will employ at least ten people. The
requirement is only $500,000 if the business is located in a rural or
economically distressed area in the United States mainland or Hawaii. It
may be that the CNMI could obtain a wavier and qualify should the
program be deemed to be of interest. Again, it may be worth looking
into.
      While the passage of local laws offering investment incentives is
one thing, such incentives still have to be made known outside the area
and recognized by potential investors as business opportunities in which
he or she may be interested. In short, they must be packaged, advertised
and the initial inquires adequately and successfully serviced.

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