CAPITAL COST GAP BETWEEN US, JAPAN HAS NARROWED

CAPITAL COST GAP BETWEEN US, JAPAN HAS NARROWED

Something's happening in Japan.

As if jitters about inflated stock prices, inflated land prices, maybe an inflated yen and political changes weren't enough, technology industries are watching another important movement with intense interest.The cost of capital.

For years, U.S. semiconductor and computer companies have argued that Japanese competitors enjoy a crucial advantage. The cost of long-term investment money in Japan has been decidedly cheaper.

That has been of critical concern in the chip field, for instance, where new factories cost hundreds of millions of dollars. Texas Instruments Inc., for instance, figures that Japanese competitors have had an advantage of $7 on every $100 of long-term investment. When $200 million may be at stake, that's a huge added load to carry for the company with the higher cost of capital.

But in the last couple of years, and more pointedly in the last couple of months, the gap between the U.S. and Japanese costs of capital appears to be narrowing.

"If it's dramatically changing, that would be very profound," said Norman Neureiter, TI's longtime corporate communications chief who now has taken on the task of becoming a specialist in Japanese affairs.

The Japan Economic Institute in Washington, D.C., for instance, notes that long-term corporate bonds had yields of 9.43 percent in the United States at the end of March 1990. By comparison, such bonds had yields of 7.44 percent in Japan.

"This gap actually was much narrower than at any other time in the recent past," said Douglas Ostrom, the economist who completed a recent report on the convergence of the costs of capital for the JEI.

Indeed, when inflation is figured into the equation, the gap may well have closed. During the 12 months that ended in February, U.S. consumer prices rose 5.3 percent. Japanese prices rose 3.6 percent, Mr. Ostrom noted. If that difference of 1.7 percent is factored in, the gap disappears.

But there is more than meets the eye than such "superficial analysis would suggest," said Mr. Ostrom.

Other factors affect the cost of capital, he noted in his study. These include:

* The cost of raising long-term investment money is not just a matter of borrowing. Companies also raise capital by issuing stock. The cost of equity is much harder to calculate and compare than is the comparison of interest rates for debt.

* The mix of debt and equity is changing. U.S. companies are perceived as borrowing to the hilt. But Japanese companies historically have carried more debt. Now, the Japanese companies are becoming "less leveraged than before." If, as Mr. Ostrom postulates, equity costs more than debt, that means ''Japan's capital cost advantage, if any, probably is narrowing."

* Corporate taxes raise the cost of capital, other factors being equal. Here the issue is muddy. Japanese experts argue that Japanese corporate tax rates are higher, hampering companies there. U.S. experts argue the opposite.

* Not all projects are equally risky. For less-risky projects, the U.S. company can raise money at rates that compare favorably with Japanese companies. But for more risky investments, the Japanese advantage remains.

On balance, Mr. Ostrom concludes, "the beginning of the 1990s suggests the possibility that the United States and Japan may face an analogous convergence of capital costs, with possible implications" for "long-term management perspectives" also converging.

"The cost of capital may well have been an important past factor in explaining behavioral differences between Japanese and American firms, but it is likely to be far less important in the future," he said.