Japan: A leopard loath to change its spots

Japan: A leopard loath to change its spots

The economic crisis in Southeast Asia has left Japan highly
exposed at a time when it is mired in a deep recession. William
Keegan in London warns that the global economy will suffer if
Japan, sticking to what it knows best, tries to export its way
out of recession.

LONDON: The economic crisis in Indonesia and the rest of
Southeast Asia has left Japan highly exposed at a time when it is
mired in the biggest recession since the Seventies.

The subject has dominated discussions among Group of Seven
leading industrialized countries' officials, who are worried
about the possible global ramifications.

Eddie George, governor of the Bank of England, the UK's
central bank, told the House of Commons Treasury Select Committee
last Thursday that "the biggest uncertainty for the world economy
is Japan".

He conceded the world had come close to the financial abyss at
the turn of the year because of the Korean banking crisis,
brought back only by the extension of maturities by Group of
Seven banks.

Continuing concern about Asia was behind the decision to leave
U.S. official interest rates unchanged at last week's monthly
meeting of the Federal Reserve's open markets committee.

The Bank of England governor warned of "substantial
international (payments) imbalances" and "large external
deficits" that carry "all sorts of politically worrying messages
for the global economy" and raised the specter of a revival of
protectionism.

With industrial production and consumer spending falling in
Japan, the country's imports fell by nearly 14 percent in April.
At the same time, Japan's exports fell by almost 2 percent. The
net result was yet another rise in Japan's politically sensitive
trade surplus -- up more than 50 percent compared with a year
ago.

Although Japan has introduced ostensibly reflationary
packages, other G7 countries fear the country will take the time-
honored route of trying to export its way out of its troubles.

In April, Japan's exports to the U.S. rose by more than 7 per
cent, and shipments to Europe were up 16 percent. This helped
offset the sharp declines in Japan's exports to countries such as
Korea, Thailand and Indonesia -- all down by more than 40 percent
on April 1997.

Meanwhile the latest data for the U.S. shows a 26 percent
increase, to US$37 billion, in the country's overall trade
deficit between the first quarters of 1997 and 1998. U.S. exports
to Pacific Rim economies fell by 15 percent year on year, while
imports from Asia rose 11 percent.

At the recent G7/8 economic summit in Birmingham, England,
much was made of the U.S. having approved Japan's latest plans to
deregulate and open up its markets. But the reality is that the
bilateral trade deficit, on which the Clinton administration has
worked since it first came into office, was up by 23 percent (at
almost $6 billion) between January-March 1997 and January-March
1998.

Last week there were official celebrations in Geneva
commemorating 50 successful years of the General Agreement on
Tariffs and Trade and its successor, the World Trade
Organization. But G7 officials are concerned that Asia poses the
biggest threat to free trade since the oil crises.

The big international payments imbalances now building up are
reminiscent of similar shocks in the Seventies. Now it is not
higher oil bills that are hitting Western industrial countries
but the loss of Southeast Asian export markets, accompanied by a
surge of Asian imports.

There are increasing concerns that the Asian imports will come
not just from Southeast Asia, but from Japan, as the highly
efficient Japanese industrial sector reacts to depressed
conditions at home.

Former analysts at the Organization for Economic Co-operation
and Development see increasing parallels with the delayed
reactions to the first oil shock of the early Seventies. "People
forget that it was a long time before the oil crisis finally hit
the West," said one analyst.

There is an obvious difference between the Seventies, when the
price of basic industrial and consumer input quintupled, and now.
In fact, as Federal Reserve chairman Alan Greenspan points out,
the Asian crisis, which has sparked intense competition from
cheap imports, has a depressing effect on prices, and a
beneficial one on monetary policy -- easing the pressure for
interest rate rises.

But the competition from cheap imports, and the collapse of
Asian markets for G7 exports, threatens to increase trade
tensions in the way George has warned. The Asian crisis has also
inhibited the Bank of England's monetary policy committee (MPC)
from raising interest rates recently.

The hope of the rest of the G7 is that the succession of
Japanese fiscal packages will undo the damage done by the 2
percentage point hike in consumer taxes there last spring, which
stopped the long- delayed Japanese economic recovery in its
tracks.

The collapse of confidence within Japan gives rise to
speculation about whether tax cuts will actually be spent.
Japanese government officials point out that, whatever happens to
tax cuts, traditional Keynesian public expenditure packages ought
to have a multiplier effect throughout the economy, because the
government can guarantee that the money will be spent.

Critics retort that the multiplier is low because of the
collapse of confidence. They also have seen the impact of
previous public expenditure packages disappear into thin air. Dr
Gerard Lyons, of DKB International, notes that the Japanese
situation is so desperate that some analysts argue in favor of
raising interest rates in order to boost savers' confidence and
get them to spend more.

But the growing suspicion among other G7 countries is that the
Japanese leopard has not changed his spots, and wants to export
its way out of recession.

-- Observer News Service