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