Japan is not the driving force behind Asia

By Christopher Lingle

SYDNEY (JP): Maybe a bit of humility would serve Japan well in finally addressing its domestic economic problems. For the past months, Japan has been widely portrayed as a stalled locomotive that must be re-ignited before the rest of East Asia's economies can recover from their doldrums.

But Japan's likely role in East Asia's recovery is much exaggerated. It is true that with the second largest economy in the world that Japan has the largest GDP in Asia. Nonetheless, its trade with the rest of Asia and its engagement in most forms of investment in the surrounding region are less significant than often supposed. On the contrary, a rebound in Southeast Asia and an increased consume in imports is more likely to be the basis of recovery in Japan.

For example, Japan is not now nor was it the most important trading partner for most of its regional neighbors. In 1998, exports to Japan from the rest of Asia recently fell by 15 percent, year-on-year, a decrease well below the declining trend for Asian exports. Japan now receives only 12 percent of the region's total exports and much that is in the form of natural resources instead of manufactured goods.

In terms of financial commitments, Japan's role is also less than inspiring. Foreign direct investment (FDI) by Japanese multinationals to the rest of Asia accounts for less than one- half of 1 percent of the GDP of these countries and is declining due to disinvestment from the region over the last two years. And there has been a hastening exodus from endless disappointments in China.

There are various signs that foreigners are viewing their presence in China much more critically. Japan's Export-Import Bank released a survey of manufacturing firms with three or more overseas affiliates asking them to rate countries on the basis of FDI performance. Most identified China as the worst. Statistics offered by China show that investment by Japanese companies there declined by 15 percent in 1998 while their total investment declined by 27 percent.

Japanese bank lending in Asia has been significant but much of it was in acting as middlemen for local currency or U.S. dollar capital flows. Few funds come directly from the personal savings of Japanese citizens, most of which are deposited in low interest-bearing accounts in the government-run postal savings bank.

Particular countries or specific sectors are doubtless suffering from the retreat of the Japanese. Yet pessimism at Japan's notorious dithering about solving its domestic problems may be overblown. If Japan's homegrown problems are such a small part of the problems of East Asia, then maybe it is not the linchpin in the recovery of the global economy.

Can East Asia "miracle" economies rebound to their former growth path by relying upon exports? The answer is complicated, but almost certainly no. But clearly Japan is not the solution on its own or even mostly. A large part of the problem is that companies in many countries, like Indonesia and Thailand, import intermediate products for assembly as finished goods for export. Heavy indebtedness and declining currency values continue to price inputs out of their reach. At the same time, many small and medium sized enterprises have been bankrupted. Before targeting export markets in Japan or elsewhere, goods for export must first be produced.

Then there is an uphill battle of exporting to countries that bought their products during their high growth phase. These destinations are North America, Europe and each other. The United States and Europe absorb 21 and 15 percent of Asia's exports, respectively. Most of these exports are industrial goods. Intra- Asian trade by other Asian countries outside of Japan accounts for about 35 percent of the region's total trade.

West European countries are unlikely to be of much help given their protectionist instincts. That means that hopes for export- led recovery will depend upon developing new markets or upon the capacity of the U.S. to absorb larger amounts of their exports while enduring a growing trade imbalance.

There is some encouragement in that American economic growth remains high. Despite weakening consumer confidence and volatility in world financial markets, an annual rate of over 5 percent was reported in the last three months of 1998. While the U.S. economy may slow in 1999, the likelihood of recession seems to be receding.

So is this good news? Yes, and no. The good news is that the U.S. is likely to continue growing rapidly enough to continue buying products made elsewhere. The bad news is that global competition is stronger than ever when the East Asian economies are weakened. Then there is the likely political resistance in the US to relentless and rapidly expanding trade deficits.

The lesson of this story is that emerging economies must encourage growth in their respective domestic sectors. If there is a locomotive for their recovery, it must come from within. It is unlikely that their international trading sectors can pull their economies out of recession. Were this possible, Japan would not be suffering its worst economic downturn of the post-war era. Its exporters are going from strength to strength while the domestic sector is experiencing record levels of bankruptcies and unemployment has risen to historic highs with well over three million out of work and a rate of 4.6 percent.

The way forward for all Asian countries, especially Japan, is to move rapidly to allow and encourage more competition to inspire their domestic producers to become more efficient. By allowing consumers access to cheaper imports, they will have more to spend on other domestic products and services. In those sectors enjoying productivity increases, workers can expect higher wages while consumer will have greater choices and lower prices.

This approach would allow them to discover their true comparative advantages instead of relying upon market distorted signals that have inspired chronic overproduction. The slogan "Export for Growth" should be changed to "Import for Growth".

Meanwhile, stop picking on Japan. It has its own problems at home.

The writer is an independent corporate consultant and adjunct scholar of the Centre for Independent Studies in Sydney.