Japan riddle haunts Asia-Pacific

By S. P. SETH

SYDNEY (JP): According to reports, Japan's economy has turned the corner. For the year ending March 1996, its Gross Domestic Product (GDP) is estimated to have risen by about 2.5 percent: the best results since 1991. Indeed, its 3 percent economic growth in the last quarter (January-March) of the financial year would point to a much higher annual economic growth, if sustained. But financial analysts are not betting on it. Even a sustained annualized growth rate of 2.5 or 3 percent is being treated with some caution. That is because much of Japan's economic growth is due to heavy government spending (totaling $US130 billion) on public works projects, which is unlikely to continue.

The contrast in public spending between 1991 and recent times illustrates this point. In 1991, Japan had a budget surplus equivalent to 3 percent of its GDP. Today, it has a budget deficit approaching 6 percent of its GDP, which would suggest that the government might have to rein in public spending. Besides, it looks as if interest rates will be rising soon. Although the country's central bank has helped jump-start the economy through record-low interest rates, this cannot continue for fear of fueling inflation.

Yet lately, profits are up, consumer spending is on the rise, private capital outlays are healthy and the yen appears stable with U.S. dollar, at about 105-110 yen to a dollar.

The celebrations, however, are muted because of doubts about the sustainability of Japan's economic growth, from a likely fall in public spending and a rise in interest rates, lack of political will to continue with economic deregulation and general political uncertainty in the country, with its changing coalition governments. It remains to be seen if next year's elections will resolve this problem. The country's political culture of fixing up deals remains unchanged.

However, to the extent that Japan is emerging from its economic wilderness, it is beneficial for the world economy. The Japanese economy is an important engine of world economic growth. In order to stage a comeback, Japan has been undergoing significant economic restructuring. This, among other things, has involved a shift of its low and medium level manufacturing to countries in Southeast and East Asia.

Japan is estimated to have already invested about $85 billion in Asia, and is adding to it by over $10 billion every year. Its trade with Asia has overtaken its combined trade with the European Union and the United States. Japan's trade surplus with Asia is burgeoning, accounted for by exports of machinery and parts to Japanese manufacturing units in these countries. (Some analysts, though, believe that eventually, growing Japanese imports of manufactures from Asia will wipe out this surplus. But that is in the indeterminate future)

These developments have a negative side as well. For instance, Southeast and East Asia, in effect, have become part of Japan's Greater East Asia Co-Prosperity Sphere, which Tokyo did much to foster before and during World War II. Even though it is happening now in peacetime and with the willing participation of the concerned Asian countries, it is still causing considerable strain and tensions. As Sumie Kawakami, an analyst on Japan, has pointed out: "The use of Asia as an assembly base for Japanese products is beginning to result in friction, as it becomes obvious that Japanese companies are reluctant to shift management responsibilities to non-Japanese."

The tensions are also inherent in a relationship where Japan is unwilling to establish high-technology operations in Asia, thereby seeking to perpetuate an unequal economic relationship. Even though Japanese investments in Asia are creating economic opportunities and prosperity, the resultant status of an economic appendage or satellite of Japan is not a very pleasing prospect for regional countries.

Therefore, while Japan is seeking to create an inter- dependent economic relationship with its Asian neighbors, there is no corresponding attitudinal change in terms of regarding these countries as its equal partners. Japan's old wartime attitude of regarding them as its economic subsidiaries/colonies is still very much alive. Japan's growing trade surplus with Asia year by year is a constant reminder of it. Unless corrected soon, this might become a serious issue between Japan and its Asian trading partners.

At another level, Japan's economic expansion in the region is likely to create new tensions in U.S.-Japan relations. Japan is increasingly replacing the United States as Asia's preeminent economic power. At the present time, however, the U.S. and Japan are enjoying a honeymoon in their security partnership against a perceived Chinese threat to regional security. There are too many imponderables to warrant any long-term predictions in this regard. For instance, trade tensions between the two countries are still largely unresolved.

Even within Japan, its economic recovery is a mixed blessing. Economic restructuring is causing considerable pain. The shift of manufacturing abroad, mostly to Asia, is adding to unemployment at home. Job security and seniority are no longer assured. Many businesses have trimmed their operations by sacking workers to remain competitive. Japan is in the midst of record unemployment, reaching around 3.5 percent. The real unemployment figure (including "discouraged workers" who have stopped looking for work) is much higher -- at about 9 percent -- according to Kishi Nohubito, a Japanese scholar. Such changes are bound to affect Japan's social harmony and stability.

How Japan will cope with pressures at home resulting from growing unemployment and criticism abroad of Japanese insularity and arrogance will significantly affect the strategic environment in the Asia-Pacific. For instance, if Japan were to once again feel besieged, as it did in the 1930s, one can only predict disaster in the Pacific during the next century.