Japanese Jam
the new republic....
12 october 98.
By John B. Judis
Time for a true economic miracle.
Most of Asia is still in the throes of a severe recession, with unemployment hovering at 20 percent in Indonesia and gross domestic product falling seven percent this year in South Korea and Thailand. The crisis now appears to be spreading eastward toward Europe through Russia and across the Pacific to the United States and Latin America. It could be halted, but not without dramatic changes in Japan's governing economic philosophy. And these won't be easily forthcoming, as the Clinton administration once again learned last week.
Japan, the world's second-largest economy, holds the key to Asia's economic crisis and recovery. From 1989 to 1997, when the region's banks began tottering, Japan was the largest source of loans to Asia's newly industrializing countries (NICs) and, along with the United States, their most important export market. According to Ed Lincoln of the Brookings Institution, Japanese lending to Asian countries totaled about $125 billion by 1997. But Asia's trade deficit with Japan has grown, and, in late 1997, the Japanese began both cutting back and calling in loans to the region. As a result, Japan is now undermining economies that it once helped sustain.
The seminal event in the Asian crisis was Japan's 1995 decision, made with vigorous American support, to drive down the value of the yen against the dollar. (See my "Dollar Foolish," tnr, December 9, 1996.) The drop in the yen's value put Japanese goods at an advantage over the goods of other Asian countries whose currencies were pegged to the dollar. From 1995 to 1996, South Korea's trade deficit with Japan increased by twelve percent, while semiconductor and other critical Korean industries found themselves undersold by Japan in third markets.
By last year, Japan itself had fallen into a recession--the result of a misguided tax increase and of declining demand in faltering Asian markets for Japanese products as recession set in. The International Monetary Fund projects a 1.8 percent decline in GDP for this year and a further downturn the next. This August, Japan's overall exports rose only 1.7 percent from the year before, while its imports declined by 3.2 percent.
And now the United States is beginning to feel the pinch. As the United States has become the market of last resort for both Japan and the Asian NICs, the American trade deficit with the Pacific Rim countries has soared: between July 1997 and July 1998, it rose 42 percent. Foreign steel producers, most of which are based in Japan, are expected to capture 27 percent of the U.S. market this year, which has already put one major American steel company in jeopardy. The entire California market is under siege. According to a study by the Milken Institute, exports from California, concentrated in high technology, dropped 18 percent to Japan and 38.7 percent to South Korea between the second quarter of 1997 and 1998--the first such decline since the recession of the early '90s. This month, the Economic Strategy Institute asked Wharton Economic Forecasting Associates (wefa) to run a computer simulation of what would happen to the U.S. economy if the Japanese economy continued to falter. Wefa predicted a recession next year.
If the Asian imbroglio does spread, it could lead to a world recession as severe as that of the early '80s--the last time when world trade actually declined. It could spark currency crises in Brazil and other developing countries that could imperil banks in the United States and in Europe. It could also inspire governments to adopt the kind of monetary autarky and trade protection that prolonged and deepened the Great Depression of the 1930s.
It's true the United States and Europe might temporarily forestall a global crisis by jointly lowering interest rates, as many commentators now propose, thus creating demand for products from Asia and taking the pressure off embattled currencies. But the most important ingredient of an Asian recovery is a recovery in Japan that would stimulate new demand there for Asian products and new investment in Asia. Japan, in economic parlance, would become the "locomotive" that would pull Asia out of its ditch.
But plenty of obstacles loom on the tracks. For one thing, some of the conventional antidotes for recession won't work. Japan can't lower interest rates, which are already near zero, because it is in the midst of a "liquidity trap": with its industries already suffering from excess capacity, lower interest rates cannot induce new investment. Lincoln and Fred Bergsten of the Institute for International Economics have both argued for a large fiscal stimulus that would boost consumer demand and spur new investment. A tax cut in 1995 sparked a recovery the next year that the tax increase in 1997 helped to kill. But the stimulus would have to be extremely large and would have to be accompanied by reforms that would encourage domestic consumption.
And that last point is the rub. Since the end of World War II, Japan's economy has been rigged to encourage saving rather than consumption. Tax laws reward bank deposits and punish spending; cartels have kept domestic prices unnaturally high. Banks and the Ministry of Finance have used the resulting savings to fund industrial investments but not primarily for the home market. As Richard Katz, the author of Japan: The System That Soured, has shown, the gap between what Japan's consumers spend and what its economy produces has risen from an average of four to five percent of GDP during the 1980s to almost seven percent today. These surplus products have gone overseas and have become the basis for Japan's burgeoning trade surplus. This mercantilist strategy famously produced an economic "miracle" in the '70s and '80s, but today it is the source of profound instability in Asia and recurring trade conflict with the United States and Western Europe.
Encouraging consumption would be tantamount to abandoning this mercantilist strategy. An emphasis on consumer-driven investment could also undercut the role of the banks and the Ministry of Finance in allocating investment, while possibly unleashing uncontrollable political forces, including an independent labor movement and a democratic opposition. Writes Akio Mikuni, the president of Japan's only independent bond-rating agency: "Japan's policy elite is unlikely of its own accord to promote measures that could replace the mercantilist thrust of Japan's political economy with a system aimed at maximizing living standards for the broad mass of Japanese. The current system will have to break down to the point where economic conditions for ordinary people become sufficiently desperate that they demand real reform."
Alas, President Clinton's expression of sympathy and confusion, which he offered to Prime Minister Keizo Obuchi this week, will only embolden the opponents of economic reform. Says Richard Katz: "Clinton's statements made it more likely, rather than less, that financial turmoil in Japan and its neighbors will continue and perhaps accelerate." And, while dire warnings from Secretary of the Treasury Robert Rubin and Deputy Treasury Secretary Larry Summers have certainly had an impact in the past, American jawboning can only accomplish so much. In the end, Japan is going to have to act on its own behalf. Let's hope that happens before American workers once again start taking sledgehammers to Panasonics and Toyotas. |
