Does Japan Still Matter?
We've been mesmerized by Japan for too long.
SAMUEL BRITTAN Principal Economic Commentator, Financial Times, London.
No one country is "essential" to the health of the world economy. The USA most nearly meets the bill. Japan does not do so at all. Japan makes up less than 18 percent of the OECD GDP and just over 14 percent of world GDP.
It is also a much more self-sufficient economy than generally realized. Japanese imports are less than 8 percent of OECD imports and only 5 percent of world imports. These are WTO estimates. Other ways of compiling the figures might lead to slightly different results, but are unlikely to change orders of magnitude.
Perhaps the most important ratio is that of Japanese imports to world GDP, which comes to one percent. It is changes in this relatively modest total that could add or subtract from world demand and thus worsen a world recession or sustain a world upturn.
There is another aspect. The U.S. punches above its weight because it is the world's most important financial center. Wall Street movements have a powerful effect on equity prices throughout the world and thus on the whole climate of confidence and investment. This is not the case with Japan.
The problem with the Japanese economy is not that output and demand are falling, but merely that they are not rising as fast as they could and that a negative output gap has appeared. Since 1991 Japan has had a sizeable increase in its output in only one year, 1996, when GDP grew by just over five percent. In 1998 it fell by nearly three percent; but in nearly every other year it grew by small amounts, typically just over or just under one percent. So the problem is not that Japan is precipitating a recession, but that it is not playing its part in the present world upturn. This may be as well for the moment, given that, according to most estimates, world output as a whole is now growing faster than productive capacity, leading to potential inflationary strains -- which can be seen from the upward trend in world interest rates in almost all financial centers.
There is a broader comment to make. The Western business establishment and the U.S. political establishment have been mesmerized by Japan for too long. For many years, when Japan was simply catching up with the U.S. economy, Japan was both demonized and admired. It was demonized because of a ridiculous fear that its rapid expansion and penetration in export markets could lead to the burial of American and European business. It was worshipped because Western leaders of an authoritarian disposition preferred its managed capitalism to the uncertainties and excitements of the more market-driven Anglo-Saxon variety. These obsessions were then followed by a period of hysteria about the opposite problem, that of a weak Japanese economy preventing the world from ever seeing prosperity again.
If I were writing for a European audience I would suggest putting Japan on the back burner. The reason why I cannot say this to Americans is that the policy of successive administrations has contributed to that country's difficulties. A durable Japanese recovery probably requires export-led growth, possibly with currency depreciation, but above all with some assurance that the yen will not be allowed to appreciate to the highs seen in the last few years. U.S. administrations have been too pre-occupied with a supposed threat from Japanese export competition to agree to any such concord -- the case for which has been powerfully argued by Ronald McKinnon of Stanford.
The combination of exhortation to expand the economy, and resistance to the currency conditions which would facilitate that expansion, is reminiscent of the contradictory stimuli used in torturing prisoners to obtain confessions. If I were U.S. Treasury secretary I would stop exhorting Japan to expand but co-operate in a sensible currency concord. And this is one of the many reasons why I do not occupy that position.
If Japan fails, the global impact would be formidable. That's why the time for supply-side reforms is now.
RUDI DORNBUSCH Ford Professor of Economics and International Management, MIT.
Yes, Japan does matter as an important part of the world economy and an all-important pillar for continued growth in Asia. What has been done to bring Japan back on its feet was all for the good. But much more needs to happen, especially from the supply side. If everything is done right, Japan may be back to strong growth a decade from now. It might even escape from an all-out fiscal crisis. But if supply-side measures are postponed and any incipient upswing is met by renewed taxes, kiss Japan good-bye.
Since the collapse of its asset bubble in 1990, Japan has been attempting to get back on its feet. There was a brief success in 1996, but that was soon undone by a mindless tax increase. A move to the very edge of a depression followed. Deepening recession and the risk of pervasive failure of banks and insurance companies -- their balance sheets being far below water -- were thwarted by a dramatic set of measures: huge construction spending and a wholesale guarantee for finance and no-questions-asked loan programs for small- and medium-sized firms. The upshot was a stabilization of sorts -- moderate growth and a return to some normality.
So far, unfortunately, we have only that. Investment and consumption spending are not piggybacking on the public works programs. And as long as they do not, Japan is far from a significant upswing. If and when an upswing does get underway, moreover, the Ministry of Finance will want its pound of flesh -- tax increases and a cutback on public works to reduce the huge budget deficits. But if that is done overeagerly, as in 1997, everything will unravel once again, and worse.
Japan's desperate strategy of the past two years was correct: Keynesian policies and pervasive guarantees were essential to avoid depression. They worked because they were huge and comprehensive. Unfortunately, the story stopped there. Rightly, the Bank of Japan (BO J) supported recovery by a zero-interest rate strategy. Rightly, the BOJ refused to engage in a misconceived notion of "making inflation." Wrongly, there has been no aggressive drive for deregulation and reform. Japan's supply side is even worse than Europe's. Without dramatic supply-side reform, a high growth-led fiscal stabilization will not happen. In fact, the anemic growth of the present will be hard to maintain. And if growth does not come, make no mistake, the pressure of huge deficits, huge debt burdens, and demographics will mean Japan's debt will become junk bonds. The Japanese public may be in love with JGBs, the only asset that has never disappointed them. But let them understand how bad the fiscal situation is and even they will return to offshore investment.
A few signs of optimism can be discerned outside the public policy arena. First, Japanese companies are furiously restructuring, far more than in Europe. The macro fall-out is unpleasant, but this route is the only option. Restructuring will contribute to growth over time, more so as it translates into a return of investment.
Another important development will contribute to confidence and medium-term employment: Japan is outstanding in technology, and technology is the hot stuff around the world. In communications, Japan is tops, far ahead of the United States. That should both increase confidence, which is all-important to spending, as well as help to establish a new industry that can undermine the entrenched old economy.
If Japan fails, the impact on the world economy will be formidable. Its debts will go bust, restrictions on capital flows would be likely, and a currency collapse will translate into trade problems. Asia will lose a much needed export market and, given their failure to reform much after the crisis, will be right back to volatility if not recession. Steady prodding of Japan on the public reform and restructuring effort is all important. The risk lies with the politicians not getting the message: Public works might make for a wonderful pork-barrel and corruption business, but it has no future. Earth to Japan: Get moving on reform!
The truth is that Tokyo had better get to work.
NORBERT WALTER Managing Director, Deutsche Bank Research and Chief Economist, Deutsche Bank Group.
Treasury Secretary Larry Summers needs nobody's education. Nobody needs to remind him that Japan is the world's second largest economy, still generating almost 10 percent of global GDP. And he is certainly not unaware of the fact that Japan is home to the second largest national capital market, with all the rest of us as counterparties.
As I know from private conversation -- already half a decade ago -- Summers is fully aware that Japan-bashing and Keynesian recipes will not help an aging economy more worried about future than present consumption. Summers is too smart not to understand that pushing a central bank to adopt negative nominal interest rates is more likely to create trouble than to solve today's spending impasse. He perfectly understands that lowering high tax rates, though welcome as an incentive to work, does not immediately propel consumption but feeds private savings, which are badly needed in view of the dwindling value of assets accumulated for old age (be it real estate, stocks, miserably yielding IGB, or money market instruments). The other tool of the Keynesian remedy, namely government spending, has lost its effectiveness. To boost government consumption in light of a towering government deficit (almost 10 percent of GDP) and debt levels already above 125 percent of GDP, would suggest to someone not even fully rational that tax rates cannot but increase in the future (possibly in the form of a devaluation of government paper).
Could public works programs be the answer under such circumstances? The returns on additional subways, sewage systems, roads, and bridges to barely populated islands in Japan are a far cry from the rates that could be achieved on such investments in the poor and densely populated countries in nearby Asia.
Is Japan a lost case? No chance of ever clawing its way back? Not yet! But if mismanagement, sometimes following inadequate international advice, continues for some time, the land of the rising sun will become a sunset country.
But why worry? Don't we neglect Africa? I do worry, not so much because of Japan's large share in world GDP, but because of its massive international capital linkages, considering the big balance sheet difficulties of its companies, particularly life insurers. The capacity of the state to stage a second bail-out operation within a few years seems to be almost non-existent in view of high debt and income tax rates.
What should Summers and the rest of us worry about? What course of action should we help to bring about? The answer is fast and deep structural reforms: full international participation -- not just ownership -- in the Japanese economy, especially at the management level; higher female participation rates in the age groups thirty and over; and liberal immigration laws, particularly for young Asians.
The course to be advocated to bring Japan's traditional economy back to normal capacity utilization should include two things: a yen weaker than 120 to the U.S. dollar, and an Asian Marshall Plan to increase external demand for Japanese goods and services, especially from Asia.
Japan doesn't matter, but it could soon.
JUREK MARTIN Former Tokyo Bureau Chief and Foreign Editor, Financial Times.
It is hard to ignore the facts. The Japanese economy has barely moved in ten years. Yet during that time, the other three engines of global growth have gone their own way. The United States has boomed, Europe is ticking along quite nicely after a sluggish period, while the rest of Southeast Asia survived a deep financial crisis -- which had very little to do with Japan -- and is now well on the path to recovery. It might be tempting to conclude that Japan does not matter as much as everybody thought it did.
Of course, it is easy to cite the facts with the benefit of hindsight. When Robert Rubin joined the Clinton Administration, it was an incontrovertible article of faith that Japan was a major contributor to the global economy, as it had grown to be over the previous quarter of a century. It was also, and still is, a vital regional strategic partner of the United States. Therefore, American national interest had long dictated that Japan get special attention. Even before its bubble economy burst, U.S. officials were constantly advising Japan how to reform itself.
Endless and ineffective reform and stimulus packages by Tokyo in the 1990s may have persuaded Larry Summers that hectoring had lost its impact (though reticence was not his modus operandi before becoming Treasury secretary). Or perhaps the timidity of a succession of relatively weak Japanese governments has quieted him. And it is perfectly plausible, if difficult to prove, that he believes the bottom will not fall out of the global economy if Japan, still hoarding its savings, stays in the doldrums.
However, the acid test of Japan's relevance will come if and when the other leading economies, most obviously the United States, confront the end of their expansions. It's easy to deride the "locomotive" theory that was in vogue twenty years ago. But if the global train goes off the rails, Japan surely will be asked to help put it back on again. Then we will know if it matters.
Summers is right to back off. Japan is recovering.
YOSHIO SUZUKI Member, House of Representatives, Japan.
Owen Ullmann is right to say that Treasury Secretary Lawrence Summers appears less strident than his predecessor Robert Rubin in pressuring Japan to grow its economy. Perhaps Summers has recognized that, after two consecutive years of negative growth in fiscal 1997 and 1998, Japan's growth rate shifted into positive figures in fiscal 1999. When Rubin was Treasury secretary, the negative growth performance of the world's second largest economy was a serious threat to the health of the global economy.
Today, however, the Japanese economy has begun recovering under the impetus of both the "zero interest rate policy" applied since February 1999 and the 9.4 trillion yen tax cut in the fiscal 1999 budget. This recovery was first stimulated by an enormous increase in public construction. It gained momentum from the bottoming-out of private fixed investment and housing construction thanks to the "zero interest rate policy" and the enormous tax cut. For Summers to continue haranguing Tokyo officials to change their economic strategy would be superfluous. In my judgment, Summers and Rubin share the view that a vibrant Japan is essential to the world's economy. But their approach to Japan has differed due to the beginning of economic recovery in Japan.
The issue now is how to sustain the increase in private capital spending, which has become a leading contributor to positive GDP growth. Japan has already implemented a corporate tax cut and the "zero interest rate policy." What else can Summers recommend? A further increase in public works? That could cause a crowding-out effect resulting in a rise in the long-term interest rate, which would in turn undermine the economic recovery. All Summers can do is express, in moderate language, his hope that the recovery will be sustained and accelerated by expanding domestic demand, rather than overseas demand.
Japan has seemed less important because the U.S. has been carrying the load.
CLYDE PRESTOWITZ President, Economic Strategy Institute.
Over the last few years, Japan's recovery has proven to be less integral to Asia's economic rebound and less important to the global economy than most observers previously believed. However, the international economy has been increasingly dependent on the strong performance of the American economy. And the U.S. economy cannot indefinitely continue to lift all boats. What remains unclear is whether Japan can be the engine of Asia's economic growth when the U.S. economy slows.
Following the onset of the Asian crisis in 1997, conventional wisdom suggested that Japan would drive the region's economic recovery. Meanwhile, most Asian countries have roared in the aftermath of the crisis. But Japan continues to be mired in slow growth, rising unemployment, and a dismal economic outlook. Even Tokyo's attempts to resuscitate the economy with a zero interest rate monetary policy and with massive deficit spending amounting to about ten percent of GDP have not been able to bolster Japan's economy.
The remarkable endurance of the robust U.S. economy has produced coattails that have carried the global economy for the past decade, and the ability of the American market to absorb the world's excess capacity following the Asian crisis prevented a global economic catastrophe.
In fact, there has been a symbiotic relationship between the United States and international economies over the past few years. The strong American economy has allowed us to finance a skyrocketing trade deficit resulting from a flood of incoming goods from the rest of the world, while cheap imports from Asia have helped to subdue inflation in the U.S. economy. The incredible period of 4 percent GDP growth for the U.S. economy that began in the first quarter of 1996, and the surge in consumer spending, which climbed to a record 67.8 percent of GDP in the final quarter of 1999, have been sources of international economic stability.
But the U.S. economy and the American consumer cannot indefinitely levitate the global economy. Fiscal responsibility, stable monetary policy, open markets, and technological innovation have served as the building blocks of America's record economic expansion. When the U.S. economy slows, it will be accompanied by a reduction in consumer spending and a squelched ability to absorb the world's excess capacity. At that time, the onus will be on Japan to step up and serve as the engine for Asia's economic growth.
Summers isn't aggressive because the world today is on firmer footing.
DAVID PUTH Managing Director, Chase Manhattan Bank.
Some have speculated that Treasury Secretary Lawrence Summers has not been as aggressive as his predecessor in pressuring Japan to improve its economy because he does not share Rubin's belief that a vibrant Japan is essential to the global economy. Given that Summers was in charge of international affairs under Rubin and that Rubin sent him to Japan during the fateful June of 1998, it's hard to imagine that U.S. economic policy towards Japan has changed much under Summers.
But it's easy to understand why the United States has not aggressively pushed its policy agenda on Japan recently. Tokyo has run out of policy options to boost demand. The Bank of Japan brought short-term rates to zero and is willing to leave them for the time being. A quantitative easing would probably not help, given that bank lending is still declining. Fiscal stimulus has been pushed to such an extent that a further rise in the budget deficit risks a counteractive upturn in long-term interest rates and a debt downgrade -- with all the implications for the international financial markets that would bring. The remaining tool for policymakers appears to be the yen. And a weaker yen would worsen trade strains. Japan may still be dragging its feet on bank restructuring, but progress has been made.
Moreover, the world is on firmer footing. The United States has proved to be a durable engine for the global economy. Most of Asia is recovering. European growth is broad-based and accelerating. Most analysts would not consider the current yen-dollar exchange rate of 105-110 a problem. Fortunately, Japan does not pose the risk to the global economy it did two years ago.
Back in the summer of 1998, the dollar was headed towards 150 yen. China was threatening to respond to yen weakness with a devaluation of its own -- which could have launched a renewed downward spiral of the Asian currencies. The Japanese government was wrongly committed to cutting its budget deficit. And it was backsliding in restructuring the banking system, a crucial step if Japan is ever to get its economy back in shape. Desperate times require desperate measures, and the U.S. government's pressure on Japan to change policy course was appropriate.
One may question whether the United States should have acted earlier. Perhaps Washington should have put more pressure on Japan to amend its tax hikes of April 1, 1997. The combined retraction of income tax cuts and sales tax increases sent the Japanese economy into a tailspin just as the Asian dominoes started to fall. In January 1997 the tax hikes appeared ill conceived and ill timed. The private sector was showing signs of strength in 1996, but much spending late in 1996 sought to take advantage of the coming changes in sales taxes. Moreover, the banking system was still dysfunctional. Secretary Rubin voiced his concerns but didn't press the issue hard enough.
Summers' reported downgrading of Japan's importance is anothe example of U.S. myopia.
CHRIS HUGHES Senior Research Fellow, Centre for the Study of Globalisation and Regionalisation, University of Warwick, and author of Japan's Economic Power and Security.
Lawrence Summers' reported downgrading of the macroeconomic importance of Japan in the global economy is another disappointing illustration of U.S. myopia on several fronts. First, the tendency to sporadically berate but then forget about Japan demonstrates the petulant refusal of U.S. policymakers to acknowledge the shortcomings of their own policy prescriptions and inability to comprehend the intricacies of the Japanese economy, rather than a genuine attempt to hunt for wise and appropriate advice. Second, in overlooking the importance of Japan, U.S. policymakers are only overlooking the shaky foundations of U.S. growth and the high degree of U.S.-Japan economic interdependence and its importance for the stability of the global political economy. After all, outflows of Japanese capital may have brought calamity to the Japanese domestic economy in the late 1980s, but it has also helped to sustain the U.S. trade deficit throughout the following decade, and thereby the United States' self-proclaimed function as the engine of growth and global macroeconomic stability. Third, Japan's role in contributing to the stability of the East Asia region and thus indirectly to global macroeconomic stability should not be ignored. Japan may not have fully distinguished itself in providing leadership for the East Asia region in the immediate aftermath to the financial crisis of 1997. Ever since, though, it has been working behind the scenes to create bilateral frameworks for monetary and trade cooperation centered upon itself- revealed most recently in Japanese proposals for a currency swap regime in East Asia. The inability or refusal to acknowledge Japan's regional leadership role will only lead to the United States' gradual sidelining in East Asia, with unforeseen consequences for global macroeconomic
co-operation and stability. Fourth, U.S. policymakers are myopic in thinking only short term about Japan's relative weight in the global economy. Japan remains the second largest national economy and has begun to grow again, even if not on a par with the spectacular performance of the 1980s. The United States will have to contend with renewed Japanese economic strength, as well as with a more assertive political attitude by Japan toward projecting their influence regionally and globally. U.S. policymakers would do well to refocus their attention right now upon Japan and treat it as a proper partner instead of as a delinquent pupil.
Cajoling can play a useful role.
RICHAR N. COOPER Maurits C. Boas Professor of International Economics, Harvard University.
The Japanese economy needs economic stimulus, and it needs serious structural change in its financial and corporate sectors. After years of denial, Japanese political leaders and officials now accept both. They also realize that structural reform will be less painful in an environment of economic growth than one of stagnation. Thus they have engaged in substantial fiscal stimulus since 1998, with the budget deficit running over 7 percent of GDP this year. There is of course a trade-off: With rapid growth, structural reform is less costly, but also seems less compelling.
Japanese officials hope that economic growth will be come self-sustaining this year. There are some positive signs, and an Economist panel forecasts growth at 1.3 percent for 2000 and 2.0 percent in 2001. But consumption is still weak, and it is not unreasonable to predict another supplemental budget in the fall.
In 1997 Japan unwisely implemented a significant increase in taxes, throwing Japan into recession and aggravating the Asian economic crises that occurred only months later. The sharp economic declines that took place in several East Asian countries in 1998 could be mitigated by Japanese economic recovery, and that fact undoubtedly influenced Secretary Robert Rubin's pressure on Japan. Now most of these countries are recovering nicely -- indeed too nicely for difficult economic reforms to seem necessary -- and the need for further Japanese action is less urgent from a global perspective.
Japan's political scene remains dominated by the Liberal Democratic Party, with no serious substantive political opposition. Over the years, the U.S. government has played the role of "loyal opposition" in Japan, urging changes in policy that were not only in American interests, but also in the interests of a Japanese population. These changes were resisted by special interests that historically supported the LDP, both financially and electorally; and by officialdom whose power would be weakened. Unhappily, this situation has not ended. Hence a useful role for American cajoling continues. It need not always be strident, or even public; that is a question of tactics. But the U.S. government should continue to press Japan to adopt both micro- and macroeconomic policies that help the United States, the rest of the world, and, not least, the Japanese.
It's all a mere difference over tactics.
ADAM POSEN Senior Fellow, Institute for International Economics.
Why did the U.S. Treasury recently lay off' publicly lecturing the Japanese government on macroeconomic policy? The previous lectures worked. The Obuchi government of July 1998-April 2000 largely followed the recommendations of Rubin and Summers, and of common sense: by pursuing fiscal stimulus instead of contraction in the midst of a persistent recession; by cutting interest rates when facing deflation; by cleaning up at least part of a financial crisis through recapitalization and nationalization; and by increasing transparency and consistency between declared and implemented policy. None of these measures were taken as far as the Treasury and common sense demanded, but far enough to make a difference and satisfy Treasury's public demands.
Had these measures not been taken, Japan could have tumbled over the precipice of outright economic collapse on which it was perched in 1997-1998, possibly taking the crisis hit countries of East Asia with it. Had the Rubin-Summers macroeconomic diplomacy been quiet during this period, the critical recommendations would have been ignored --just as the quiet advice given by the United States in 1995 was ignored when the Hashimoto government brought on a deeper recession by raising taxes and neglecting financial fragility. With Japan and East Asia now both back from the brink, it makes sense for the Treasury to turn down the volume.
The relative quiet, however, should not hide the importance of Japanese economic performance to U.S. interests. A weak Japan is a source of uncertainty and therefore volatility in international capital flows. And a weak Japan that is still America's third largest trading partner is a huge lost opportunity for mutual growth. Nonetheless, a few discrete short-term policy choices were capable of changing a self-destructing Japan into a weak Japan, whereas turning a weak Japan into a strong Japan will take a lot longer and much more work.
Loud public demands for specific macroeconomic policies are best reserved for those occasions when a clear policy option is needed to respond to an imminent threat. Japan was initially disinclined to believe in the legitimate merits of American calls in the mid- 1990s for expansionary policy because the United States had "cried wolf" by calling for expansion in the mid-1980s, when it was U.S. policies that were at fault. It's proper tactics, not a difference between Rubin and Summers, that has the U.S. Treasury saving its macroeconomic voice for times when yelling at Japan is both necessary and appropriate.
It's time the Clintonites clean up their mess with Japan.
GEORGE R. PACKARD President, The U.S.-Japan Foundation.
It is hard to believe that Secretary Lawrence Summers would dismiss the importance of a full Japanese recovery to prosperity in East Asia and to the global economy as a whole. No sane economist can ignore the health of the world's second largest economy, the largest overseas U.S. trading partner with its $68 billion surplus in 1999, the world's largest creditor nation, home of about one-third of the world's private savings, key importer from struggling Asian economies, major ODA donor, and vital U.S. ally providing more than $5 billion in host country support for U.S. troops and bases.
If Summers has been less strident than his predecessor in lecturing Japanese government officials, it may be that this Administration is finally waking up to reality when it comes to dealing with Japan. The prevailing U.S. Government view of Japan in 1993 rested heavily on the false image of Japan put forward by the so-called "Revisionists" in the latter half of the 1980's. In Japan's "Bubble Years" of 1985-90, the tiny but vociferous handful of revisionists were able to seduce the mainstream American media into accepting the image of Japan as "The Enemy," an economic juggernaut out to destroy American industry through predatory trade policies.
Many of the leading Clinton policymakers on Japan who took office in 1993 were influenced by revisionism, even though its central arguments were by then getting hard to sustain. There was a consensus in Washington that it was time to "get tough" with the Japanese. One veteran national security advisor (who prefers to remain anonymous) said that in those days "in order to get ahead in Washington, it was important first of all to prove your utter contempt for the Japanese." Policy was made by persons who lacked deep knowledge of Japan; specialists were suspected of being too sympathetic to the Japanese.
This attitude led to the stiff-arming of Prime Minister Morihiro Hosokawa when he made his first official visit to Washington in February 1994. Hosokawa, a former governor, came to power as a reformer advocating deregulation and decentralization of the Japanese economy -- the very measures American officials had been pushing for years. He was the first prime minister elected since the collapse of the Liberal Democratic Party which had been in power since 1955. His summit meeting with President Bill Clinton was a fiasco. The two leaders told an amazed press conference that they had been unable to agree on some relatively minor trade disputes -- the first such failure in the postwar era.
Hosokawa enjoyed a brief surge in popular support for standing up to the U.S. president, but was out of office three months later. His political rivals used the Washington failure, among other things, to undermine him. They argued that the first task of any prime minister is to cope successfully with Washington, and Hosokawa had failed.
Another example of the Clinton Administration's hostility came at the time of the Asian economic meltdown in 1997. For years American officials had urged Japan to be a "normal nation" and a player in the international arena. When Japan stepped forward to propose an "Asian Monetary Fund;' however, the Treasury Department immediately rebuffed the idea. Today, many thoughtful analysts think well of such a fund. The Japanese continue to push the idea, and the Americans continue to shoot it down. Is this American hegemonism gone wild, or something else? Treasury doesn't explain.
If Summers now understands that public hectoring creates enemies in Japan, hurts our natural allies there, and fails to achieve any purpose, that's progress. The next administration should start in January 2001 with a clean slate, establish a high level binational commission to re-think the entire range of military and economic trouble spots, appoint a genuine Japan expert to the National Security Council, coordinate Japan policy among the competing bureaucracies at State, Defense, USTR, and Treasury, and start treating the Japanese as our potentially most valuable friends and allies in Asia. An enormous reservoir of mutual goodwill exists among ordinary Japanese and Americans. It's time officials in Washington and Tokyo stopped wasting this asset.
When the U.S. slows, Japan's macroeconomic failures will loom large.
DOUGLAS H. PAAL President, Asia Pacific Policy Center and former senior staff, National Security Council in the Reagan and Bush Administrations.
It is possible to speak of Japan as less important to the globe's economic health only in a period like the present one, when U.S. growth is the dominant feature on the landscape. If the American economy were in more parlous straits, Japan's macroeconomic gravity would be felt quite strongly.
One reason Japan is played down in Washington today is the Japanese people's enormous savings. These have permitted Tokyo to vastly expand its indebtedness, both to rekindle the domestic economy and to sustain capital flows into other nations, especially its troubled neighbors in East Asia. By financing this debt at home, Japan is not exporting the negative effects in the way a debtor nation like the United States would.
We can question the wisdom of a collective Japanese decision to promote restructuring so slowly. The Japanese evidently prefer to run down their national savings in order to cushion the impact of a radical reshaping of their economy. The U.S. restructuring in the 1980s, by contrast, was accomplished with much greater social dislocation. Japan is now entering a well-documented demographic shift toward a reduced work force and a rapidly expanding pool of retirees. In the next two to three years, therefore, more drastic reform measures will be required to expand Japanese productivity.
Whether the Japanese political leadership will be up to the task of promoting more rapid restructuring is an open question. Corporate Japan is now reaping an earnings boost because of cost cutting undertaken in the past few years. The Nikkei has responded positively. New and unfamiliar foreign acquisitions of Japanese assets promise to help productivity in some industries, but these harbingers are few compared to the scale of the low productivity problem in Japan's service sector. If Japan fails to address the problem aggressively, its macroeconomic entropy will be felt abroad as well.
Japan still matters as an "opportunity."
EHUD HARARI Senior Fellow, The Truman Institute, Hebrew University of Jerusalem.
Yes, Japan's political economy still matters. The argument to the contrary is lopsided. It implies that Japan matters when it poses a threat; when it has the upper hand in economic competition with the United States; when it transforms its neighbors' economies into dependent extensions of its own economy; and when it triggers crises in other economies and fails to prop them by rapidly recovering its own. But in the wake of the economic, political, and administrative crises of the last decade, Japan's weight seems less formidable, and floundering economies have been coping without the lever of Japan's recovery. Ergo, Japan does not matter.
In fact, Japan has mattered not only as a threat but also as a source of opportunities. Examples? It has challenged U.S. industries to restructure and increase international competitiveness while providing the U.S. economy with a financial safety net. It has led its East Asian neighbors' growth as a trade partner, investor, model of development, and major donor of aid. It has championed the concept of "open regionalism" and initiated forums of international cooperation such as APEC, which are regionally-centered but global in membership. In fact, Japanese government financial aid and the activities of Japanese firms have contributed to the recovery of East Asian economies. And Japanese initiatives towards creating preventive mechanisms to forestall future crises, such as a modified version of an Asia Monetary Fund, are gradually winning acceptance in the region and beyond.
The argument that Japan no longer matters is also shortsighted. It implies that Japan is unlikely to regain its formidable weight in the world economy because it is unable to carry out reforms deemed essential by foreign experts. Indeed, Japanese educational institutions and institutions of state administration and corporate governance, once touted as the foundations of Japan's economic achievements, may have become counterproductive. Nonetheless, there is no guarantee that the policies urged on Japan by the U.S. Administration would have the expected effects. It is these policies that may not matter.
The last decade has been called the "lost" decade for Japan. But its significance has not been lost on the Japanese public, business firms, economic associations, organized labor, state bureaucrats, and politicians.
Domestically, complacency is giving way to a sense of urgency. Reforms have been instituted, though piecemeal, as in the financial system. And coalitions in support of other reforms are being forged. Interests resistant to change persist, but they are gradually being neutralized and compensated. Signs of resurgence of vitality in strategic sectors are evident and prospects for renewed growth have brightened.
In international forums, offensive theorizing on "flying geese" and pontification on Pax Nipponica has given way to more modest, less intimidating evaluations of Japan's international role. Thus, the argument that Japan no longer matters as a perceived threat, real or potential, makes it easier on Japan to matter as a source of opportunity.
Ironically, Japan's faded luster and the argument that Japan no longer matters are blessings in disguise.
Summers is more low key because the situation is brighter.
HUA HE Professor of Finance, Yale School of Management, and former Managing Director at Salomon Brothers, Inc.
Japan matters, then, now, and in the future. In 1998, the Japanese economy was in a downward spiral. After a decade-long economic slump, negative GDPs and price deflation figures finally prompted Japanese officials to accept the fact of a recession. Financial markets reacted to Japan's weakness by sending the Nikkei 225 average to its 10-year low of 13,000, while the yen got crushed to 147 by the summer of 1998. Japan's problem in 1998 was partially triggered by government policy errors, such as the tax increase and a tight fiscal policy.
Japan's recession in 1998 dragged down the economic growth of its neighboring countries, including Korea, Hong Kong (China), Singapore, Malaysia, Thailand, and Indonesia. While Japan's economic weakness was not necessarily the only cause of its neighbors' economic problems, Japanese recovery was vital to the economic recovery of the region. In other words, Japan's economic problem was a global problem and threatened to jeopardize the global economy.
The U.S. government, in its capacity as a global leader, voiced the strongest concerns over Japan's economic situation and was extremely critical of its' economic policies. Former Treasury Secretary Robert Rubin became increasingly frustrated by Tokyo's lack of action and took every opportunity to urge the Japanese government to act aggressively. Since 1998, the U.S. government has maintained the position that a strong Japanese economy is vital to the global economy. Treasury Secretary Lawrence Summers has reiterated his urge for the Japanese government to continue to improve its economic situation. Japan matters to the global economy.
The low-key approach taken by the current Administration and Summers indicates the recognition that Japan has made significant progress since the new government took its post in 1998. Led by the late Prime Minister Keizo Obuchi, the new government initiated aggressive fiscal measures to jump-start its economy through massive public spending. New tax policy was also implemented in order to provide the right incentive for business as well as entrepreneurs. The latest economic data from Japan indicates that negative growth has been reversed, while deflation is gradually changing course to modest inflation. More important, Japanese business is undergoing major restructuring and corporate downsizing, which should fundamentally revise management, labor, and organization structure and create a more competitive environment. Japan is also benefiting from technological advances such as the Internet. Indeed, financial markets reacted to changes in Japan by sending the Nikkei 225 over 20,000, and the yen to the 105-110 level in April 2000.
To summarize, the current economic situation in Japan is far brighter than it was in 1998. Harsh words from other nations are not necessarily helpful, given that Japan is doing what the West has suggested. Instead, developed countries, including the United States, should work in a more constructive and coordinated way. In a recent G7 finance ministers meeting, Japan was urged to keep its fledgling economic recovery going through reform measures. Japan's economy has shown some encouraging signs of recovery, but a sustained recovery remains to be established. Measures that further strengthen the financial system and structural reforms will be important. "You can't have balanced global growth without more rapid growth in both Europe and Japan," said Summers. This indicates that growth in Japan remains on Summers' mind. At the same time, growth in other regions is also on the mind of Summers.
The real question is whether U.S. hectoring makes sense now.
ANDREW DEWIT Associate Professor of Economic Policymaking, Shimonoseki City University.
Japan clearly matters. And it will matter even more when the U.S. economy rediscovers recessions and the Bank of Japan puts an end to the policy of zero-interest rates.
The real question is whether there is any point in hectoring the Japanese to hasten the pace of economic reform. The answer here is just as obvious. During Robert Rubin's tenure at the Treasury Department, Summers tried playing bad cop to Japan. But he merely added to the worrisome level of trans-Pacific distrust.
These days the reaction would be worse. Japanese economic policymaking, particularly at the national level, is deeply split between the immobilist old boys and the still too-fluid representation of the baby boom, or stated otherwise, between protectionist porkbarrellers and a whirl of more or less market-oriented reformists. The political ascent of the latter's economically liberal element might suit America's long-term interests, but it would be hazardous to try pushing things along. Stagnation and its social fallout, including increasing unemployment, violent crime, inequality, suicide, and the like, have strengthened the potential for an emotional backlash against foreign pressure. Most Japanese greeted the "divine nation" nonsense of arriviste Premier Yoshiro Mori like week-old sushi. But Tokyo's charismatic and rabidly nationalist Governor Shintaro Ishihara remains as popular as ever. He has a strong track record of skillfully exploiting hot-button issues, and would likely make great use of a round of public "gaiatsu" from American officialdom.
Trying to coordinate macroeconomic policies with Japan is almost certainly about to become more important and more exasperating. It is therefore encouraging that Summers is now surprising everyone with his diplomatic skills. Let's hope that, following the June 25 election, Japan's policymaking institutions and personalities can just as quickly get their own act together.
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|Publication:||The International Economy|
|Date:||Jul 1, 2000|
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