Re: Japan

["ÁÎ×Ó¹â HenryC.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

Japan see its bubble as having been forced on them by US monetary policy in earlier
decades and the political pressure from Washington on Japanese interest rates and
the exchange value of the yen.
The Japanese see their current probem as primarily financial and not
economic.
They see the Japanese miracle as having been rendered inoperative by American
financial globalization.
Japan looks to regionalism as a solution to their problem, in line with the EU, and
as a countermeasure against American globalization.
Japan fears Toyko becoming a second London, a financial outpost of an American
financial empire.
Traditionally, Japan sees economics as a factor of geo-politics, not the
other way around, as the US does.
Japan has no intention of changing the society and culture to fit into
globalization requirements.  Asian capitalism remains inherently state
capitalism.
There is very little desire in Japan to structurally reform its business
culture merely to fit into an American globalization of dubious future.
Collectively as a national economic force, the Japanese feel they are
beginning to command respect in the West, but individually, they feel that
Westerners still harbor deep-rooted perjurdice agianst them.  This sentiment,
reinforced by Confucian aversion towards individualism, discourages entrepreneurship
in Japan.
Most Japanese still look at Japanese maverick multinationals, such as Sony and
Honda, with disdain and skepticism.  What is good for Sony is not necessarily good
for Japan, the opposite of General Motors.

US policy misjudgments did not begin with Bill Clinton. But the
administration certainly exacerbated the situation when it eased pressure on Asian
nations to buy as much from the United States as they sell to the US.
Over the last decades, Asian nations?China and Japan in particular?have amassed
massive holdings of U.S. dollars and Treasury securities. These holdings have
underpinned the administration's quixotic policy of using a strong dollar to keep
inflation at bay.
For this and other reasons, there has been zero effort to encourage the Southeast
Asian exporting economies to float their currencies, comfortably linked to the U.S.
dollar until 1997.

Developing Asia has followed the Japanese model in finance. The world's highest
savings rates are intermediated almost entirely through banks.
Capital markets, although they exist, have been relatively illiquid. Asian equity
markets, of course, roared ahead, driven by the phenomenal appetite of US mutual
funds for emerging-economy stocks.
According to the World Bank, private capital flows to East Asia quintupled between
1990 and 1995. In 1995, East Asia claimed 47 percent of capital flows to low-income
and middle-income countries.
By 1995, trading volume as a percentage of market capitalization was greater in
China, South Korea, Thailand and Indonesia than in the United States.

The 90s "miracle" unravelled abruptly  in July 1997 when, starting in Thailand,
speculators bet against currencies when it became apparent that exports would be
inadequate to service loans.
The process spread across the region so rapidly because devaluation in Thailand made
exports from other countries less attractive. As the ranks of plummeting currencies
grew, the pressures on remaining ones escalated.
Even relatively well-managed Hong Kong finds its investments in
export-dedicated manufacturing in South China uncompetitive, and the Hong Kong
dollar came under repeated speculative and manipulative attacks. Ironically, Hong
Kong was a victim of the relative liquidity of its equity market.
These development were exacerbated by the Chinese and Japanese policies of running
large trade surpluses with the United States.
Over the last decades, both countries have made massive purchases of U.S. dollars
and Treasury securities, which permitted these juggernauts to continue their
mercantilist strategies and capture excessive shares of the U.S. market at the
expense of their Asian neighbors.  Yet, the main beneficiary of this trend has been
the US which continued to finance the trade deficit with treasury notes bought
readily by its trading partners and basked in the artificial sunshine of low
inflation sustained by cheap Asian imports.

Regarding Japan, U.S. officials have been more concerned about the health of its
equity markets and debt-laden banks than Japan's export bonanza.
Until recently, the US has turned a blind eye to Japan's de facto policy of keeping
the yen above 120 to the dollar (147 in August 1998) despite a ballooning trade
surplus.
U.S. domestic policy has played a major role in fostering Asia's economic response.
While Federal Reserve Board Chairman Alan Greenspan has fretted that equity
prices?with the Standard and Poor's 500-stock index yielding only about 4
percent?are too high by historical standards, he has failed to acknowledge that real
interest rates are abnormally high until after the Asian crises.
A 30-year Treasury rate close to 6.5 percent translates into a real interest rate of
about 5 percent with an inflation rate of 1.5%.
Asian economies could not keep their currencies in line with the lure of those
yields.
Japan and its banks, being dominated by US monetary policy, were in no position to
bail out these economies.
While the United States was able to rescue Mexico, it was unwilling to save Asia
unless Asian leaders become less ambivalent about free markets.  The US decided that
the solution was an even stronger dollar.
All through the crisis, the Clinton administration has maintained the
soundness of the domestic economy through external deflation and safe haven capital
inflow.
Yet since 1985, one-third of U.S. growth has come from exports. If the United States
can't export, and a flood of new imports depresses
or distorts incomes and growth, economic fundamentals will suffer.
Thus the US is impatient for Japan to "carry its weight" in leading recovery in
Asia, while Japan is saying its problems are not its internal structure (though its
could use modernization, but not along US suggested lines).  To Japan, the culpit is
US global policy.  Since 1997, the US has discovered the new economy of high tech,
information and Internet commerce.  Its planners now aorry that a recound of export
may trigger undesirable inflation. Thus what even little incentive to help Japan dig
itself out of the hole has evpaorate in the new economy.

There have been many occasions during the twentieth century when
stock market developments in New York or London depressed
equity values in east Asia, but October 1997 was the first time that
the causality worked in reverse.  While this is painful to Asians, its
instill in them an awarenes of their own importance in the global economy.
Increasingly, Asians, led by Japan, are reluctant to play by rules set by Western
interest for Western interests.

The power of financial contagion is recognized by Asian as a bargaining chip in the
old North/South dialogue. The countries of east Asia have experienced numerous
financial crises in the modern era, but the notion that defaults on Thai property
loans might rock the currencies of countries as far away as Korea, Japan, Russia,
and Brazil and eventually the US, is a new development.  Suddenly, the rich have
more to lose, or at least that was what was widely expected. What was not ecpected
was the Greenspan ordered a serious of interest rate cuts that fueled US equity
prices.  Global funds, fleeing toward quality, had no alternative but to accept
lower US rates.

The countries of east Asia, excluding Japan, accounted for half of the growth in
world output since 1991, up to 1997, despite the fact that they accounted for only
about twenty percent of the world?s real GDP. Their sharply reduced growth rate
since 1997 due to systemic banking problems and reduced access to foreign capital,
offset the upturn in the EU.
Investment spending accounted for about 30-35% of East-Asian growth during the
1990s, compared to 15-20% in other regions of the world.
In 1996, East-Asian capital investment, excluding Japan, was equal to about 82% of
U.S. business investment, up from only 30% in the
mid-1980s.
Because East Asia accounted for about two thirds of all capital
investment in the world economy from 1990-97, the recent devaluations will encourage
countries with surplus productive capacity to become even more aggressive exporters
than they were previously.
Also, because East Asia already accounts for about 26% of
world exports, compared to 8% for Japan and 17% for
the United States, its newly enhanced competitiveness is a major disinflation shock
to the world economy, especially in
sectors where it has significant excess capacity, such as textiles,
footwear, steel, petrochemicals, semiconductors, and other
electronic goods.
East Asia has been a major importer of capital from the
global banking system during the 1990s. The region?s outstanding
loans at the end of 1996 were about $752 billion, with $207 billion in
Hong Kong, $189 billion in Singapore, $100 billion in Korea, $70
billion in Thailand, $55 billion in Indonesia, and $22 billion in
Malaysia.
The recent East-Asian financial shock's adverse effects on the region?s consumption
and investment has set the stage for global
deflation, not just disinflationary competition in the goods markets
where East-Asian countries have surplus capacity. The East-Asian investment boom and
bust is unlikely, however, to be as deflationary as the opening of new regions of
settlement during the nineteenth century, because the world has shifted from a gold
standard to a floating exchange rate system, with discretionary monetary policy. The
gold standard made it impossible for central banks to respond to large increases in
output with offsetting expansion of the money supply. In the current situation, by
contrast, central banks can respond to deflationary shocks by slashing interest
rates,
expanding the money supply, and devaluing currencies.

The major systemic risk posed to the global economy by the
East-Asian devaluations is likely to be trade conflict. The United
States currently sends about 20% of its exports to East
Asia and 12% to Japan, while deriving about one third of
its imports from the region.  Japan sends about 37% of its
exports to East Asia, while the same countries account for about 35%
its imports. The EU, by contrast, conducts less than 10% of either export or import
trade with East Asia, excluding Japan.

As a result of its exposure to the region, the United States will be
vulnerable to several potential trade shocks. American
exports to East Asia will continue to slump, while exports from East Asia will
become far more competitive in U.S. markets. The East-Asian crisis will also depress
the value of the yen, as well as developing-country currencies in Latin America,
south Asia, and those devaluations will encourage further growth of import
penetration into the U.S. economy, without generating any offsetting growth of
American exports. When all the exchange rate adjustments resulting from the
East-Asia crisis work their way through
global markets, it is not difficult to imagine the U.S. trade deficit
expanding to $300 billion range before reversing, up from $192 billion in 1996.

There is nothing automatically wrong with large trade deficits.
Because the United States currently has a full-employment economy,
the trade deficit is actually a potential inflation safety valve. It is
providing the United States with a larger supply of goods at low
prices than would be possible if it depended solely on domestic
manufacturing capacity. In fact, the relationship between inflation
and traditional measures of resource utilization, such as the
unemployment rate and the capacity utilization rate, has broken
down, because the import share of American goods-consumption is
now over 33 percent, compared to 15 percent in the early 1980s. The
current trade deficit has also resulted from a surge in America?s
private investment spending, not from the large budget deficits that
required the United States to import capital during the 1980s.

The problem with trade deficits is political. Many Americans
perceive the trade deficit to be a source of job losses or slower wage
growth, not an inflation brake that permits a stronger and longer
expansion in the economy?s non-tradable sectors. This phenomenon
is very apparent in the debate over the administration?s request for competitive
policy, and the defeated fast-track authority to negotiate new free trade
agreements. Many members of Congress are reluctant to give the president new
negotiating authority, because they perceive that the trade agreements of the early
1990s, such as NAFTA and
GATT, failed to prevent a return to large trade deficits. Allegations that global
competition threatens the wages or job security of less-skilled American workers are
persistently vocal, the latest expression of which is the anti-China/WTO positon
taken by the AFL-CIO.

Because the Asian crises have lowered global inflation and postponed
monetary tightening in the G-7 economies for a few years, the stock markets of
NorthAmerica and Europe has enjoyed a sense of invincibility.  But as Greenspan
warnedrepaeatedly, this cannot going for much longer.
The Asian crises have ignited a political struggle to slow the growth of
world trade, and that could undermine the competitive forces that have made it
possible for flexible economies, such as the American one, to achieve near full
employment with low inflation.

The current US attempt to place competition policy at the top of the
international negotiating agenda is designed to counter the fact that a very large
number of emerging market economies, especially in Asia and the former Soviet bloc
but elsewhere as well, are currently developing national competition policies for
the first time. Every country will incorporate unique national characteristics in
its approach but the world according the US gospels should be spared of the enormous
future controversy and conflict with international agreement now to create norms on
which those new policies
could be based.
Japan, leading the rest of Asia, is simply not buying the US line.

Hence competition policy, and especially its links with international trade and
investment, has become a central focus of  recent US-Japan summits in anticipation
of the next set of major negotiations in the World Trade Organization. The US goals
are agreement on (1) common rules that can be credibly enforced at the national
level and (2) effective cooperation between national antitrust authorities.
Four sets of issues are to be included in such an agreement :

1.    cartelization, notably including export cartels;
2.    other horizontal restraints, especially price-fixing;
3.    mergers and acquisitions; and
4.    national treatment of foreign direct investors and services.

The United States wants Japan to address a whole oists of items of which auto parts,
steel export are top of the list.

Ironically a major problem in moving toward international agreement has been
domestic opposition in the US. Part of the problem has simply been bureaucratic,
with the antitrust authorities resisting a central role for the trade policy
authorities in negotiating such an arrangement. Part has been a fear of a watering
down of American antitrust standards, or a "race to the bottom."
Part of the problem, however, is a fear that other countries want to use the rubric
of "competition policy" to attack US (and European) antidumping practices.
The US feels that Japan, instead of proposing new funds that would make $100 billion
of capital available for the rest of Asia, Japan should be importing an additional
$100 billion worth of products from the region.
Japanese rejection of American advice implies a major challenge to the continued
march of globalization. Antiglobalization forces are mounting in both the industrial
countries, where they are celebrating the defeat of fast track negotiating authority
in the United States as a "historic turnaround in attitudes toward international
integration," and in many emerging market economies due to the onslaught of yet
another financial crisis. Both the intellectual underpinnings of globalization, and
the policies to implement it, are likely to
be questioned more severely than at any other time in the past two decades, as
evident in Seattle.
Japan is a leading voice in this debate.

Conventional views of Western economists on Japan are dominated by US Treasury/IMF
attitudes that essentially carry a creditor's bias: that solutions lie in various
degrees of putting fundamentals in place so that banks can lend again without
excessive risk (the so-called confidence game, as Krugman puts it). If "good
fundamentals" should wreck economies and political structures in the short or medium
term along the way, that is the price of good finance.
The paradox is that the proponents of this approach, American economists personified
by Summers and Fischer, come from a net debtor nation, but this condition is
generally disguised by decades of American dominance in international banking.
Asians, including the Japanese, may have different views.
Behind the apparent Japanese reluctance to follow US/IMF advice on how to cure the
Japanese/Asian financial/economic problems, is a seldom mentioned (at time surfacing
quietly in unreported Diet debates) search for a strategy for jockeying for
independent and equal positions in the pending restructuring toward a new global
financial architecture and economic order.
Tokyo has no desire to become another London after the Big Bang and Asia does not
want to become like Latin America.
The sooner American policy makers accept and deal with this serious
communication and conceptual gap, the sooner the dialogue will be on
track for real solutions.
Japan, where the ruling class is sharply divided along a number of axes, is unified
with regard to the desirability of more political independence from the U.S.  With
respect to domestic issues, the
key split is between rural and city interests. The former does not want city folk to
socialize Japanese bank debt, which places too much of the burden of crisis
resolution on the rural districts. The latter does not want to nationalize the
financial system with the aim of restructuring banks and other financial
institutions from the bottom up because too many jobs and privileges enjoyed by city
folks owning and working in the financial sector are at stake. The bailout package
approved by the Diet in late October 1998 - a package that divided the burden
between rural and urban interests - had limited positive effects on the Japanese
economy.  Nor is Japan able or willing to join the U.S. as a market of last resort
for the surplus products of Asia. Japan (like Europe), whatever the relative
importance of export versus home demand at any given time, will not give up its
balance of payments surpluses (hence strong currencies) nor will its workers and
small businesspeople uncritically ape mindless American consumerism. That leaves
investment and government spending as the only realistic sources of new effective
demand.  Home investment for the time being is dead, hence the great stress  on tax
reductions and an expansion of government spending, specifically public works, to
restart the Japanese economy. However, there are strong
conservative pressures in Japan to keep the already high budget deficit from growing
even higher; and because public works have been the main avenue of internal economic
expansion in Japan for more than adecade, it's difficult for planners to develop new
projects that make sense in terms of economic rationality and social welfare. The
Japanese will not trade away their familist, groupist, and
egalitarian values and practices for more Anglo "economic efficiency", namely
preditory economic practices.  Japanese "groupism" has been responsible for Japan's
export powerhouse status, that is, its superior capacity to compete with foreign
countries, while enjoying a relatively egalitarian society at home, a balance
lacking in the America system.

Japan may be an economic superpower, but it is not an independent political power,
and not even a financial power.
In order for trade with the US to grow beyond trade barriers, historicall the
Japanese had to allow their trade surplus to be invested mostly in US assets and US
production facilitates. In the last decade, Japan had begun to invest in Asia to
develop an Asian market. But the nature of market capitalism is such that the export
side grows exponentially faster than the domestic side, resulting in overcapacity in
relation to a slow growing global consumption market due to low wages. The problem
was that unlike the US market, Asia did not,
and still does not, have a central authority to manage a stabilizing regional
economic and trade policy and to ensure a balance between production and
consumption.  While the US controls, to a lesser extend as time passes, Asia
politically, its economic involvement in Asia has been relatively minor.
Asia represented a cheap bargain for the US in geo-political terms.
American banks lost only US$30 billion in Asia since 1997, while Japanese banks lost
US$450 billion and European bank who came late, lost US$250 billion .  This was the
result of the US strategy of maintaining global political control with money from
dependent allies (18% IMF contribution, 95% control).  Because of the size of the
American economy and American dominance in the global financial structure, foreign
capital in the US becomes domestic capital. If the Japanese starts to sell their US
assets, they lose as much as the Americans, perhaps more brcause the Japanese sell
to America.  That is why Japan cannot act like a financial superpower despite of
their paper wealth. Just like nuclear arms control scholastics, the American
financial system has been designed so that it cannot be destabilized by opponents
because it is a doomsday machine.
Another point is that since Asia, along with the rest of the world, suffers from
overcapacity, its problem cannot be solved by further injection of capital. As has
been pointed out by others, new funds are needed by Asia merely to bail out the
existing creditors. What Asia (and the world) needs is greatly expanded consumption
to absorb the overcapacity.  Yet market capitalism does not permit increased
consumption without increased investment which in turn exacerbated overproduction.
What the global economy needs is getting used to a drastically lower rate of return
on capital, say 3% instead of 20+%, with the 17+% transactional surplus (profit) to
go directly to labor
rather than to capital, thus stimulating consumption by providing purchasing power
to workers.  (Even Soros supports this idea). Investment bankers were complaining
that 20% returns were not enough just prior to the crash because the money could go
next door and get 25%, causing a race to the bottom in wages and environmental
pollution all over Asia.
Capital cannot comparison shop for higher returns if the global standard return is
fixed at 3%.  Within a short time, the norm would be widely accepted.  It is a myth
that the world needs capital and must meet its terms.  On the contrary, capital
needs the world and must meet its terms.

The Asian Financial Crises have sparked the reemergence of regionalism.
The G7, G10 or G20 structures, categorizing economies by wealth, are increasingly
irrelevant, as reflected since by the loss of influence of the Trilateral
Commission, the Club of Rome, and the like.  The surprised success of the euro is
stimulating new thinking about Asian regionalism, among intellectuals and some
government officials.  During the annual IMF meeting held in Hong Kong in October
1997, 3 months after the collapse of the Thai currency that began it all , a
Japanese proposal for a $100 billion regional rescue plan was killed, not
surprisingly, by the Americans in favor of the US-controlled IMF.  Many in Asia had
thought that a Japanese-led rescuse
would have been more effective and at least less damaging than the failed IMF
attempts.  That view is now reluctantly acknowledged, if still not openly accepted,
even within the IMF and the US Treasury Dept.
With the euro a reality, the vision of an unified Asian currency has gained
momentum.
In the long run, the world may see the replay of a new Bretton Woods agreement, but
instead of a gold-backed US dollar that became fatally wounded in 1973 by decades of
US fiscal irresponsibility, this time it may well be a USD-EURO-Asian Unit parity
arranged under the umbrella of a UEA world currency, to rid us of the destructive
currency turmoil of the past decades.  The problems to be overcome toward this
vision is immense,
including a need to reorient Asian political attitudes and a historical
legacy of conflicts further poisoned by the divide and rule policies of 150 years of
Western imperialism.  And the G7 now must cut the smaller economies a better deal.
But then less than 10 years ago, no one expected the euro to be
realistically possible.
And if Europe, with its long history of wars and conflicts, can come
together for a common good, why not Asia and the world?


Henry C.K. Liu