Helping Japanese Economic Reform

It stands as a monument to bad timing. One month before Japan's bubble popped on New Year's of 1990, one of America's most brilliant economists wrote:

An Asian economic bloc with Japan at its apex ... is clearly in the making. This all raises the possibility that the majority of American people who now feel that Japan is a greater threat to the U.S. than the Soviet Union are right.

Today, that economist, Lawrence Summers, is U.S. secretary of treasury. What keeps him awake at nights now is not the mythical threat from a Japan that is supposedly too strong, but the all-too-real consequences of Japan being too weak. The point is not to single out Summers, but the contrary. The fact that someone as intelligent as Summers was temporarily taken in indicates the degree of hysteria then gripping the United States. ¹

Today, the opposite mistake is being made. In much of Washington, Japan is simply off the radar screen. There are even some voices suggesting we "let 'em stew in their own juices." Such sentiments are shortsighted. The welfare of the United States and the international community at large is seriously damaged by the ills emanating from a weak Japan.

The greatest damage is not seen bilaterally but in the U.S.-Japan-Asia triangle. Japan's weakness was a major contributor to the 1997 financial meltdown in Asia, which, in turn, provoked the scariest global financial crisis in decades. For one thing, Japan's recession led to a 15-percent cut in its imports from Asia between mid-1997 and mid-1998. Added to that was the weak yen. Convinced in 1995 that economic stagnation posed a threat to the Japanese banking system, the U.S. Treasury helped Tokyo weaken the yen to stimulate Japanese exports. The collateral damage was a steep drop in the export earnings of countries such as South Korea that directly compete with Japan. Finally, due to their own shaky finances, Japanese banks were less willing than others to partially write-off and/or roll over short-term loans. Japanese banks withdrew half of their loans to Asia from mid-1997 to the end of 1999, twice the 22-percent withdrawal by U.S. and European banks. ² Japan's malaise did not cause Asia's catastrophe but did make it significantly worse.

Japan's rejuvenation is critical to Asia's continued long-term industrialization. That industrialization is built on exports of manufactured goods. Until now, Japan has not provided much of a market. As of 1990, Japan bought only 5 percent of Malaysia's manufactured exports compared to 28 percent by the United States; 15 percent of Korea's as opposed to 32 percent by the United States; 9 percent of China's against 23 percent by the United States; and 14 percent of Thailand's versus 28 percent for the United States. ³ Since then, Japan's manufactured imports have improved, but the bulk of the increase is from Japan's own affiliates in Asia (e.g., black and white TVs from Matsushita's overseas plants). Since America's absorption capacity is limited, Asia's continued progress will be held back unless Japan imports more.

Fortunately, Japan can do well for itself by doing good for Asia. Importing more competing goods--such as steel from Korea, petrochemicals from Singapore, or finished wood products from Indonesia--will provide the competitive pressures needed to give Japan a productivity boost at home.

As Indonesia's dicey transition emphasizes, Asia's economic health has clear security ramifications. Beyond that, as long as Japan is economically stagnant and politically gridlocked, it will be more focused on its internal problems than on playing a role on the global stage. Yet, to cope with new concerns in Asia--particularly the integration of a rising China--the United States needs an equal and politically engaged partner, not an unsinkable aircraft carrier and open checkbook.

Bruce Stokes of the Council on Foreign...