In 1977 that former Primer Minister of Japan, the late Mr. Takeo Fukuda, announced what came to be known as the "Manila Doctrine" that mutual understanding should be the basic principle of Japan's approach to Southeast Asia.
Kenichiro Hirano, Professor of International Relations at the University of Tokyo, Executive Director of Japan Association for Asian Political and Economic Studies, Association of International Relations (JAIR), and Japan Association of International Law, wrote: "we Japanese are aware that there are many cultural dissimilarities from the other peoples of Asia. Dissimilarities in culture are products of differences, first in places and second in history. I do not think I have to point out that local differences produce cultural differences. We Japanese must take a special note of our dissimilarities from the other Asian peoples that were produced by historical differences. As Asians we have been under the same destiny, but in Asian peoples' trying to get over the destiny in their own ways, we Japanese gave the other peoples of Asia a great deal of trouble and hardship by our military advances during the war and our economic advances during most of the postwar period. Some chances of international exchanges and cultural contacts we are currently enjoying with the other peoples of Asia may still be the products of our previous economic advances. But fortunately our economic relations have recently changed to more equal-footed ties, and above all internationalisation is making the Japanese people more sensitive of cultural similarities and dissimilarities than ever."
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 "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. 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 adknowledge that real interest rates are abnormally 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.
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 a 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.
The countries of east Asia, excluding Japan, have accounted for half of the growth in world output since 1991, despite the fact that they account for only about twenty percent of the world’s real GDP. Their sharply reduced growth rate due to systemic banking problems and reduced access to foreign capital, has already offset the upturn in the EU. Investment spending accounted for about 30-35 percent of East-Asian growth during the 1990s, compared to 15-20 percent in other regions of the world. In 1996, East-Asian capital investment, excluding Japan, was equal to about 82 percent of U.S. business investment, up from only 30 percent in the mid-1980s. Because East Asia has accounted for about two thirds of all capital investment in the world economy since 1990, 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 percent of world exports, compared to 8 percent for Japan and 17 percent 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 discretionarymonetary 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 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 now occurring in Washington 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.
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 warned this morning, 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 the the current US-Japan summit in anticipation of the next set of major negotiations in the World Trade Organization by the end of 1999. 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. 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 don't want city folk to socialize Japanese bank debt, which places too much of the burden of crisis resolution on the rural districts. The latter don't 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 divides the burden between rural and urban interests - will have 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 giveup 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 that the U.S. (and Japan) are placing 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 a long time, 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 fiancial power. In order for trade with the US to grow beyond trade barriers, historically 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 capialism 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. 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 represeted 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). The Americans are very smart. 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 loose 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 has no where else to go 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 coming of the euro, 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?
Compared to other capitalist countries, Japan's society, its economy and politics have excessively favored the big companies. Akio Morita of Sony Co., Ltd., a maverick leader of Japan's business circles, published an article titled "'Japanese-style management' is in crisis," in which he warned that if Japanese companies continue with their current style of management in their business relations with foreign companies they will soon become isolated in the world. As problems of management, he pointed to wages, working hours, measures to protect the environment, relations with local people and the attitude toward small- and medium-sized businesses. Japan's way of using the people's taxmoney and its national budget is completely up side down. 50 trillion yen is being spent on public works and only 20 trillion yen is being spent on social security. This has been the basic framework of the national budget in Japan, but in other countries much more is being spent on social security than on public works. In Germany, social security expenditure is three times public works expenditure; four times in the United States; and six times in Great Britain. These figures clearly show that Japan's politics is very backward socially. Japan's foreign policy and military affairs is reflected in the new "Guidelines for Japan-U.S. Defense Cooperation". Japan is a base for U.S. expeditionary forces. Of the countries in Europe Germany has the most U.S. military bases. But the U.S. military bases in Germany are under NATO and until recently, assigned the duty of defending Germany and the rest of Europe in the event of an emergency. But the U.S. forces in Japan, including the U.S. Marines in Okinawa, the naval battle group in Yokosuka and the Air Force unit in Misawa are all assigned the main duty of taking part in expeditions abroad. Therefore, for them to take action from Japan abroad is a matter of routine. There is no other country in the world in such a position. It is from this position that the new "Guidelines" have arisen and Japan's lack of freedom to carry out its own foreign policy. The recent TMD proposal furhter complicates Japanese foreign/military policy deliberations. Sales of "Japan can say no", a book that inspired "China can say no", is on the rise again.
Doug Henwood wrote:
> Henry, I'd like to hear more about what you think the Japanese are trying
> to accomplish with what looks to Americans like inaction in the face of
> slump. How will they get the better of the Americans over the long term?
> What's their goal? Imperial succession?
>
> Doug