How Japan Became Dominant Player in Asia
The region's high degree of dependence on Tokyo is worrisome even to those who welcome the country's expanding investment role. MARKET FORCES TRANSFORM REGIONAL TIES
FROM South Korea to Thailand, across the vibrant sweep of Pacific Asia, the hum of economic activity has become almost deafening. And for the most part, the tune these countries are playing has been composed in Japan. Even the casual traveler through Asia cannot help but feel the increasing dominance that Japan exerts over the economic life of the most populous region of the globe. The streets are filled with Toyotas and the homes with Sony televisions. The roads and dams are constructed with Japanese foreign aid. And the new factories, which employ millions of Asian workers, are financed by Japanese corporations.
A few simple facts bear this out:
Japan provides 65 percent of all the funds (both government aid and private investment) that flow into the rest of Pacific Asia.
Japan is the largest aid donor to every country in Asia except Pakistan, and the source of 64 percent of the aid to the developing countries of Southeast Asia.
Japan's total trade with Asia is now the largest of any nation, and its imports from Pacific Asia have almost doubled in the past two years.
``Japan is the most important player,'' says Thai economist Twatchai Yongkittikul. ``For the most part, Europe has ignored this part of the world.'' And increasingly, so has the United States. ``Something went wrong in the US,'' says Mr. Yongkittikul, the director of the Thailand Development Research Institute, who laments the loss of competitiveness in US industry.
The degree of dependence is worrisome even to those who welcome Japan's economic role.
``We need balance,'' says Thai economist Banyat Surakanvit. ``If the whole world relies on Japanese industry, what will happen?'' he asks rhetorically. Some others, in Asia and outside, are concerned that Japan is trying to rebuild the ``Greater East Asian Co-Prosperity Sphere,'' as its World War II propaganda called it - this time without using military force.
But most experts interviewed in Japan, the US, and in key Asian nations say Japan's apparent domination is not the product of a concerted plan to gain regional hegemony. Rather, it is the result of market forces as Japan adjusts to the leap in the yen's value since late 1985.
A September 1985 agreement among the major industrial nations to force a realignment of currency values triggered a sharp decline in the dollar and a rapid rise of the Japanese yen, along with the German mark. The aim was to reverse the American trade imbalance by making US products cheaper and foreign goods more expensive.
Japan's huge trade surplus has declined somewhat, as imports grew by 14 percent in 1987 and 25 percent in 1988. Domestic demand, rather than exports, became the driving factor for growth.
The currency change also had the effect of transforming Japan into the largest source of capital in the world. By late 1986, in dollar terms, Japan's wealth had increased by about 50 percent.
But for Asia, the major effect of the yen's rise was to boost the cost of production at home. In response, Japanese firms moved increasing amounts of their production overseas in search of cheaper labor, land, and other costs.
``It is like the late 1950s and early 1960s, when US multinational companies shifted capital massively to Europe,'' contends Akira Kojima, economic writer for the Nihon Keizai Shimbun, Japan's largest financial daily. In the short term, shipments of equipment for the plants have helped keep overall Japanese exports high. But as happened before with the US, analysts say that the investment will ultimately reduce Japan's trade surplus.
While the main recipients of Japanese investment have been the US and Europe, a significant share has gone into Asia. Compared with other parts of the developing world, Pacific Asia economies are geographically close, culturally familiar, politically stable, and economically dynamic.
``I don't have much hope for Africa because of the lack of education,'' says Jiro Tokuyama, head of the Center for Pacific Business Studies at the Mitsui Research Institute. The Middle East is embroiled in constant conflict, he adds. And with the exception of Mexico, South American nations are embedded in debt while their ``rich people send their money out to Europe and the US.''
Before 1985, Japanese investment was also focused in the US, Europe, and Asia, but was mainly aimed at penetrating the markets of recipient countries. The new flood of investment seeks to improve the competitive position of Japanese companies by producing goods in countries such as Thailand and Malaysia and then exporting them to the US, Europe, and back into Japan.
``This creates a new type of division of labor,'' says Mr. Kojima. Mitsubishi Automobile Company, for example, produces car parts in Taiwan and Malaysia and ships them to Bangkok, where the car is finally produced and then exported to Canada.
Japanese policymakers see their relationship with Asia as one of mutual interest, feeding Japan's growth while promoting the emergence of new industrial powers such as South Korea.
``We recognize the success of the development of the other Asian countries will have long-term benefit to us,'' asserts former Foreign Minister Saburo Okita, a leading advocate of Pacific cooperation. ``Markets will expand, living standards will increase and purchasing power will grow.''
Dr. Okita made famous the metaphor of a wedge of flying geese, with Japan in the lead and opening the door for the countries that follow. The first wave of industrialization was Japan, he says, followed by the second wave of the Asian newly industrializing economies (NIEs), known as the ``four tigers'' - Singapore, Hong Kong, Taiwan, and South Korea. The ``third wave'' is led by Thailand and Malaysia, with the Philippines, Indonesia, and coastal China (where there are free economic zones) behind them.
The Association of Southeast Asian Nations (ASEAN) is a six-nation regional group of countries - all of which are benefiting by various industrializing waves. ASEAN includes Thailand, Indonesia, the Philippines, Malaysia, Singapore, and Brunei.
The wedge concept envisions stages of linked development. Japan shifts its labor-intensive industries such as textiles and consumer electronics to the ``geese'' behind it as it moves into more advanced industries. The NIEs, as they move ahead, do the same.
This is already seen in the post-1985 structural change. As the currencies of major trade surplus nations such as Taiwan and South Korea have also revalued, their companies have begun to set up plants in the less-developed parts of Asia. In Thailand, the new boom economy in Asia, Taiwan, and Hong Kong are the second- and third-largest sources of investment following Japan, with the US slipping to fourth, barely ahead of Singapore and Korea.
Japanese aid plays a key role in promoting this process, says Nabuo Maruyama, a senior analyst at the government-linked Institute for Developing Economies. Aid to poorer countries, such as Burma, Bangladesh, or China, focuses on building basic infrastructure, such as transportation systems or electric-power generation, encouraging private investment to follow.
When basic economic conditions are established, the focus of aid shifts to supporting industry, Mr. Maruyama explains. In Indonesia and Malaysia, for example, Japanese aid has encouraged development of the timber and aluminum industries. Finally, the development specialist says, aid is used to ``graduate'' countries such as South Korea, providing, for example, loans to Korean government banks to finance Korean private companies.
Aid, trade, and investment are linked by ``the idea of integrating those economies into the Japanese economy,'' argues Richard Cronin, a specialist in Asian affairs at the Congressional Research Service in Washington.
The strategy has produced results in the emergence of Asia as the growth center of the world economy. But it masks certain key conflicts, Mr. Cronin says. The division of labor ``implies a certain difference of status - the Japanese are always going to be higher up on the technological chain.''
Asian critics complain that while Japanese investment provides employment, Japanese companies are slow to transfer technology and to localize all aspects of production. Japanese companies see these countries as export bases, bringing in parts and components from Japan, assembling them with cheap labor and exporting them, Asian experts say.
Japanese foreign aid is another source of controversy, with critics charging it mostly benefits Japanese construction firms and companies who get most of the contracts. ``In many cases, Japanese aid is meaningless,'' asserts Shizuka Kamei, a conservative member of Japan's parliament. ``Japanese contractors are just making profits off those projects.''
But the key test of whether Japan's role is truly for mutual benefit, most analysts agree, is that it is willing not only to shift technology and production, but to become a market for Asian-made goods. ``Japan must become a very large absorber of the products of those countries, otherwise the process doesn't work,'' Dr. Okita says.
Asian nations complain of barriers to the Japanese market, but there are some signs of change. While the US is still the largest market for most Asian nations, exports to the US are slowing as those to Japan grow rapidly.
In the past, Japan predominantly imported raw materials and processed them into manufactured goods. But since 1985, the proportion of imports that are manufactured goods has grown from 31 percent to almost 50 percent in 1988. From the Asian NIEs, the proportion is even higher - 72.9 percent - reflecting in large part the importing of goods such as consumer electronics made in Japanese company plants in those countries.
A special study group of Japan's Ministry of International Trade and Industry argues that the growth of intra-Asian trade would benefit the world economy. With Japan playing the role of major importer, Asian exporters will lessen their dependence on the US market, helping to reduce the American trade deficit. And the growth of all Asian economies would cushion the world from the impact of a recession in the US, which some economists predict.
This ``thickening'' of intra-Asian interdependence is well under way. Japan's total trade with Asia, which grew by about 57 percent between 1985 and 1988, is now larger than its trade with the US. Overall, intra-Asian trade is also growing rapidly. This year, for the first time, the total imports of Asia surpassed those of the US, totaling about $600 billion.
``I hope US business goes out there [to Asia],'' says economist Tokuyama. ``The demand for goods in the coming 20 to 30 years is endless.''
(Second in a five-part series, the first part of which ran Monday, Nov. 6.)