Magazine article Brookings Review

Sputter, Cough, Choke: Japan Misfires as the Engine of Asia

Magazine article Brookings Review

Sputter, Cough, Choke: Japan Misfires as the Engine of Asia

Article excerpt

Hopes in Asia Pacific that Japan will help solve the region's financial crisis are all but certain to be dashed. Japan does not have the fiscal power and maneuverability to act as the engine of Asia. More important, it may not have the political will.

Since the equity and real estate bubble burst in 1990, Japan has abdicated the intellectual leadership of the region. By tinkering with and expanding--rather than junking--the state-capitalist economic model of the postwar period, Japan is offering a "wagons in a circle" example to Asian countries. Even if that strategy were right for Japan (which is doubtful), it is almost certainly not economically optimal for other Asian nations.

But economic optimality may not be driving either Japanese or Asian policy. If "Asian values," rather than the conservatism of wealth, have been the determining factors behind Japan's torpid reform efforts of the 1990s, then the policy choices made by the Asian countries may not accord with Western logic. To the extent that Asian countries imitate the Japanese reform model, economic prospects for the region--and for the firms that operate there--could improve more slowly than now expected.


The Japanese economy is now facing gale-force headwinds from private domestic demand. Fight as it may, the government's demand-support policies are unlikely to generate positive growth in 1998.

Business investment has already entered a downturn. Typically, such downturns last two to three years, and so far no sign of revival is visible. In addition to negative profit momentum, tighter credit standards imposed by banks are causing a credit crunch among small and medium-sized businesses. Housing investment is in just as serious shape. The effects of low interest rates and government housing programs have worn off, and the outlook for income growth is poor. Moreover, latest indications suggest that residential land prices are headed for another dive--hardly the time that households will rush to buy. Inventories relative to sales are at the highest level since 1975. The March decline of nearly 14 percent in overtime hours in manufacturing is a harbinger of a continued decline of production, income, and demand. Finally, the export outlook is cloudy. The drop of shipments to Asian economies, which make up about 40 percent of Japan's exports, will likely cut about 1 percent from Japanese GDP growth. Even the weakening of the yen against the dollar and European currencies and continued upswings in the United States and Europe will barely offset the losses to Asian destinations. (The net export contribution to growth may be positive--but only because Japanese imports are collapsing.)

Both fiscal and monetary policy are fighting against the downturn. Although the initial 1998 budget was contractionary, the stimulus package announced at end-April should generate a modest gain of public works spending during fiscal 1998. Moreover, the package's restoration of the 2 trillion yen of income tax cuts, which had been withdrawn in February 1997, should replace much of income lost to lower overtime and the squeeze on wages. In addition, the Bank of Japan is maintaining its low interest rate policy, and is providing huge quantities of credit through nonstandard routes as a means to offset the credit crunch.

These measures put a floor under the economy for 1998, but are not likely to spark sustainable growth.


The yen, already weak against the dollar, is unlikely to strengthen and may weaken further, putting more downward pressure on the currencies of Asia against the dollar. That would exacerbate foreign debt problems in Asia, destabilize financial systems and corporate balance sheets further, and worsen and lengthen the Asian crisis. Certainly in the recent past, weakness in the yen against the dollar has been followed by Asian currency weakness. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.