The Global Debt Crisis and the Shift of Japan's Economic Relations with Southeast Asia
Schulz, Martin, Journal of Southeast Asian Economies
On the surface, Japan's economic relations with Southeast Asia do not seem to have changed much during the last decade. Then, as today, Japan was recovering from a financial crisis--the 2000 IT bubble at that time, and the 2007 global finance bubble now. The governments in power during the recovery periods declared bold structural reforms to kick-start growth in the ailing economy--the "Koizumi Reforms" joined by heavy currency intervention, followed by "Abenomics" with extreme monetary expansion. Southeast Asia, at the same time, had recovered from the 1997/8 Asian Financial Crisis (AFC) ten years ago and started growing strongly again. Today, ASEAN-5 countries are still growing at a real rate of 6 per cent and are expected to do so well into the future. However, fundamentals and fortunes have changed lastingly below the surface.
In Japan's ageing society, the potential growth rate (sustainable growth at full employment) is below 1 per cent of GDP today, and can potentially fall to 0.5 per cent or even lower if no major reforms are implemented. Japan has lost its regional leadership status (including its strong currency), and will have to try to manage its exploding public debt imbalances for decades to come. Southeast Asia, on the other hand, has deepened its integration with "Greater China" and become part of the world's foremost growth market, even though it seemed to have fallen into a "middle-income trap" following the AFC (Figure 1). Today, exporters, in addition to domestic demand-driven economies such as Indonesia and the Philippines, have become anchored in greatly improved governance, which provides the basis for more regional integration in the ASEAN group.
In Southeast Asia, two factors seem to have played a particularly important role in its positive performance. Internet-based globalization, with its easy access to information, tools, and education, as well as a strong push towards urbanization has unlocked tremendous growth potential. At the same time, strong growth in China pulled the entire region along due to strong demand for raw materials and pre-fabricated manufactures. While all countries were exporting to China, political relations in Asia stabilized and more trade integration became possible. This benign economic environment changed after the Global Financial Crisis (GFC) somewhat; in particular, export competition started to heat up, especially from China, which is now trying to increase exports to Southeast Asia. However, at least the major ASEAN countries seem to have matured to a degree where "middle income" growth and internal demand have become the main engines of growth.
This change of fortunes will define relations between Japan and Southeast Asia for many years to come, which should make it worthwhile to have a closer look at the fundamental changes that have hit Japan's economy during its two "lost" decades.
II. The Shifting Role of Japan's ODA
The changes in Japan's relations with Southeast Asia are strongly reflected in the changes of its overseas development aid (ODA). Overall ODA loans and grants had been increasing strongly with Japan's development as a major economic power in Asia. From the early 1970s to the development of Japan's financial "bubble" in the latter half of the 1980s, contributions increased from less than US$5 billion to US$8 billion. This positioned the country as one of the world's top donors that contributed a comparatively stable share of about 15 per cent of all OECD-DAC aid. During the bubble years, contributions jumped again to more than US$12 billion, turning the country into the world's largest donor with a share of more than 20 per cent of all donations. After a peak in 1995, assistance oscillated between US$12 billion to US$18 billion, largely dependent on fiscal trends during a period when the government tried to get the stagnant domestic economy growing through stimulus and transfers. …