Japan's economic pain may become Asia's gain

For decades it was the benefactor that spread the wealth. Now, with another dismal economic year under its belt, Japan is resigning itself to a different reputation in Asia -- purveyor of pain.

But experts say that reputation might not be fair. Bad domestic economic news, they say, won't become the next great Japanese export. It might, in fact, work in the region's favor.

As foundering companies cut costs and make cheaper goods amid deflationary pressures here, they'll step up moving production offshore -- a headache for Japan's economic growth statisticians but a trend that has major benefits for Asia.

"Japanese investment in Japan will become smaller than before, and that will lead to smaller economic growth in the country," said Masataka Fujita, director of investment trends at the United Nations Conference on Trade and Development in Geneva. "But investment will become larger abroad, simply because Japanese companies have to be competitive."

Economists also say Asian nations have learned the lessons of the regional financial crisis, allowing their currencies to absorb the shocks of a volatile Japanese yen and forcing themselves to open their industries to foreign ownership. There are plenty of problems from Japan that threaten the region.

The biggest immediate worry is that demand in Japan shows no sign of recovering as the country slogs through its third recession in a decade. The economy shrank an annualized 4.5 percent in the three months ended in December for the third straight quarterly contraction.

Lending to Asia by Japanese banks, which are struggling to dispose of hundreds of billions of dollars in bad loans, was cut in half between 1997 and the end of the third quarter of last year -- from US$121.7 billion to US$61.7 billion, according to the Bank of International Settlements.

Japan's decision to slash Official Development Aid this year by a record 10 percent will hurt Asia's poorest nations, especially since a big proportion of aid will likely go to emergency Afghan reconstruction efforts instead of Southeast Asia.

"We simply can't look after other countries, we have our hands full with our own economic problems," said Hideki Kusakabe, assistant director of aid policy at Japan's Foreign Ministry. "There is a high possibility that ODA will fall even further in the future."

Yet despite the myriad concerns, the overriding trend for Asia is an influx rather than an outflow of funds.

Cheap production

The world's developed nations are scrambling to set up cheap manufacturing bases and the combination of technical prowess and low costs makes Asia the most attractive factory.

In Taiwan, Japanese electronics companies aren't just buying parts, they're increasingly importing high-end finished products.

"Many Japanese firms transfer technology or join Taiwanese firms in product development. In some cases, they simply provide ideas for their Taiwanese partners to turn into products," said Shen Jong-chin of Taiwan's Industrial Development Bureau under the Ministry of Economic Affairs.

Japan's foreign direct investment to the region has in fact risen as it combats its economic woes: From 1995 to 2000, Japanese FDI in Asia rose every year from US$22.62 billion to US$31.56 billion, according to UNCTAD figures.

In this context, economists argue, the most formidable threat for Asian economies is not Japan's weakness but China's awakening strength.

The East Asian giant's accession last year to the WTO will force nations throughout the region to drastically liberalize their economies if they want to stay competitive.

"The emergence of China as most favored area for foreign direct investment is the biggest threat to Asia," said Richard Koo (辜朝明), chief economist at Nomura Securities in Tokyo.

"Why should a Japanese company invest in Thailand if it can get a better job done in China?"

Economists say Japan still has plenty of cash to throw around overseas.

According to UNCTAD, the ratio of Japanese FDI to the size of its economy in 2000 was 5.7 percent. That's less than half of the 13 percent for the USand much less than Britain's 49.8 percent.