Looking the other way when Japan threatens global prosperity may not help the US much. Tokyo's attempts to export its way to recovery with a weaker yen aren't playing out well here in Singapore and elsewhere in the region. Nor do Japan's neighbors appreciate the nation's failure to become a productive member of the global economy once again.
"The biggest threat to the world economy in terms of drag on economic activity may well be Japan," Reserve Bank of Australia Deputy Governor Glenn Stevens said on Monday. "How things will play out there remains extremely uncertain."
With the US -- Singapore's key export market -- in recession, officials here can't afford a Japanese crisis. The island nation remains more vulnerable to global economic trends than many people here would like to admit. Even the most optimistic of analysts say nothing will return Singapore to health like an international recovery.
Moreover, the US has a clear national-security stake in the Japanese economic situation. "A financial crisis on the order of 1998 in Japan will draw capital out of Asia and scare money into the United States from around the world," says Adam Posen, a Japan expert at the Institute for International Economies, a think tank.
That's good news for US markets in the short run, bad for global stability in the long run.
For one thing, the credit markets could seize up and foreign direct investment to industry throughout East Asia could be cut off. True, the direct economic effects on the region may be smaller than those seen during Japan's last banking crisis in 1998. Most of Asia is off of exchange-rate pegs, and the region's nations have less foreign debt.
But the political fallout could be much greater, Posen warns. Frustrated middle-class workers in South Korea and elsewhere may complain that Japan is making them suffer again without having reformed when others in the region have tried. China, meanwhile, may play this opportunistically, highlighting the fact that it maintained its currency peg throughout recent years.
The US Congress also may be intolerant of Japan's competitive currency devaluation while US unemployment rises and manufacturing profits fall. "This will be destabilizing in the region," Posen says. "Everyone will say that it is Japan's turn to bear the costs of its own adjustment, and everyone will be largely justified."
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