Travel around Asia these days and a prickly question is bound to come up: Does Japan matter to Asia anymore? Of course it does. Japan is home to the region's biggest markets and boasts its only truly international currency. It's also by far Asia's biggest economy -- and its traditional growth engine. The nation also provides crucial financing and loans to parts of the region.
Yet Japan's status in Asia -- and the global economy -- has been shrinking steadily in recent years. It's a side effect of the country's 11-year slump and the paralysis in Tokyo over how to fix things. The trend is likely to continue in the years ahead.
"The Japanese economy matters much, much less than it used to," says Dong Tao, an economist at Credit Suisse First Boston in Hong Kong. "While it's not irrelevant, it's moving in that direction."
The size of Asia's economies has increased dramatically relative to Japan's. That's true even after taking into account the impact of Asia's 1997-1998 financial crisis. In 1990, Asian economies together amounted to 46 percent of Japan's. Today, they amount to at least 74 percent of Japan's output.
At the same time, Dong points out, only 10 percent of Asia's exports go to Japan nowadays, while 20 percent flow to the US. Besides, many Asian economies are reporting trade deficits with Japan. And Japan's foreign direct investment in Asia last year was 45 percent below 1995 levels. All this means the performance of the Japanese economy vis-a-vis its Asian peers is far less relevant.
"Japan has been [imploding] for the last 10 years, and the world has shown in that time it can grow very vigorously without Japan," says Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York.
That's not to say Japan isn't still a major concern for global policy makers. Meeting in Washington Saturday, the G7 members spent considerable energy mulling Japan's problems -- a reminder that these woes could hurt the global financial system. Last week, the IMF upset Tokyo by saying Japan "poses a risk to the sustainability and durability of the [global] upturn."
Here in Osaka, where Japan's waning dynamism is amply on display, it's hard to be optimistic. This western city, the nation's second largest, was at ground zero of Japan's post-World War II miracle. Its companies raised the exporting of high-quality goods to an art form. Yet, even as stiff competition from low-wage countries like China began decimating the region's economy, Japan hasn't acted decisively to restore growth.
Economists, businesspeople and average taxpayers here will tell you they have little confidence that Tokyo is fixing things.
It's taken over a decade for this reality to make its way around Japan, but it's sinking in. The same dynamic is unfolding throughout Asia. From Manila to Seoul, officials are forging their own economic futures independent of Japan.
In decades past, Asia's smaller players could rely on Japanese consumers to buy their exports. With Japan weighed down by deflation, bad loans and political gridlock, that's no longer an option. There's also ample evidence that Tokyo is hardly working furiously to restore growth to the economy.
Last week, economic officials reacted angrily to the news that Standard & Poor's had lowered Japan's credit rating. Finance Minister Masajuro Shiokawa dismissed S&P as "selfish" and misinformed. He also took aim at the IMF, saying its staffers "don't know the real situation in Japan." Such comments, however, suggest that Japan's government continues to sow the seeds of its own irrelevance. Rather than owning up to its problems and admitting how bad things are, Tokyo remains in denial. Warnings by the G7 and the IMF are meant to prompt action among policy makers. Tokyo sees them as attempts to meddle in its domestic affairs.
Yet even Tokyo's arguments that it knows best betray some ignorance. Take Prime Minister Junichiro Koizumi's comment that "it's nonsense that Japan's national strength is lower than African countries to which Japan is providing assistance." Japan's credit rating is nowhere near any such nation. Those willing to give Koizumi -- who's not an expert in economics -- a pass here should consider that Shiokawa's been making the same point.
Asia's getting antsy about Tokyo's denial, fearing a Japanese banking crisis would send shockwaves around the region.
Yet, as Edward Lincoln makes clear in his book Arthritic Japan, a financial crash here is highly unlikely. Lincoln, a Japan expert at the Brookings Institution, argues that Japan won't recover or crash over the next decade, but will muddle along.
Its slow and orderly decline will continue apace, leaving the world no choice but to adjust to a less prosperous and productive Japan, Lincoln concludes. The Japanese, awash in savings and wealth relative to the rest of the world, have merely amended their lifestyles and moved on. Unfortunately, muddling along is the best Asia can expect from Japan in the years ahead.
China's rise in the interim is increasingly eclipsing Japan. China's 7.3 percent growth in 2001 contrasted with Japan's slide into its third recession in a decade. China is sucking up the jobs and capital Japan once took for granted. Even investors here are shunning Japanese stocks and buying Chinese shares.
If Koizumi understands how much clout Japan is losing on the global stage, he's not admitting it. Nor is he doing much about it. Political scandals are dominating Tokyo these days, distracting Koizumi from doing what a year ago this week he was elected to do: Fix the economy.
Koizumi only made matters worse Sunday by making a surprise visit to Tokyo's Yasukuni Shrine, which honors Japan's 2.5 million war dead, including its war criminals. The act is sure to upset Asian neighbors and undermine Koizumi's hopes of improving ties with its Asian trading partners. The controversy also will distract him from focusing on the economy.
"If the Japanese government continues to favor short-term comfort over long-term reform, Japan seems to me likely to remain on a road characterized by stagnation," former US Trade Representative Charlene Barshefsky said in Tokyo in late February.
"Year by year, Japan's influence will erode, and the centrality of the US-Japan relationship to Pacific affairs will diminish along with it."
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