ECONOMICS: by Colin TeeseNews Weekly
Just how real are Japan's money woes?
, December 14, 2002
Since the last issue of News Weekly, the Australian Financial Review has carried a couple of important items. One, a news piece, concerned Australia's current account, and the other, a longer feature on Japan, appeared in the Friday Review section of the paper.
Two vastly different items, though in important respects, closely connected and of special relevance to Australia and to the way it looks at Japan.
The news that Australia's current account deficit had taken yet another turn for the worse surprised no one who has followed these events over the last years. Strangely though, it has got worse under the Howard Government. It will be remembered that the Treasurer, when in opposition, feigned anger at the deplorable state of the current account under Labor. He vowed to do something about it.Revealing
Even more interesting than the Treasurer's lack of concern about a problem he once took seriously, was the attitude of some of the expert commentators to last week's bad news. Of these, the comment by the Chief Economist of the Hong Kong and Shanghai Bank was by far the most revealing.
Yes, he conceded, the deficit had worsened, but that was due to much stronger economic growth.
In the opinion of this expert, then, we may conclude that economic growth improvement can only be sustained on the back of an ever-increasing debt burden. Is a mounting current account deficit, many of us would want to ask, a good or a bad thing?
Just what is going on with our economy? Economic growth built on the back of debt. Satisfactory export performance, so it would seem, requires that we watch our currency decline in value.
Unfortunately, there is downside to that. Because the performance of our currency is unreliable, those who lend us money to fund the deficit, demand higher than usual interest rates in order to insure the value of their loans against the possibility of currency devaluation.
And, of course, higher interest charges require that a greater and ever increasing proportion of our output must be set aside to service a rising debt burden. Talk about Catch-22!
How different we are from Japan. In its economy a current account surplus
is the cornerstone of its economic power.
For all that, and despite all the cracks beginning to show up in our own economic management, there are those in government who presume to offer guidance to the Japanese on economic policy. Amazingly, these advisers are suggesting that the Japanese abandon their present prescriptions in favour of the market dominated policies of ourselves and the United States.
Much has been written lamenting the so-called malaise affecting the Japanese economy - including, in some cases, by those in a position to know better.
Fortunately for themselves, and perhaps for the rest of the world, external criticism of Japanese policies appears to be largely ignored by Japanese politicians and their policy makers. Typically, though, out of a combination of politeness, disdain for gratuitous Western advice, and having regard for long-term strategic considerations, they sometimes pretend otherwise.
With these considerations in mind, we must congratulate the Review
magazine section of the AFR
for presenting us with a balancing, if somewhat frightening, perspective on the Japanese economic strategy. Published each Friday the Review
provides readers with some of the best available writing on what it calls "issues, ideas and opinion". It is not uncommon for the material published in the Review
to differ from the paper's editorial policy.
An article on Japan by a Tokyo-based American, Eamonn Fingleton, provides us with a recent example of such an alternative view.
In its editorial columns the Australian Financial Review
stands behind the orthodox view that the Japanese economy is in a parlous state and is in desperate need of 'reform' - that is to say free market orientation.
Fingleton delivers a fatal blow to what he calls, "the basket case myth" of Japan. He doesn't deny that Japan has faced serious financial strains in recent years. But he points out that these have been confined to the financial sector, and have hardly impacted elsewhere.
The wider Japanese economy, he points out, has "quietly thrived". So much so, that it threatens to outrank the US as the world's economic superpower.
Mr Fingleton has no hesitation in backing up his claim.
The effects of the stock market crash in 1990, and Japan's apparently bumbling attempts to fix it he says, suits important interests among Japanese economic planners. These interests argue that the more US opinion leaders fuel the fires of the basket case theory, the more it diverts the attention and hostility of Western leaders over Japanese trade policies, and the more it helps mask Japan's future geopolitical intentions.
And certainly, a close examination suggests that the Japanese economy is anything but a basket case.
Fingleton provides us with many examples. Trade is one. In the 1990s its surpluses totalled US$987 billion (A$2 trillion). That is almost 2.5 times what it achieved in the previous decade when Japan was being hailed as an economic giant.
As for savings, Japan's stand at 8.7 per cent of GDP. Throughout the 1990s it has accounted for 30 per cent of all new savings in the OECD countries. And these savings help expand the influence of Japanese economic power by being used to buy up overseas assets. According to the IMF, Japan's net foreign assets have quadrupled in the last eleven years. Savings are also used to fund domestic infrastructure and industrial development.
Fingleton asks the question - how can all of this be reconciled with the, admittedly, parlous state Japan's banks. Easily, he maintains. Trade performance and current account surpluses - not the health or otherwise of banks - fund the export of capital.
And the pattern of Japanese trade has altered fundamentally. Its exports these days are not built round television sets and consumer electronics - or even cars - but around the technology that makes consumer goods. And these have always been the measure of economic success. Britain in the 19th century and then the US up to 1975 accumulated great wealth by this means.
Japan is now supplanting them.
Because of this, far from being threatened by the expansion of Chinese exports as many claim, Japan is supplying the capital goods which make them possible.
In many of these areas - especially those related to high technology - they have no real competitors, based on product superiority.
And finally, to the problem of the banks. Certainly, Japanese banks suffered catastrophic losses as a result of unwise lending policies in the late 1980s. Fingleton points out that the problem is being dealt with by allowing the banks to reconstruct their balance sheets by borrowing at very low rates of interest and lending on at much higher rates.
This is hardly a novel approach: indeed it is exactly what Australia did when its banks, by imprudent lending policies ran into the same problems back in the 1980s.
With this important difference. The straightened condition of Japan's banks has not affected the ability of the Japanese economy to fund the expansion of its industrial development and the acquisition of foreign assets. Japanese savings have taken care of that.
In the same way Japanese savings - public and private - according to the Washington based Institute for International Economics, well and truly cover Japanese government debt.
There is no solvency problem, while ever Japanese savings and the willingness of Japanese to support the government bond market is maintained.
If Fingleton has it right, how come so many of the Western commentators have it so wrong?
Well first and foremost, there is an ideological consideration. If Japan is not floundering, if it is dealing with its economic future, more effectively and possibly better than others committed to free market solutions, then that becomes a bad advertisement for the free market ideology. And to challenge this orthodoxy calls into question the reputation of far too many academic economists, along with the of interests of those aligned with them.
But more than mere ideology lies behind the Western criticism of Japan's approach to managing its economy. And it is here that Eamonn Fingleton is at his most fascinating.
He first disposes with the obvious. Western commentators don't understand how the Japanese economy works. For example the Japanese stock market is not like that of Britain or the US. It doesn't fund industry in the same way, nor is its health or otherwise closely connected with overall economic well-being as in the US or Britain. Neither does Japan consider itself in competition for what Fingleton calls "the favours of the world's investors". It is, after all, a capital exporter rather than importer. Neither is it a consumer-based economy in the same way as the US or Australia.
In short it is a different kind of economy.
But now comes the punch line. Whatever the Western media has done to perpetrate the "basket case" myth, Fingleton believes that the Japanese themselves have done much to support Western opinion. And quite deliberately.
Understating their strengths and exaggerating their weaknesses, has always been a Japanese characteristic exploited to serve the national interest. The basket case myth is merely another example. And, as always, it is used to serve another agenda.
In this case, among other things, it has bought Japan's trade bureaucrats peace from international torment over the country's continuing trade surpluses. If it had done nothing more, that would have been an enormous gain. It has however done more. It has helped mask what seems to have been an attempt to help China achieve superpower status.
If Fingleton is right, this too is no accident. The Japanese conclude, if together, Japan and China become the dominant forces in the region, then, in co-operation, they would be able to exert greater economic influence over the world than anything the US is now capable of. In the process they would be able to remove the Western influence from Asia.
Of course, all of this is for the future. But, then again, Japan and China have always had a keener eye for the future than for the present. Which is what makes them so hard for Westerners to understand.