Sun May Be Setting on Japan’s Fiscal Dominance Over Asia

In the past, Japan has been a powerful engine of growth that led its Asian neighbors out of recession like a locomotive dragging its many boxcars. Thus, many have presumed that the rest of Asia cannot truly recover from its current crisis until Japan is back on its feet.

But that dependence is weakening, say economists and financial analysts. In a significant break that arguably puts them more in charge of their own destinies--and underscores Japan’s waning influence--Asian nations now seem fully capable of staging a recovery without their former mentor.

Indeed, it has already begun. In recent months, Japan’s neighbors from South Korea to Indonesia have seen industrial production indicators turn positive, economic growth forecasts upgraded and capital markets restructured while a few regional stock markets have hit post-crisis highs. Yet Japan, Asia’s economic giant and the world’s second-largest economy, remains mired in gloom.

“Today, it’s no longer the case that Japan will lead Asia out,” said Makoto Ebina, chief economist with Fuji Research Institute Corp. “Japan is not contributing these days, but it’s not hurting.”

A key reason for the new dynamic, analysts say, is that Japan’s three traditional drivers of Asian growth--its investments abroad, its consumption at home and the tourists it sends overseas--are now less important for its Asian neighbors.

To be sure, the links between Japan and the rest of Asia are by no means decoupled. Japan is still a huge regional and global powerhouse that produces twice as much as the rest of Asia combined.

In general, however, the ties are far more elastic than they once were, in part because the rest of Asia is now more economically mature.

“I think the whole relationship, while it has not totally disappeared, has far less influence,” said Frederick Au, Hong Kong-based senior vice president with State Street Bank of Boston.

In recent months, spring has brought a wave of optimism to much of East Asia amid signs that the worst of the Asian financial crisis is over. Across the region, currencies have stabilized and partially rebounded, providing more security for investors, even as interest rates fall sharply. Stock markets in Hong Kong, South Korea and Singapore are returning to the levels seen before the crisis. Foreigners are back investing in banks and companies in South Korea and Thailand--the first two victims of the “Asian flu”--even as those nations start socking away foreign reserves again.

Economists caution that such positive financial yardsticks do not necessarily lead to the humming factories, new hiring and ringing cash registers associated with a broad-based economic recovery. Still, the worst appears to be over.

South Korea, the furthest along the recovery path, now believes it may grow 4% this year, while even laggard Indonesia saw its economy grow 1.34% in the first quarter. Japan has been slow to reform, and its economy shows few signs of life after an eight-year downturn.

Traditionally, Japan’s greatest importance to Asia has been its loans and direct investment in the region. After the yen’s value grew sharply higher in the mid-1980s, Japanese companies funneled billions of dollars into Taiwan, South Korea, Hong Kong, Singapore and the rest of Southeast Asia.

The flood of money expanded East Asian factories making everything from television sets and cars to computer parts, as Americans grew more used to seeing “Made in Malaysia” and “Made in Indonesia” on their athletic shoes, disk drives and garments. It also helped create new Asian middle classes that became significant buyers of goods produced locally.

But in the depths of the latest crisis, Japan’s direct investment in Asia has plummeted--declining 48.3% to $3.42 billion from April to September 1998, the latest figures available, according to Japan’s Finance Ministry. Japanese banks have also retreated as the credit crunch back home worsened.

As many Japanese players pull in their wings, American and Europeans have moved in. Britain’s Standard Chartered Bank agreed to take over Thailand’s Nakornthon Bank after acquiring a controlling stake in Indonesia’s PT Bank Bali. Britain’s HSBC Holdings PLC in February bought South Korea’s Seoul Bank, and U.S. investment firm Newbridge Capital is trying to buy Korea First Bank.

GE Capital has spent $15 billion to buy stakes in Thailand’s Central Card Co., Asia Finance Public Co. and GS Capital Corp.; Indonesia’s GE Astra Finance; Philippine Asia Life; various banking and leasing assets in Hong Kong; and Japan Leasing Corp., Lake Co. and Koei Credit in Japan. Morgan Stanley also just announced that it would become a lender in the Japanese market.

More fundamental, Japanese investments in factories may be less important in the near term for Asia, some analysts believe, because Asia now suffers from industrial overcapacity and must pare back and restructure, skills that Western companies are far better versed at than their Japanese counterparts.

“The last thing Asia needs is another steel plant,” said Ian Burden, a Hong Kong-based fund manager with HSBC Securities.

Finally, emerging Asian nations these days have many more places to turn to for capital than they did a decade ago when they were heavily dependent on the Japanese. Even average Americans these days may be investing indirectly in the region without realizing it through pension, 401(k) and mutual funds.

“A lot of alternatives for capital other than the Japanese are coming into the region,” Burden said.

A second traditional propellant for Asian growth has been Japan’s appetite for imports, which grew steadily during the 1990s to a point where Japan was buying 15% of Asia’s products. This was driven in part by more value-conscious Japanese consumers, more Japanese companies importing their own Asian-made goods and the erosion of Japanese trade barriers.

But this all collapsed last year as Japan’s economy tanked, with imports from various Asian countries dropping by 10% to 25%.

Replacing Japan as buyers of the region’s products are Europe and especially the United States, whose robust markets are boosting hopes for an export-led Asia recovery. It has also helped to fuel the U.S. trade deficit, which is zooming toward record levels.

“Japan’s been languishing for the past seven years and the U.S. growing,” said Neil Saker, head of East Asia research with SG Securities Singapore. “The U.S. is now far more important as an export market.”

Obviously, growth in Japan would help Asia, but few expect it any time soon. Many analysts expect Japan’s economy to contract for several more quarters--despite the government’s official fiscal 1999 growth target of 0.5%.

A third traditional benefit Asia has derived from Japan is tourism, which has fallen with its economy. “Japanese tourism has dropped way off,” said Kate O’Donoghue, Singapore-based regional economist with Barclays Capital. “It used to be a huge source of growth in some economies.”

Finally, Japan had played a leadership role across the region. Asian nations duplicated in waves the brilliant export-led strategy pioneered by Japan after World War II to transform their societies from rice fields to modern economies.

Asia’s unique style of business and Japan’s influence won’t go away; indeed, Japan has created a $30-billion fund intended to help the region recover from the crisis. But East Asia is now turning to the West for economic practices it once dismissed during the heady growth days as unsuited to Asian culture--including clear accounting standards, better risk management, more arm’s-length review, a focus on return rather than market share, and the gradual dissolution of traditional conglomerates with their hidden inefficiencies.

Along with a grudging acknowledgment that more Western practices must be incorporated into Asia’s business environment comes new Western leadership in areas traditionally handled by Japan.

“In the past, we followed the Japanese way,” said John B.D. Sohn, executive deputy chairman of the Federation of Korean Industries. “But now Japanese capitalism has problems. . . . In Korea, if we’re to be an advanced country, we have to follow the Anglo-Saxon model.”

Not everyone agrees that Asia and Japan’s futures are so independent. Taiyo Suzuki, senior Asian economist at the Japan Research Institute, attributes Asia’s recent upturn to what some economists call a “dead-cat bounce”--a short-term upturn after an extended contraction. Furthermore, he said, Asian companies haven’t really restructured, and Asia still depends on Japan.

“Japan’s economy must recover as well,” he said.

Indeed, one direction in which Japan could lead Asia is down, analysts on both sides of the debate believe, if its economy really goes into a free fall.

One concern: if Japan’s economic deterioration starts to contrast too sharply with an Asian improvement, the yen could come under strong pressure to depreciate. That, in turn, could force--or provide the political cover--for China to devalue. The combination, if severe enough, would spark another round of competitive currency devaluations throughout Asia.

“Even though China doesn’t compete with Japan,” said Eden Wong, Hong Kong-based analyst with Barclays Capital, “a lot of China’s competitors compete with Japan.”

Serious deterioration in Japan’s domestic economy could also put Japanese multinationals under pressure to become more aggressive in pricing their products overseas--Japan is still the largest market for these global players--further destabilizing competitors such as Korean electronics or vehicle manufacturers.

Finally, a broader global problem with a sickly Japan is one of balance, economists say. “Japan remains key for Asia,” said Barclays’ O’Donoghue. “The global economy is becoming very unbalanced, with only one economy [the United States] doing well. You can go on one engine, but not for very long.”