The Trends Of Japan's Economy And Foreign Policy

XIA Liping, General Secretary and Professor
Shanghai Institute for International Strategic Studies

Current Situation of Japan's Economy.    The Asian financial crisis that began in Thailand in July 1997 has had complicated effects on the situation in the Asia-Pacific region. Japan is the country that has suffered most from it in the developed world. In 1997 and 1998 the increasing rate of Japan's economy was - 0.4 % and - 2.2% respectively. For the first time since the end of the Second World War, Japan has had negative economic increases for two years in succession, which indicates that Japan's economy has been in both serious and longest economic recession in the post-Second World War period.

At present, the main problems of Japan's economy are as follows:

  1. The level of consumption of personal consumers has been weakening for a long time. Even during the economic recession, Japanese personal savings deposits have been increasing so as to make Japan's economy go further in recession, which has led to a vicious circle.
  2. Investments to real estate have been decreasing year by year.
  3. Investments to equipment of civilian business have been going down by a big margin.
  4. Since the second half of 1998, exports of Japan have stagnated. At the same time, imports of Japan have come down by a big margin. So Japan's favorable balance of trade has continued to expand.
  5. The rate of unemployment of Japan has reached 4.3%, which is the highest since 1950s; and the de facto rate of recruiting workers is 0.48%, which is the lowest since 1950s.

The reason why Japan's economy has been in the bad situation is mainly because Japanese Government has made some major mistakes in formulating its economic policy:

  1. The Japanese Government did not handle the bad creditor's rights of Japanese banking institutions at the right time. The period of Japan's economic "foam" expansion had left a lot of bad creditor's rights. Since the collapse of Japan's economic "foam" in August 1992, its economy has fell into gradually intensified deflation. Because of the decrease of land prices and stock prices as well as the reduction of personal consumption and enterprises' investments, annual growing rate of Japan's GDP had come down to 2% from 1991 to 1993. From 1994 to 1996, it continued to go down by the annual rate of 0.8%. Under the circumstances, Japanese Government put a large quantity of Government's funds into stock markets in order to maintain the stock prices instead of using them to handle the bad creditors' rights of Japanese banking institutions, which has led to the current serious economic recession.
  2. The Japanese Economic Planning-making Agency think that there are three main reasons why Japanese Government and banking institutions had not handled the bad creditors' rights in the right time:
    1. They optimistically thought that the stock prices and land prices could rise sooner or later.
    2. The mechanism of banking institutions had hindered them to handle the bad creditors' rights respectively according to their own judgment.
    3. Japan's banking institutions had not opened their information thoroughly.1
  3. The Japanese Government has taken a laissez-faire attitude towards the big fluctuation of Japanese yen. Since the signing of the Plaza Agreement in September 22, 1985, Japanese yen has had the fluctuation in a big margin.
    1. The first big rising and dropping period was from September 1985 to June 1990. In September 1985 the rate of exchange between Japanese yen and US dollar was 242:1. This rate rapidly increased to 120.45:1 in January 1988; then it came down to 160.35:1 in June 1990. The period of rapid growth of Japanese yen was also the time of forming of Japan's economic "foam".
    2. The second big rising and dropping period was from 1990 to 1998. In April 1995, Japanese yen rapidly rose to its highest value in the history, which was 79.75 Japanese yen for one US dollar. However, afterwards Japanese yen began to come down. In August 1998, the exchange rate between Japanese yen and US dollar reached 147.61:1. Japanese Government has had little interference in foreign exchange markets, especially for a part of the period since the beginning of Asian financial crisis. The big fluctuation of Japanese yen has imposed negative effects on the stable development of Japan's economy. When the development of Japanese economy had slowed down from 1991 to 1995, Japanese yen went up in a big margin. It is thought that there was the influence of speculation of international financial speculators such as hedge funds. Since the end of 1998, Japanese yen has been still unstable. On January 7, 1999, it rose to its highest for consecutive 28 months, which was 109.75 Japanese yen for one US dollar. When Japan's economy has fell into serious deflation, Japanese yen has been going up. The big fluctuation of Japanese yen has not only made Japan's economy in recession, but also imposed relatively big pressures and risks on other Asian economies.
  4. On April 1, 1997, Hashimoto Ryu Cabinet took measures of increasing tax and levying expenses of social security, which added the burden of Japanese people and restrained their purchasing power so as to make Japan's economy go down rapidly again. The economy had just had some indications of resurgence at that time.

Main Measures Taken by Japanese Government for Economic Resurgence. On November 27, 1998, When Japanese Prime Minister Obuchi Keizo made a speech of administrative affairs, he expressed that his cabinet would try its best to making Japanese economy take a favorable turn, and be resurgent by 2000. Recently Obuchi Cabinet has taken some new policies and measures in economic fields:

  1. Resolving the bad creditors' rights of Japanese banking institutions and regarding it as the first priority on its economic agenda. Obuchi Cabinet has begun to carry on "The General Plans of Financial Reconstruction" and put forward nine bills related to financial reconstruction to the Diet. In order to reconstruct Japanese Banking institutions, Japanese Government is preparing to put into 43 trillion Japanese yen to establish a financial security mechanism, which will have 60 trillion Japanese yen and can protect the interests of depositors if a banking institution breaks.
  2. Expanding the internal needs and stimulate the personal consumption, which has been regarded as an urgent issue. Obuchi Cabinet has decided to take the "Emergency Measures of Stimulating Economy", including 24 trillion Japanese yen totally. Afterwards it made up an additional budget of investments for public undertakings. It has also pursued the plan of tax reduction of seven trillion Japanese yen and reduced the rates of income tax and corporation tax since the beginning of 1999.
  3. Further easing the money market and reducing the rates of interests. On September 9, 1998, the Bank of Japan announced that in order to prevent spiraling deflation and block the further economic deterioration, it will pursue the policy of easing the money market, reducing the interests of the short-term loans of the previous night between banking institutions from 0.5% to 0.25%. Under the circumstances, the rates of other interests have been reduced correspondingly. The Bank of Japan also expressed that in order to maintain the stability of the money market; it will expand the supply of money and provide sufficient money when it is necessary.
  4. Putting forward "the Plan of Doubling Living Space" and "the Plan of Industries reconstruction". The purpose of the plans is to dispel the psychological pressures of Japanese consumers, investors and managers, stemming from deflation, to push forward the economic boom, and to raise the living standards of Japanese people. The plans have been carried on since the beginning of 1999.
  5. Giving impetus to internationalizing Japanese yen, so as to establish a triangle international money mechanism composed of US dollar, Euro and Japanese yen. On January 7, 1999, during a visit to European countries, Japanese Prime Minister Obuchi Keizo said in Paris that Japanese Government would try its best to internationalize Japanese yen. On January 16, 1999, at the 21st Euro-Asian Forum of Financial Ministers, Japanese Financial Minister Mizayazak Kiich put forward a proposal that a world mechanism of money should be established, which will include the three major moneys - US dollar, Euro and Japanese yen.2 The reason why Japan does so is that Japan is concerned that the United States and European countries will neglect Japan and establish a "bio-polar mechanism of money composed of US dollar and Euro" after Euro has come into being. And Japan also expect to promote the trade, application of funds and foreign exchange reserves in all of which Japanese yen will be used for quoting prices and settling accounts, in order to make Japan get the leading position in Asian financial field and to accelerate Japan's foreign trade.
  6. Being prepared to formulate a comprehensive plan of increasing employment, which will create employment opportunity for one million Japanese people.

The Trends of Japan's Economy. Although Japan's economy has been in a woeful predicament now, it will not collapse soon as some news medium have reported, because it has the strong potential for economic recovery:

  1. Japan is still the second biggest economic power, the biggest creditor nation and has the biggest favorable balance of trade in the world. It has 220 billion US dollar of foreign exchange reserves, 130 billion US dollar of regular favorable balance of trade, nearly one trillion US dollar of foreign creditor rights, 1223 trillion Japanese yen of financial capital, 1200 trillion Japanese yen total savings deposits, and one trillion US dollar foreign trade. Japan's economy is 65% of Asian economy.
  2. Although there are many problems in Japan's banking system, Japan has the first-rate technology in the world and very skilled laborers. Its manufacturing industries are still very strong and have very powerful capability of competitions. So long as Japan's internal needs and needs of other Asian countries increase, Japanese companies will raise their ability of competitions greatly through the reduction of their production costs.
  3. Japan has very good historical record of showing its strong capabilities to overcome crises in economy. It surmounted the petroleum crises in both 1973 and 1979, and dealt successful with the influences of nearly doubled value of Japanese yen after the Plaza Agreement was reached in 1985.

Predictions and Rationale. On January 19, 1999, at the Diet when he made a speech of administrative affairs, Japanese Prime Minister Obuchi Keizo said that Japanese Government will make its great efforts to realize 0.5%of Economic growing rate in 1999. Although Japan is still facing many problem in economic field, if the bills of stabilizing its finance and the emergency measures of recovering its economy can be effectively carried out, Japanese economy will extricate itself from the predicament within one-two years, and will grow steadily again due to the increase of personal and enterprises' consumption. And Japan will return to the social and economic levels that it was at prior to the financial crisis within 4-5 years. However, in the near future, there are still some unfavorable factors in Japan' economic recovery:

  1. Because of the current situation of Japan's stagnant internal needs, serious overproduction, and it is difficult for personal consumption to increase rapidly, if only Japanese Government expands its public investments, the impacts on Japan's economic growth will be very limited.
  2. Reorganizing Japan's financial organizations will make some more Japanese banking institutions go bankrupt, which may lead to temporary turbulence and instability in Japan's money market.
  3. With the further tax reduction and increase of Japanese Government's public investments, financial deficits of Japanese Government will rise by a big margin; by 2003, they will rise to 11.7% of Japanese GDP, and the debt of Japanese Government will be twice as much as Japanese GDP; After 2000, half of Japanese Government's tax income will be used to pay the costs of its bonds, which will make the sources smaller and smaller for Japanese Governments to be able to use to recover its economy through financial means.
  4. The fluctuation of exchange rate of Japanese yen is too big; other countries are still concerned about the possible big devaluation of Japanese yen in the near future.
  5. Non-governmental business will focus their efforts on the reduction of their bad funds, so they will be unwilling to expand the circulation of their capital; as the result, the difficulties to increase cash supply will weaken the impetus of development of Japan's substantive economy.
  6. There are uncertainties in external economic environment; if the growth of US economy slows down, the friction of trade between Japan and the United States will intensify, which will make it difficult that Japan maintains its exports to the United States at the level of 1998.

Japan at a crossroads. Since the end of the Second World War, Japan not only has recovered from the ruins of the War, but also has made a lot of economic miracles so as to have become the second biggest economy in the world. All these are the results of Japan persisting in its road of peaceful development. Whether Japan can continue the road or not is a problem that the international community, especially other Asian countries, has been paying close attention to. At present, Japan is at a crossroads, and Japan's foreign policy and defense policy are in readjustment.

Currently Japan's foreign policy is turning from the old line of following the United States, and regarding economy as its core and western countries as its focus to the new line of striving for the position of a political power and playing a leading role in the Asia-Pacific region as well as in international community. Japanese Foreign Minister Koumura Masahiko said that to play the leading role by Japan in international community has been regarded as the most important contents of Japanese diplomatic affairs.3 In order to realize the objective, the diplomacy of the Japanese Government has been focusing on those as follows:

1. Making its great efforts on its diplomacy among major powers.

    1. The Obchi Cabinet has put the readjustment and improvement of Japan's relationship with the United States as the first priority on its agenda. At present, the striking problem between Japan and the United States is economic contradiction. Through issuing a whole set of bills and policies to overcome the financial crisis, and strengthening its dialogue with the United States, Japan has relaxed their economic friction with the United States. At the same time, Obuchi Cabinet is trying hard to push the Diet to pass the bills relevant to the revised "Japan-US Defense cooperation Guidelines" as soon as possible.
    2. The cabinet has regarded the further improvement of Japan-Russian relationship as the focal point of Japanese diplomacy. During 1998, both Russian President and Prime Minister visited Japan one after another. The visit by Japanese Prime Minister Obuchi Keizo to Russia in November 1998 had been the first visit of Japanese Prime Minister to Russia for 25 years. At present, both Japanese Government and Russian Government are making their efforts to conclude the Treaty of Peace and friendship between the two countries by 2000. During January 1999, officials of the two countries held the first talks of the Commission of Delimiting the Boundary Line and the Commission of Common Economic Activities. However, because Japan and Russia still have significant differences on the sovereignty of the North Islands, Russia's economy is in turbulence and its politics is unstable, and Japan's enthusiasm about economic cooperation with Russia has been going down, it is difficult for the two countries to make a breakthrough at their relationship by 2000.
    3. China-Japanese relationship has made progress. During November 1998, Chinese President Jiang Zemin paid a state visit to Japan, which has been the first time that Chinese head of state visited Japan. In the China-Japan Joint Declaration issued during his visit, both sides declared that they will devote themselves to the friendly and cooperative partnership of peace and development based on the spirit of taking warning from the history and looking on to the future. That has established the framework of development of China-Japan relationship towards the 21st century, demonstrated the direction of its development, and indicated that the relations of the two countries has entered a new phase of development. Although China and Japan still have some differences, they have many common interests and cooperative space in bilateral economy, regional and international affairs. Currently Japan is facing the serious economic recession and global financial crisis. To maintain and develop good China-Japanese relationship will be beneficial not only to the growth of Japan's economy, but also to the smooth development of Japan's diplomacy between major powers and towards other Asian countries.
  1. Widely pursuing its "Active Diplomacy". At present, Japan has regarded East Asia as the focus of its "Active Diplomacy". At the same time, Japan is also making great efforts to developing its relationship with European, Middle East, African and Latin American countries. For a period after the beginning of Asian Financial crisis, many Asian countries were very unsatisfactory about Japan's unwillingness to provide economic aids to them and continual devaluation of Japanese yen. Obuchi Cabinet has understood that if Japan does not take effective measures to assist other Asian countries that have been in the financial crisis, Japan will lose their trust. So Japanese Government has been readjusting its Asian policy to some extent.
    1. Firstly, Japan has increased its funds supports to other Asian countries. In October of 1998, Japanese Finance Minister Miyazaki Kiich declared that in order to help other Asian countries to rejuvenate their economy, within the next two years Japan would provide a package assistance of 30 billion US dollar, including 15 billion US dollar as mid-term or long-term funds to help other Asian countries to recover and another 15 US dollar as short-term funds to assist some other Asian countries to pursue economic reform. On December 16, 1998, Japanese Prime Minister Obuchi Keizo announced that Japan would provide long-term and low-interests loans of 600 billion Japanese yen with strings attached to some other Asian countries.
    2. Secondly, Japan has enhanced its diplomatic exchanges with other East Asian countries. In November and December 1998, Japanese Prime Minister Obuchi Keizo attended the informal summit of the Asia-Pacific Economic Conferences (APEC) and the informal summit of Japan-ASEAN states respectively, and met with the state and government head of other Asian Countries. In October 1998, Japanese and South Korean leaders declared that the two countries would establish a new-type partnership. However, Japanese Government still imposed some sanctions on North Korea on the excuse of missile launching by North Korea since October 1998. The hard-line attitude by Japanese Government to North Korea is not only unfavorable to the regional relaxation, but also places restrictions on the leeway of Japanese diplomacy. That has made it impossible for North Korea to accept the proposal by Japan about six-party conferences on Northeast Asian security.
  2. Actively carrying out "multilateral diplomacy". During the recent years, Japan has vigorously participated in multilateral dialogue, meetings and consultations in the United Nations, G-8 summits, the Asia Pacific Economic Cooperation Forum (APEC), ASEAN Security Forum (ASF), the Northeast Asia Security Dialogue and other international and regional organizations, in which Japan has sought to play a leading role in the fields of regional security, disarmament, nuclear nonproliferation, environment protection and so on, and to enhance its international position.
    1. Although most of Japanese people want to continue the way of peaceful development, some persons in Japan have still denied the history of Japanese troops invading other Asian-Pacific countries during the Second World War, and have tried to make Japan deviate from the course of peaceful development. Moreover, the current economic recession and political turbulence have speeded up the turning right of Japan's politics. Some Japanese politicians attempt to put the blame on other countries for Japan's economic recession and advertise the extreme nationalism to divert Japanese people's attention. At present, in Japan's politics there are some phenomena that have worried the peoples of other Asian countries:
    2. Some Japanese politicians want to expand Japan's rights of belligerency and defense through amending Japan's "Peace Constitution". In the early January 1999, Japanese Justice Minister Nakamura Masasaboro publicly criticized Japan's Constitution for its restraints on the role of Japanese armed forces.4
    3. Since it was formed in January 1999, the united cabinet of the Liberal Democratic Party (LDP) and the Liberal Party has tried its utmost to make the bills related to "Japan-US Defense Cooperative Guidelines" to be passed in the Diet. In the late January 1999, the leader of the Liberal Party Ozawa Ichiro publicly professed that the periphery of "Japan-US Defense Cooperative Guidelines" includes China and Taiwan. Secretary General of Japan's Democratic Party Hata Tsutomu criticized that the defense policy of the current Japan's cabinet is running vigorous on military road and is pregnant with dangerous factors, which may lead to arms race among Asian countries and may go in the unimaginable direction.5
    4. Japan has quickened its steps to develop the Theater Missile Defense system (TMD) and reconnaissance satellites as a result of the missile launching by North Korea. What Japan is doing in this way will break Japan's traditional principles of "three nos" about arms transfer and its principle of non-military use of space.
  3. Japan is now facing two different roads:
    1. The first road is to continue its way of peaceful development and to play more important role in international community on the basis of establishing mutual trusts with other Asian countries. The second road is to try to pursue the new nationalism of making light of economy and laying stress on military, and to seek for a leading rod in the Asia-Pacific region using its strong military power as the backing forces and the means to exert its influence.
    2. According to the history and world trends, the first road will be in the interests of Japanese people and beneficial to the peace and prosperity in the Asia-Pacific region as well as in the world. On the other hand, the second road will be harmful to the interests of Japanese people and detrimental to the stability and development in the region. International community, including the peoples of Asian Countries, hope that Japan will go along the first road.

Recommendations

1. Japan should continue the road of peaceful development. That is a successful way and conforms to the current world trends. So long as Japan sticks to peaceful development and strengthens the mutual trusts with other Asian countries, it will become a political power contributing itself to the regional and world peace and prosperity. If Japan changes its policy to push forward the nationalism of making light of economy and laying stress on military, it will increase the suspicion of other Asian countries, and be unfavorable to Japan's prosperity and its leading role in the international community. The most important thing that Japan should do now is to promote the mutual trust with other nations instead of expanding its military role and military influence. Currently the United States is encouraging Japan to expand its military role. The purpose of the United States in doing so is to make Japan play a supporting role for it. However, it may lead to the results contrary to the expectation of the United States. With the development of Japanese military forces and increase of its military influence, Japan will be more independent in military field and its contradictions with the United States will rise.

2. China, Japan and the United States should establish a constructive, stable and balanced triangle. Since the end of the Cold War, the situation of the triangle has become the most important factor whether peace and stability in the Asia-Pacific region can be maintained or not. At present, with the development of the trends of economic globalization, economic interdependence among countries is growing steadily. At the same time, China, Japan and the United States have many common interests when they deal with regional and global problems. Although each of the three countries has its own restrictions from its internal factors and seek for the respective national interests, they all hope to create and maintain peaceful and stable international and regional environment, and are willing to resolve many regional and global problems through cooperation. In order to reach the objective, two countries of each side of the triangle of the United States, Japan and China should carefully handle the relationship with the countries of other two sides of it and keep their balance. Only by establishing firm triangle and carrying on close consultations can the three countries realize the cooperation needed for peace and prosperity in the Asia-Pacific region. The efforts to realize the cooperation are beneficial to the interests of other countries in the region.

3. Japan should make its best efforts to maintain the stability of exchange rates of Japanese yen and further open its market. To maintain the stability of exchange rates of Japanese yen is not only conducive to the resurgence and prosperity of Japan's economy and to the internationalization of Japanese yen, but also contributes to the recovery and development of other Asian countries. Japan further opening its market is not only beneficial to the improvement of living standard of Japanese people, but also conduces to alleviating of its economic frictions with the United States and to helping other countries in the financial crisis to recover from it. If Japan can maintain the stability and further open its market, it will promote the trust of other Asian countries to Japan and improve the international position of Japan.

About the author:  Mr. Xia is General-Secretary and Senior Fellow of Shanghai Institute for International Strategic Studies (SIISS) and Deputy Director of Department of American Studies, Shanghai Institute for International Studies (SIIS). He is also in charge of the East Asia Security and Arms Control Program at the Institute. Mr. Xia is a Colonel (PLA Reserves), and Senior Guest Fellow at the Institute of International Technology and Economics in the Center for Development Studies under the PRC State Council. From 1988 to 1996, he was Associate Professor of the Institute for Strategic Studies, National Defense University, Beijing. Mr. Xia specializes in Asian Security and Arms Control, especially nuclear non-proliferation and confidence-building measures. From 1984 to 1988, he studied English and International Relations at the PLA Foreign Language University. From there he received a Master of Law degree. Mr. Xia was a military officer for the Headquarters of the Fuzhou Military Command and the Headquarters of General Staff of the PLA.

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