Eas205 2015 lecture 8

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EAS205AutumnSemester　2013-2014
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UNITUNIT
88
ECONOMISM:ECONOMISM:
JAPAN'S ROLE IN THE EAST ASIAN POLITICAL ECONOMYJAPAN'S ROLE IN THE EAST ASIAN POLITICAL ECONOMY

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Aim
This session examines Japan’s role in the
East Asian regional economy and analyse the
development model propagated.
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Objectives:
1) To examine the investment links between Japan
and other parts of East Asia.
1) To examine the trade links between Japan and
other parts of East Asia.
1) To analyze in what ways the Japanese model of
development has had an impact on East Asia.
2) To look at Japan’s response to the Asian
Financial Crisis and new initiatives.
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The Trans-Pacific Partnership
(TPP)
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Japan-East Asia-US link
• Japanese economy developed rapidly in the
postwar period on the basis of building close
economic links with both East Asia and the US.
• US has been the most important market for
Japanese consumer goods,
• the East Asian region has been important for
Japan as a source of raw materials, as a
production base and increasingly as a market.
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Linked countries
• The most important countries for Japan are:
the East Asian Newly Industrializing Economies
(NIEs) of Hong Kong, Singapore, South Korea
and Taiwan,
The Association for Southeast Asian Nations
(ASEAN) - Indonesia, Malaysia, the
Philippines, Thailand, Burma, Cambodia, Laos
and Vietnam
....and of course, China.
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Linked through...
• These economies have been closely linked to
Japan through:
• Official Development Assistance (ODA),
• Foreign direct investment (FDI),
• trade,
• Development of production links – helping to link the
economies together and promote integration.
• Over the years, Japanese companies (e.g.,
electronics and automotives) have transferred their
production facilities to East Asia.
A manufacturing platform for exporting finished products
to the United States and elsewhere.
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East Asia’s Reaction
• The links with East Asia brought back memories of
Japan’s wartime attempt to dominate the region
and create the so-called Greater East Asia Co-
prosperity Sphere.
• In the 1960 and 1970s new economic ‘Japanese
imperialism’ was feared.
• Some concerns remain in East Asia over the
dominant position of the Japanese economy, but
this has greatly decreased over the years.
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•Q: What are the investment
links between Japan and
other parts of East Asia?
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…certain advantages.
• The investment links developed
between Japan and other parts of East
Asia reflect the way in which Japanese
corporations have taken advantage of:
• The close geographical location.
• Cheap factors of production, land
and labour.
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Links: Advantages
• Foreign Direct Investments (FDI) first
focused on the acquisition of resources in
the 1950s and 1960s.
• Japan is a resource-poor country.
• Southeast Asia offered Japan a nearby
location to acquire the resources needed
for its own industrial development.
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... and the consequences
• Economic success at home, gradually led to...
the increase in the cost of production, then...
 a decline in international competitiveness,
particularly as the cost of land and labour
increased in Japan.
• Japan’s economic success was causing
economic conflict with its major trade partner,
the United States.
textiles in the 1960s + high technology products
(e.g. computer chip) since the 1990s. 12

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Impact of the Nixon Shocks
• By the end of 1960 – Japan’s status as an
export-oriented economy  structural changes
in the world economy.
• Most important factor to Japan’s economic
relationship with East Asia was the impact of
the Nixon shocks of August 1971.
• President Richard Nixon announced that, due to
the US’s deteriorating balance of payments, the
US would discontinue gold convertibility.
• No longer converting gold to dollars at 32 dollars
an ounce. 13

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Yen moved to floating rate
• The move by US to floating exchange rates
 a rapid increase in the value of the yen.
• Japan resisted, but was forced to float the yen
• Moved from the 1949 peg of 360 yen to the
dollar to 308-315 yen by the end of the 1971.
The increase value of the yen made the cost of
producing overseas cheaper.
Japanese companies started to move
production to East Asia.
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Higher YEN led to
more FDI in East Asia
• In the 1970s, a large proportion of this FDI
was concentrated in industries such as textiles
(30-40 %) and electronics (15-30 %).
• The advantage to Japanese companies of
producing in East Asia was not just the costs:
Japanese consumer goods produced in other parts
of East Asia could be exported from those countries
to the US.
This alleviates the trade conflict with the US.
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Another major increase in
FDI: External environment
• Due to changes in the external environment,
following the Group of Five* Plaza Agreement**
of 1985
• The Agreement encouraged even more Japanese
companies to move production overseas.
* US, UK, Japan, Germany, and France
**The agreement was made at the Plaza
Hotel in New York
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Yen exchange value surge
Following the Plaza Accord...
• The yen was revalued by about 40 % between
1985 and 1987.
• Following the rise in the value of the yen much of
Japan’s investment went to Europe and North
America.
Japanese companies produced for the local or
regional market,
• East Asia continued to be an important site of
investment for Japan.
the value of investment rose considerably, although
the % remained about the same.
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further effects
• East Asia became important as a base for a
regional production system.
• Parts/components made in different countries.
• Cost-conscious, Japanese investment moved to
Southeast Asia rather than the NIEs.
• Japanese investments in electronics industry in
East Asia was hollowing out production in Japan.
• Japan exported 13.4million TV sets in 1985.
• ... but decreased to 4.5 million sets in 1992.
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Japan’s FDI to East Asia,
mid-1990’s ~
• In total dollar, the overall proportion to total FDI,
declined, and fluctuated between 23 and 10 %.
• The geographical focus has shifted.
• China reached ca. 14 % in 2005, sloped down to
ca. 5% in 2008, and was ca. 12% in 2012.
• ASEAN-4 (Indonesia, Malaysia, Philippines, and Thailand)
nearly reached 15% in 2011 and 8 % for the
NIES-4 (South Korea, Taiwan, Hong Kong and Singapore).
• China has grown in importance as a destination
for Japanese FDI.
•  but it has been affected by the recent political
tensions (WWII legacies, territorial disputes, etc.)
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The overall impact of
Japanese investment to Asia
• Japanese firms were employing nearly two million
workers in Asia each year in 1999-2000.
• The US has remained Japan’s largest trading
partner, but its share decreased during the last 30
years despite a temporary surge in 2009.
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Q: What are the trade links
between Japan and East Asia?
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Changes in the patterns of
exports to US and Asia
• The US market has dropped in importance for
Japanese exports:
• 30.7 % in 1970, 37.2 % in 1985 (Plaza Accord),
31.5 % in 1990, 29.7 % in 2000, and 24.6 % in
2003, then 13.7% in 2011.
• Japan’s trade with East Asia (NIEs-4, ASEAN-4
and China) has also fluctuated, but on the
general upward trend:
• 19 % of the total in 1970, 24 % in 1980 and 29 %
in 1990, 45 % in 2003. It reached nearly 50%
(49.3%) in 2011.
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Exports: US vs. Asia
Data Source: METI, 2012.
Part of export to US and Asia in Japan’s total
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... and western Europe ?
Though slowing down recently, Japanese export to Asia exceeds 50% of
the total export since 2004, while export to US and western Europe have
remained relatively low (ca. 15% and 12.5%, respectively).
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... and with China?
• In 2003 China rated 15.6 % of Japan’s total trade
(3.5% in 1990).
• China is growing in importance for Japan.
• The total amount of exports to East Asia has grown
from 19% in 1970, 24% in 1980, 29% in 1990, 39.7
% in 2000, to 44.9 % in 2003 and 49.3% in 2011.
• However, the pattern of trade relations between
Japan and East Asia since the late 1990s has
remained asymmetrical.
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How is the Japan-East Asia
trade asymmetrical?
• Japan is a major exporter of goods to East Asia
• 49.3 % of Japan’s exports is to East Asia in 2011.
• East Asian economies have struggled to penetrate
the Japanese market.
Manufactured goods + agricultural products (rice).
• In 2011, the total imports from East Asia was of
30.4%, the trade deficit stood at US$63billion.
• The majority of East Asia’s trade deficit with Japan
comes from the export/import imbalance of
manufactured goods (electronics, transportation
machinery e.g., cars, etc).
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What trade model?
• Despite Japan’s dominance in many sectors of
the East Asian regional economy, US market is
still important in absorbing finished goods.
• A triangular trade pattern still exists between
Japan, East Asia and the US (the EU is also an
important market, too).
• Since the East Asian financial crisis (1997), the
trade patterns remained basically the same.
• The crisis raised the question on the Japanese
development model pursued in the East Asia.
Since the East Asian financial crisis (1997), the
trade patterns remained basically the same.
A triangular trade pattern still exists between
Japan, East Asia and the US (the EU is also an
important market, too).
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Recent changes
• Significant recent change has been the growing
importance of trade with China.
• China became particularly important destination for
Japanese manufacturing investment.
Since 1980s Dalian area is popular with Japanese
manufacturers, as in the electronics industry.
In 2013 there are over 580 Japanese companies
(Sony, Panasonic, Toshiba, Canon, TOTO, etc.).
However, as with other East Asian economies, many
of the finished products from China end up in the
American market.
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Growing interdependency
The large deficit for the US in its trade with
China is creating economic conflicts similar to
those with Japan.
Japan, the NIEs, ASEAN 4 and China, are still
reliant on the US market to some extent.
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Q: In what ways has the
Japanese model of
development had an impact on
East Asia? 30

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The Japanese model for
development
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State intervention to
nurture a particular sector
 Malaysian government cooperated with Mitsubishi motors
for nearly 20 years in setting up Proton.
 Mitsubishi held a stake in the company, but the local
manufacturing company was basically state-controlled.
 State support in the economy can lead to national
champions, but companies are often uncompetitive
internationally.
 Would Malaysians really choose the Proton even if foreign
competitors cars are available?
 Or, should nationals of a country support the ‘national car’
by buying it preferentially?
 It may also make the state protectionist: Imported foreign
cars may undermine domestic models, which may lead to
establishing tariffs to protect the domestic industry.
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Major problems of the
model
• The model distorts the market by the close relations
between state officials and the private sector.
• It may also give rise to corruption:
• government officials may be rewarded for their
support of the industry: direct benefits while in the
government / a job after retirement.
• These concerns were aired at the time of the 1997
Asian Financial Crisis.
There were charges of ‘crony capitalism’ against the
East Asian economies (Thailand, South Korea,
Indonesia, Malaysia) that suffered.
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Development model:
Export-oriented growth
• Outward-looking policy: Export oriented
growth, not inward looking.
• ≠Import substitution is based on the idea that
a developing country should substitute the
imported products (e.g., consumer goods), by
locally produced goods.
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East Asia’s choice
• Basically followed export oriented policies,
prioritizing attraction of foreign investment to
build up an export base.
• In this context, the government can become
active in offering support and incentives to
industries likely to focus on exporting (e.g.
electronics, electrical equipment, etc.).
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Role of funds from banks
• Banks’ support to companies – offering loans at
preferential rates.
• Develop close links between banks (rather than
the stock market) + the funding of companies.
• For Japanese corporations, local companies
have developed as suppliers of components to
Japanese brands (auto parts in Thailand or
electronics component Malaysia).
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The Flying Geese model
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The concept of
‘flying geese’ model
• Once Japan moves up to a higher level of
technology
• the older technology cascades down to the next
level of development (=the next goose in the
formation).
• which then is able to develop by using the lower
level of technology.
• It is the transfer of older technology, then, that
gives the formation its shape and Japan’s
position as the lead goose. 38

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What makes the model
work
• Supporters say it is the ability of countries
further down the line to maintain comparative
advantage.
• It is clearly built on the idea of Japan as the
lead goose, always able to advance and
develop new technologies.
• The ‘follower’ countries would use the lower
level of technology that Japan no longer
needs for their own development.
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practically speaking...
• Take the television industry. It would mean that:
• Once LED screen TV production has been
established in Japan, TFT televisions would then
be produced elsewhere in East Asia.
• The high level of growth achieved by the East
Asian economies, sometimes higher than the 10%
in the high growth period, seemed to give support
to the model...
• ...At least until the Asian Financial Crisis of 1997.
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... times change
• Japanese industry has changed over the
years, in line with moving to a higher level of
technological sophistication in the products
produced.
• In the 1960s, Japan was a major textile
producer, creating the great ‘textile wrangle’
with the US.
...but now, Japan relies on imports of textiles
rather than produce them itself.
• Many of these are now imported from China
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also in the region...
• Some of the industrial sectors where
Japan used to be a key producer is now
taken over by another country.
Example: shipbuilding, once a sector of
the economy where Japan dominated,
was taken over by South Korea in the
1970s.
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Where the model fails
• The ‘flying geese’ model is technology
driven, whereas the production of
goods involves not only technology.
• Technology may not mean that
production always heads in the same
direction: out of Japan.
...an example?
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Take Sony’s case
• Sony had used China as its production base for
the Camcorders.
• But in 2003, due to a change in production, it
decided to produce Camcorders for the US
market back in Japan. Why?
Answer: a new cell-based manufacturing system
enabling the company to manufacture a product one
day after the order is taken and deliver it the next.
more efficient and competitive to do the work in
Japan, despite the lower cost of production in
China.
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“Flying geese”= Ideology?
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What the model means
• The flying geese pattern seen in the sky is in
reality the hierarchical and asymmetrical
relationship of inequality on the ground.
• What Japan is doing, from this perspective, is:
• To promote a particular model of development.
• A model different from the market driven
approach of Anglo-American capitalism.
• Japan always remains in lead position.
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Q: How did Japan Respond
to the Asian Financial Crisis?
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Background of the
collapse
• July 1997: the Thai Baht collapsed with a sudden
outflow of capital from the country.
• Spread to other East Asian currencies during the year,
e.g., Malaysia, the Philippines, Hong Kong, Indonesia,
and South Korea.
• The Japanese model was thought to have international
competitiveness and to be an alternative to the Anglo-
Saxon model.
• After the crisis, a change occurred in Japan’s relations
with its East Asian neighbours. 48

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Who’s fault, who’s fault?
• The responsibility for the crisis was indirectly
attributed to Japan for:
• Establishing a dependency of the economic
structure on Japanese subcontracting/investing.
• Over-dependent on exports.
• Close links between government and business,
• Lack of transparency.
• Japan claimed that the problem lays in the
dollar-peg currency system of the East Asian
economies and a large debt.
(i.e. temporary mismanagement problem, not of the structure)
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Japan’s initial response
• Offered a rescue package for boosting their
economies without major economic
restructuring:
➡Establishment of the Asian Monetary Fund
(AMF), mainly sponsored by Japan.
• ...but Japan was forced to withdraw the proposal
for the AMF because of strong objection by the
US Treasury, IMF and China.
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Countering criticism and
containing image of failure
• Japan took initiatives in late 1998 to reassert its
economic model and regional leadership:
• Launched a package to stimulate the Japanese
economy to absorb more imports from East Asian
states.
• Issued export credits to ensure the circulation of
intra-regional trade.
• A new ODA to provide up-dated technology to
regional states.
• A US$30 billion rescue package without obligation of
undergoing economic reforms. 51

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Responses &
Consequences
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What resulted for Japan
• Japan benefitted from further economic
cooperation with East Asian states.
• In the interim, the Japanese economy has become
more dependent on China’s economic growth.
• Pressure on Japan to liberalize its market.
• A movement to promote the formation of Free
Trade Areas (FTAs) and agreement on Economic
Partnership (EPA) within East Asia emerged. 53

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FTA/EPAs with Asian
countries
Countries with FTA/EPA Effective in
Japan-Viet Nam Oct. 2009
Japan-Philippines Dec. 2008
Japan-Burnei Jul. 2008
Japan-Indonesia Jul. 2008
Japan-Thailand Nov. 2007
Japan-Malaysia Jul. 2006
Japan-Singapore Nov.2002
ASEAN-Japan Dec. 2008
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Japan- China- South Korea
• Trade amongst these three countries totaled
$690billion in 2011
• Negotiations difficult due to outside factors, such
as territorial disputes
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Trans-Pacific Partnership
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• Agreement reached on 5th
October 2007
• Regulation across goods and service, trade,
agricultural tariffs and patents and copyright
• Pros: Will boost growth for particular countries such
as Malaysia and Vietnam; forecasted 0.5% average
yearly growth.
• Cons: Undermining of wages and working
conditions, corporations overriding governments
 What does this mean for
Japan?

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• An opportunity to catch up with China
• Japan’s market opened up to imports:
A possible decline in food self-sufficiency
Negative effects on the labour market
Abandonment of rural areas
• Threat to healthcare system

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Conclusion
• Japan's role in the East Asian regional
economy.
• The investment links between Japan and
other parts of East Asia
• The impact of the Japanese model of
development on East Asia.
• Japan’s response to the Asian Financial
Crisis.
• The trade links between Japan and other
parts of East Asia. 59

Eas205 2015 lecture 8

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