World Economic and Financial Crisis, Japan and the Asia Pacific
During the opening act of the financial crisis, Japan stood offstage. What did Japan have to do with a crisis whose origins seemed to lie in a U.S. real estate bubble and lax American regulation? But as the crisis threatens to engulf the entire planet in a second Great Depression, eyes have turned to East Asia and the Pacific. Not simply because, contrary to earlier hopes, Japan and its neighbors cannot avoid damage to their own economies. But because of three other issues.
First, Japan recently endured its own domestic version of a real estate bubble that burst into a financial crisis. The seeming parallels between what happened to Japan in the early 1990s and what is going on today in the United States have caught the attention not simply of journalists and analysts, but key decision makers including the Chairman of the Federal Reserve and the incoming Secretary of the Treasury. We will consider lessons from other economic pandemics, too, such as the relative success of the US and Japanese economies in responding to the depression of the 1930s.
Second, because the Japanese postwar model of export-led growth, copied to a greater or lesser extent by China, Korea and the other leading Asian economies, helped facilitate what has happened. Central to this model was the accumulation of reserves denominated in the dollars earned from exports -- reserves that, by definition, stayed inside the U.S. banking system since they were denominated in dollars. These reserves permitted the United States to run the endless "deficits without tears" that both provided an outlet for Asia's exports and facilitated irresponsible policy making in Washington. The two largest holders of those hundreds of billions of dollars of reserves are China and Japan. In short, East Asian economies are closely linked to the origins and outcomes of the US financial crisis both as a result of the massive US deficits and their purchase of US treasuries that long enabled the deficit to grow.
Third, some analysts see the present crisis as heralding the end of US hegemony and the rise of East Asia and other regions and nations as a likely outcome. But Japan, China and Korea, with their economies intertwined with that of the US and heavily dependent on export markets, also face serious problems in the economic recession now underway. We explore attempts by analysts to project regional and global outcomes of the crisis.
The Asia-Pacific Journal: Japan Focus will periodically post articles that address one way or another these issues. In particular, we will post pieces that address:
•The extent to which Japan's "bubble economy" and aftermath parallel what has happened in the United States and the danger that policy makers in Washington and elsewhere will draw the wrong lessons from Japan's experience..
•The continued viability of the Japanese/East Asian model of export-led growth and the question of what might replace it.
•What Japan, China and South Korea might or might do to cope with the immediate economic turmoil as well as the longer-term need to restructure their societies in response to demographic, environmental and external security threats.
•The future of a region whose security, economic, and financial frameworks continue to stand on an American base that is now palpably weakening; how long these frameworks can survive, what
new ones could be brought into being, and with what effect on the US, Asian regional and world economies.
In addition to posting major articles at our site, we also plan to maintain a list of important articles published elsewhere. We invite reader suggestions for material to add to the list. Please write to us at info@japanfocus.org
Coordinating this new section of Japan Focus will be R. Taggart Murphy, Professor in the MBA Program in International Business, Graduate School of Business Sciences at Tsukuba University's Tokyo Campus. A former investment banker with 12 years experience in the Japanese financial markets, Murphy has been a non-resident senior visiting fellow at the Brookings Institution and is the author of The Weight of the Yen (Norton: 1996) and, with Akio Mikuni, of Japan's Policy Trap (Brookings: 2002). His articles have appeared in such publications as the Harvard Business Review, the London Review of Books, the National Interest, the New Left Review, and Fortune. He is a frequent contributor to, and a coordinator of, Japan Focus. His "Asia and the Meltdown of American Finance" and his comments on "dollar seignorage" are linked below.
• Money in Socialist Economies: The Case of North Korea
Ruediger Frank
• The Copenhagen Challenge: China, India, Brazil and South Africa at the Barricades
Peter Lee with a post-mortem on Copenhagen’s COP15 by Eric Johnston
• Get FIT: Public Policy, the Smart State and the Energy-Environmental Revolution
Andrew DeWit
• Clean Coal and The Two Faces of China's Coal Industry
Andrew DeWit and Jonathan Watts
• In the Eye of the Storm: Updating the Economics of Global Turbulence, An Introduction by R. Taggart Murphy to Robert Brenner's update
R. Taggart Murphy
• Is Japan Headed for a Fiscal Doomsday?
R. Taggart Murphy
• Regime Change Short-Circuited: Japan’s Feed-in Tariff System
Andrew DeWit
• Is Hatoyama Reckless or Realistic? Making the Case for a 25% Cut in Japanese Greenhouse Gases
Iida Tetsunari and Andrew Dewit
• Vietnam and China in an Era of Economic Uncertainty
Brantly Womack
• The Financial Crisis and the Tectonic Shifts in the US-Japan Relationship
R. Taggart Murphy
• China's Outward-Swinging Trade Doors - More Lessons from the 1970s?
R. Taggart Murphy
• Will East Asia Rule the World Economy? Economic and Financial Lessons from the 1970s
R. Taggart Murphy
• Japan’s Future/America’s Future
Taggart Murphy - Rejoinder to Richard Katz
• Why America Is Not Japan: Capacity for “Paradigm Shift”
Richard Katz - A response to Taggart Murphy
•Japan's Trade Collapse and Road to Recovery: Vertical Foreign Direct Investment the Key
Tanaka Kiyoyasu
Introduction
Will Japan recover more quickly?
Conventional wisdom sees Japan faring among the worst of the industrialized countries in the ongoing economic crisis. Tanaka Kiyoyasu does not dispute this view directly; he concedes that “trade in Japan has declined at a much faster pace than that in the US” even if the overall “impact of the economic crisis on Japan has so far been relatively moderate.” But he maintains this does not tell us the whole picture. He cites studies to demonstrate a strong link between “vertical specialization and international trade” and then goes on to note that “vertical specialization is particularly clear in the case of FDI by Japanese multinationals” as opposed to those in the US.
•Forget Global Imbalances, It Is Now a Sino-American Imbalance-
Brad Setser
•Rethinking the Lessons for the US and the World of Japan’s 1990s Economic Collapse: Finance Capital and the State
R. Taggart Murphy
Andrew DeWit
“If you think this is only a cycle you're just wrong. This is a permanent reset" Jeff Immelt, chair and CEO GE
“…I know that oil and gas companies won’t like us ending nearly $30 billion in tax breaks, but that’s how we’ll help fund a renewable energy economy that will create new jobs and new industries. I know these steps won’t sit well with the special interests and lobbyists who are invested in the old way of doing business, and I know they’re gearing up for a fight as we speak. My message to them is this: So am I.” Barack Obama
Think back to this time last year. The market-fundamentalist model of economic governance was clearly in serious trouble. A quasi-religious fervour for even dumb deregulation had led to the injection of over 10 trillion American dollars worth of toxic assets into the arteries of global finance, sending a profound shock towards the real economy of production and consumption. It was also clear that the carbon-intensive consumption bubble of the past few years was unsustainable. Highly sensitive to even small shifts in demand and supply, oil prices were high, and then they shot up to nearly USD 150/bbl last summer. They'll skyrocket again in due time. And all credible evidence on greenhouse gas emissions and global warming suggested that the Inter-Governmental Panel on Climate Change (IPCC)'s worst-case scenarios were in fact hopelessly optimistic. Now, just a year later, we seem trapped in some B-grade Hollywood epic where Antarctic ice fields are collapsing and you can ignite the methane pouring forth from the melting tundra up north.
• No Return to Normal
R. Taggart Murphy and James Galbraith
In a must-read article in the Washington Monthly, James Galbraith maintains that the Obama administration's focus on fixing the American banking system is fundamentally misguided. He writes that in August, 2007:
"Banks discovered that the markets for their toxic-mortgage-backed securities had collapsed, and found themselves insolvent. Only a dogged political refusal to admit this has since kept the banks from being taken into receivership by the Federal Deposit Insurance Corporation."
And goes on to say:
"(Treasury Secretary) Geithner’s banking plan would prolong the state of denial. It involves government guarantees of the bad assets, keeping current management in place and attempting to attract new private capital."
Instead, Galbraith calls for the government to "take control" of the insolvent banks. And for "more recovery bills" reflecting the "true state of the emergency." These would include "open-ended support for state and local governments, public utilities, transit authorities, public hospitals, schools, and universities," large increases in spending for public housing, Social Security and Medicare, "a jobs program to put the unemployed to work quickly," and "a payroll tax holiday (to) help restore the purchasing power of working families."
It is when Galbraith gets to the issue of who is going to finance all this spending that readers of Asia-Pacific Journal will find themselves perking up their ears. He writes:
"The chorus of deficit hawks and entitlement reformers are certain to regard this program with horror. What about the deficit? What about the debt? These questions are unavoidable, so let’s answer them. First, the deficit and the public debt of the U.S. government can, should, must, and will increase in this crisis. They will increase whether the government acts or not. The choice is between an active program, running up debt while creating jobs and rebuilding America, or a passive program, running up debt because revenues collapse, because the population has to be maintained on the dole, and because the Treasury wishes, for no constructive reason, to rescue the big bankers and make them whole.
Second, so long as the economy is placed on a path to recovery, even a massive increase in public debt poses no risk that the U.S. government will find itself in the sort of situation known to Argentines and Indonesians. Why not? Because the rest of the world recognizes that the United States performs certain indispensable functions, including acting as the lynchpin of collective security and a principal source of new science and technology. So long as we meet those responsibilities, the rest of the world is likely to want to hold our debts."
Galbraith's "rest of the world" comes down in the last analysis to two countries: China and Japan -- the petroleum exporters and other Asian countries are important only as supporting actors. These two countries have financed the US deficits by keeping their export earnings in dollars. They have done so because it worked for them -- their economies were organized around making things for Americans (and other foreigners who largely pay in dollars) to buy, and by lending the dollars they had earned back to the Americans, they kept the mechanism going. But it is now broken. When the Americans no longer buy Chinese and Japanese manufactures -- because the US economy is shrinking; because the US banking system has imploded -- it is not clear that holding earnings in dollars works for China and Japan any longer. If the economic downturn turns out to be as bad and deep as Galbraith seems to fear it may, both Beijing and Tokyo could face political challenges beyond anything either government has dealt with for some decades. In such cases, we may see desperate searches on the part of elites in both countries for alternatives to the existing dollar-based financial order that permits the US to run the deficits Galbraith envisages.
That raises the question of the alternative. A true internationalization of the yen? Saori Takahashi and I explore why that seems unlikely in this article. A common Asian currency along the lines of the Euro? It is difficult to picture a Japanese Adenauer meeting a Chinese de Gaulle to construct the institutional framework that might lead that to happen. So perhaps Galbraith is right and China and Japan will continue to finance the US. Given that he sees enormous American deficits as inevitable -- the only question lying in whether the borrowings are to be well or poorly spent -- one can hope so. But to regard it as a foregone conclusion? Particularly when the quid pro quo consists of the US meeting "responsibilities" that Galbraith specifies as "acting as the lynchpin of collective security" and serving as a "principal source of new science and technology”? Since US foreign policy over the last decade has arguably made the world less, not more, secure and since many of the most brilliant students at US research universities are non-Americans that the US government insists on throwing out of the country as soon as they get their degrees, one hesitates to be optimistic. R. Taggart Murphy
•China’s Way Forward? Historical and Contemporary Perspectives on Hegemony and the World Economy in Crisis
Mark Selden
China’s $1.7 Trillion Bet: China’s External Portfolio and Dollar Reserves [PDF Here]
Brad Setser and Arpana Pandey [Updated]
This important study puts some numbers on our understanding of China's role in global dollar markets. Without coming out directly and saying so, however, the study can give the reader the impression that China is the world's largest foreign holder of US dollar instruments and thus the most important financier of the US current account deficit. While this is true of official holdings, Mikuni and Company estimates that the totality of Japan's holdings -- those in nominally private hands as well as official holdings -- are still two to three times China's. While no sensible observer would deny how critical China has become to global dollar markets, since many of Japan's financial institutions still respond to extra-legal directives from the bureaucracy, Tokyo's stance towards the dollar remains arguably as important as Beijing's. R. Taggart Murphy
Brad Setser is a fellow for geoeconomics at the Council on Foreign Relations.
Arpana Pandey is a research associate for geoeconomics at the Council on Foreign Relations.
This article was a January, 2009 Working Paper at the Council on Foreign Relations.
Posted at The Asia-Pacific Journal on February 25, 2009.
Recommended citation: Brad Setser and Arpana Pandey, "China's $1.7 Trillion Bet: China's Portfolio and Dollar Reserves" The Asia-Pacific Journal, Vol. 9-1-09, February 25, 2009.
See also, Brad Setser's March 1, 2009 report with new information about China's Treasury holdings and its equity holdings in US securities, Secrets from the Treasury's Survey: It looks like China bought a lot of equities just before the stock market tumbled.
•Japan’s Twenty Year Response to Economic Crisis
Andrew DeWit and Tobias Harris
•Overproduction not Financial Collapse is the Heart of the Crisis: the US, East Asia, and the World
Robert Brenner speaks with Jeong Seong-jin
•Japan on the Brink of Abyss? [Updated]
Andrew DeWit
•Foreign Policy: The Worst is Yet to Come.
The January-February issue of Foreign Policy has just run a special report by five economists whose warnings went unheeded preview the next stage of the global financial crisis. The five are Nouriel Roubini, Stephen S. Roach, David M. Smick, Robert J. Schiller and Dean Baker.
The piece by Stephen Roach, "A Lethal Shakeout," is particularly interesting. He notes that Asia's economies were: driven by export bubbles, which, in turn, were a levered play on the U.S. consumption bubble. Asia was also aided and abetted by sharply undervalued currencies. And to keep their currencies cheap, countries such as China had to recycle massive amounts of foreign exchange reserves into dollar-based assets—suppressing U.S. interest rates and sustaining the very asset and credit bubbles that fueled a bubble-dependent U.S. economy. That virtuous circle has now been broken.
This bears out what our contributors at Japan Focus have been saying: that Asia's export-led growth tactics and the U.S. housing bubble were two facets of the same phenomenon, that both have collapsed, that a return to the /status quo ante/ -- Asia sending its surplus production to the U.S., then lending back the dollars earned to keep the party going -- looks less and less likely.
•The US and the Temptation of Dollar Seignorage
Kosuke Takahashi and R. Taggart Murphy
• This Doesn't Look Good: Taiwan, Korea and China Exports Tank
Brad Setser
At every point since the full dimensions of the crisis became obvious, it has been the most pessimistic forecasts that have proved most accurate. Brad Setser's discussion of what is happening to Korea's, Taiwan's and China's exports suggest that this applies also to forecasts that the current crisis directly threatens Asia's model of export-led growth.
•Capitalism's Demise?
Immanuel Wallerstein interviewed by Jae-Jung Suh
Immanuel Wallerstein reminds us in this interview that a proper view of the current crisis requires a long-term historical perspective; that what we may be seeing is the unraveling of the world-order that has prevailed since the late 1940s.
•So Now the US is Trying to Emulate Japan's Lost Decade?
Yves Smith
US economists have relentlessly harangued the Japanese for their supposed mismanagement of their post bubble era, which has led to nearly 20 years of low growth, borderline deflation, with a not-much-discussed, robust export sector. What are the lessons, positive and negative, of Japan's post-bubble experience for the US and other nations facing economic meltdown today?
•Soaring Yen Produces First Trade Deficit in 28 Years as Japanese Authorities Watch the US
Kosuke Takahashi
Japan's currency has gained almost a quarter against the US dollar this year and a third against the euro, making life even harder for the country's exporters, such as Sony and Toyota. In October, Japan experienced its largest trade deficit in nearly three decades. Yet Tokyo is unlikely to halt the rise, out of concern with its relations with the United States.
•Asia and the Meltdown of American Finance
R. Taggart Murphy
The boardrooms and finance ministries of Seoul, Bangkok, Jakarta and Kuala Lumpur are today filled with a fair degree of schadenfreude at America’s troubles. Schadenfreude is not a very nice emotion; Theodor Adorno once defined it as “unanticipated delight in the sufferings of another." But asking Asia’s business and governing elites to repress shivers of pleasure at the meltdown of the American financial system is probably demanding more than flesh and blood can bear. The spectacle of the politicians, pundits and academics of Washington and Chicago thrashing about in attempts to justify the vast amounts of money being shoveled at their, um, cronies on Wall Street is just a little too rich. Particularly since much of the money will have to be borrowed from the very people who a decade ago at the time of the so-called Asian Financial Crisis were being pooh-poohed for their “crony capitalism,” “opaque” banking systems, “incestuous” government-business relations, not to mention their supposed absence of transparent financial reporting, good corporate governance, or accountable executives and regulators.
But the glee in seeing the United States hoisted by its own petard must surely be mixed with a good deal of apprehension. Not only because Asia cannot escape this crisis unmarked. But because the crisis could conceivably force Asia’s elites to engage in the open political discussions they have largely avoided until now—discussions about the kinds of economies they expect to shape in the wake of the American debacle; discussions that carry with them all kinds of risks.
•The Rising Risk of a Hard Landing in China: The Two Engines of Global Growth – U.S. and China – are Stalling
Nouriel Roubini and Brad Setser
For the last few years the global economy has been running on two engines, the U.S. on the consumption side and China on the production side, both lifting the entire global economy. The U.S. has been the consumer of first and last resort spending more than its income and running large current account deficits while China (and other emerging market economies) has been the producer of first and last resort, spending less than its income and running ever larger current account surpluses.
For the last few months the first engine of global growth has effectively shut down as the latest batch of macro news from the U.S. are worse than awful: collapsing consumption and consumer confidence, plunging housing, collapsing auto sales, plunging durable goods spending (while supply side indicators such as production, ISM (factory index) and employment are also free falling). The U.S. is entering its worst consumer recession in decades both supply and demand data look worse than in the severe recessions of 1974-75 and 1980-82. And in due time this tsunami of awful macro news, together with ugly downside surprises to earnings will take another toll on equity valuations that are now temporarily lifted by another bear market sucker’s rally.
More worrisome there are now increasing signs that the other main engine of the global economy – China - is also stalling. Let us consider now in detail the evidence that China may be on its way to a hard landing…
•Subprime Learning: Positive and Negative Lessons of the Japanese Bubble for Americans
Kaneko Masaru and Andrew DeWit
What Japan can teach Americans and the world about financial crises is a question that has been cropping up for some time. References to Japan in fact appear to be increasing, with a recent turn to worries of "becoming Japanese" through a decade or so lost to malaise and marginal growth, perhaps interspersed with bouts of financial panic. Heralding this Japanization is America’s seeming onset of deflation and a liquidity trap in tandem with a virtually zero interest rate policy. These developments have largely eroded American policy options on the financial side. In Japan, this impotent, "pushing on a string" stage of the post-bubble shakeout left the state sector largely moribund, especially after it vainly tried to spend its way out of the crisis. It remains to be seen whether the US, under Obama, will pursue an effective fiscal policy or repeat this year’s tax rebates, the equivalent of simply throwing money in a hole. This Japan Focus commentary reviews the highlights of our current crisis as well as what we can learn from Japan and whether we are, in fact, learning from Japan.
• Learning to Cooperate: China's Multilateral Approach to Asian Financial Cooperation
Injoo Sohn
Injoo Sohn has examined changing Chinese stances towards financial cooperation with its neighbors. Sohn employs what he calls a 'learning thesis' to frame his article, suggesting that the Chinese elite has collectively learned from the events of the last decade. As a result, Sohn argues that China's policies may be more 'consistent and stable' than 'sceptics might anticipate. Sohn's article appeared in the June 2008 issue of The China Quarterly, prior to the meltdown of the US and other economies, including strong pressure on Chinese industrial employment and exports.
• A Nordic Mirror: Why Structural Reform has Proceeded Faster in Scandinavia and Japan
Richard Katz
Richard Katz suggests that the Scandinavian experience in coping with its financial crisis can be profitably studied by policy makers in both Washington and Tokyo. The Scandinavian countries endured financial and wider macroeconomic crises at roughly the same time as Japan's so-called bubble economy burst. But Scandinavia seemingly recovered much more quickly. Katz focuses on comparative policies, institutions, and attitudes in explaining what happened. But what precisely are the lessons to be drawn for the contemporary economic crisis that began in the United States and is spreading globally? And should economic reform precede or follow the application of measures to bring under control economic and financial crisis?
