THURSDAY, JUNE 2, 2005
Japan is undisputedly an economic heavyweight. It’s a member of the Group of 7 leading industrialized nations, has Asia’s only international currency and the world’s biggest bond market and is a major provider of development aid near and far.
Yet Japan “boxes” far below its weight globally.
It may be the No. 2 economy, and a recovering one, at that; yet its clout in markets and with foreign governments is a shadow of what it could be. And things may only get worse.
I was reminded of that on May 19 while moderating a panel at Euromoney’s annual foreign-exchange conference in London.
Titled “Does the Future Belong to Asia,” its purpose was to put the so-called Asian century into perspective and to offer investors clues on how to profit from it.
Certainly, any discussion of Asia’s trajectory is going to zoom in on China and India.
You would think, though, that Japan also would figure prominently into the equation, especially now that its economy is off life support.
Think again. The panelists had little time for Japan, as did many attending the conference.
“Japan has had its chance, and now the attention is rightfully focusing elsewhere,” said David Kern, economic adviser to the British Chambers of Commerce, voicing an emerging Western consensus.
Officials in Tokyo will no doubt shudder at the suggestion. Here, there’s a sense of euphoria that Japan’s 15-year malaise is finally over.
After years of unsteady progress, Japan’s 11 major banks, including Mitsubishi Tokyo Financial Group and Mizuho Financial Group, cut bad-loan ratios to 2.93 percent for the year that ended March 31, down from 5.18 percent a year earlier.
While the focus now shifts to Phase 2 of the bad-loan problem – regional banks – Japan’s financial system is out of the emergency room. So is its economy, even if growth is less impressive this year than investors had hoped.
The economy is “steadily moving to overcome its lull,” Hideo Hayakawa, head of the Bank of Japan’s research department, said Tuesday.
Why, then, is Japan still being relegated to also-ran status?
Until a year ago, the reason was clear: the once mighty economy had fallen and couldn’t get up. Now it is standing on its own again; unemployment in April fell to 4.4 percent, the lowest in more than six years.
“It’s just fascinating that in all this talk about Asia rising and taking on the West, Japan is rarely mentioned,” says Ifzal Ali, chief economist at the Asian Development Bank. “The reason is that Japan isn’t offering forward-looking ideas or talking about the future.”
China, by contrast, is doing just that. It has been courting neighbors across Asia, and making the rounds in resource-rich regions of Africa and Latin America.
Chinese policy makers are blanketing Asia not merely with promises of prosperity, but with actual growth. Even Japan’s rebound owes much to growing Chinese demand for its exports.
Watching China step toward the role Japan used to play – that of Asian economic anchor – has prompted some soul-searching in Tokyo. Fears of being eclipsed by China are forcing Japan to focus on the East anew.
“Japan needs to go further in changing its mindset,” says Ali at the Asian Development Bank. “What’s certain is that the Japanese are crying out to be more influential in Asia, and the world, but they just don’t know how to do it.”
Ali points to the odd sight of Prime Minister Junichiro Koizumi showing up in India last month fresh on the heels of the Chinese prime minister, Wen Jiabao. It was hardly the first time that had happened in Asia in recent years.
“It’s a reminder of how Japan is scrambling to play catch up to China,” Ali says. “It’s also a reminder of where Asia’s future lies.”
Currently, the world is dominated by the United States Ten years from now, Ali says, it will be a bipolar one, with the United States at one end and China at the other.
Yet 20 years from now, a tri-polar arrangement – the United States, China and India – is likely to emerge, he says.
Millions of increasingly entrepreneurial Indians and Chinese will bump up against an aging Japan that is no longer entrepreneurial enough. Japan will have to adjust to a new place in Asia’s economic pecking order.
All this should be a wakeup call to politicians who are poisoning Asian relations by visiting the Yasukuni shrine, where convicted Japanese war criminals are among those enshrined.
The same goes for Japanese officials who think that being a staunch ally of the United States will pay bigger dividends than playing a more central role in Asia.
Japan still focuses too much on job protection at the expense of job creation. And it still relies more on increasing government debt to achieve growth rather than on stimulating consumer demand.
That Japan needs to think more about the future isn’t being lost on global investors, many of whom may be wary of long-term bets on the nation’s economy.
Japan will not become irrelevant soon, but it needs to prove that the conventional wisdom about Asia’s outlook is wron