Japan and Thailand I: Tarrin to Tokyo

23 October 1998

Soon after the baht float on 2 July 1997, the then finance minister and central bank governor got on a plane to Tokyo. This was not surprising. For the previous two decades, Japan had been Thailand’s chief source of foreign investment, aid, economic advice, and inspiration. Besides, both the Thais had been educated partly in Japan and had good contacts there.

They arrived back with little to say and nothing to show. From that moment on, Thailand’s economic orientation seemed set to change - swivelling back from east to west, perhaps to a second "American period" like the two decades which had preceded 1975. Over the next six months, the US took a gradually more dominant role in the management of the crisis. In August, it oversaw the IMF’s arrival from the background. But after Indonesia tottered, it took a more forward role and crushed Japan’s idea for a separate Asian Monetary Fund to stabilise the region. When Korea fell, the US government moved ahead of the IMF. In the new year, the US president and his cabinet members were brought personally into the shuttle diplomacy of crisis management. In Thailand, the eastward-looking Thai team were removed and replaced by team west - Tarrin (Harvard), Supachai (Holland) and Chatumongkol (Cambridge).

In parallel, US business leaders openly welcomed the crisis. It would force market liberalisation and allow US companies to buy in cheap. Western academics spun theories that the crisis was the fault of "Asian capitalism" and could only be overcome by replacement with the superior, American variety.

But over the last two months, the US stance has collapsed. The condemnation of the US-backed IMF approach is now universal. The globalisation of the crisis has undermined the argument about the failure of Asian capitalism. The bailout of a hedge fund has shown the dishonesty behind American arguments about crony capitalism, moral hazard, over-leveraging, the importance of letting markets work, and the need to let bad banks fail. The Russian crash has struck deep into US banking. The Brazilian wobble has brought the crisis onto the American continent.

Against this background, over the last three weeks, Thailand has swivelled back again. Japan announced the US$ 30 billion Miyazawa Plan for Asia. Days later, the head of Japan’s powerful Keidanren business federation arrived in Bangkok dispensing reassurances of Japanese support. Tarrin has beaten the pack to Tokyo with his shopping list for help. His long stay (4 days) suggests serious talking, not just a photo-op.

The Miyazawa Plan signals that Japan can no longer leave the job of cleaning up its backyard to the Americans. "Japanese banks have huge bad loans in Asia," notes Professor Kiichi Fujiwara of Tokyo University, "it’s not just your crisis but our crisis too."

A senior official in the Japanese Ministry of Finance (MoF) stresses that Japan took a lead role in crisis management from the beginning. The Japanese government convened an urgent meeting in Tokyo in August 1997, "before the IMF was in the picture". After the Indonesian crisis, Japan moved first and proposed the Asian Monetary Fund. Only when the US squashed this proposal, was Japan shouldered aside.

So is the Miyazawa Fund just the Asian Monetary Fund reborn under different circumstances? The official announcement manages to be both very brief (3 double-spaced pages) and very broad - it envisages almost any kind of financial aid, even currency support. This is, the MoF official confesses, "a very tricky issue. The IMF is expected to play a major role. But as to the future role of the IMF, views are mixed at this stage. Perhaps that is why the Japanese government has been very cautious about announcing details of the Miyazawa Plan." But was it discussed with Washington in advance? "There had been some informal exchanges." The US’s terse response to the Plan suggests that it is still a matter for negotiation between Tokyo and Washington.

Katsuhiko Meshino, a Nikkei group journalist specialising in Southeast Asia, is less constrained by diplomatic nicety. "If Asia does not revive, Japan’s industries will suffer. Also, a stable Southeast Asia is a big asset for Japanese foreign policy. Japan has to face China and the US on its own."

"The Miyazawa Plan is not a new idea," says Professor Yonosuke Hara of Tokyo University, "Eisuke Sakakibara [vice finance minister - "Mr Yen"] has had this idea for a long time." Late last year, the MoF sent a team around Southeast Asia which proposed the idea. But with Washington in such an aggressive mood, any announcement was delayed. So is the scheme a challenge to the IMF monopoly? "Just don’t call it the Asian Monetary Fund, that’s all," says Professor Hara.

There are also some quiet Japanese challenges to other aspects of the American vision for Southeast Asia. Sakakibara has been instrumental in setting up a new research institute, affiliated to the Asian Development Bank, but located in the heart of Tokyo’s government quarter. The institute’s brief is to examine alternative models for managing the international economy.

In May, a high-powered team of Japanese officials, academics and businessmen compiled a report on "Lessons from the Asian Currency Crisis". The report’s explanation of the crisis is conventional: too much money was sunk into countries where banking and regulatory systems were too weak. But the recommendations diverge from the prevailing American model for the international financial market.

Countries should liberalise flows of direct investment, the report advises, but impose controls on short-term capital flows. The MoF official agrees: "In the post-war phase, Japan opened the door to foreign investment but not short-term capital. And it worked well."

The report supports the Chilean scheme for managing capital flows. The journalist Meshino goes further: "Many Japanese businessmen support Mahathir’s capital controls. They understand why he needs to do this." A senior official in the Economic Planning Agency (EPA) cautiously agrees: "Some form of short-term controls are needed so that smaller countries can regain control over macro-economic policy." But he would prefer the Tobin tax - a levy on international financial transfers designed to choke off speculative short-term movements. "It would definitely be good for smaller economies. But will it be good for the US? That is the question."

The MoF official is doubtful about such a tax, but wants some clampdown on the hedge funds, if only through better disclosure. But he wonders if the scheme currently up for international discussion has any chance of success: "The US will probably object, because of their dominant neo-classical approach and their faith in the market mechanism. Remember Clinton’s speech to the G22 meeting wanted reform of the international financial system "to ensure the free international flow of capital".

The final paragraph of the report on Lessons from the Asian Currency Crisis notes: "One of the factors contributing to the Asian currency crisis can be described as the region’s overdependence on the dollar". Again there is a long-term Sakakibara scheme to increase the usage of the yen in Asia. The Keidanren endorses the idea. But weaning the region away from the dollar will not be easy. The dollar-pegs for currencies have now gone. But the region still trades marginally more with the US than with Japan. In the crisis, that margin has increased. More importantly, Japan’s money market is much less developed than the US. Bond-trading is still hedged with old restrictions. Asian governments look to New York or London when they want to deal in bonds. Realistically the role of the yen will change only when the Japanese economy recovers and becomes an even larger factor in the region.

Some Japanese academics take a more cautious view of the Miyazawa Scheme and of the relationship between the US, Japan and Southeast Asia. Japanese politicians, notes Professor Akira Suehiro of Tokyo University, have only a passing interest in the region: "The ruling LDP has had no permanent committee monitoring the Asian crisis. There have just been ad hoc reports. And no clear policy." The bureaucrats in the MoF and other ministries, says Professor Hara, have seized this opportunity to impose their own policies. Partly this is a chance for them to be heroes when they are under attack for corruption and mismanagement inside Japan. Partly it reflects a nationalistic element in the bureaucracy which the academics feel is outdated. "Rescuing the region is a good horse for the nationalists to ride," says Professor Fujiwara.

Certainly the Miyazawa Plan indicates some fencing between Japan and the US. But it only goes so far, argues Professor Takashi Shiraishi in Kyoto. Japan, he believes, has done very well in Asia throughout this century by working from within the hegemony of another great power - first Britain, then the US. "It is better for Japan to deal with [an Asian crisis] collectively with the United States as the senior partner rather than making it an "imperial" issue to be resolved by Japan alone."

But despite these political complexities, one thing seems clear. Japan has more understanding of Asia, more empathy with catch-up economies, and more self-interest at stake. Tarrin will be back in Tokyo again.