Japan and Thailand II: beyond the crisis

27 October 1998

"Only two years ago, investment in Southeast Asia was the most profitable for Japanese companies," says the Nikkei group journalist, Katsuhiko Meshino, "but now Southeast Asia is a land of danger. Companies are losing money. Banks have huge bad loans."

But, says a senior official in the Economic Planning Agency (EPA), "it’s unrealistic to think Japanese companies will pull out and look elsewhere. The big firms will stay put and sweat it out. But many small and medium firms have to quit. They can no longer get finance."

What about the future? "The economic potential of Southeast Asia is still very high because of good human resources," says a senior Ministry of Finance (MoF) official. "Compared to Latin America, Southeast Asian governments have a good record of continually improving their economies." Japanese companies are looking to South Korea and Thailand as the best opportunities "because they have been most sincere in implementing reforms".

How does corporate Japan react to the advances which US banks and other firms are making into the region during the crisis? NHK recently ran a 2-part TV special detailing US firms’ involvement in China. "It was a shock to Japanese business leaders," says Professor Kiichi Fujiwara of Tokyo University. "Here were concrete images of the US returning to Asian markets. As people say now: the US is not Japan-bashing but Japan-passing."

But the MoF official is more sanguine about Southeast Asia. US and other western companies are buying into finance, retail and basic industries like petrochemicals, but "Japan still has tremendous comparative advantage in manufacturing. And the weakening of the yen has reduced the opportunity for Korea and Taiwan, especially in the electronics sector." So will Japanese manufacturers expand their investments in Southeast Asia in the next year or so? Most Japanese observers expect mixed results. The impact of the crisis on big Japanese firms has been very uneven. Some like Toyota, Sony, Honda, Matsushita, Mitsubishi are still very strong and may look to expand. But others will stand still or contract.

"The most important contribution we can make to the Asian crisis," says Masakazu Kubota of the Keidanren business federation, "is to revive the Japanese economy." This will not be easy. The government has just revised this year’s growth prediction down from 1.9 percent to -1.8 percent. For next year, estimates fluctuate around zero. "Many businessmen think recovery will take more than 1-2 years", says Kubota.

The financial crisis has affected the whole society and economy. "Confidence in the future has collapsed," says Kubota. "Before we thought that big financial institutions like Long-Term Credit Bank could never collapse. Now wives worry whether their husbands will have a job."

"We have had expansionary packages since 1992," says the EPA official, "but nothing has worked. This shows how deep the structural problems are." He divides these problems into three. "First, we have not managed to complete the transition from the catch-up phase of industrialisation, to growth led by expanding domestic demand." Second, many sectors outside the export economy remain backward because they have been starved of investment and protected from outside competition. Finance, housing, retail and other service industries are good examples. "These are challenges from the past," he says, "the third is a challenge from the future - the transition to an ageing society."

The EPA official believes that tackling these structural problems head-on is the key to reviving the confidence of the Japanese in their own economy and their own future. "If we get it right and confidence returns," he says, "the pick-up can be quite quick. The economy has lots of under-utilised capacity. It would not be difficult for us to move quickly to rates of 2 percent growth or higher."

The Keidanren business federation agrees with the strategy of tackling the big structural problems. In June it produced a report on "The Challenge of Structural Reform and Pursuing Dynamism in Society and Economy" which visions a dramatic overhaul of Japan’s economy and society. Besides detailing a route out of the financial mess, the report sees three main strategies for reviving the Japanese economy for the next twenty years.

First, a phase of large-scale government spending, financed by a 3.4 percent budget deficit, to kickstart the economy and lay the foundations for a new era. The spending would go into the infrastructure for a new economy, and a social security system to restore confidence about the future within an ageing society.

Second, investment in new and better products for the home market which excite consumers to start spending again. The highlight of this scheme is a plan to upgrade housing. Compared to other societies of similar wealth, Japanese live in small and tacky houses. The plan is to expand home area per person from 30 to 40 square metres by 2010, and to improve the quality. This should in turn generate demand for many kinds of consumer products. "The implications of this plan are enormous," says the Nikkei group journalist Katsuhiko Meshino, "It can have a huge impact not just on Japan but on the world economy."

Third, Japan will introduce more competition into home markets by scaling back protective government regulations, breaking down cartels, and making labour more mobile. But more competition will not be allowed to destroy the community values and social protection now provided by the corporations and valued by the society. Social institutions will be strengthened to compensate.

It’s a bold vision which the Keidanren hopes will move Japan on from the "lost decade" to a "new decade". Anyone who doubts the capacity of Japan to "remake itself’ to this extent has not been paying attention to the last century of Japanese history. The projected transformation also has big implications for Thailand and other Asian countries whose economic fate has become closely linked to Japan.

Over the past few decades Japan has spewed out export-oriented industries which are no longer viable in Japan. Thailand and other Asian states have prospered by offering these industries a home, staffing them with cheap labour, and hooking them up to suitable infrastructure. This process may continue, but with less dynamism. Meanwhile, Japan will begin to gulp in resources and services needed to rebuild its own society. Some of these will be resources and services needed to satisfy the growing ranks of elderly. Some will be directed to improving the environment. Some will simply provide Mr and Mrs Japan with a bigger and better home to live in.

Here may lie the opportunity and the challenge for Thailand and the other little dragons of Asia beyond the crisis. But it will require very different strategies from the era of industrial location, including understanding the Japanese market.