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NO. 11 — March 20, 1998

 

Feature Article

JAPAN-CHINA RELATIONS: CHALLENGES AND PROSPECTS by Eric Altbach

Summary

Japan and the People's Republic of China face several challenges in moving bilateral ties forward after starting to rebuild frayed relations in 1997. On the security front, last fall's revision of the U.S.-Japan defense cooperation guidelines set off alarms in Beijing. Senior officials have expressed concern that the new framework may represent either an effort by the United States and Japan to contain China or a stronger military commitment by the two allies to intervene in the event of a conflict in the Taiwan Straits. The Japanese government has been successful so far in reassuring Chinese leaders that the updated guidelines do not signify a change in Japan's "one-China" policy. Nevertheless, a high-profile debate in the Diet over Tokyo's specific support for U.S. military activities in the event of problems in "areas surrounding Japan" could create considerable friction between that country and China.

The Asian economic crisis also has created problems for China that could affect its relationship with Japan. Beijing has pledged to resist devaluation of the renminbi despite the tougher international competition likely to come from Southeast Asian countries that already have seen their currencies plunge in value. Moreover, in his former position, new Premier Zhu Rongji began the tough job of restructuring the economy's state enterprise sector. Those changes are certain to create rising unemployment and significant social dislocation. With Chinese growth apparently headed for a slowdown as a result of the problems roiling Asia, the reform process could be even more painful.

Whether Beijing can shoulder the economic and political burdens of maintaining the value of the renminbi under these circumstances may depend in part on the government's ability to stimulate growth through an ambitious expansion of public works spending. To accomplish this, China is likely to need considerable amounts of foreign aid, especially from its biggest contributor, Japan. However, Tokyo's development assistance budget will take a major hit in FY 1998 and remain smaller in subsequent years. Thus, resources will be constrained at the same time that demand for them from Southeast Asian countries as well as China is greater than in years past. How Tokyo and Beijing manage the domestic and international pressures each faces will have an enormous impact on their ability to achieve cooperative solutions to the potentially divisive issues confronting the bilateral relationship.

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Weekly Review

JAPANESE ECONOMY EKED OUT SMALL GAIN IN 1997 by Douglas Ostrom

John Maynard Keynes, the famous British economist, is long dead. His theories, although increasingly open to question, live on, however, as demonstrated by the performance of the Japanese economy in 1997's final quarter. Just as Mr. Keynes argued, a big increase in savings led to a drop in aggregate demand, which, in turn, resulted in less output. According to the Economic Planning Agency, gross domestic product contracted 0.7 percent in the October-December period on a real, seasonally adjusted, annualized basis. This shrinkage helped to trim last year's growth to an inflation-adjusted 0.9 percent.

 

CABINET PRIMES FINANCIAL MARKET BIG BANG by Jon Choy

The cabinet of Prime Minister Ryutaro Hashimoto put the country's financial industry on notice March 10 that his pledge to make Japan's financial markets "free, fair and global" by the year 2001 was not an empty promise. It approved a comprehensive reform bill that sets dates for many changes and formally commits the government to others. Mr. Hashimoto's promised financial-market Big Bang, however, will not mean unbridled freedom. In light of the stream of scandals plaguing financial institutions, the Ministry of Finance and, most recently, the Bank of Japan, the bill mandates tougher financial disclosure rules and penalties for wrongdoing at the same time that it lifts restrictions on business activities. Although opposition parties disagree with some aspects of the draft legislation, the bill should be approved by the Diet without significant changes before the mid-June end of the regular session.

 

UNITED STATES, JAPAN AGREE ON MORE AID FOR THAILAND, DISAGREE OVER MYANMAR by Eric Altbach

Washington and Tokyo have decided to reward Thailand for its efforts to meet International Monetary Fund-mandated conditions for reforming its battered economy. The prize is new trade financing and investment insurance to help encourage the return of private capital to the troubled Southeast Asian nation.

 

JAPAN TO REPLACE LARGE RETAIL STORE LAW by Susan MacKnight

"Be careful what you wish for." This warning applies equally to daydreamers and the White House and its Japan trade agenda. Virtually every list of market access demands that Washington has forwarded to Tokyo over the last decade has featured repeal of the Large Retail Store Law — the 1973 small retailer-protection measure that, in the U.S. telling, stunts the expansion of the types of stores most likely to sell American products. Japan finally is ready to grant the United States its wish. In two years, the Large Retail Store Law will be scrapped. However, legislation potentially far more restrictive than what now is on the books will go into effect at that time.

 

Notes: NUCLEAR WASTE SHIPMENT

Tokyo's plans to increase the country's energy independence and reduce emissions of climate-affecting greenhouse gases by expanding the use of nuclear power face growing resistance from citizens and elected officials. In the latest incident, which lasted from March 11 through March 13, the governor of Aomori prefecture refused to allow a British-flagged vessel carrying reprocessed nuclear fuel and waste products to dock and unload its cargo at the Mutsu-Ogawara port. Located on the eastern side of northern Japan, the port serves the town of Rokkasho, where government-owned Japan Nuclear Fuels, Ltd. is building the country's first commercial-scale nuclear fuel storage and reprocessing facility.

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