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No. 35 — September 18, 1998

 

Feature Article

WEATHERING THE STORM? JAPAN'S PRODUCTION NETWORKS IN ASIA AND THE REGIONAL CRISIS by Eric Altbach

Summary

Japanese manufacturers have expanded their overseas production activities significantly since the sudden rise in the value of the yen following the 1985 Plaza Accord. Asian countries have been a major focus for the development of Japanese overseas production networks for the automotive, electrical machinery and electronics industries, among others. Asian production bases are an important part of the networks and play a central role in the overall corporate strategy of many large Japanese manufacturers and their small and medium-sized subcontractors.

However, after years of impressive growth, many countries in both North and Southeast Asia were hard-hit by the wave of instability that swept through regional currency and equity markets beginning in the summer of 1997. Devalued and unstable local currencies, slow or negative economic growth, a severe "credit crunch" caused by widespread structural weaknesses in domestic banking systems, rising unemployment, weakened domestic demand and greatly reduced access to international credit markets in these countries are affecting the strategies of Japanese corporations with established production bases in Asia.

Many Japanese manufacturers already have announced that, due to contracting regional demand, they will scale back plans to expand production at their Asian subsidiaries, postpone new investments and reorient additional local production for export. However, preliminary reports seem to indicate that while Japanese firms have been feeling the short-term impact of the Asian crisis, they are not yet rethinking how Asia fits in to their medium- and long-term strategies.

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Weekly Review

GDP PLUMMETS . . . AGAIN by Douglas Ostrom

Sometimes the journalists are right. For months, they have been saying that Japan is suffering through its worst postwar recession. But the numbers have not been there to support that conclusion — until now. With the September 11 release of Japan's second-quarter gross domestic product statistics by the Economic Planning Agency, however, the unprecedented weak state of the Japanese economy became unmistakable. According to EPA's preliminary numbers, Japan's GDP declined 3.3 percent in the April-June period on a price and seasonally adjusted annualized basis.

 

YEN'S GYRATIONS REALLY DO REFLECT SOME FUNDAMENTALS by Arthur J. Alexander

The daily reports in newspapers and broadcast media that purport to explain the day's market outcomes are more like popular fiction than economic literature. Whatever occurs is sure to be interpreted by imaginative commentators. Although the day-to-day movements of such prices as stock values or foreign exchange are better explained as random walks, the after-the-fact stories may have some entertainment value. Let us entertain you.

 

INITIAL FY 1999 BUDGET REQUESTS TARGET RECESSION by Jon Choy

With an eye on deteriorating economic indicators, Prime Minister Keizo Obuchi and his cabinet are rushing to prepare a special stimulative budget for the 15-month period beginning January 1, 1999. The initial FY 1999 budget requests submitted at the end of August by all government ministries and agencies amount to nearly ¥84.6 trillion ($626.7 billion at ¥135=$1.00), an increase of 8.9 percent over the initial FY 1998 budget. While this rate of change is more than double that recorded at the same stage of the FY 1998 budget process, what has caught the attention of outside observers is the even heftier percentage increase in general expenditures (discretionary spending). At 11 percent, the hike in discretionary outlays is the largest in the postwar era. Some analysts caution, however, that because the budgets cover a 15-month period, it is risky to compare the figures directly with the usual one-year budgets.

 

WASHINGTON, TOKYO WRESTLE WITH POLICY RESPONSE TO NORTH KOREAN TEST by Barbara Wanner

Transpacific reverberations continue following North Korea's August 31 test of what was thought to be a ballistic missile that flew over Japanese territory before falling into the Pacific Ocean off the northern coast of Honshu, the largest island in the archipelago. It turns out that Pyongyang may well have been truthful in its statement that its intention was to launch a satellite to commemorate the nation's 50 years of statehood. It was not testing a longer-range missile, as U.S. intelligence initially had proposed. Washington confirmed September 14 that the late August launch was a failed attempt by the closed, Stalinist regime to place a small satellite into orbit.

 

TOKYO TAKES HEAT FROM WASHINGTON, BEIJING OVER APEC STANCE, WEAK YEN by Eric Altbach

U.S. trade officials, pointing to Tokyo's unwillingness to open domestic markets, criticized Japan for slowing progress on trade liberalization in the Asia Pacific Economic Cooperation forum. This complaint came at the September 15 conclusion of a three-day meeting of senior APEC trade officials in Kuantan, Malaysia. The participants had failed to conclude an agreement on tariff reductions in the nine sectors covered by the Early Voluntary Sectoral Liberalization initiative.

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