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No. 13 — April 2, 1999

 

Feature Article

POSTCRISIS JAPAN-SOUTH KOREA ECONOMIC RELATIONS: THE UPS AND DOWNS OF TRADE AND FOREIGN DIRECT INVESTMENT by Marc Costellano

Summary

East Asia's financial and economic crises have altered Japan-South Korea trade relations, at least for now. Sagging consumer and industrial demand in both countries took a substantial bite out of bilateral trade at the same time that extraordinary currency fluctuations sparked tension over the international competitiveness of key export industries. Japanese and South Korean managers of companies in such businesses as semiconductors, shipbuilding and steel watched helplessly as the pricing edge shifted with exchange rates, seeming to make or break chances for sales and profits in one country or the other.

The current state of bilateral economic relations is more a consequence of South Korea's rapid downturn than of Japan's prolonged slump. The main operating factors — exchange rate realignments, a more open foreign direct investment environment and demand reduction — were outcomes of the problems that enveloped South Korea starting in the latter part of 1997. Thus, a recovery there, rather than in Japan, likely would have a greater effect on economic ties over the near term. Prospects for a turnaround in South Korea in 1999 are considered to be fairly good. A rebound could bring in its wake a return to traditional levels of trade while also providing added impetus to the recent, rapid inflow of direct investment from Japan.

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Weekly Review

SPY-SHIP INCIDENT FOCUSES ATTENTION ON GUIDELINES LEGISLATION by Barbara Wanner

The March 23 intrusion into Japanese territorial waters of two suspected North Korean spy boats that were masquerading as fishing vessels and their hot pursuit the following day by Maritime Safety Agency ships and, subsequently, by more powerful Maritime Self-Defense Force destroyers once again jolted the Japanese body politic. Just as Pyongyang's August 1998 launch of a missile over northern Honshu served as a reminder that the security situation in Northeast Asia remains volatile (see JEI Report No. 34B, September 4, 1998), so, too, did North Korea's latest clumsy but provocative act underscore Japan's need for an effective defense capability.

 

BUSINESS INVESTMENT DECLINE IN JAPAN PROJECTED TO ACCELERATE by Arthur J. Alexander

Capital spending, which in many ways defined Japan's postwar experience, fell in the final quarter of 1998 to its lowest level relative to gross domestic product since the 1950s. According to three recent surveys, business investment will decline even further in the coming year or so.

Investment made Japan affluent. In 1974, total private and public spending on plant and equipment, housing, infrastructure and inventories reached a peak of 40 percent of GDP. Throughout the 1960s and the 1970s, Japan invested on average a full 34 percent of its total output. This was income that was not spent on current consumption or government expenditures. Instead, it was plowed back into expanding Japan's ability to produce in the future.

 

JAPAN'S SAVINGS SOARED IN 1998 by Douglas Ostrom

Last year, Japanese households, already famous for their frugality, outdid themselves. According to a recent Management and Coordination Agency report, average household savings went up ¥1 million-plus ($8,300 at ¥120=$1.00) in 1998 (see Table). At the same time, average household income rose a mere ¥296,000 ($2,500). In other words, people saved all of the modest increase in their incomes — and then some. These developments were in sharp contrast to those of 1997, when savings levels declined (see JEI Report No. 12B, March 27, 1998).

 

JAPAN, VIETNAM STRENGTHEN ECONOMIC RELATIONS by Marc Castellano

Expanding Japanese aid, investment and trade were the chief objectives of Vietnamese Prime Minister Phan Van Khai's March 28-30 visit to Japan. Negotiations concluded during his stay produced a breakthrough development: Tokyo's extension of most-favored-nation status to Vietnam. The Southeast Asian country will join the People's Republic of China as the only other nonmember of the World Trade Organization to enjoy MFN tariff treatment.

 

NOTES

Philippine Aid - International donors pledged March 25 to provide $4.5 billion in aid for economic structural reform programs in the Philippines this year. Japan's share — the largest portion by far at $3.1 billion — will come out of the Miyazawa Plan, the $30 billion initiative outlined last October to support East Asia's reeling economies (see JEI Report No. 6A, February 12, 1999). However, only $1.7 billion is new money; Tokyo already has committed about $1.4 billion in aid for the Philippines (see JEI Report No. 8B, February 26, 1999, and No. 11B, March 19, 1999). According to Ministry of Foreign Affairs officials, the promised additional funds will be used to back small and midsized businesses and to help alleviate poverty in rural areas. The latter goal will involve programs geared toward boosting food production, promoting medical services and building educational facilities.

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