No. 30 — August 6, 1999


Feature Article



The East Asian financial crisis, sparked by the July 1997 devaluation of the Thai baht, dealt a devastating blow to a region that had enjoyed spectacular growth patterns envied the world over. Millions of people were thrown out of work, and in some countries, social instability triggered violence, toppled governments and destroyed the economic gains of an entire generation. The United States, Japan and the other rich countries scrambled to understand and contain the crisis as it threatened to expand beyond regional borders and infect the global economy.

First on the scene was the International Monetary Fund, which came to the rescue with billion-dollar loans and programs for financial system reform. Tokyo was not far behind, proposing the creation of an Asian Monetary Fund, envisioned as an alternative institution that would serve the region quicker and more effectively than the IMF. But the reigning global financial entity and the IMF's largest shareholder, the United States, rejected the idea.

In the face of such opposition, Tokyo was forced to shelve the AMF plan. In its place, a new policy response was formulated, which focused on a more traditional Japanese role: provider of financial aid. By November 1998, in concert with the IMF and through various bilateral channels, Tokyo dutifully had churned out $44 billion worth of checks for its struggling neighbors. Despite these contributions, the international community continued to complain that Japan was not doing enough.

In October 1998, Finance Minister Kiichi Miyazawa unveiled a $30 billion East Asian aid package, which was basically the functional equivalent of a scaled-down AMF. Complementary programs were announced shortly after, and in May 1999, the so-called Miyazawa Plan, already an enormous aid fund, was expanded significantly. Tokyo claims to have dedicated to date more than $80 billion to help stabilize the East Asian financial crisis. That extraordinary amount is, by far, the largest contribution of any single nation.

Above and beyond its financial generosity, Tokyo has been busy working out proposals to strengthen the global financial architecture. These plans envision a greater role for the yen and more restrictions on cross-border capital flows. Despite Japan's substantial efforts to battle the East Asian economic crisis, critics have questioned the true value of and the intentions behind Tokyo's strategies and massive aid program for shoring up the global economy. The often criticized "Japanese way" of addressing international affairs does not always correspond with the ideas of other international players. Nevertheless, Tokyo has made important contributions to solving one of the global economy's most pressing problems.

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Weekly Review


After increasing for eight straight quarters, Japan's customs-clearance trade surplus contracted 16.5 percent in the April-June period from a year earlier (see Table 1). Together with the data for 1999's first quarter (see JEI Report No. 18B, May 7, 1999), the latest numbers point to important changes occurring in the Japanese economy, even though, at first glance, they appear to represent little more than the effects of changing currency valuations.


--- by Jon Choy

The ruling Liberal Democratic Party and its governing ally have introduced legislation that could revolutionize pensions in Japan. A bill submitted to the Diet July 19 would authorize defined-contribution pension plans similar to the 401(k) plans popular in the United States. This option could be available as early as October 1, 2000. In the meantime, both pension providers and managers are maneuvering to take advantage of the pending opportunity. While the new system will benefit workers in a labor market undergoing major changes, it also will expose them to greater financial risk. Whether employees embrace or reject this trade-off could have major political implications.



Underscoring Tokyo's efforts to make Japan's financial markets "free, fair and open," the Financial Supervisory Agency has sent an unmistakable message to financial services providers that it will not tolerate certain practices that its predecessor — the Ministry of Finance — explicitly or implicitly condoned. The watchdog agency announced July 29 that it was revoking the business license of one Credit Suisse Group AG subsidiary and penalizing five other affiliates for violation of Japan's banking laws and obstruction of a government investigation into their activities. The sanctions put foreign financial institutions on notice that they will not escape FSA scrutiny or be given special treatment. However, the seeming mismatch between the alleged transgressions and the harsh punishment meted out, coupled with the agency's fallback on a vague provision to justify such penalties, has left some observers questioning the FSA's judgment.



North Korea had better think twice about testing another ballistic missile. In recent weeks, American and Japanese defense officials have used several high-profile forums, including meetings of cabinet-level personnel and the Japan Defense Agency's 1999 white paper, to convey this blunt message to Pyongyang.

Adopting a far more urgent tone than previous defense white papers, JDA's annual review of regional and global security concerns, released July 27, maintains that North Korea's ability to produce missiles that can reach Japan is becoming "a more and more serious destabilizing factor for the East Asian region." The report's authors argue that it is imperative for Japan to beef up its intelligence-gathering capabilities, pass legislation that would facilitate a prompt Self-Defense Forces response in the event of an emergency, proceed with plans to codevelop with the United States a theater missile defense system and continue to work closely with Washington and Seoul in dealing with President Kim Jong Il's worrisome regime in Pyongyang.


At a July 28 donors' meeting in Brussels on Kosovo's reconstruction that was attended by representatives from more than 60 nations and dozens of multilateral aid organizations, Tokyo announced that it would make available $220 million in assistance. This amount is not a new commitment; rather, it is a restatement of earlier pledges. Tokyo had approved a plan in late April to boost aid for Kosovo as well as for Albania and Macedonia to $200 million from the $15 million pledged earlier that month (see JEI Report No. 18B, May 7, 1999). A second increase followed roughly two months later when, in response to a United Nations' appeal, Tokyo decided in mid-July to provide $20 million to the Office of the U.N. High Commissioner for Refugees and the World Food Program for humanitarian relief.

At the eighth meeting of the Consultative Group for Indonesia, an international donors' consortium led by the World Bank, Tokyo announced that it would contribute nearly $1.7 billion in grants and loans to Jakarta in FY 1999. Although most of these funds already had been promised, Japan restated its commitments and offered some new money at the July 27-28 meetings in Paris. The latest initiative, a ¥72 billion ($600 million at ¥120=$1.00) social safety net adjustment loan, will be cofinanced by the World Bank.

For all the controversy that the government-to-government semiconductor pact created over most of its 13-year history, the July 31 end of this Japan market access agreement occasioned remarkably little notice or comment on either side of the Pacific. The nonevent nature of the accord's expiration was perhaps the ultimate proof that conditions of competition have changed dramatically in the world semiconductor business since the Reagan White House concluded in the summer of 1986 the prototype of the managed trade framework embraced so wholeheartedly by the Clinton administration years later.

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