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No. 36 — September 24, 1999

 

Feature Article

JAPANESE AFFILIATES IN ASIA: THERE TO STAY by Marc Castellano

Summary

Since well before the 1990s, Japanese businesses have been developing production networks and establishing market niches throughout Asia. This trend accelerated during the early part of the current decade, propelled by the so-called miracle growth in the region and by rising costs at home. Trade, aid and credit flows rose in step with the increased foreign direct investment activity, strengthening the economic links between Japan and Asia. This pattern of growing interdependence had important implications when the region experienced a severe economic downturn.

In July 1997, the Thai baht fell into a precipitous downward spiral. Fallout from that rapid devaluation triggered the East Asian financial crisis, a catastrophe that caused prolonged economic turmoil regionwide. As a result, Japanese exports to Asia fell along with foreign direct investment. Moreover, many overseas affiliates of Japanese companies were forced to cut production, lay off workers and report lower profits. Although some businesses benefited from the increased export competitiveness caused by the depreciation of local currencies, most firms suffered significant losses in the wake of the regional slowdown.

By mid-1999, many of the hardest-hit countries finally were showing signs of a turnaround. On the heels of the fledgling recovery, Japanese exports to Asia have started to increase after a period of decline, and Japanese companies have begun to report increased sales in the region. Moreover, a number of large Japanese firms, spanning a wide range of industries, have boosted production or expanded their market positions in Asia.

Despite the effects of the East Asian economic crisis, Japanese companies in Asia remain optimistic about the future. For the most part, they not only expect the region to recover but also have plans to expand overseas operations. Several already have seized new opportunities that had emerged as a result of the crisis; others have begun to increase capacity in expectation of a strong economic recovery. Japanese affiliates suffered during the recent regional tumult, but they not only appear to have withstood the blows, they also now seem anxious to get back in the ring.

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Weekly Review

BOJ REFUSES TO EASE MONETARY POLICY FURTHER by Douglas Ostrom

The Bank of Japan, under intense domestic and international pressure to change course as a means of restraining the soaring yen and stimulating the economy, held fast to its existing policies in its regularly scheduled meeting September 21. The central bank's decision is not likely to go unchallenged and is almost certain to come up during the September 25 meeting of the Group of Seven finance ministers and central bank governors in Washington.

 

JAPANESE BANKING INDUSTRY REALIGNMENT ACCELERATES by Jon Choy

Japan's cast of banks is being rearranged: some players are merging or reorganizing, others are folding, foreign actors are seizing leading roles and new banks are being established. The banks appear to have gotten control of their nonperforming loans, but the problem will continue to impact balance sheets and operations for the next several years. Rising domestic and international competition is forcing bank executives and government regulators to be more creative and daring, yielding unprecedented changes and opportunities in the marketplace.

 

OBUCHI ACES REELECTION BUT FACES POLITICAL, ECONOMIC CHALLENGES by Barbara Wanner

As widely anticipated, Prime Minister Keizo Obuchi handily won reelection as the Liberal Democratic Party's president in the ruling party's September 21 leadership race. Mr. Obuchi garnered 350 votes, or 68 percent of the total. His challengers, former LDP Secretary General Koichi Kato and past LDP policy chief Taku Yamasaki received 113 and 51 ballots, respectively. Given the LDP's majority in the powerful lower house, which has the final say in selecting the prime minister, Mr. Obuchi will remain the head of government.

 

JAPAN CONTRIBUTES FUNDS, NOT TROOPS, TO EAST TIMOR PEACEKEEPING FORCE by Marc Castellano

Tokyo announced September 16 that it would provide $2 million to help finance the United Nations-authorized peacekeeping force dispatched to deal with the conflict in East Timor. The funds, made up of a fresh contribution of $1 million, complemented by another $1 million to be drawn from a previous donation to the U.N. World Food Program, will support the U.N. High Commissioner for Refugees. Tokyo also pledged to send investigators to East Timor and to help in reconstruction efforts over the medium and long term. At a press conference following the aid announcement, Foreign Minister Masahiko Komura confirmed that Tokyo would send no troops to the warring province for now but instead would contribute to a trust fund to be established by the U.N. to support the peacekeeping mission.

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