No. 5 — February 4, 2000


Weekly Review

--- by Marc Castellano

On the trade front at least, Japan, Asia's economic powerhouse, has done relatively little to help propel the recovery of its neighbors. In yen terms, the world's second-largest economy imported just 2.7 percent more from Asia (broadly defined) in 1999 than the year before (see Table). More significantly, purchases remained lower than in 1996 and especially in 1997. However, relative to the 4 percent reduction in Japan's overall imports in 1999, the small gain in deliveries from Asia — the only major area besides the Middle East to register an increase — shone through as a bright spot in a generally dark picture. Plus, last year's uptick was a major improvement compared with the 10.4 percent contraction in purchases of Asian goods in 1998.

Japan's trade with Asia suffered a steep decline in 1998 due to the financial and economic crisis that engulfed such countries as Thailand, Indonesia and South Korea in late 1997 and caused collateral damage of varying severity to other economies in the region. Trade is a major growth vehicle for most Asian countries, almost all of which rely on Japan and the United States for a large portion of their overseas sales as well as for the capital and intermediate goods vital to development. In the late 1990s, though, Japan still was trapped in a slump that dated back to the start of the decade, severely diminishing its ability to serve in its traditional role as the regional engine of growth. That reality, however, did not stop Asian leaders from calling on Japan to play this part.

The crisis finally began to subside in 1999, and with the nascent recovery came a rebound in trade flows for most of the region. Singapore's external trade, for example, jumped 8.1 percent last year after contracting 7.5 percent in 1998. Japan, however, continued to struggle, posting at most 1 percent real economic growth, analysts generally calculate. That made the rise in imports from Asia all the more notable. Of Japan's major trading partners in the region, only Hong Kong, Thailand and Vietnam did not participate in the upturn in Asian imports. As a group, the 10 members of the Association of Southeast Asian Nations shipped 1.1 percent more to Japan in 1999. Other Asian countries also saw sales increases of various sizes, with South Korea registering the largest gain. The fact remains, however, that Japan's purchases from few countries returned to their precrisis levels, at least in value terms.

The latter is an important qualifier because a strengthening yen played a key role in boosting the volume of imports from Asia and some other supply sources as well. Overall, real imports expanded 9.5 percent last year, with volume presumably increasing even more for the manufactured products and industrial and agricultural inputs that Japan buys from Asia.

Import prices have been declining since mid-1998, when the yen began a fairly steady appreciation against the dollar as well as vis-a-vis the currency of virtually every one of Japan's Asian trading partners (see JEI Report No. 3B, January 21, 2000). Less expensive computers and clothing from Asia proved particularly attractive buys for Japanese consumers throughout most of 1999. Because changes in import volumes tend to lag changes in price levels by about six months, the effect on trade flows of realigned exchange rates was delayed until early last year. Japanese officials contend that the fall in import prices triggered by the yen's appreciation was a bigger factor in boosting imports than any increase in private demand.

Japan's exports to Asia staged a rebound of sorts in 1999, edging up 0.8 percent for the year. While this gain certainly was an improvement on the 21.7 percent contraction logged in 1998 at the peak of Asia's problems, it still left regional shipments far below their precrisis levels. Key to the upturn was a 30.1 percent jump in Japan's exports to South Korea. The South Korean economy staged a spectacular recovery last year, at least on paper, beating even the most optimistic predictions in expanding by some 9 percent. In contrast, Hong Kong, one of the last Asian economies to emerge from the wreckage of the crisis, bought 15 percent less from Japan as its economy shrank another 0.5 percent.

Ironically, trade with Asia became more important to Japan in 1999. As a share of imports, purchases from the region rose to 39.6 percent of the total from 37.4 percent in 1996. Significantly, the proportion of imports originating in Asia has increased by roughly 10 percentage points since 1989, whereas the supply position of the United States — Japan's largest trading partner — has remained relatively constant at around 30 percent. Imports of oil products, liquefied petroleum gas, PCs, clothing and other, generally labor-intensive, manufactures from Asia have taken on greater significance for the Japanese economy, backstopped by higher volumes.

Although exports to Asia declined to 37 percent of the total in 1999 from 44 percent in 1996, the ratio was up from the 34.7 percent of 1998. Shipments of semiconductors were strong in response to higher demand from Asian electronics manufacturers. Exports of steel and organic chemical compounds also increased due to recovering demand for industrial goods.

Most of developing Asia is just beginning to return to something approaching normalcy. To achieve the real thing, these countries need help in the form of a robust, domestic demand-led recovery in Japan. Over the near term, however, Japan is unlikely to fulfill its role as the locomotive that pulls in imports from its neighbors.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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