No. 24 — June 23, 2000

Feature Article

RAPID RECOVERY IN SOUTHEAST ASIA STRENGTHENS JAPAN-ASEAN ECONOMIC RELATIONS

Marc Castellano

Issue Index aaaa 2000 Archive Index aaaa Subscriber Area aaaa Home


Summary

Economic links between Japan and the member countries of the Association of Southeast Asian Nations run deep. Indeed, substantial trade, aid and investment form the backbone of strong bilateral relationships. The financial and economic crisis triggered by the devaluation of the Thai baht in July 1997 reverberated throughout East Asia and temporarily weakened the Japan-Asean connection. However, the region's recent and unexpectedly speedy recovery has put economic relations back on a rapid-growth track.

The 10 Asean nations — Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (formerly Burma), the Philippines, Singapore, Thailand and Vietnam — were keen to restore growth quickly and worked hard to boost trade and investment. Regional commerce picked up as stability returned, and Japanese investment, after a short-lived slowdown, looks set to flow back into the Southeast Asian market.

On the aid front, the Japanese financial assistance packages that were introduced to soften the blow of the crisis have run their courses. But cooperative efforts have produced a major new regional fund that may help to avoid a future economic meltdown. Japan, Asean and other regional partners have reached a landmark agreement to establish a substantive crisis-prevention facility.

Top


The Unexpected Recovery

The 1997-99 East Asian financial and economic crisis dealt a humbling blow to the "tiger economies" accustomed to miracle growth. Suddenly, the darlings of the developing world became the scorn of investors, a change of attitude that unleashed an avalanche of problems that led to mass chaos, then disaster. Across the region, currency values and output plunged while poverty and unemployment soared. What initially had been characterized as a run-of-the-mill financial crisis turned into one of the worst panics seen in a generation. Riots, protests and other forms of civil strife ensued, aggravating an already-chaotic scene. The situation went from bad to worse, and by mid-1998, no end was in sight. In fact, the outlook appeared especially grim as the turmoil in East Asia spread to other parts of the developing world.

South Korea and four countries in Southeast Asia — Indonesia, Malaysia, the Philippines and Thailand — had sustained the heaviest damage. Although each endured varying degrees of devastation, Indonesia was hardest hit. In May 1998, political upheaval (see JEI Report No. 19B, May 15, 1998) forced the resignation of President Suharto, a strongman who had been in charge for more than 30 years. The power vacuum was filled by a much weaker leader, and the economic fabric of the country, already in tatters from a year of turmoil, started to unravel. Separatist movements gathered steam, opposition parties gained popular support and ordinary citizens became unruly. Meanwhile, Indonesia's financial system continued to crumble as observers simply dismissed the country as a basket case.

The financial troubles also affected such other Southeast Asian economies as Cambodia, Laos, Singapore and Vietnam, but those countries were able to avoid a total political meltdown. Nevertheless, trade and investment, the twin engines of growth for much of the region, declined sharply. To be sure, overall damage was substantial for the smaller economies as well.

Despite the severity of the crisis, once the worst had past, recovery came quickly. Although a debate rages over whether true reform has occurred in Southeast Asia, widespread agreement exists that several key macroeconomic indicators have turned around — and have done so much faster than many had expected. Remarkably, all five of the hardest-hit countries posted positive growth rates for 1999 (see Table 1).

Table 1: Real Growth in Countries Hardest Hit by East Asian Crisis

Year

Indonesia

Malaysia

Philippines

South Korea

Thailand

1994

7.5%

9.2%

4.4%

8.3%

9.0%

1995

8.2

9.8

4.7

8.9

8.9

1996

8.0

10.0

5.8

6.8

5.9

1997

4.5

7.5

5.2

5.0

-1.8

1998

-13.2

-7.5

-0.5

-5.8

-10.4

1999

0.23

5.4

3.2

10.2

4.0

Source: Asian Development Bank

Midway through last year, evidence of a nascent recovery began to appear. In Southeast Asia, trade and industrial production picked up, helping to breathe life back into the struggling economies. Exports rose on the back of increased global demand for semiconductors and consumer electronics goods, mainstay products of the region. Moreover, during the second half of 1999, currencies strengthened against the dollar, and healthy increases were recorded in the levels of foreign exchange reserves. Observers pronounced the crisis over in early 2000, and, now, some semblance of optimism finally is beginning to return to the region.

Of course, drastic changes had to be made in order to rebuild the shell-shocked economies. In general, these adjustments involved implementing a series of reforms in the legal, financial and corporate sectors. As a result, Southeast Asian economies have taken significant steps toward becoming more free-market oriented and have opened up to greater foreign competition and investment. Equally important were the coincident efforts being made to strengthen regional cooperation. The Association of Southeast Asian Nations established programs to liberalize trade and investment flows and worked toward developing crisis-prevention facilities. All these changes affected the grouping's economic relations with Japan, a country to which Asean's business and policy links run deep.

Top


Investment

Japanese companies have made huge investments in the Asean region. During the middle to late 1980s, a horde of Japanese manufacturers moved overseas to take advantage of the long and steady rise in the value of the yen vis-a-vis the dollar. Currently, some 6,000 Japanese-affiliated companies operate in East Asia.1 The vast majority of these businesses are based in the Asean countries and produce vehicles or electronic goods for export to third countries and, increasingly in these and other industries, for sale in the markets of the host countries.

According to the Paris-based Organization for Economic Cooperation and Development, corporate Japan is collectively in terms of stock ownership the largest single foreign investor in Indonesia, Malaysia and Thailand.2 At a February investment promotion conference held in Tokyo (see JEI Report No. 10B, March 10, 2000), Asean Secretary General Rodolfo C. Severino reported that Japan had provided 20 percent of all net foreign direct investment flows into Southeast Asia from 1995 to June 1999. Asean official estimates also show that from 1990 to 1998, Japan invested the equivalent of $52 billion in the region.

The economic crisis, however, interrupted the steady pattern of increases in Japan's FDI to Asean countries in FY 1998 (see Table 2). But recent Ministry of Finance figures indicate that the sharp decline already is on track to reverse. Asean estimates tell a similar story. Malaysian International Trade and Industry Minister Rafidah Aziz, who led an Asean investment promotion delegation to Tokyo in February, reported that Japan's FDI in Asean countries had reached a record level of ¥960 billion ($8.7 billion at ¥110=$1.00) in 1997. In 1998, FDI dropped by almost half to ¥515.6 billion ($4.7 billion). But, when compared with the 1990-96 average of ¥534 billion ($4.9 billion), the decline appears less drastic. Moreover, a number of signs suggest that investment from Japan is on the rebound. Two key factors have contributed to the recent turnaround: Asean's aggressive investment promotion efforts and the emergence — or at least the appearance — of a sustainable recovery in the region.

Table 2: Japan's Direct Investment in Six
Asean Countries,[1] FY 1995-FY 1999[2]

(in billions of yen; notification basis)

Fiscal Year

Value

Change

1995

¥532.6

0.7%

1996

719.0

35.0

1997

960.8

33.6

1998

515.6

-46.3

1999

326.1 [2]

26.5[3]

[1]Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

[2]First half of FY 1999.

[3]Estimate based on extrapolation of half-year data.

Source: Ministry of Finance

In a belated attempt to respond to the economic crisis, Asean introduced a series of investment incentive schemes. The first of these, presented in October 1998, was based on the expansion of the so-called Asean Investment Area, a strategic initiative aimed at spurring interest in the region. Two months later, at its annual summit, Asean introduced the Hanoi Plan of Action, which included a set of "bold measures" designed to make it easier for foreign companies to operate in the region and a host of additional investment incentive plans for 1999 and 2000. Among these was a provision that gave foreign investors various tax breaks. Moreover, the plan exempted from tariffs capital imports required by the investment. Another measure allowed resident multinational corporations to be 100 percent owned by foreigners, to use or lease industrial land for 30 years and to employ foreign workers on liberal terms. Still other incentives were offered later. In September 1999, for example, Asean economic ministers and finance officials agreed to add services relating to manufacturing, agriculture, forestry, fishery and mining to the framework of the AIA.

A similar initiative, the Asean Industrial Cooperation scheme, or AICO for short, also gathered steam. The number of AICO arrangements has exploded in the last few years, especially in the automotive industry. The agreement, implemented in September 1996, was designed to provide special treatment for intra-association investment projects. Basically, this goal involved allowing approved companies to enjoy preferential tariff rates of zero to 5 percent. In other words, two or more firms operating in different Asean countries could exchange goods at significantly reduced rates, an arrangement that lowered costs for all participants. AICO participation required that companies be registered or operating in an Asean country and have at least 30 percent of their shares held within that country. The latter provision, however, was dropped as part of the incentives introduced in 1998.

Toyota Motor Corp., which has auto-part suppliers and assemblers all over Southeast Asia, saw AICO as a tremendous opportunity. In fact, a growing number of automotive makers have become interested in using it to gain a competitive advantage. As of December 1999, in Malaysia alone, 18 out of 22 approved AICO applications involved arrangements relating to automotive products. Isuzu Motors Ltd. announced plans last December to establish a flexible truck-supply scheme under AICO, a move that would enable the company to distribute its large-sized truck inventory among Asean countries to meet changing trends in demand. Asean countries charge a 33 percent levy on assembled vehicles imported from Japan but only a 5 percent duty on those coming from other association members. Upon approval, Isuzu, for example, could ship trucks made at its Thailand plant to Indonesia, where the demand for trucks is recovering. Most importantly, the swap plan will help reduce inventories, which remain excessive as a result of the economic crisis.

In early 2000, Asean also launched a major initiative aimed specifically at wooing the Japanese business community. As part of that effort, Asean held the February investment promotion conference mentioned earlier. The joint seminar in Tokyo attracted more than 700 Japanese companies. At a minimum, the campaign succeeded in spurring a mutual interest in exploring additional investment agreements.

At Asean's May meeting of trade ministers in Yangon (formerly Rangoon), International Trade and Industry Minister Takashi Fukaya proposed that Tokyo conclude an investment pact with each member of Asean to boost commercial relations. Tokyo already is negotiating such an accord with Indonesia, which is expected to serve as a prototype. Mr. Fukaya also proposed that Tokyo send experts to Southeast Asia to help develop component-supply networks in the automotive and electronics industries.

Top


Industry

The vast numbers of Japanese companies in Southeast Asia were hit hard by the economic crisis. Most were forced to cut production, lay off workers and report lower profits. The automotive industry took a beating along with many other businesses. For example, Toyota's sales in Thailand fell 60 percent in 1998, the worst year of the crisis, while sales for Honda Motor Co., Ltd. declined 55 percent.

By mid-1999, however, a number of Japanese firms were reporting that business conditions had begun to improve.3 A survey conducted last November and December by the Japan External Trade Organization, a quasi-governmental trade promotion agency, confirmed that a degree of optimism had emerged.4 Among Japanese manufacturers operating in the countries known as the Asean 5 — Indonesia, Malaysia, the Philippines, Singapore and Thailand — and in South Korea, 69 percent estimated that 1999 sales would exceed those of the previous year and 62.8 percent reported that 1999 sales had reached levels attained before the economic crisis. A whopping 72.2 percent predicted that sales would grow again in 2000. In contrast, only 52.1 percent reported an annual sales increase in 1998.

Notably, however, opinions varied substantially on the outlook for individual countries. Japanese manufacturers reporting that their host economies had recovered to 1996 levels totaled 28.4 percent in Singapore, 18.8 in Malaysia, 18.5 in the Philippines, 4.5 percent in Indonesia and 3.5 percent in Thailand. Not surprisingly, respondents who did not expect their host economies to fully rebound until sometime between 2002 and 2004 totaled 54 percent in Indonesia and 51.3 percent in Thailand.

Regarding earnings estimates, 67.2 percent of companies expected to turn a profit in 1999, up from 54.6 percent in 1998. Those forecasting an increase in profits for 2000 made up 60.3 percent of the sample, while 30.1 percent predicted little change and 9.6 percent expected a decline.

Automotive industry data supports the optimistic perspectives indicated in the JETRO survey results. Total vehicle sales in Thailand rose 52 percent in 1999, greatly surpassing analysts' expectations.5 The increase was attributable to the huge rise in December's car sales, which were more than double their year-earlier level. Thailand is a key barometer for the Southeast Asian automotive market because Japanese and most American and European automotive makers vigorously compete there. In November 1999, vehicle sales were up 84 percent in Malaysia and 39 percent in Indonesia, a clear indication that consumer confidence was on the rebound.

Driven as much by a nascent recovery in Southeast Asia as by a slowing economy at home, many Japanese car and truck manufacturers have begun boosting their production and expanding their market positions abroad. In 1999, domestic automotive output fell for all five of Japan's top car and truck makers — Toyota, Nissan Motor Co., Ltd., Honda, Mitsubishi Motors Corp. and Mazda Motor Corp. Instead, production was being shifted offshore. Last year, output increased 27 percent at Toyota's Asian plants and 40 percent at Mitsubishi's.

In February, two major Japanese automakers expressed continued confidence in Southeast Asia's unexpectedly rapid recovery. Toyota and Honda outlined plans to further increase production of vehicles in the region to capitalize on increased demand. Toyota expects the Thai market for passenger cars and one-ton pickup trucks to grow 28 percent in 2000. Using Thailand as a future export base also has become a part of the firm's strategic plan. In May, Toyota announced that it would boost production of the Soluna, a passenger car made for the Southeast Asian market.

The market for motorcycles also is expanding — but in different areas. Because Japanese makers do not expect a return to the type of growth that Thailand experienced in the early-1990s, they are setting up production lines in such nearby countries as Vietnam and Cambodia. The four biggest producers now ship parts in from Thailand for assembly in Vietnam, where the demand for motorcycles is projected to grow. Honda expects annual sales in Vietnam to reach 500,000 units in 2004, up 57.8 percent from the 315,000 sold in 1999.

Electronics manufacturers, who also have a huge presence in Southeast Asia, have been adjusting to the changing business conditions. Matsushita Electric Industrial Co., Ltd., for example, runs a large operation in Malaysia. Its total manufacturing output in 1999 accounted for 2 percent of the country's total exports. To take advantage of the improved business climate, MEI is transferring production of high-end flat-screen televisions and tubes to Malaysia. In addition, MEI and its Thai partners will invest the equivalent of $18.6 million in capacity expansion, upgrading factories and launching new products in FY 2000. The action follows the news that consolidated sales for MEI's Thailand operations in FY 1999 increased 22 percent from FY 1998.

Sony Corp., another major electronics company, has four Thai manufacturing plants, which produce television sets, semiconductors, audio equipment and mobile phones. The firm has announced plans to expand production capacity at its semiconductor and audio equipment plants. Because both factories already are operating at 100 percent capacity, Sony will tack on another 30 percent, an addition that will require an investment equal to more than $2.6 million. In 1999, due to increased demand for flat-screen televisions, stereos, DVD (digital video disc) players, Handycam digital video recorders and Walkman units, the company reported the highest turnover since it began operations in Thailand in 1995. Sony estimates that the local market for electronic appliances will grow 10 percent this year and expects its overall sales in Thailand to increase by 15 percent in FY 2000.

The electronics giant also has established a position in Vietnam. As of March 2000, Sony Vietnam Ltd., a joint venture between Sony and Vietronics Tan Binh, a state-run company, had produced more than 1.1 million units, a milestone that few foreign companies can claim. Total sales reached the equivalent of $39.7 million in 1999. The company, set to join an AICO arrangement with Sony Electronics Singapore, Pte., Ltd., is keen to cut costs to beat its competition. If approved, the deal will be the first involving a Vietnamese company since Hanoi signed on to AICO with six other Asean capitals in 1996. According to the AICO authorizing body, the applications have met the requirements. Once confirmed, import duties on the goods exchanged between the participating companies will be reduced from the 10 percent to 20 percent range to the zero to 5 percent range.

Finally, other industries, from trading houses to steelmakers, also are optimistic about prospects for growth in the Asean region. Mitsui & Co., Ltd., a trading company, has put its large projects in Malaysia and Thailand back on track after being put on an indefinite hold due to the economic crisis. Nissho Iwai Corp., another major trading firm, also is confident that its sales in Southeast Asia will pick up this year. Teijin Ltd., a global giant in the manufacture of fibers, chemicals and other products, plans to spend more than ¥10 billion ($90.9 million) on expanding capacity at its Singapore plant. Exports of Japanese steel also boomed. Japanese manufacturers delivered 2.4 million tons of steel to the rest of Asia in February, a 41.2 increase over the same month in 1998.

Top


Trade

Japan is Asean's second-largest trading partner behind the United States. In 1998, despite the fact that the economic crisis had taken a huge bite out of regional commerce, Japan made up 13.7 percent of the group's total global trade. That year, Japanese exports to the region declined 27.9 percent while Asean exports to Japan suffered a more moderate 14.2 percent dip. In 1999, however, overall trade returned, growing by more than 1 percent for the year (see Table 3). The rapid rebound not only was a boon to both sides but also offered hope that the overseas flow of goods and services had resumed an upward trajectory.

Table 3: Japan's Trade with Selected Asean* Countries, 1995-99

(in billions of yen; exports f.o.b., imports c.i.f.)

1995

1996

1997

1998

1999

Change
1998-99

Asean







aaExports

¥7,237

¥7,955

¥8,437

¥6,085

¥6,170

1.4%

aa Imports

4,451

5,703

6,059

5,191

5,259

1.3

aa aa Balance

2,786

2,252

2,378

894

911

Indonesia







aa Exports

935

986

1,230

560

551

-1.6

aa Imports

1,335

1,653

1,769

1,416

1,429

0.9

aa aa Balance

-401

-667

-539

-856

-878

Malaysia






aa Exports

1,573

1,668

1,756

1,216

1,265

4.0

aa Imports

992

1,279

1,375

1,133

1,241

9.5

aa aa Balance

581

390

380

83

24

Philippines







aa Exports

667

915

1,051

948

997

5.1

aa Imports

326

492

607

579

603

4.1

aa aa Balance

341

423

445

369

394

Thailand







aa Exports

1,850

1,988

1,764

1,222

1,284

5.1

aa Imports

950

1,111

1,157

1,068

1,008

-5.6

aa aa Balance

900

877

607

154

276

Singapore






aa Exports

2,158

2,260

2,450

1,930

1,854

-3.9

aa Imports

644

797

710

616

618

0.3

aa aa Balance

1,514

1,463

1,740

1,314

1,236

Vietnam







aa Exports

86

124

155

174

185

6.4

aa Imports

162

220

265

229

223

-2.6

aa aa Balance

-75

-96

-110

-55

-38

*The Association of Southeast Asian Nations includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (formerly Burma), the Philippines, Singapore, Thailand and Vietnam.

Source: Japan Tariff Association

To facilitate the process of economic expansion, Asean took steps to advance the Asean Free Trade Area, which was established in 1992, when regional leaders signed a framework agreement aimed at enhancing economic cooperation. Implementation began the following year, with the objective of achieving a bona fide free-trade area by 2008. The six original signatories — Brunei, Indonesia, the Philippines, Thailand and Singapore — began by reducing intra-Asean import duties on 15 groups of products, steadily increasing the number each year. The ultimate goal was to reduce tariffs on all goods and services to between zero and 5 percent.

However, Asean's expanded membership and the severe economic setback it had suffered in the 1997-99 crisis changed the AFTA implementation plan. Now, Asean claims that the free-trade scheme will be fully effective for the six founding members by 2002. Vietnam will have until 2006; Laos and Myanmar will have until 2008. Cambodia, the most recent addition to the group, has agreed to liberalize its trade by 2010.

Japanese companies stand to gain substantial benefits from AFTA. First, it would give them access to a single market with more than 500 million people and a combined annual gross national product equivalent to some $820 billion. They could locate their facilities in any of the 10 member nations to serve the entire region. Asean claims that it is the fourth-largest market in the world after the United States, Europe and Japan. Moreover, leaders of the regional grouping are talking about joining the Australia-New Zealand Closer Economic Relations trade agreement by 2010, meaning even greater market potential. Second, Japanese firms would be able to procure raw materials and other supplies from the Asean region at more competitive costs.

However, AFTA does have limitations and may not, in fact, keep to its current implementation schedule. The most sensitive farm products have been excluded completely from the agreement, and Kuala Lumpur has voiced strong opposition to the proposed liberalization of its automotive sector. As a result, Malaysia has been granted an exception and has until 2005 to cut vehicle tariffs. Other Asean members are considering backsliding as well. Ironically, Japanese automotive makers, which, unlike their European and American counterparts, have invested heavily throughout the region, are keen to protect their competitive advantage and may favor a slower pace of trade liberalization.

Despite the fact that some local businesses may founder under tough new competition, most Asean members are committed to meeting AFTA's deadlines, and the group has made substantial progress. By March 1999, negotiations to free trade in seven key areas — air-transport, business services, construction, financial services, maritime transport, telecommunications and tourism — had been completed.

Still, most Japanese companies remain cautious. Only 2.9 percent of overseas affiliates already have made changes to take advantage of AFTA and just 13.2 percent are considering changes, according to the JETRO survey.6 Notably, however, in the transportation machinery sector, these figures jumped to 16 percent that have made changes and 52 percent that are considering them. Other Japanese businesses are moving aggressively. For example, Sony Vietnam will undergo a major restructuring, reducing a large portion of its work force in preparation for competition that will result from AFTA's implementation.

Another important factor in the Japan-Asean trade equation is the emergence of discussions about forming bilateral agreements.7 Japanese officials long had approached the formulation of international trade policy under the framework of the World Trade Organization — or that of its predecessor, the General Agreement on Tariffs and Trade — preferring to negotiate multilateral agreements rather than establish regional or bilateral arrangements. This thinking, however, essentially was reversed in 1999, when MITI highlighted in its annual white paper on trade the benefits of economic integration and recommended that Japan work to establish free-trade agreements with its neighbors (see JEI Report No. 21B, May 28, 1999).

Another report, released last September by the Mission for Revitalization of the Asian Economy, a special task force commissioned in June 1999 by then-Prime Minister Keizo Obuchi, hailed regional trade liberalization and recommended that Japan actively pursue a free-trade agreement with South Korea. It further suggested that the agreement could be expanded to include other interested East Asian countries, for example, Singapore. Regarding broad policy objectives, the report concluded that free-trade agreements are one way to strengthen and deepen economic relations between Japan and East Asia, especially ties with South Korea and Asean.

As a result, Japan and Singapore have initiated a dialogue. During a December 1999 visit to Tokyo, Singaporean Prime Minister Goh Chok Tong proposed that the two sides begin the process of developing a framework for a free-trade agreement. In March, delegates from the two countries met to discuss a pact and agreed to complete a feasibility study and to propose possible areas of coverage. The two sides also decided to schedule the beginning of their formal negotiations to coincide with the informal meeting of the Asean heads of government that the Japanese and Singaporean prime ministers are scheduled to attend in November. During his April trip to East Timor, Indonesia and Singapore (see JEI Report No. 18B, May 5, 2000), Foreign Minister Yohei Kono hailed the progress of the joint feasibility study. Singapore officials, meanwhile, have indicated that Japan-Asean bilateral efforts will contribute to economic integration and will help build support for AFTA.

Top


Aid And Monetary Cooperation

Tokyo's role as an aid provider is another important part of the Japan-Asean economic relationship. Throughout the 1990s, the bulk of Tokyo's official development assistance outlays have been channeled into Japan's own backyard. From 1990 through 1998, the latest year for which figures are available, Asian countries received 50 percent or more of Japan's annual ODA disbursements. In October 1998, Finance Minister Kiichi Miyazawa unveiled a $30 billion aid package to help the five most affected East Asian countries — Indonesia, Malaysia, the Philippines, South Korea and Thailand — weather the economic storm that had started a year earlier.8 Over the next few months, Tokyo introduced additional support measures, including a ¥600 billion ($5 billion) special loan facility (see JEI Report No. 1B, January 8, 1999) and the $10 billion Asian Growth and Recovery Initiative, a joint effort of the United States and Japan aimed at mobilizing private-sector financing (see JEI Report No. 16B, April 23, 1999).

By mid-1999, the flagship fund, the so-called Miyazawa Plan, was exhausted but demand for assistance remained strong. In response, Tokyo announced the establishment of a ¥2 trillion ($16.7 billion) bond-guarantee program.9 In all, Tokyo committed $80 billion-plus to the region over the more than two-year crisis period.

In February, Ministry of Finance officials announced that the Miyazawa Plan finally had fulfilled its role, after providing the equivalent of $5.3 billion of a pledged $21 billion to the five Asian nations. A ministry spokesperson indicated that although Tokyo had not closed aid spigot, no additional extraordinary assistance packages would be provided unless a sudden economic deterioration occurred. The official added that a loan to Indonesia, worth $150 million, promised earlier as part of a contribution by a World Bank-led consortium of donors (see JEI Report No. 6B, February 11, 2000), would be the final installment of credit extended under the Miyazawa Plan. Despite these words, Asean finance ministers lobbied to have the plan extended or even made permanent. They were most interested in establishing some sort of buffer against financial crises, an objective that soon was covered by a separate initiative.

A new level of monetary cooperation was achieved in March, when finance and central bank officials from the Asean countries, the People's Republic of China, Japan and South Korea agreed to establish a regional fund that would act as a cushion against severe economic shocks (see JEI Report No. 13B, March 31, 2000). East Asian finance officials decided at their annual "Asean+3" meeting that such a facility was needed for protection against currency speculators, whose actions were widely believed to have been a chief cause of the 1997-99 crisis. Tokyo had advocated such a mechanism since it first presented its proposal for the ill-fated Asian Monetary Fund in 1997.10

Regional officials made more progress in May, when they came together on the sidelines of the annual meetings of the Asian Development Bank in Chiang Mai, Thailand. Mr. Miyazawa, a leading proponent of enhanced monetary cooperation in East Asia, introduced what has become known as the Chiang Mai Initiative. The current plan joins China, Japan and South Korea with Asean in a pact that involves a network of bilateral swap and repurchase agreements. The goal is to help participating economies avoid balance-of-payments crises by making emergency liquidity readily and easily available.

Last year, Tokyo agreed to swap the equivalent of $7.5 billion with Seoul and Kuala Lumpur as part of the Miyazawa Plan. Such arrangements essentially allow the central banks of South Korea and Malaysia to trade their national currencies for dollars, yen or other in-demand currencies held by the Bank of Japan. For its part, Tokyo now will extend the scheme to the nine other Asean countries as well as to China.

Top


Toward Stronger Japan-Asean Economic Relations

The regional recovery has boosted trade and investment flows between Japan and Asean. Moreover, the vast network of Japanese affiliates operating in the region have begun to step up production to meet increased demand and are making plans for future expansion. A number of initiatives, including AIA, AICO and AFTA, have played a role in creating an environment conducive to business. As they grow stronger, these structures likely will continue to facilitate commercial development.

Despite the exhaustion of the Miyazawa Plan funds, aid flows from Japan to Asean countries will remain substantial. Support for the region has been a longtime priority for Tokyo; the end of the economic crisis likely will leave that policy unchanged. Indeed, the introduction of the Chiang Mai Initiative underlines Japan's ongoing commitment to support its neighbors in difficult times. The cooperative spirit not only will contribute to the viability of the regional fund but also will provide an additional boost to the overall Japan-Asean economic relationship.

Jason Russell provided research assistance.

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

Top aaaa Issue Index aaaa 2000 Archive Index aaaa Subscriber Area aaaa Home


Notes
aaa

1aa Nobuo Tateisi, Initial Remarks on The Road to Economic Recovery in Asia: Japan-ASEAN Cooperation, Occasional Paper Series, No. 7, January 1999, Japan Institute for Social and Economic Affairs. Available at http://www.kkc.or.jp/english/activities/publications/007.html. Return to Text

2aa Aelin Chi and Maiko Miyake, OECD Observer, "Japan and Asia: developing ties," No. 217/218, Summer 1999. Return to Text

3aa See Marc Castellano, "Japanese Affiliates In Asia: There To Stay," JEI Report No. 36A, September 24, 1999. Return to Text

4aa Japan External Trade Organization, Saiajia Nikkeisaizou Gyoukatsudoujitai Chousa Ni Tsuite (Survey of Japanese Manufacturers in Asia) (Tokyo: March, 2000). Return to Text

5aa Ted Bardacke, "Vehicle sales in Thailand up 52%," Financial Times, January 12, 2000, p. 13. Return to Text

6aa Japan External Trade Organization, op. cit. Return to Text

7aa See Marc Castellano, "Japan, Northeast Asia And Free Trade: Coming Together At Last?" JEI Report No. 47A, December 17, 1999. Return to Text

8aa See Marc Castellano, "Japanese Foreign Aid: A Lifesaver For East Asia," JEI Report No. 6A, February 12, 1999. Return to Text

9aa See Marc Castellano, "Two Years On: Evaluating Tokyo's Response To The East Asian Financial Crisis," JEI Report No. 30A, August 6, 1999. Return to Text

10aa See Eric Altbach, "The Asian Monetary Fund Proposal: A Case Study Of Japanese Regional Leadership," JEI Report No. 47A, December 19, 1997. Return to Text

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

Top aaaa Issue Index aaaa 2000 Archive Index aaaa Subscriber Area aaaa Home