Japan's Role in Southeast Asia

Date: 25 May 1999

1   The Asian crisis has dramatically changed the regional landscape. Asian economies have been ravaged. Several governments have fallen. The complacent assumption that Asian countries would cruise effortlessly into the next century has been shattered.

2   Meanwhile, Japan has been preoccupied with a protracted economic downturn. Repeated fiscal packages have failed to jump start the economy. Deep-rooted problems in the banking system are only now beginning to be overcome. Consumer and business confidence has been severely shaken.

3  . Japan played a major role in the Asian boom that preceded the crisis. Japanese investments, imports and tourists contributed to the progress and development of all Southeast Asian countries. The present altered environment raises the question: what will now be Japan's role in the region?

4   I believe that while the present difficulties will take time to resolve, they will not be permanent. Eventually Southeast Asia will recover from its problems, and Japan's resilience and cohesion will enable it to overcome the structural weaknesses in its economy. Japan will remain a key factor in Southeast Asia's prosperity, and the region will again be an important partner for Japan.

THE US-CHINA-JAPAN TRIANGLE

5   The backdrop to Japan's relationship with Southeast Asia is the triangular relationship among the US, China and Japan. Despite the tumultuous changes which have taken place, the importance of this strategic factor has remained constant. Sound relations among these three powers continue to undergird the stability and prosperity of the Asia Pacific.

The US

6   A decade after the Cold War ended, the US remains pre-eminent. It is the strongest economy in the world and the only superpower with global reach.

7   US prosperity is inextricably linked to Asia. US trade across the Pacific exceeds trade across the Atlantic by more than one-third. The US is a major market of all Asian countries, including Japan. America's economic interest in the Asia-Pacific is matched by its longstanding security interest, particularly in Japan and the Korean peninsula, but also in Southeast Asia.

8   The US has provided the framework of peace and stability for the region, that has enabled countries in Asia to concentrate on economic development and peaceful competition. Generous American policies and the history of US engagement since the Second World War have earned America a deep reservoir of goodwill and respect throughout Asia. Neither China nor Japan can replace the US in this pivotal role.

China

9   China's emergence as a major global player will be the most important strategic development in Asia, and indeed the world, in the next century. According to the World Bank, China has already become the second largest economy in the world, at least in terms of Purchasing Power Parity.

10   China will continue to pursue economic reforms and liberalisation, and therefore will continue grow, although not in a straight-line. It will need to attract foreign investments, obtain new technology, and open overseas markets. This will give China a strong incentive to be a constructive inter-national player, and not a spoiler. China's determined, but unfortunately not yet successful, effort to settle the terms for joining the WTO when Premier Zhu Rongji visited the US is a good sign that it understands the benefit of playing by the rules. Regional countries hope that the tragic bombing of China's Belgrade Embassy by NATO aircraft will not derail long-term relations between the US and China.

11   A constructive, peaceful China will be a major positive influence on the region. It will be an expanding market for exports. Entrepreneurs and investors will find many business opportunities in China as the country opens up, generating confidence and optimism throughout the region. Relations between China and its much smaller neighbours are more likely to be on the basis of equality and mutual benefit.

12. Provided China perseveres in this course, its growth should benefit rather than alarm its neighbours. The contrast between China now, committed to reforms and seeking foreign investments and trade, and China in the 1960s, volatile and unpredictable, exporting revolution and instability, leaves no doubt which is better for Asia.

Japan

13   Japan is the most powerful economy in the region. It has been an important source of investments, capital and technology, and a major export market, for many Asian countries.

14   Japan's present economic problems have caused observers to become pessimistic about the country, and to doubt whether Japan will recover its drive and vitality. I do not share this pessimism. The Japanese are a cohesive, determined and resilient people with an ancient history, and a track record of overcoming daunting challenges. In the Meiji Restoration, Japan transformed itself to enter the modern age. After the Second World War, Japan single-mindedly rebuilt its economy from total destruction to create the Japanese miracle. After the first oil shock in 1973, despite high oil-dependency, Japan reoriented its economy, emphasised energy conservation, and quickly recovered.

15   Ezra Vogel, in his book Japan as Number One, described how the Japanese took longer to reach decisions, but once they formed a consensus were able to carry out the decision quickly. The present problems have no quick or simple solutions. But I believe that once Japan forges a national consensus on the fundamental changes needed, it will be able to muster the political will to revitalise Japan's banking system, restore the confidence of consumers, and get the economy moving again.

SOUTHEAST ASIA

16   Southeast Asian countries have suffered a severe setback in the financial crisis. Weak banking systems nearly collapsed, asset bubbles burst, exchange rates fell sharply, and even some basically sound economies succumbed to the financial panic and plunged into deep crisis. The economic problems have led to social and political difficulties.

17   In the last few months stock markets across the region have surged in a burst of euphoria. This improvement exaggerates the progress made in resolving the real problems. But the worst of the crisis does seem to have passed. The countries are in their different ways putting things right, and getting their economies restarted. They are running large current account surpluses, and building up foreign exchange reserves. Progress has been made in bank recapitalisation. Exchange rates have strengthened from their lows in the first part of 1998. Interest rates have declined markedly to pre-crisis levels, another indication of returning confidence.

18   Korea and Thailand have made the most progress towards recovery, but they are finding it much harder to restructure the corporate sector than to recapitalise weak banks. South Korea expects to grow by 4% this year, and Thailand by 1%. Malaysia is also seeing confidence return, although some analysts are still worried that its structural problems have been postponed but not yet solved.

19   Indonesia remains a worry. The deep crisis in the body politic has caused ethnic, religious, and separatist violence and bloodshed. The political transition is still underway, with elections scheduled next month. The elections will not by themselves resolve all the fundamental problems. Indonesia needs a government with the mandate and resources to reestablish order, restore confidence, and persevere with difficult and painful reforms to get the country back on track. We hope the elections will lead to such an outcome.

20   Elsewhere in the region, in the medium term countries are beginning to recover, as reforms take root and investors return. The region is not likely to return to the frothy days of 8-10% growth. But the countries still have the fundamentals that produced the Asian miracle - an increasingly educated population, high savings rates, prudent fiscal policies and investments in infrastructure. These factors will enable the countries to generate sustained growth.

21   The new environment will be more competitive, as investors become more discriminating, and countries remedy weaknesses uncovered by the crisis. Those countries which use this opportunity to strengthen their economies by tightening banking super-vision, improving corporate governance, enhancing transparency, and building new capabilities, will emerge leaner, stronger, and better prepared for the challenges ahead.

22   One key issue is whether this traumatic experience will cause countries to become disenchanted with globalisation, and turn inwards. The boom years before 1997 eventually convinced almost all Southeast Asian countries that they had to open up their economy, attract invest-ments and generate exports to improve the lives of their people, although in practice they did so to varying extents. Now the crisis has shown them the downside of globalisation. It has visited severe punishment and suffering on countries and their people, often totally disproportionate to the mistakes made by the governments. It has forced the sale to foreign interests of companies and banks, which have long been part of the countries' establishment, in the name of efficiency and reform. This will provoke an immune reaction from within the societies, to reject external pressures to open up, and to reassert control over their own destinies. Nationalist and xenophobic sentiments are unavoidable.

23   However, I believe that countries will turn inwards only to a limited extent. All the governments know that despite the risks, there is no alternative to plugging in to the world economy. One may install circuit breakers as a precaution, but the price of disconnecting oneself is simply too high. No country can be self-sufficient, whether to make motorcars or computers. Every country needs the technology, the jobs and the markets which only come from being part of the global division of labour.

24   Thus one of South Korean President Kim Dae Jung's first acts after being elected President was to meet and be photographed with Mr George Soros, whose endorse-ment he considered valuable. Both South Korea and Thailand have been scrupulous in working with the IMF every step of the way in this crisis, despite some domestic resentment, because that is the way to restore investor confidence. Even in Malaysia, which rejected IMF orthodoxy, condemned speculators and imposed exchange controls, Prime Minister Dr Mahathir has taken pains to reassure investors that they are welcome, and is now raising a US$2 bn bond issue in London and New York. ASEAN as a whole is pressing on with its plan to set up an ASEAN Free Trade Area, and has indeed brought forward the target date by one year, from 2002 to 2001.

JAPAN AND SOUTHEAST ASIA

25   Japan has an important role to play in Southeast Asia. It has long been a major investor in Southeast Asia, among the top three in most ASEAN countries. These Japanese investments have buoyed regional growth, particularly after the Plaza Accord. In Singapore, they account for one-third of our foreign direct investments in manufacturing, and are vital to our development.

26   Japan has done much to help the Southeast Asian economies in this crisis. It has consulted closely with regional countries as events unfolded, to assess developments and coordinate policies. It has been the single largest contributor, both to bilateral and IMF-led rescue packages. In Indonesia, it contributed US$5 bn to the second line financing in support of the first IMF package in October 1997, together with Singa-pore and other countries. It took further steps with the US$30 bn Miyazawa Plan, and the recent proposal to help the crisis economies tap private sector funding through credit guarantees, public bond guarantees and interest subsidies. Doubtless these actions were also in Japan's own interests, as many Japanese banks and companies have large stakes in Southeast Asia. But this fact reflects the close inter-dependence between Japan and the region.

27   These direct measures will give the crisis economies both material and moral support. But the greatest contribution Japan can make to the region's recovery is to put its economy right, and once again radiate energy throughout the region. Japan is the locomotive which helps to power the region's economies. It is one of the three major economic powers, together with the US and Europe, and is thus a key market and source of foreign direct invest-ment. Its MNCs are world leaders, operating world-wide using leading edge technologies, and taking advantage of the specific strengths of each location to maximum effect.

28   Without this contribution from Japan, the regional pickup will be much slower and less robust. As Prime Minister Obuchi (then Foreign Minister) said in Singapore on 4 May 98: "Japan fully recognises how important its own economic recovery is to restoring stability to the East Asian economies". This is why Southeast Asian countries all hope that Japan will overcome its problems soon, and finally put the bubble economy and its aftermath behind it.

29   In the post-crisis environment, Japan's importance to Southeast Asia will continue. However, Asian countries also need to maintain their links outside the region, particularly with the US and Europe. They do so through APEC, the WTO, and other global organisations. A weakening of these ties would mean fewer sources of investments and growth. It would also mean a less integrated world trading system. The risk of trade friction between the Asia Pacific on the one hand, and the US or Europe on the other, will increase. Worse, a US disengagement from the region would have serious security and strategic implications. It is profoundly against the interests of the Asian countries and Japan to divide the Asia Pacific region down the middle, with East Asia on one side and the US on the other. All this makes it unlikely that an Asian economic or trading bloc will emerge.

30   From Japan's point of view, Southeast Asia will continue to be important for both economic and strategic reasons. Japanese MNCs have made full use of the region in their global strategies. Southeast Asian countries offer competitive and conducive investment locations. Southeast Asian plants of Japanese MNCs manufacture not just for the regional market, but to export to the US, Europe and back to Japan. This has been an important reason why Japanese MNCs have held their own against US and European competitors.

31   Although China's economy will become increasingly important, China is not likely to replace Japan as a source of investments in Southeast Asia, or replace Southeast Asia as an investment destination for Japanese MNCs. It will be a long time before China develops the technology and the MNCs to match Toyota, Matsushita or Sumitomo, which can generate foreign investments and jobs in Southeast Asia. And while a growing and liberalising China will attract more Japanese investments, Southeast Asian countries will strive to stay at least one step ahead in terms of the quality of their infrastructure, their legal framework, the overall business environment, and ultimately lower total costs.

32   For example, one MNC executive told me that the total cost of making a disk drive in Singapore is still lower than in China, even though Chinese wages are many times lower than Singapo-rean wages. Wages formed only a small part of the cost of this high tech product, and the costs and delays of transportation and handling in China reversed the difference. This does not mean that Southeast Asia is invulnerable to competition; only that if it upgrades, it will stay useful to Japanese and other MNCs even as competitors make progress.

33   A second reason Southeast Asia is significant to Japan is because it represents a growing market for Japanese companies. ASEAN accounts for 12% of Japan's exports. The rapid economic growth over the last decades has created a substantial middle class, with significant purchasing power. This group has been hurt in the crisis, but will recover as the economies pick up, because they are the entrepreneurs, engineers, bankers, lawyers and administrators whose skills will be in demand in the knowledge-based economy. This layer of affluent and sophisticated consumers will provide a significant market for Japanese exports.

34   Beyond economics, Southeast Asia is also important to Japan strategically. Japan's sea lines of communi-cations to the Middle East and Europe pass through the Straits of Malacca. The region is an important source of energy to Japan, supplying one fifth of Japan's mineral fuels, including two thirds of its natural gas. It is in Japan's interest that Southeast Asia remains stable, so that these sea routes and energy supplies are not put at risk.

35   Underpinning all these areas of cooperation is the common strategic perspective shared by Japan and many Southeast Asian countries. Both believe that the stability of the Asia Pacific region depends on maintaining a balance of power, and that the US presence has been and continues to be vital to this regional balance.

36   Japan alone is not able to balance China; nor would such a balance be stable, considering the history of Sino-Japanese relations. Japan and ASEAN together also cannot balance China. But Japan with the US, through the US-Japan Security Alliance, provides the strategic anchor for America's continued engagement - not just in Japan but throughout Asia.

37   As Japan grows economically, it will seek a greater non-economic role. Over the past two years America and Japan have worked to strengthen their security relationship, and enable Japan to share greater responsibility in its self-defence. But while there is agreement about Japan playing a bigger role, there is still no consensus either in Japan or the region as to what military role Japan will play. A continuation of the defence arrangements between the US and Japan is the best way to assure the region's stability and Japan's security.

THE WAY AHEAD

38   For all these reasons, Southeast Asian countries will work together with Japan, in a strategic partnership that benefits both. As an ASEAN dialogue partner and a participant in the ASEAN Regional Forum, Japan has the avenues to work together with ASEAN to assure a more stable and prosperous Southeast Asia, to the benefit of both Japan and the region.

39   In a key speech in 1977, then Prime Minister Fukuda set the basic directions for Japanese policy in Southeast Asia. PM Fukuda had pledged that the government and people of Japan "will never be sceptical bystanders in regard to ASEAN's efforts to achieve increased resilience and greater regional solidarity: but will always be with you as good partners? not only in fair weather but in adverse circumstances".

40   PM Fukuda had outlined a policy for economic and other cooperation with ASEAN that set the basic directions for Japanese policy towards Southeast Asia ever since. The world has changed several times in the two decades since he spoke. But Mr Fukuda's vision remains valid. In 1977, ASEAN was in a precarious position not long after the fall of Indochina. Japan's support to ASEAN at a time of need was deeply appreciated. Now ASEAN is again going through a difficult period. Japan's assistance to the crisis economies has not only assisted the countries with their economic problems, but produced positive political impact by helping to stabilise the region. This has earned Japan goodwill and respect as a long- term player with an enlightened understanding of its own interests.

41   The post-crisis region will present new challenges and problems. But it will also throw up fresh opportunities for Southeast Asian countries to work together, and to cooperate with Japan for mutual benefit. I hope both sides will seize them, and help to build further decades of peace and prosperity for our peoples.