February 22nd 2003

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Articles from this issue:

COVER STORY: Getting a grip on Japan

EDITORIAL: Kiwibank: lessons from NZ

CANBERRA OBSERVED: NSW Liberals in the spotlight as election looms

WATER: Farmers' water rights at risk in the Murray-Darling Basin

Sugar Summit held in Brisbane

STRAWS IN THE WIND: Destruction of wealth / Negative gearing

INTERNATIONAL TRADE: Free trade: where do we stand?

WESTERN AUSTRALIA: Protests in Fremantle

Deregulation and growth (letter)

Iraq and Zimbabwe (letter)

Time to get serious about Australia (letter)

QUEENSLAND: Dangers in Qld Nats' move to become 'relevant'

NORTH KOREA: Is time finally up for dinosaur regime?

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Getting a grip on Japan

by Reg Little

News Weekly, February 22, 2003
Reg Little agrees with the assessment of Japan by some Japan-resident economic analysts. Its banks might be languishing, but its productive economy is getting stronger by the day.

Patrick Buchanan, one time US Presidential candidate, wrote for the WorldNet Daily on 27 January 2003 the following lament under the heading 'Is the global economy about to crash?':

"The US merchandise trade deficit in November shot over US$500 billion a year, or 5 percent of Gross Domestic Product. We are shovelling out dollars at the rate of US$1.5 billion a day to satisfy our craving for foreign goods...

"So, here is the financial situation of the world superpower: We are running a trade deficit near $500 billion a year and a budget deficit headed for US$300 billion. We have a dollar that is falling against the euro, against the yen and against gold, and an economy that grew at an anaemic rate in the last quarter.

"While these twin deficits, and falling dollar, do not ensure a rise in interest rates, that would seem to be the way to bet. And if interests rates rise, that could collapse the housing market and put a stop to all that refinancing that has provided the cash to keep the economy going."

Asian assets and American liabilities

Eamonn Fingleton, the Tokyo based financial commentator has been warning of this deteriorating situation for several years in an occasional column on his website www.unsustainable.org, which has the sub-banner "The Looming Crisis in US Trade Policy".

Since he published Blindside: Why Japan is Still on Track to Overtake the US by the Year 2000 - which was followed on 2 January, 2000 by an article in the International Herald Tribune demonstrating the accuracy of his 1995 prediction - Fingleton has provided voluminous evidence of the US' inability to manage its economic relationship with Japan.

Most critical amongst his evidence in January 2000 was that which showed that "in the first nine years of the 1990s, while reportedly in deep recession, Japan's net external assets jumped from US$294 billion to US$1.15 trillion. Meanwhile, the United States, which was allegedly enjoying boom times, saw its net external liabilities rocket from US$49 billion to US$1.5 trillion".

By 2000, America net external liabilities had reached US$2 trillion while the Confucian communities of Japan, China, Taiwan and Korea had built up net external assets of well over US$1.5 trillion. Precise statistics are not readily available in IMF publications and are difficult to estimate due to the fluctuating valuations of assets and liabilities flowing from market variations.

Only occasionally does the Western media address such facts, and then in minor, easily neglected articles. Fingleton and another long-term Japan based American authority, Ivan Hall, have also pointed out that the Japanese encourage false perceptions of weakness in their economy to soften protectionist sentiment in Washington.

Fingleton and Hall have both used their long-term understanding of Japan to challenge many comfortable illusions about Japan perpetrated by most media reporting on that country.

In 1999 Fingleton published In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the key to Future Prosperity and in 2002 Hall put out Bamboozled: How America Loses the Intellectual Game with Japan and Its Implications for Our Future in Asia, both suggesting how different the world looks after intelligent, educated and questioning observers have spent some time in a major East Asian capital.

Both Fingleton and Hall are long-term Japan residents who do not claim expertise beyond Japan, but others who have lived and worked in Japan and elsewhere in East Asia have few doubts that the points they make about Japan often apply in other parts of East Asia - most importantly, in China.

In the 1980s, the US actively pursued a Structural Impediments Initiative designed to bring about changes in the Japanese economy and remove the problem of growing American trade deficits with Japan. In the 1990s, Japan's recession led to this action being quietly sidelined and forgotten. As a consequence, as Fingleton puts it in the conclusion of his latest website comment, "the Japanese nation increased its net foreign assets fourfold since 1989".

Japanese savings

Perhaps even more important are Fingleton's full concluding remarks in that comment:

"Of course, it must be acknowledged that the Japanese government's borrowing has increased considerably in recent years. But virtually all the money comes from within Japan - from the redoubtable and indefatigable Japanese saver. [This is a key point because when the United States runs budget deficits, it must borrow heavily abroad and it, therefore, exposes itself to unwelcome foreign financial influences.]

"Moreover - and more importantly - rather than squandering the money on 'bridges to nowhere' and other domestic boondoggles, as the doomsters allege, the Japanese government has been investing the money heavily in such useful ways, from the viewpoint of Japanese power, as buying foreign financial assets, not least US Treasury bonds.

"All this helps explain a little known but crucial fact: that the Japanese nation increased its net foreign assets fourfold since 1989. Far from being a sign of weakness, Japan's government borrowing binge is one of the great power plays of modern times. Just ask the US Treasury."

This situation has led Fingleton and Hall to argue that Japan has been misleading and out-manoeuvring a gullible and self-indulgent United States for many years. Were the evidence not so overwhelming, the charge would seem absurd. Of course, all but the most astute observers still seem to believe that the charge is absurd. Fingleton and Hall have been rewarded for their efforts mostly with neglect, bordering on being deliberate ostracised.

Nevertheless, the evidence is mounting. American democracy cannot wean itself from high quality, inexpensive products from East Asia, paid for with East Asian savings. Some would-be, hard-headed American commentators argue that it would be foolish to reject such a bargain. They do not look far into its consequences. Again, Fingleton has been meticulous in detailing in his writings how this strategy not only makes the United States dependent on Japanese Asian savings but also enables Japan (and other East Asian countries) to develop long-term monopolies in a wide range of strategic hi-tech material and component industries. This works to hollow out American industry and make it increasingly dependent on East Asian suppliers for surviving American industry.

Even since the much misreported 1997 Asian financial crisis, this situation has become one of the great unspoken secrets of international affairs. In a column with the above heading in The Australian on 30 January 2003, Robert Gottliebsen reported:

"You could have heard a pin drop at the World Economic Forum in Davos, Switzerland. An American commentator had just declared that as both Japan and China were investing their trade surpluses in US dollars, they were funding the US current account deficit.

"Zhu Min, economic adviser of the Bank of China, got up to respond. He was incredibly frank, saying that China did not want all its savings invested in dollars and might well diversify into Euro. Everyone knew what that would mean when currency trading opened. The US dollar continued to fall against the Euro, which contributed to the big fall in equities this week.

"It was also an important sign of the future power of China, which was the only significant country at the 2003 Forum to present a plausible high-growth story."

China joins the Japanese game

Readers of Fingleton, know how serious the situation is and how vulnerable the American economy and polity both are. As his website declares the situation is unsustainable. Of course, the Japanese have no reason to pull the pin and neither do the Chinese, whatever a representative in Davos might say. His role was little more than to remind Washington that it had to be as mindful of Chinese as of Japanese interests if it wanted to avoid serious economic and political pain.

In a short period, Chinese economic expansion has created an industrial and financial dynamic where the whole global economy now has to be acutely tuned into Beijing's thinking. As Gottliebsen reports:

"The Chinese have a population of about 1.3 billion, of which about 400 million live in the coastal communities where GDP is growing at some 12 per cent a year. The remaining 900 million live inland and are growing at about 2 or 3 per cent... China plans to swing half the 900 million rural people into manufacturing and services over more than a decade."

It is difficult to grasp the likely future course of Chinese policy, however, without a clear understanding of exactly how Japan has conducted its economic affairs. Sadly, Western reporting of this (and of the Asian economic situation generally) has been abysmal. Mostly, it is no better than the rehearsing of Japanese disinformation designed to advance Japanese strategic interests.

It is not hard to see, however, that the Chinese, despite the fact that they are still a much smaller economy than Japan, will quickly exercise even greater leverage on other economies than Japan and that the Chinese are likely to be at least as strategically astute as the Japanese.

It's a commonplace, which is nevertheless not taken seriously, that Asian leaders are informed by the world's richest strategic tradition, namely that of China with well over a thousand classical works extant. Fingleton and Hall provide substantial detail of the strategies deployed by the Japanese in making themselves indispensable to their trading partners, even as they move to gain a long-term stranglehold. The difficulties they have encountered in gaining the attention of policy makers in Washington, however, has limited the effectiveness of their work.

It should never be forgotten that free trade ideology must have a very different meaning among people where it is historically associated with the Opium Wars in China and Admiral Perry's Black Ships in Japan. Against this background it cannot but be natural to see it as an ideology that is manipulated as needed to gain national advantage. Accordingly, Japanese, Chinese and other Asians are unlikely to feel any obligation to do more than meet the immediate expectations of their trading partners, while seeking to optimise their strategic advantage. In this they are assisted not only by their familiarity with Chinese strategic wisdom but also by the fact that their Confucian-Daoist tradition frees them from many of the theoretical expectations and hang-ups that rule the thinking of most people from a Western background.

An additional strategic factor, which few in the West address seriously, is the problem posed for Japan by the emergence of China. While Japan has a record of bamboozling America it is unlikely to expect to be able to do anything similar with China. Given the fact that the influence of Beijing and Shanghai now reaches deep into all the capitals of East Asia, often working through wealthy powerful local ethnic Chinese, Japan faces a political dilemma that is unprecedented in recent centuries – how to manage its relations with a powerful and coherent China with influence extending around the globe. Increasingly, it will need to balance the interests of its post-1945 alliance with the US against the expectations of its vast neighbour.


How has the United States allowed itself to be so outplayed strategically? It has run up trillions of dollars of debt while permitting many of the hi-tech manufacturing industries of the future to be located in East Asia. Japan now even has a computer able to carry out 35.6 trillion mathematical operations per second, more than five times faster than America's best at 7 trillion per second. Contrary to its rhetorical claims of leading the world technologically, America is rapidly becoming dependent on East Asian suppliers for many of the materials and components needed to keep its industries operating.

Sometimes Fingleton and Hall make it sound as if Japan (and China) are not playing fair. It may be true that East Asians often do not behave as Americans and others expect and that they often seem to outwit their business partners. Yet Americans and other Westerners, who keep coming back for more, cannot complain if they do not seem able to manage things as well.

The problem lies in a Western sense of superiority that, with only a little encouragement, readily becomes complacency and gullibility. And much encouragement is offered throughout East Asia.

The 1997 Asian crisis, even more than Japan, bamboozled America. It will in time come to be seen as an unmitigated strategic disaster for the West, sweeping away decades of effort to get Asian values taken seriously. It also disguised rampant American corruption behind the pointed allegations of crony capitalism in Asia and encouraged the American triumphalism that fed the excesses the consequences of which now haunt Patrick Buchanan. Most important, perhaps, it created the environment in which America could advance to annual trade deficits of half a trillion dollars or more.

The Australian dilemma

Gottliebsen concluded his piece in The Australian from Davos with the following paragraphs:

"China would like to incorporate Australia into an ASEAN-plus-four trade grouping. It is now ASEAN-plus-three (South Korea, Japan and China) but Malaysia is blocking Australian entry.

"While China understand why we have gone to the US for a free trade deal, it believes the American economy is in for a hard time, given the US's low savings and high debt, fully extended consumers and military problems.

"Chinese officials quietly and gently point out that if Australia becomes a satellite of the US, in the longer term, when China is much larger, Australia might find itself on the opposite side of the fence to China. Australia will need to work very hard to make sure that does not happen."

Prime Minister John Howard has been most successful in managing Australia's relations with China but the dilemma posed by Gottliebsen will test him. Now is the wrong time to be getting closer to an America that has demonstrated a preoccupation with affairs in the Middle East and an inability to manage itself in East Asia.

Yet, without the United States, Australia would feel very lonely in Asia and would discover, belatedly, that it is no less prone to bamboozlement.

  • Reg Little, a career diplomat, was Deputy Head of the Australian Mission to China and former Director of the Australia-China Council

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