By Eva Cheng
"I think it is absolutely critical, not only for Asia but for the rest of the world, that Japan [its economy] get back on track", warned US Treasury secretary Robert Rubin on September 4, the day before he met Japanese finance minister Kiichi Miyazawa to again pressure Japan to "fix" its economy.
Reinforcing Rubin's message, US president Bill Clinton said: "Unless Japan begins to grow again, it's going to be difficult for Russia and other countries to do what they need to do [to address their economic crises]."
The size of Japan's economy — the world's second biggest — is only a blunt indicator of its global importance. More important are the role that it plays, especially the extent that other economies depend on it, and the root causes of its economic problems.
Japan's weight
Commodity exports were of overriding importance to Japan's growth until the mid-1980s, much helped by the US's provision, after WWII, of a large market.
To reduce its ballooning trade deficit with Japan, however, the US tried to induce a price disadvantage for Japanese products by forcing up the value of the yen with the September 1985 Plaza Accord.
The yen more than doubled its value against the greenback within months. However, with everything overseas instantly becoming much cheaper, Japanese capital rushed out to snap up assets, including productive facilities whose costs were significantly less than at home and generated far higher profits.
The exodus peaked between 1989-91, with an average US$41 billion outgoing Japanese foreign direct investment (FDI) a year. Of this, 83% went to the First World (51% to the US and 23% to the European Union) and only 12.1% to Asia.
Japan's seriously inflated asset markets eventually crashed in 1990. Its FDI was halved to an average of US$21 billion a year between 1994-96. But the share going to Asia rose to nearly 42%. (The portion going to the First World was still a significant 58% — 37% to the US and 13% to the EU.)
This rising share of Japan's FDI in Asia coincided with its progress in turning Asia into its production backyard. Japan's share in the world accumulated stock of FDI also rose, a measure of Japan's increasing influence on other economies.
From $42.3 billion, or 6.4% of the global sum, in 1985, Japan's accumulated FDI rose to $204.7 billion (12.1%) in 1990. Its share dented to 10.9% ($306.8 billion) in 1995, second only to the US's $709.2 billion.
Meanwhile, Japanese capitalists increasingly relied on this form of capital export to maximise their manufacturing profits. Outgoing FDI was equivalent to 7% of Japan's GDP in 1990 and 6% in 1995, from 1.8% in 1980 and 3.3% in 1985.
However, to protect their home turf, FDI into Japan was restricted to 0.3-0.4% after 1980.
On the world scale, the output share of foreign affiliates — predominantly controlled by First World capital — seems modest: 6% in 1994. But in the Third World, that share rose to 9.1% and in Asia 8.6%.
Critical controls
However, less noticeable but no less important control was exercised through strategic arrangements, such as joint ventures, licensing, subcontracting, franchising, marketing, and research and development agreements.
An equity stake is often not involved in these cases, but is facilitated by it. These arrangements, which are often structured to maintain the dependence of the service-receiving parties, were struck most commonly within the same transnational group.
Not surprisingly, the key imperialist countries — the US, Japan and the EU, or the Triad — dominate such cross-border relationships. Of such contracts struck during 1990-95, US firms were involved in 80%, EU firms in 40% and Japanese firms in 38%.
The most vulnerable receiving parties came from the Third World.
These indirect controls have gained further significance in recent years. According to the UN World Investment Report 1997, between 1983-95, global payments of fees and royalties for technology quadrupled to an estimated $48 billion. Based on such payments for the US and Germany, four-fifths took place across borders but intra-firm. It was strikingly similar for Japan.
The US still dominates in this area, receiving an estimated $27 billion (56%) of such global receipts, up from $6 billion (50%) in 1983. Of the US's 1995 receipts, 20% came from Japan, although this is only one of many ways in which the US benefits from Japan's wellbeing.
Although Japan's royalties receipts rose steadily from 164.9 billion yen in 1985 to 756.2 billion in 1996, and the position of individual companies varies, every year between 1992-96 Japan paid more than 300 billion yen more than it received in this area.
While Japan imports certain technology, such a need is marginal compared to other Asian countries' dependence on Japanese technology which, according to the Bank of Japan, often came with Japanese FDI.
All the "newly industrialising" Asian economies depend heavily on Japanese production technology. They are welded together, often based on a regional division of labour, by the web of Japanese affiliates.
South Korea's dependence is disguised. Many of its chaebols just couldn't produce without Japan's designs, technology and crucial parts.
Commodity export from Japan is still critical to the profits of Japanese capital. But significant trade movements are generated from the needs of their regional production empires, of which its Japanese base is the nerve centre.
This explains why in the five years to 1997, between 44-48% of Japan's imports came from Asia while 43-47% of exports went to the region. However, Asia's dependence is most evident in its trade structure.
In the year to March 1997, 74% of Japan's exports were machinery, other capital goods and transport equipment, while 61% of its imports were raw materials, mineral fuels, chemicals, textiles, metals and foodstuffs.
South Korea, Thailand and Indonesia are among Japan's most important client states, which is why their economic crises hit Japan hard.
Apart from FDI and trade, Asia's subordination is also forged through other means, such as loans, portfolio investments (mainly in shares and bonds) and aid.
Outstanding Japanese bank loans to Asia in 1997 amounted to $276 billion, or 32% of total lending to the region. Japan is the world's largest aid donor, mostly to Asia, with contributions tied tightly to the use of Japanese capital, equipment and loans.
It is easy for Japanese capital to swamp any Asian stock or bonds markets. Its economy is more than twice the size the rest of Asia together.
Achilles heel
The US's persisting budget deficits, contributed to significantly by the mammoth expenditure of its war machine, and the super yen and rock-bottom Japanese interest rates since the mid-1980s, have turned the US into the world's biggest debtor country. The debts have been funded significantly by Japanese holders, mainly the Bank of Japan (BoJ) and business.
Whether or not Japan holds on to these debt papers has acquired critical importance to the US, and Japan knows it. At the height of tension with the US in June 1997, then Japanese prime minister Ryutaro Hashimoto threatened to sell the BoJ's holdings of US treasuries — an estimated $291 billion.
Another factor that might trigger damaging sales of US treasury papers by Japanese companies is their need for cash. The fall in Japanese share prices will increase that need, and it's been long speculated that the fall of the Nikkei index below 14,000 points will prompt a panic sale. That point was already breached twice in mid-September.
The huge devaluations of currencies struck many Asian economies critically because of their dependence on international transactions — for crucial inputs in production and food, exports of the bulk of their products, as well as investments to keep production going, and loans to make production and sales possible.
In all these areas, Japanese businesses are seriously hit, due to knock-on effects within firms, or by being dragged down by defaulting business counterparts. Banks are hit especially hard because of their flimsy capital base.
According to the standard set by First World authorities, to allow banks to maximise profits while lending "prudently", they need only eight dollars' worth of capital to support each $100 worth of loans. Moreover, part of this capital can be borrowed from the market!
The "black hole" of bad loans is impossible to fathom because more loans turn bad as more businesses go under.
The direct and indirect dangers to the US of a sagging Japanese economy mount as the Asian economic crisis deepens. This explains why the US keeps pressuring Japan to "fix" its economy, basically in vain.
Washington thought it could finally make a difference when Tokyo asked it to help prop up the yen in June. Washington demanded that Tokyo do a few things in return: fix its banking system, cut income tax permanently by an equivalent of 2% of GDP, and cut profit tax from its present 46%.
The Japanese government has blamed insufficient demand — "weak consumer confidence" — for the problems of Japan's economy.
But insufficient purchasing power is the real problem, both at home and abroad, not the lack of needs. "Confidence" wouldn't recover unless the "consumers" have the hard cash or reasonable prospects of repaying a loan.