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"Japan's Role in Regional Growth and Stability"

June 8, 2001

Lim Hng Kiang
Minister for Health and Second Minister for Finance, Republic of Singapore

1 Japan plays a critical role fostering the overall balance in the Japan-US-China triangular relationship. The US is the key player in maintaining peace and stability in the region. But the US neither can nor desire to perform this role alone. The US-Japan Security Alliance is therefore a key pillar of regional peace and stability.

2 However, recognising the domestic as well as external constraints on Japan playing a more direct strategic and security role, the larger strategic vision would have to be achieved through economic co-operation and development. Regional peace and stability is better ensured if there is sustained economic development. This nexus underpins the political impact of Japanese economic activity in Southeast Asia. Japan is among the top three trade and investment partners of all Southeast Asian countries. It is the major source of aid for many. These economic flows inevitably have important political and strategic consequences.

3 Looking back, the Fukuda Doctrine was a very significant and explicit commitment whereby Japan pledged itself as a partner of ASEAN, in its efforts to achieve increased resilience and greater regional solidarity.

4 Although not explicitly stated, the Fukuda Doctrine was a response to the extremely precarious position of ASEAN countries after the fall of Indochina. In other words, it was a strategic and political response to a political and strategic threat. In his 1977 speech, Prime Minister Fukuda also outlined the goal of a united Southeast Asia: of peaceful and cooperative relations between ASEAN and Indochina. It was a bold vision only two years after the victory of communist forces in Vietnam, Laos and Cambodia. But today, ASEAN-10 has become a reality.

5 The Plaza Accord was another significant milestone in Japan's policy towards Southeast Asia. Signed in Sep 1985, the Accord aimed at lowering the US trade deficits with the rest of the world. The consequence of it was the sharp appreciation of yen against the US dollar. Japan moved its production base overseas to lower cost. This led to the first big wave of Japanese FDIs to East Asia, hitting US$40 billion in the first half of the 1990s. The inflow continued unabatedly until the onset of the Asian crisis. Between 1985 and 1995, total employment by Japanese firms in Asia had increased to over 1.25 million employees from only 500,000. Japan was the lead goose in the "flying geese" formation, which spurred the economic development of several countries in the region.

6 Japan also played a key role as an aid provider to the region. After the end of cold war, Japan overtook the US as the world's largest ODA donor. Asia was the largest recipient of Japan's aid, amounting to more than 60% in 1999, among which, China and Indonesia received the two biggest shares.

7 However, Japan's domestic economic woes in the past decade has prevented it from playing a larger role in Asia. While Japan continued to absorb exports from and invest long-term capital in East Asia, its share in the region's trade and FDIs vis-a-vis the other countries had declined significantly.

8 Japan was one of East Asia's top trading partners, accounting for 20% of East Asia's total trade in the early 80s but Japan's share has fallen steadily in the last two decades to about 15% in 2000. In Foreign Direct Investment (FDI), we have seen Japan's FDI share to East Asia declining from over 20% to only 9% (Chart 1 in Annex A). The growth of Japan's FDI to East Asia also dropped from an average of 35% (1981 - 1990) to 3.0% (1991-99).

9 The role of Japanese banks as a provider of cross-border credit to East Asia has also declined. From 1986-90, Japanese banks expanded their loan books rapidly, often building market share at the expense of profit margin. Following the domestic asset market collapse, new loans to Asia were sharply reduced. In the 2nd half of the 1990s in particular, Japanese banks not only reduced new lending to East Asia but shrank their outstanding loan positions in East Asia as well. This in turn led their share of total cross border loans to East Asia to fall from 45% at the start of 1996 to 25% in 2000.

10 On balance, since the early 1990s, Japan has had a negative impact on liquidity flows to the region. According to our computation based on the aggregate of trade, foreign direct investment, portfolio investment and bank credit flows, Japan had added a total of US$69 billion in net liquidity to East Asia during the second half of the 1980s. The net liquidity inflow, however, turned to a net outflow of US$126 billion during 1991-95 and an even larger net outflow of US$374 billion during 1996-2000 (Chart 2 in Annex A).

11 The net outflow of liquidity from the region was contributed by two main factors. First, East Asia's large and persistent trade deficit with Japan. In 1985, East Asia's trade deficit with Japan stood at US$9 billion. By 1995, however, the shortfall had ballooned to US$71 billion (Chart 3 in Annex A). The uptrend was interrupted briefly by the Asian crisis, when the collapse of regional demand helped to shrink the deficit with Japan. Nonetheless, with the economic recovery in place, the shortfall has again been on the rise.

12 Second, Japanese banks' withdrawal of credit from the region. During 1986-90, Japanese banks extended a total of US$130 billion worth of new loans to borrowers in East Asia. Following the collapse of the asset market in Japan, this was reduced by a quarter to US$97 billion during 1991-95. In the second half of the 1990s, however, Japanese banks turned from being net suppliers to net withdrawers of credit from East Asia. During this period, Japanese banks withdrew some US$204 billion worth of credit from the region, almost wiping out the amount of new loans granted in the preceding 10 years.

13 We should note that despite its economic difficulties, Japan had made significant efforts to help countries affected by the crisis. It has consulted closely with regional countries as events unfolded so as to assess developments and co-ordinate policies. It was the main contributor to rescue packages to the region, through the US$30 billion Miyazawa Plan. It has also announced a US$15 billion package to help narrow the global digital divide, focusing on Asia. At the ASEAN+3 Informal Summit in Singapore, the "Mori e-Action" was launched to bridge the developmental gap between the newer and older ASEAN members.

14 Japan's ability to enhance its regional role however will depend very much on the health of its economy. Economic and structural reform seems to be the future direction of the Japanese economy, championed by Prime Minister Koizumi Junichiro. Koizumi enjoys the support of the Japanese people but will need the support of his party to implement and manage the impact of these reforms. When Japan restores its economy back to health, it can resume its role as an engine for economic development for the region. Sustained economic development is the best guarantee for regional peace and stability.

Titles of speakers, names of companies, etc., were correct as of the time when the forum was held.