It’s not fair! Those Americans caused the global financial crisis, but their GDP only contracted by 2 1/2 % last year. Poor Japan, whose financial sector was in good shape, suffered a crash of more than 5%, as its exports of goods and services plummeted by 24% (in fact, exports fell by some 50% between September 2008 and January 2009).
What happened? And which way next?
Japan’s exports are rather unique. Over 90% of merchandise exports are highly income elastic industrial supplies, capital goods and consumer durables. This means that when the economy goes down, exports of these goods typically go down in tandem and much more sharply than the economy. (Conversely, they can be expected to bounce back with a vengeance!)
And so it was that Japan’s exports fell right across the board in all these product categories. And the fall in exports was registered not only for exports to the US and EU which account for over 40% of Japan’s exports, but also to emerging and developing Asia which represent more than half of total exports. (Bytheway, the sharp appreciation of the yen around this time only made things worse for exporters.) Interestingly, the decline in exports of consumer durables was sharper to US and EU markets than to Asian markets, whereas the fall in exports of industrial supplies and capital goods was more pronounced to Asian markets than to US and EU markets.
But to understand thoroughly what happened, you need to take account of the triangular nature of much of Asia’s trade. Japan, Korea, Singapore and Taiwan export parts and components to China and other emerging Asian economies which in turn assemble final products for US and EU markets. So, the reduction in demand for Japanese exports from Asian markets was an indirect effect of the reduction in demand for final consumer goods from the US and EU. Japan is indeed at the centre of East Asia’s supply chains through its exports of parts, components and capital equipment.
In short, Japan’s exporters are hooked on US and EU markets, whether directly or indirectly! And analysis of trends in the decade leading up to the global financial crisis shows that Japan became more and more hooked on these markets.
The “Great Moderation” was a period where the US consumer was driving the world economy, with Chinese (and Japanese) exports to US growing more and more, with concurrently growing trade surpluses and deficits in the China and US respectively. But behind these Chinese exports were also Japanese exports of parts, components and capital equipment to China (and other Asia countries). Over the period 1995 to 2008, Japan’s exports rose from 9% of GDP to some 17 1/2%!
So over this period, Japan’s one engine economy, became ever more one engine, as growth was dependent on exports, thereby exposing the economy to market vulnerability.
Looking ahead, US and EU markets are likely to be sluggish for some time as Americans continue to wind down their debt, and as Europe digs itself out of the sovereign debt hole. Where can Japan find a new growth engine? Deregulation of the domestic services sector could provide a boost. But expanding exports of final consumer goods to fast growing Asian markets could be another path. Is it realistic?
May be. The OECD is betting on an 18% in Japanese exports this year. And all the signs suggest that this is a good bet. In April, Japan’s exports rose by 40% (the fifth straight monthly increase), with growing demand in China and developing Asia being the driving force.
According to JETRO, Japanese exports to China could be held afloat by new demand for infrastructure projects as a result of the government’s stimulus plan. In addition, domestic demand in China for consumer goods such as automobiles and home appliances is expected to grow.
The new Japanese Prime Minister Naoti Kan also has an "Asian economic strategy" as part of his "New Economic Strategy". He sees opportunities for Japan as many parts of Asia are confronted with challenges of urbanisation, industrialisation and accompanying environmental problems, as well as falling birth-rates and the ageing of society. Japan will be able to help these countries improve their social infrastructure, such as railways, roads, power supply and waterworks.
JETRO’s latest annual survey on the international operations of Japanese firms reveals a rising interest in expanding business and sales operations in China and other Asia developing countries. There is also interest in expanding sales in Vietnam and India, as well as expanding production of mid- to low-end products in India. More generally, increasing numbers of firms are targeting the low- to medium-price range, although these firms cite Chinese firms as being their greatest rivals – and not only in China, but in other Asian markets too.
This latter point is interesting. Japan’s comparative advantage is in high-tech manufacturing. But emerging Asia’s demand for final consumer products is more concentrated in mid- to low-end products. Targeting this market will require a new style of innovation for Japanese exporters. Although very few Japanese enterprises know how to innovate for mid- to low-end products, Uniqlo the cheap clothes shop has shown the way.
This is also an area where migrants into Japan from developing Asia could make an interesting contribution. They understand how local Asian markets function. But does Japan realize how beneficial such migrants could be?
IMF World Economic Outlook, April 2010
OECD Economic Outlook, May 2010
Why was Japan hit so badly by the global financial crisis?
Asian Development Bank Institute
JETRO, Japan-China Trade in 2009 Declines for the First Time in 11 years
Policy Speech by Prime Minister Naoto Kan
at the 174th Session of the Diet, 11 June 2010
JETRO Releases the Results of its Survey on International Operations of Japanese Firms
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