Today's date:
Summer 1995

For East Asia's Sake, Japan Should Open Up

Lee Kuan Yew, formerly the prime minister and now senior minister of Singapore, remains the power behind the throne in that prosperous city-state and the most clearminded exponent of the Asian way.

Following are excerpts of a speech Mr. Lee delivered in Tokyo in late May, just as the United States announced trade sanctions on Japanese luxury cars in an effort to force open the auto and autoparts market in the world's second largest economy.

Singapore - The time has come for Japan to take the lead in regional initiatives.

After World War II, America presided over the building of the key multilateral institutions - GATT (General Agreement on Tariffs and Trade), IMF (International Monetary Fund) and the World Bank. It helped to shape the multilateral trading system which has given the world and East Asia unprecedented growth and prosperity. Now it is Japan's turn to lead. But before Japan can lead, it must set the example and open up its own markets.

Japan's opening up is not just an obligation it owes to the United States and its other trading partners. Economic deregulation and market opening will promote Japan's domestic restructuring and make Japanese firms more competitive.

As the largest and richest economy in Asia and the current chairman of APEC (Asian Pacific Economic Council), Japan is the key player -one which can set the pace of trade liberalization.

By leading an APEC initiative for freer trade, Japan can push the world towards a better trading order, a world, which through increasing trade, will increase interdependence between nations and create prosperity for all.

If Japan re-examines its past strategy, its leaders must recognize that conditions have changed so fundamentally that they have to break the mold of the last 50 years. That strategy which was designed to maximize exports and minimize imports had served Japan well, but will now limit Japan's role and damage its growth.

There is nothing wrong with current account surpluses as such. Britain, in the 19th century, and West Germany before reunification, ran large current account surpluses. Japan's current account surpluses allow it to invest abroad, and to finance deficits in the rest of the world.

The issue is Japan's restrictive trade practices and closed markets. Japan's imports account only for six percent of its consumption of manufactured goods, compared to 16 percent for the US and 15 percent for Germany.

Japan has more than 11,000 regulations covering about 40 percent of the economy. They include price stabilization systems, price-support policies, the Staple Food Control Act (which blocks rice imports) and the Large Scale Retail Store Act (which restricts the opening of large stores).

Japan's business community has concluded that deregulation and restructuring are necessary and inevitable. Therefore the Keidanren has actively lobbied the Japanese government for deregulation. Japan's corporate leaders know that its trade policies have alienated many thoughtful American friends of Japan.

Japan's overseas production ratio at six percent is still low compared to 28 percent for the US, though the ratio in many product lines is far higher. Two-thirds of Japanese color TVs and microwave ovens are now made abroad, while fewer cars are exported to the US than are assembled there.

The recent yen appreciation will accelerate this trend. Sony has moved 42 percent of its output overseas and is now aiming for 50 percent.

Japanese manufacturers are preparing to move even their higher-end activities offshore. For example, Matsushita is making its surface mount technology machines outside of Japan, in Singapore. Singapore will replace Japan as the manufacturer of this model worldwide.

Even the keiretsu system is no longer sacred. Japan's oldest corporate networks are learning to do business with foreign partners. From Toyota to Toshiba, Japanese keiretsu manufacturers are increasingly turning to lower cost foreign parts makers. Toyota, for example, is buying its anti-lock brake systems from General Motors.

I am confident that as Japan deregulates, its corporate sector will innovate and move up into higher value-added activities, including services. I am also sure that Japan will integrate the regions' economies with Japan's through investments, technology and transfers and trade.

In the last decade, Japan's trade with East Asia has risen two times faster than its trade with the rest of the world. Japanese foreign direct investment (FDI) in East Asia has risen at a time when its total investments world-wide have declined. A recent survey by Japan's Exim Bank predicted that, over the coming three years, three quarters of Japan's new FDI will go to Asia.

The strong yen will be a powerful driving force behind this wave of new Japanese FDI. The Japanese economy will undergo a challenging and difficult adjustment phase. But the strong yen gives Japan powerful advantages. Imports of oil and raw materials quoted in US dollars are cheaper. And it is much cheaper for Japanese companies to acquire foreign assets and increase their stakes in Asia.

There is considerable scope for an expansion of Japanese investments in Asia. About 16 percent of Japan's stock of FDI is in East Asia today. This compares with 44 percent in North America and 20 percent in Europe. Conversely, the devalued dollar makes it expensive for Americans to invest abroad.

The strong yen therefore enables Japan to pre-empt American and European investors in moving into key sectors and securing market share in East Asia.

Japan's role as a capital exporter is a key factor for economic growth in East Asia. East Asia, excluding Japan, now has an approximate balance in savings and investment. But the region will be a net borrower in the coming years. The surpluses of the newly industrialized economies (NIEs) will dwindle. The ASEAN countries will continue to run deficits. China alone will account for over two-thirds of the projected total current account deficits of the region in the next 15 years.

Japan's ability to generate high savings need not suffer from deregulation and liberalization. A more open economy does not mean lower savings. Singapore has one of the most open economics in the world, but it also has one of the highest saving rates. High savings in Japan are necessary to ensure the support of its aging population and to continue Japan's role as a capital exporter in the region.

In particular, Japan can recycle its surpluses toward financing infrastructure projects in the rest of East Asia. In many parts of East Asia, existing infrastructure (transport networks, telecommunication, power and water) is grossly inadequate for current and future needs.

Opportunities for coordinated infrastructural development have grown and expanded because regional governments have recognized and accepted the need for multilateral joint development. In the Mekong Delta, increased economic interdependence has created a demand for road and water networks that transport goods across borders, and for power generation and distribution across borders. Japan is best placed to play a big role in the financing and the construction of these infrastructural projects.

It is only a matter of time before Japan becomes an "absorber" nation to the rest of East Asia, providing markets for their exports. Only 12 percent of East Asia's exports go to Japan now, compared to 22 percent to the US. Japan's share of East Asia's exports can and should easily go up to US levels.

The best way to ensure that markets in the US and Europe remain open is for Japan to set the pace in East Asia in deregulation and liberalization. This will keep the world trading system on an expansion course.

APEC is the vehicle to launch this initiative. APEC should build on GATT's Uruguay Round package and be the catalyst for another phase of global trade liberalization.

The US and Canada are both members of APEC and the benefits of liberalization will spread across the Pacific through them. This will help to anchor US interests in the region.

However, East Asia will gain the most from such opening up. A World Bank study estimated that if all East Asian countries cut their tariffs by half and liberalize foreign direct investment rules on a non-discriminatory basis, about go percent of the increase in the world GDP will accrue to countries in the APEC region.

China alone would see its national income increase by an additional four percent. The GDP of the six Asian countries would climb by an aggregate of five percent; the four NIEs could expect average increases of about I - 4 percent each.

If there is a split between Asia and America, Japan has the most to lose. After World War 11, Japan placed itself firmly in America's orbit. The common phrase then was "Datsu-Ah, Nyuu-Oh" meaning "Leave Asia and enter the West."

Japan's increasing interests in the region in recent years, however, reflect a deeper integration of its economy with the rest of East Asia. The present catch phrase in Japan has become "Leave the West and enter Asia" (or "Datsu-Oh, Nyuu-Ah"). I believe this is too narrow and short-sighted a slogan. Japan should not leave the West. It should stay in the West even as it re-enters Asia, and be the bridge to straddle both East and West. That is the best for the future of Japan, for East Asia and for the world.

I am not taking sides in the present trade dispute between America and Japan on autos and auto parts. American demands amount to managed trade, which is inconsistent with WTO rules. Effectively, the US and Japan have been practicing managed trade in various sectors for many years.

Such arrangements will damage the interests of other countries. It will particularly damage Japan in the longer run because the Americans are going to continue to impose such arrangements using the threat of sanctions. This will widen the areas of managed trade, which is the opposite of free trade under which Japan and the world have prospered.

In Japan's long history, there have been repeated examples of how the Japanese have been confronted with a fundamentally changed situation, worked out a national consensus to change course drastically and overcome the challenge. They did this during the Meiji Restoration, 1868. They did it again after World War II. They did it after the two oil shocks of 1973 and 1975 and again after "endaka" - the rising yen after the Plaza Agreement in 1985.

Japan has enormous cultural and institutional strengths to overcome its present difficulties. For Japan to move beyond its present gridlocked position, it needs a strong government, which has a mandate from the people to break the mold of the last 50 years and change the conservative policies of Japan's powerful bureaucracy.

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