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No. 32 — August 18, 2000

Feature Article

PROSPECTS FOR A "NEW ECONOMY" IN JAPAN

Douglas Ostrom

Summary

The spectacular economic performance of the United States in the late 1990s and in 2000 to date has raised the possibility that this country has given birth to a "New Economy." Although initially skeptical, economists in increasing numbers have become believers in this proposition. They have concluded that America's long-run growth potential has increased over the past 10 years. Many explanations of the causes of the New Economy are possible, but most analysts assign a significant role to new technologies, particularly those associated with computers and communications.

Japan's economy, by contrast, appears anything but "new." Growth there has slowed at the very time that it has accelerated in the United States. Moreover, demographic trends and other factors imply that Japan's long-term expansion potential will fall further in the early years of this century.

Cultural and economic forces combine to explain why a New Economy has surfaced in the United States and not in Japan. While these circumstances may slow the diffusion process in Japan, new economic structures already in place will push it forward. At the same time, electronic commerce and other key components of the New Economy will undermine Japanese insularity. As the world's second-largest economy slowly embraces these concepts, it might avoid the stagnation that otherwise would be likely over the next 25 years.

Americans will be among the winners from Japan's New Economy. Most obviously, they will benefit from one of their largest export markets becoming even bigger than anticipated. More importantly, the United States will reap some of the rewards of Japanese innovation, both from the goods and services that head eastward across the Pacific and from ideas that it can put to use in offices and factories.

The spread of the New Economy to Japan does mean, however, that the distinctive U.S.-Japan economic relationship that dates from the 19th century will continue. E-commerce will engender hostility and creativity alike on both sides, just as the arrival of Commodore Matthew C. Perry's "black ships" in Edo Bay did almost a century and a half ago. As in the past, the United States and Japan may be slow to recognize that the benefits of the changes are mutual and significant. This suggests the need for a continued political dialogue between the two nations.

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Weekly Review

BOJ ENDS ZERO INTEREST-RATE POLICY
--- by Douglas Ostrom

The Bank of Japan's extraordinary 18-month-long strategy of guiding short-term interest rates practically to zero — a policy begun at a time of widely acknowledged emergency for the world's second-largest economy — ended August 11. That day, BOJ posted a brief statement on its Web site that provided the unprecedented political context for its move:

 

JAPAN STRUGGLES WITH LOAN FORGIVENESS
--- by Jon Choy

Despite the fact that Japanese banks traditionally have eased the terms of their loans to troubled companies as part of the borrower's restructuring process, the practice of forgiving part or all of the principal has become a sensitive topic. Bank executives are being squeezed on one side by regulators and investors who want lenders to clean up their books and show a profit and on the other side by strapped corporate borrowers that warn that without the cancellation of significant amounts of their debts, bankruptcy may be their only option. The government and the public, both keenly interested in this exchange, are conflicted over the subject because the policies that might speed up resolution of the problem also carry a high political and social cost. The consequences of inaction, however, may be dire for Japan's banks and economy.

 

JAPAN, RUSSIA UNLIKELY TO MEET TREATY DEADLINE
--- by Barbara Wanner

Notwithstanding the optimistic spin that officials in Tokyo and Moscow have tried to put on recent high-level bilateral discussions, it appears increasingly unlikely that Japan and Russia will achieve their goal of concluding a formal treaty to end World War II between them by December 31. At their September 3-5 meetings in Tokyo, Russian President Vladimir Putin and Prime Minister Yoshiro Mori no doubt will attempt to demonstrate progress toward removing the longtime roadblock to a peace pact — the territorial dispute over four islands northeast of Hokkaido. Insiders suggest, however, that the two sides may be less willing to soften their respective positions than even three months ago.

 

WHITE HOUSE EXPLORING OPTIONS FOR EXPIRING AUTOMOTIVE TRADE PACT
--- by Susan MacKnight

The transpacific automotive trade agreement, finalized in August 1995 (see JEI Report No. 32B, August 25, 1995), attracted more than its share of critics. Most vocal were those who attacked the hardball negotiating tactics employed by the Clinton administration, including its willingness to risk a trade war, to achieve improved access for imported vehicles in Japan, deregulation of the market there for repair parts and expanded opportunities for U.S. manufacturers of production parts to do business with Japanese car and truck builders, all within the White House's signature results-oriented framework. The naysayers also included trade and industry experts who claimed that the goals Washington unilaterally set for the five-year arrangement were nothing more than pipe dreams — even if General Motors Corp., Ford Motor Co. and Chrysler Corp. did everything right, Tokyo followed through on its commitments and Japan's automotive industry became less insular in its purchasing decisions.

 

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