Michael M. Phillips
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During the heat of the Asian financial crisis a few years ago, with markets trembling and governments nearing panic, then-Treasury Secretary Robert Rubin warned that it was "enormously important" to Asia and the rest of the world that Japan's economy start growing again. Japan, after all, was the logical first market for the exports that the rest of Asia needed to sell.
But a funny thing happened on the way to global recovery. It turned out that emerging Asia got on its feet while Japan was still flat on its back, and most of the rest of the world seems to be getting along just fine, too. If anything, says C. Fred Bergsten, director of the Institute for International Economics think tank in Washington, "a little bit of the Japanese recovery itself has been fueled by the Asian recovery."
The fact is, during what President Clinton called the worst global financial crisis in half a century, the world's second-largest market -- Japan -- just wasn't that important. The reason is simple. The world's No. 1 economy, the U.S., did the work alone, sucking up loose exports from Asia and Latin America. The U.S. economy grew a booming 4.3% last year, and the International Monetary Fund predicted last week that it would hit 4.4% for 2000. By contrast, Japan grew 0.3% in 1999, and the IMF projects a measly 0.9% for this year.
In a perverse way, some of Japan's weakness during the crisis may even have helped matters elsewhere. Blessed with a population of compulsive savers and cursed until recently with relatively few promising investment opportunities at home, the Japanese invested their money in the U.S., enabling Americans to buy more exports from South Korea, Thailand and other crisis countries.
In the simplest terms, the developing world sold, the U.S. bought, and Japan paid for it. And as much as Clinton administration trade negotiators pushed for more access to Japanese and other markets, the weakness of U.S. exports helped keep the economy here from overheating during key years of the American boom.
But it may not be healthy if Japan slumps quietly in its own corner of the globe much longer. There's a growing sense of urgency among top economic policy makers in the U.S. and the other Group of Seven industrialized nations that the U.S. can't indefinitely support the rest of the world. The U.S. current-account deficit -- the flip side of all of that capital rushing into the U.S. from abroad and all of those consumers buying foreign products -- reached a record $338.92 billion last year.
It is in everybody's interest that the trade deficit reverse gradually, not with a panicked flight from the dollar, soaring interest rates and an end to the nine-year U.S. expansion. Friday's stock sell-off was a sharp reminder that financial markets can shift swiftly, even if the economy turns more slowly. The IMF warned just days before the market plunge that overvalued U.S. stocks and lopsided growth among the U.S., Japan and Europe constituted "one of the major uncertainties facing the world economy."
The surest path to a soft landing, Treasury Secretary Lawrence Summers has taken to telling G-7 counterparts, is through expanded U.S. exports, not reduced U.S. imports, and through rising U.S. savings, not cuts in U.S. investment. That will require healthy markets for American goods and services in places such as Japan.
"We believe the global expansion needs to be balanced up, rather than balanced down," Mr. Summers said before Saturday's meeting of G-7 finance ministers and central-bank governors. "Both in Europe and in Japan, where recovery is much less certain, policy makers recognize that further reforms are urgently needed to sustain the strong domestic-demand-led growth -- based on investment and more-rapid private job creation -- that their citizens need and a more balanced global expansion will require."
Picture a skydiver jumping out of a plane. If the parachute opens, it's a happy landing. But if the primary chute fails, there had better be a backup. In recent years, the global economy has had no emergency chute, and the G-7 nations are hoping that Japan will join the European Union in taking on that role before the U.S. experiences a significant slowdown.
"Japan by itself can't break the world economy," says Carl Weinberg, who is the chief economist at High Frequency Economics, a research firm in Valhalla, N.Y. "But Japan plus one other mystery country could make a bigger dent."
That is why U.S. officials and their G-7 colleagues keep a close eye on Japanese economic policy, and were glad to extract a promise this past weekend from Bank of Japan Governor Masaru Hayami that, despite earlier hints to the contrary, he isn't planning to abandon soon the zero-interest-rate monetary policy intended to stimulate growth. Japanese authorities have tried spending their way out of the doldrums, and U.S. officials believe a more expansive, not more restrictive, monetary policy may be the best remaining tool to secure the country's recovery.
As for former secretary Rubin, now chairman of Citigroup Inc.'s executive committee, his language is less apocalyptic these days, but the message is largely unchanged.
If Japan could start growing at a "reasonably robust rate," Mr. Rubin says, "then that would be a substantial additional source of strength in the world economy."
1. Explain how strong U.S. growth helped the Asian economies out of recession. Use an appropriate diagram
2. Explain how the growing U.S. trade deficit is related to the influx of financial capital from Japan.
3. How did Japan help the Asian Recovery, without increasing its own income significantly? This seems counter to a Large Open Economy model.
4. What policy options does the U.S. have
for dealing with the growing trade imbalance?