The Asia-Pacific Economic Cooperation forum’s high-level meeting on growth strategy in Beppu, Oita Prefecture, wrapped up with a chairman’s statement on actions to be taken by 2015. That strategy is to be formally adopted at the APEC summit in November, with revisions due by the end of the year.
APEC is not the only regional forum Japan participates in. It is also a member of the ASEAN plus three, ASEAN plus six and ASEAN Regional forums, which raises the question of which grouping to prioritize.
Let us take a look at the core features that a regional economic community must have to succeed.
East Asia was quick to recover from the Lehman shock of 2008 and retained its high economic growth. Intraregional trade is expanding, and political factors aside, it is widely recognized that ASEAN plus three (Japan, China and South Korea) leads the other groups in setting the foundation for a potential East Asian community.
True, East Asia has become increasingly reliant on intraregional trade. But it must not be forgotten that the region still lacks self-sufficiency. A region needs to be self-sufficient if it is to maintain a community without relying on other markets.
If you look at the members of ASEAN plus three, Japan, China and South Korea chronically post trade surpluses. ASEAN’s key economies (except for the Philippines and Vietnam) also post trade surpluses. And they all rely on demand from outside the region — mainly the United States — to absorb these surpluses.
In other words, Asia is still unable as a region to absorb the excess supply generated by its own economies.
This, I think, is the role and duty of Japan — the world’s largest creditor country.
China is the world’s largest holder of foreign-exchange reserves today, but the nation is also holding large volumes of external debt at the same time. In addition, China hasn’t lifted many of its regulations on capital transactions and its currency lacks sufficient convertibility.
No Asian economy except Japan seems capable of playing this role as the absorber of excess regional supply. But to play this role, Japan must clear two major hurdles.
The first is structural economic reform, which is needed to boost imports from the rest of Asia. This requires a greater shift from labor-intensive to high value-added industries.
Given the wage differences in Asia’s economies, it is impossible for Japan to retain its current economic structure. Japan’s first bout of trade friction with the United States took place over “$1 blouses” it was churning out during its postwar reconstruction phase. Under a fixed exchange rate of ¥360 to the dollar, U.S. manufacturers were suddenly being threatened by a cheap blouse from Japan, where wages were lower.
This is what’s happening today to Japan. Like the U.S. in the 1960s, Japan is being exposed to highly competitive products from other Asian economies. And just as the American consumers flocked to the $1 blouse from Japan, Japan needs to buy more Asian products while shifting its own manufacturing resources abroad. This is the purpose of structural reform.
It is a waste for Japan not to use its massive foreign-exchange reserves. Given its lack of natural resources, it does not seem wise for a nation like Japan to continue expending those resources on exports and end up converting them into U.S. dollars anyway, which are declining in value.
The second hurdle is expansion of yen-denominated trade and capital transactions. Even if Japan were to incur a trade deficit from absorbing excess regional supply, the funds would automatically return to its capital account if the trades are carried out in yen-denominated terms.
A regional economic community needs a core currency as well as open financial and capital markets.
Tokyo’s market can provide these functions. On the other hand, the gaps among the East Asian economies remain too wide, and the idea of creating a euro-style currency basket for the ASEAN plus three economies does not seem realistic yet.
Unless these hurdles are cleared, East Asia will continue to rely on other markets, such as the U.S. and Europe, and the establishment of an autonomous and sustainable regional community will be difficult to achieve.
We need to know that China is aiming to play such a core position in Asia and that it is making appropriate preparations to that end.
As Japan prepares to host the APEC summit in November, it will be essential for it to discuss which regional grouping to prioritize.
Teruhiko Mano is chairman of the Mano Economic Intelligence Forum.