The future of Japan's economy is tied to that of East Asia. China, the "factory of the world," is rising rapidly while newly industrialized countries such as South Korea and Taiwan are catching up with Japan. The challenge for this nation is to define and secure its place in this region of vast economic potential.
The Japanese market is already flooded with a dazzling array of capital and consumer goods from these up-and-coming countries. Many of these products are highly competitive in price. That puts Japan, a high-wage country, at a heavy disadvantage in price competition. In this sense, dogged deflation here stems from wide cost disparities between Japan and low-wage countries elsewhere in Asia.
How should Japan meet the challenge? The answer, according to the latest annual government report on international trade, is to set up an East Asia economic zone, a free-trade area comparable to the common markets of the European Union and North America. The report, released Tuesday by the Ministry of Economy, Trade and Industry, stresses the importance of creating a framework for multilateral cooperation, including free-trade agreements.