Perils of export-driven economies: Japan (Part 1)

Singapore-one of the 4 famed Asian Tigers in the world today. The title would seem to suggest that our economy is indeed one of the best model of success for the developing world to replicate. I would not say that we were unsuccessful in that, my views on this is that this model will be indeed be successful during the initial stage of rapid industrialisation. After a certain level of economic advancement has been achieved, this model has to be ditched for further models to ensure continued economic growth.

In this essay, I would work on Singapore, with Japan and China for two of my case studies today. China and Japan, as they have two of the highest exports in comparison to the rest of the world.

As with common knowledge, Singapore pursued the lower-value-added sector of the world’s economy during its early industrialisation years. Sectors like textiles and extraction of raw materials were labour intensive and provided the country with the fastest method to reduce the unemployment rate. As the economy progressed, so did wages. To maintain our competitiveness, industries were shifted to more higher-value added sectors like assembly of electronic products. Despite this shift, there is still one thing in common, that is both were reliant on exports. Any fluctuation on the world’s economy will also be reflected in ours. However, my essay here is not on fluctuation per se, but rather, the problems of excessive exports without a correlated rise in imports.

Singapore foreign trade reserves currently stand at about US$147 billion (MAS, 7/8/2007). This reserves has steadily been accumulating over the years since our independence. This is a result of the hard work of many Singaporeans that have put in over many years. For the uninitiated, trade reserves are a result of consistent trade surpluses that Singapore has been gaining over the years. Trade surpluses occur when a country exports more than it imports in terms of monetary value. Trade surpluses are good, or are they?

Before, I dive further into Singapore, lets me first go to the example Japan which I will focus mainly on. As the only developed country currently in Asia, it has one of the longest histories of building industries in this part of the region. The “Japanese Miracle” as it was dubbed after WW2, marked the period of rapid industrialisation.

Initially, Japanese companies relied on copying western products to earn profits. Products especially electronics such as television sets, cameras and refrigerators. Once the domain of western companies such as General Electric, the world was quickly swamped by the huge influx of dirt-cheap Japanese copycats. The quality of these products were questionable, but were improved soon enough to compete successfully with their western counterparts. The is rapid industrialisation process produced large amounts of foreign exchange for the Japanese economy.

Despite this economic boom, the mainly conservative Japanese people kept on saving as (mostly) fixed deposits and to a limited extent, property purchases. This was further encouraged by government capital controls since WW2 to force people to save. Thus locking up the available liquidity. The money still stays within the country resulting in trade surpluses.

Faced with so much foreign reserves, Tokyo has to do two things, either convert it back to the local yen or use it to buy foreign products. The former option would cause the yen to appreciate which is unfavourable as it meant their exporters could lose revenue. To keep the value of the yen down, Tokyo had to purchase foreign goods/services (usually US). This usually entails purchasing US securities and treasuries as they offered a quick and safe way to “dump” their foreign reserves.

Awashed with capital, Japanese companies also went on a (mostly) property and corporate buying spree overseas with sometimes blatant disregard for national pride.. Controversial acquisitions happened such as when Mitsubishi Real Estate bought the entire Rockefeller Center(a symbol of US capitalism) in the early 1980s. Many of these irrational spendings most certainly resulted in some losses later on.

Despite corporate Japan's free-spending habits, the US trade deficit and Japanese trade surplus continued to rise. To the US, something has to be done as it was rapidly losing manufacturing jobs. The deficit also put pressure on the US government to keep up their interest payments on treasuries. And as such, the problem was placed on the undervalued Yen. This cumulated into the signing of the infamous Plaza Accord as a solution. This Accord asked for the devaluation of the US dollar and the appreciation of the yen and the then German mark. The rationale of this policy being to make US exports cheaper and Japanese exports more expensive, vice-versa for imports. Thus correcting this large imbalance in trade.

Although this was somewhat successful in solving the US side of the problem. Things on the Japanese side were not so rosy. The first 5 years yes, but after that, it was a different story.  At the beginning half-decade after that policy, the appreciating yen brought an unprecedented boom in the property sector as fixed assets prices were rising. People began to speculate on the ever rising prices of property. This “irrational exuberance” as the former US Federal Reserve Chairman Alan Greenspan coins it, was an observation of this asset bubble. Despite the signing of Louvre Accord (to reverse the Plaza Accord) two years later in 1987, this did not have an effect on the property market,With property prices rising faster than the rise in income levels and general inflation, it will reach a breaking point. This was finally reached  in 1990 when the bubble burst. Banks were soon saddled with large amounts of non-performing loans and many businesses were in the brink of bankruptcy.

Attempts were made to solve this problem though the use of near-zero interest rates. Thus releasing the need for banks to pay depositors and to encourage people to spend their money on other profitable areas( Read: release liquidity to the economy) thus propping up the faltered economy. Another measure taken was to bail out affected banks and business though the use of government funds in the hope of keeping people's jobs. At the same time, this deprived Japan's government from spending in other areas. However, this two policies did not achieve their intended aims and the Japanese economy soon lapsed into decade-long period of deflation and prolonged recession. The huge domestic government debts incurred during the initial revival process, suppressed government spending on social services for many years to come further compounding this problem. With this, the long half-decade bull-run in Japan had finally ended.

With such a detailed description of Japan, let me go to the next case study of China. As with my previous article of the Rise of China's economy, there are problems associated with its growth which could possible derail its future prospects. All these are usually the result of being too export-driven.

(Japan's trade reserves stand at US$923 billion as of July 2007 according to the IMF)

By Yeo Kheng Meng

Part 2 >