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The Japanese Locomotive

© Jason Gottlieb

With news of Clinton's escapades dominating the news recently, headlines trumpeting the grand collapse of Asia's economy have been moved to the bottom of page 24 in newspapers around the world, even in Asia. And with a looming crisis in Iraq and the opening of the Winter Olympics, it seems unlikely that Asia's financial crisis will regain its prime newsworthy position any time soon. Does that mean the Asian crisis is over?

The answer, unfortunately, is absolutely not. Despite the temporary recovery in many currencies, including the Thai baht and Indonesian rupiah, the fundamental causes of the crisis remain unsolved, as the wholesale financial reform needed in these countries will take years. The IMF is attempting to address these concerns by attaching a multitude of conditions to its loans that will, hopefully, restructure the economic foundations that must be strong to prevent any such future crises. In the meantime, what can the world do to help Asia recover?

Many nations, including, in part, the United States, are asking not what they can do for Asia, but what Japan can do. Lester Thurow, Dean of the MIT Sloan School of Management, points out in his 1992 book Head to Head: Coming Economic Battles Among Japan, Europe and America, that in the 1950s and 60s, many Asian nations, including Japan and Korea (and to a lesser extent, Indonesia) built up their economies thanks to the American "locomotive." America provided a tremendous import market, as relatively rich Americans purchased an endless stream of goods produced in Asia. The resulting influx of US dollars over the decades boosted the economies, and standards of living, of many Asian nations.

However, the US can no longer be that engine of growth. Despite the state of its economy, the best in decades, the US trade deficit is gigantic, and politically sensitive. It cannot pull Asia out of its crisis by absorbing more imports. Japan, which enjoys a large overall trade surplus, is the world's second largest economy and Asia's largest by far. Many see Japan as the next most likely candidate to lead Asia out of its doldrums. But the "next best thing" may not be so good. Japan's economy still has not really recovered from its own financial crisis, the so-called bubble bursting in the late 1980s, and the nation has been suffering slow growth for about eight years now.

The primary cause of the continuation of this sluggishness, according to analysts in both the United States and Japan, is the lack of Japanese domestic demand. It seems that Japanese consumers simply aren't spending and consuming as much as they used to, preferring instead to save their money, or spend it on things that don't help growth -- like playing pachinko, or paying off old debts from previous spending sprees. Since the Japanese aren't spending much money, economic stimulation of growth has been low, and times are tough all around. As U.S. Trade Representative Charlene Barshevsky, said on January 30, "Japan must stimulate domestic demand. It must deregulate its economy."

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