Leading East Asia in the 21st Century?

MOTOHASHI Kazuyuki, Senior Fellow, RIETI

"Conference on Japanese Economy: Leading East Asia in the 21st Century?" was held on May 30th, 2003, under the joint auspices of Research Institute of Economy, Trade and Industry and Keio University, focusing on the rise of East Asian countries and the future of the Japanese economy. In the conference, a series of analysis results concerning productivity movements in Asian countries and the relationship between the ongoing information technology (IT) revolution and economic growth were presented; as well as active debates taking place on the future of the Japanese economy. RIETI has been undertaking a research project entitled "International Comparison of Productivity among Pan Pacific Countries (ICPA)", which is to assess the industrial competitiveness of Japan, China, South Korea, Taiwan, and other East Asian economies by focusing on their productivity. Thus, the latest conference also served as an occasion for RIETI to present the interim findings of this project.

The first session focused on economic development in East Asia and its implications on the Japanese economy. Stanford University Professor Laurence J. Lau maintained that no significant change had occurred in the complementary trade structure between Japan and other Asian economies, noting that free trade agreements (FTAs) with China, South Korea, and the Association of Southeast Asian Nations (ASEAN) are beneficial to the Japanese economy. He also pointed to the importance of maintaining foreign exchange stability within the region. Yonsei University Professor Yun Kun-Young spoke about the South Korean financial-sector reform subsequent to the Asian currency crisis, in which he said Japan may find lessons to learn and apply in solving its nonperforming loan (NPL) problem. Based on a productivity comparison among Asian economies, University of Groningen Professor Bart van Ark said that South Korea and Taiwan are now catching up with Japan, especially in the IT sector.

In the second session, the results of productivity analysis on Japan, South Korea, China, and Taiwan (conducted as a part of RIETI's ICPA project) were presented by Keio University Associate Professor Shimpo Kazushige, Seoul National University Professor Pyo Hak K., and Keio University Associate Professor Kawai Hiroki. The project is designed to compare changes in economic structures and total factor productivity (TFP) in each sector (based on comparable data per sector). During the session, presentations were made on the economic trend and productivity movement of each of these economies from the 1980s onwards. A final report on the project, which is to further compare productivity levels to assess each economy's industrial competitiveness, will be compiled next year.

The third session was devoted to the presentation of analysis results focusing on the prolonged stagnation of the Japanese economy. Based on an econometric model analysis, University of Tokyo Professor Hayashi Fumio noted that the growth rate of the Japanese economy declined from the 1990s onwards. On the other hand, RIETI Senior Fellow Motohashi Kazuyuki maintained that while Japan's productivity certainly plunged in the early 1990s, it rebounded in the latter half as a result of the IT revolution; adding that productivity had been improving at an accelerated pace. Elaborating on a long-term outlook for the Japanese economy, Harvard University Professor Dale W. Jorgenson said that Japan - despite improving productivity - will inevitably fall below the United States in economic growth rate because population aging is far more drastic and rapid in Japan than in the US. Meanwhile, Keio University Professor Kuroda Masahiro showed that an increase in capital stock productivity is having a dynamic impact on the productivity of user industries.

The fourth session was a panel discussion on the Japanese economy and policy implications in the future based on a series of academic reports on East Asia and Japan that were presented in the earlier sessions. RIETI President Aoki Masahiko, the first speaker in the fourth session, stressed that the 1990s should be defined as a transitional period in which Japan began to shift into a new economic system, not as a "lost decade". Nakahara Nobuyuki, former policy board member of the Bank of Japan, underlined the need for the central bank to maintain its expansionary monetary policy to help pull Japan out of the prolonged recession, noting that the structural reform and fiscal policy measures taken to date have not been functioning properly. Yale University Professor Hamada Koichi acknowledged the importance of maintaining expansionary monetary policy based on his observation that continuing deflation is pushing up effective interest rates for corporate borrowers thereby putting a constraint on corporate capital investment. At the same time, however, he pointed out that base money hitherto supplied to the market is not sufficient. Osaka University Professor Charles Yuji Horioka said that the long-term recession, which has been continuing ever since the bubble burst, can be blamed on policy failure. At the same time, however, he maintained that the Japanese government nevertheless has a significant role to play in putting an end to the ongoing economic quagmire. Specifically, he said, the government should implement temporary tax incentives to promote household spending and corporate capital investment, and carry out social system reform so as to wipe out people's concern about the future.

The conference had been planned to provide an occasion to discuss the future of the Japanese economy - as seen in the perspective of real economy - based on a long-term point of view by focusing on productivity, a key indicator in considering economic growth. The actual debates, however, covered a wider range of issues. For instance, as a reason behind the prolonged recession, participants cited the government's slow responses to the NPL problem and other financial issues, even touching on the problem of Japan's political system as an underlying cause. A series of analysis results on productivity movements were presented, invoking active debates on data consistency. Unlike natural science in which experiments can be carried out by specifying the scope of targets, empirical studies in economics require a comprehensive approach that goes beyond the conventional disciplines of economics, such as macro economy and micro economy. It is needless to say that data which reflects the actual state of economy is of the utmost importance in conducting analysis. In this context, the conference served as an occasion to reconfirm the importance of a "comprehensive approach" that captures the whole macro economy, and the importance of data that enables such an approach, both of which are indispensable in empirical analysis for drawing up effective policy implications.