RIETI Policy Symposium

Global Recession and International Economy - Japan's challenge and approach

Information

  • Time and Date: 10:00-17:30 (TBC), Thursday, July 16, 2009
  • Venue: Nadao Hall, Japan National Council of Social Welfare (Zenshakyo)
    Shin-Kasumigaseki Bldg Lobby Floor, 3-3-2 Kasumigaseki, Chiyoda-ku, Tokyo
  • Language: Japanese / English (with simultaneous interpretation)
  • Page
  • 1
  • 2

Summary

Keynote Speech 1: "Global Disparity and Challenges in the Global Economy"

KOJIMA Akira (Senior Fellow of the Japan Center for Economic Research/Chief Editor of the Asian Economic Policy Review)

Resolving structural problems to move forward

  • Structural and cyclical problems are both very important. However cyclical problems tend to be resolved with time, while structural problems linger. The recession triggered by the global financial crisis is marked by a series of complex structural factors. For this reason, it is important to consider the post-crisis period as a process for moving forward, rather than as a recovery from a simple cyclical economic downturn.
  • There are some global structural factors: 1) The structure of the division of labor in global production through foreign direct investment (FDI); 2) A decoupling phenomenon occurring between the money economy and the real economy as a result of the rapid expansion of the money economy in the wake of financial and capital liberalizations; 3) Growing downward pressure on the prices of standardized mass industrial products and deflation on the back of the increasingly high-tech nature of emerging economies, especially China; 4) A structurally continuous upward pressure on prices of natural resources generally, driven by the sustained rise in demand for energy resources associated with the rapid development of emerging countries; 5) Factors for structural instability, such as a rise in the potential volatility of foreign exchange associated with the continuous expansion of global disparities in the nature of balances of payments; and 6) A prolonged balance sheet adjustment in the United States in the process of correcting the global disparity and the accompanying adjustment of the trilateral trade structure among Japan, Asia, and the United States, and the end of a dependence on the United States.

Continued development of external demand and stimulation of domestic demand

  • Growth in trade is greater than growth in the world's gross domestic product (GDP). A number of reforms are needed to develop external demand and stimulate domestic demand, instead of shifting the focus from external demand to domestic demand. The Asian middle class is expanding explosively, in units of 100 million people. This demands a strategic response to the expanding market for the middle class, especially in Asia.
  • Aiming for new development while strategically allocating resources to the next growth sectors and frontiers, as the Green New Deal does in the United States, will help ensure the development of new industries and will spur foreign trade. In particular, those countries that are taking strategic action in energy and the environment will be the most likely to achieve a competitive advantage that enables them to enjoy sustainable growth in the post-crisis world. This strategic response must be discussed in the context of policies and corporate management.

Keynote Speech 2: "International Economic Shock and Challenges of International Corporations"

WAKASUGI Ryuhei (Research Counselor/Faculty Fellow, RIETI; Professor, Institute of Economic Research, Kyoto University; and Adjunct Professor, Department of Economics, Keio University)

The economic crisis: background and impact

  • U.S. demand for imports surged from around 2003, but this bubble rapidly deflated with the financial crisis. The impact of the fall in demand for imports in the United States because of this recession is asymmetrical as the impact varies depending on the country. Japan and Canada have both been greatly affected, while the impact on China has been comparatively minor. By item, imports of auto parts and capital goods are declining substantially.
  • The uneven distribution of macro balances such as the current account deficit of the United States and the increasing current account surplus of China is very significant. In the meantime, Japan's trade surplus has been declining. Looking at the balance of trade and the balance of income, the balance of trade is almost even, and this suggests that the surplus in the current account balance is mostly the result of the balance of income.
  • Although the shock of the economic crisis had a major impact on exports to the United States and the European Union as the final destinations, one of the reasons why the impact was amplified is that the multilayered production networks of East Asia were part of this export structure.

Economic growth in the United States and China and changes in exports from Japan

  • When we analyze what impact changes in the U.S. GDP have on Japan's exports to the United States by breaking down the value of the exports into two factors, namely the number of items and an average unit price of each item, the following results are revealed: A rise in the U.S. GDP reduces the number of items and raises the average unit price. This means that Japanese companies have responded to the rise in GDP of the United States by reducing the number of items and shifting to higher value-added goods. Meanwhile, the picture looks different in case of Japan's exports to China, where Japanese companies export high value-added goods while widening the range of items.

A new paradigm after the financial crisis

  • A notable change has been observed in global income distribution over the last 10 years, with a concentration on high-income countries giving way to a distribution among multiple poles. In addition to high income countries, the very richest markets with per capita GDP of 30,000 dollars or more and the middle-income markets with per capita GDP between 2,000 and 5,000 dollars are also rapidly expanding.
  • The outlook for demand from high income countries is not promising, given the expected correction in the savings/investment imbalance in the United States. In contrast, demand from Asia, led by China and India, and other middle-income nations, is expected to rise, diversifying the main sources of demand. With East Asia set to become the core region for demand as well as production, a growth model that responds to this change will be needed.
  • Certain market design measures will be needed to ensure that globalized markets become high-quality markets. With the growth in cross-border transactions, the robustness of contracts will be very important. It will also be necessary to develop international rules such as legal systems and investment regulations involving not only the OECD countries but also the middle-income nations that become core sources of demand.
  • For companies seeking to respond to these changes, one important approach is to develop the capability to supply various goods and services to diversified income groups. For that purpose, suppliers will need to be able to respond to changes in the international markets. Second, creating new goods and services through innovation will be vital, as the speed of technology transfer accelerates with the rise of global sourcing. Third, it is necessary to consider the impact of the Japanese language on competitiveness, as a response to global markets. To create high value-added goods that have extensive links to software, the ability to deal in an international language could be an important factor in developing global appeal.

Panel Discussion: The World Economy in Global Recession and the Challenges and Direction for Japan

To open the panel discussion, panelists representing companies and policymakers reported on the current situation and the future outlook.

"Toyota's Tasks and Challenges in Global Recession"
HAYAKAWA Shigeru, Managing Director of Toyota Motor Corporation

  • The global automotive market expanded rapidly over the five years from 2002 to 2007. However, almost all major markets have registered year-on-year declines from the fall of 2008 to early 2009, the consequence of extremely severe conditions.
  • The automobile industry is a very broad-based sector. It has built comprehensive competitiveness through the technological development and manufacturing capabilities of both automakers and auto parts manufacturers, as well as the expertise of distributors. Although the industry contributes to employment and economic development in countries where operations are located by establishing a structure that can respond to changes in the market, the reality is that it was difficult to adapt quickly to this global contraction, given its extreme rapidity and unprecedented nature.
  • To respond to the crisis, Toyota has returned to its original corporate philosophy of contributing to local communities through automobile manufacturing. We will offer products that meet customer needs and develop environmental technologies to provide customers with appealing automobiles at a low price, the basic tasks of an automaker. In particular, environmental technology is one of the most critical management challenges confronting the automobile industry. Toyota will continue to look for ways to effectively use fuels such as bio fuels, electricity, and hydrogen, with hybrid technology at the center.
  • Governments in other countries are also providing R&D support for environmental technologies, creating a development race that draws on full government cooperation. In this environment, Japan could be stripped of its competitiveness in an instant. I believe that the Japanese government needs to undertake additional initiatives and offer further support, such as advancing R&D in next-generation areas, in an alliance involving industry, government, and the academic sector.

"The International Economic Shock and Toshiba's Response"
SAITO Hiroshi, Corporate Vice President of Toshiba Corporation

  • High value-added electric devices such as semiconductors and liquid crystal panels were particularly susceptible to this international economic shock. These products sustained heavy losses as their unit prices fell and sales declined. Factors for the decline include falling sales prices and the appreciation of the yen, as well as the fact that although we have considerably bolstered our cost competitiveness in the most advanced areas, thanks to miniaturization and other technological advances, this failed to offset the effect of the negative factors above.
  • One important initiative going forward is to rapidly improve profitability in the short term, since the fear of the credit risk has yet to be dispelled. Based on the assumption that profits cannot be increased through higher sales, we will strive to improve our earnings profile so that we can generate profits even if the business environment remains at the crisis level of 2008. But we also need to take steps to ensure that we do not miss an opportunity when the industry enters its next period of long-term growth.
  • Some say that we should drop our dependence on external demand, but for a company with sales of 6 to 7 trillion yen that aims to achieve revenues of 10 trillion yen in the future, the Japanese market is too small, while growth in overseas markets is substantial. We cannot grow unless we are competitive in global markets.
  • Looking at specific strategies, cost competitiveness and globalization are the two keywords. We will not be able to operate globally unless we can compete effectively with Chinese and South Korean companies on costs. Promising fields in the future are products related to the environment and energy savings, such as nuclear power, secondary cells, photovoltaic power systems, and new lighting technologies. I think that to effectively operate our business globally in the future, we need to sell these products in international markets from the outset, instead of attempting to establish a presence for them in the U.S. market first, as we did in the past.

"Global Economic Conditions and Japan's Response in an Economic Crisis"
OGAWA Tsunehiro, Former Director-General for International Trade Policy, Ministry of Economy, Trade and Industry

  • Governments are deploying fiscal and monetary policies through a coordination not seen in the last 20 or 30 years. What is especially striking is that China, as anticipated, is executing a radical policy involving 58 trillion yen on a yen basis, or 13% of the country's GDP.
  • If we consider the population with a disposable income of between 5,000 and 35,000 dollars as the middle class, then from 1990 to 2008 this market expanded nearly six-fold in Asia. The point is understanding middle-class demand. The market is described as a "volume zone" in the Trade White Paper, and it is necessary to compete with China and South Korea by lowering costs while preserving quality as much as possible.
  • It is also important for Asia to expand domestic demand. As indicated in the Growth Initiative towards Doubling the Size of Asia's Economy, it will be important to boost demand by cooperating with other Asian nations in their efforts to improve social security and other areas and encouraging the standardization of systems.
  • It is necessary to increase competitiveness using excellent Japanese technologies. We recommend exploring the possibility of export from the content industry and plant and vegetable factories, in addition to the environment and energy-saving industries.
  • It has also been agreed in the G8 Summit that the WTO multilateral trade talks would be concluded by 2010. In particular, the WTO ministerial meeting to be held in India in September will be crucial. Given upward pressure in the prices of natural resources, Japanese competitiveness will likely rely heavily on stable access to natural resources, in the form of industry cooperation behind economic partnerships and resource diplomacy.

Discussion

■Future outlook

(Morikawa) All the panelists are very interested in recovery going forward. There are some signs that production is picking up. I think that the background factor for a recovery in production is rapid progress in inventory adjustment. How do our private-sector panelists see the future?

(Hayakawa) Inventory adjustment is finally being completed. We want to maintain employment as much as possible, although that is difficult under the current market conditions. I think that there is a good chance of recovery if the various initiatives go smoothly. In the United States, we expect that production will recover over the medium and long terms, as there is potential substitute demand given high vehicle ownership and a growing population. In Japan, with the population is declining, I think that a recovery to the previous level is unlikely, even if the economy does come back.

(Saito) When business becomes unprofitable in the short term, this naturally results in damage to shareholders' equity. We boosted our capital base giving priority to a recovery in shareholders' equity and we were able to raise all the necessary capital in the stock market. Although the impact on demand and production was tremendous for us, I feel that financial services were relatively healthy, partly thanks to our previous experience with financial crises. With very considerable progress in inventory adjustment in the most affected electric devices, I get the sense that companies in our industry are finally looking to end their production cutbacks.

■Trilateral trade and production network

(Morikawa) There has been some discussion about corrections to trilateral trade, and I wonder how it could be evaluated for the Japanese economy. What are the policy implications that are derived from the results of analysis of the production network?

(Kuroiwa) There is scope for the production network to expand in the future, as transportation and telecommunication costs in Asia decline with the construction of infrastructure and technical innovation. The question is where production outputs will go. While products were destined mainly for Europe and the United States in the past, in the future domestic demand will need to be generated in the East Asian region. One possible way to do this is through a structure that stimulates demand for consumer goods and other products throughout the region by reducing tariffs through free trade agreements. It is also necessary to change consumer behavior by improving the social safety net and strengthening the financial capital markets so that household assets go to investment and consumption rather than savings. I think that policy cooperation among East Asian countries will be increasingly important.

■Trade rules and direction of WTO

(Morikawa) Let's discuss the relationship of trade rules. In light of issues such as countervailing duties, employment, and competition, what kinds of rulemaking are possible in the medium and long term?

(Kawase) With respect to the environment, there is debate, for instance, over whether a difference in costs between a country that has adopted a carbon tax to combat global warming and a country that has not should be offset with a countervailing duty. Although there has been a rule stipulating that the refund of domestic indirect taxes such as the consumption tax and multi-stage taxes at the time of export is not an export subsidy, measures to offset direct taxes are outside the WTO rules. Since developing countries naturally tend to strongly resist labor and competition issues, a multilateral adjustment is difficult. With respect to investment, although the OECD and the WTO tried to create a multilateral investment agreement, they fell short on objections lodged by developing countries. The environment may be an exceptional case, but it is difficult to extend the rules for the environment into new areas within the framework of the WTO given the challenges in moving forward with the Round. More important than that, is to robustly implement existing rules. Specifically, I think that considerable trade liberalization can be achieved with existing rules through the dispute settlement procedures and surveillance.

(Morikawa) Mr. Ogawa, you noted the agreement to conclude the Doha Round quickly. Would you explain based on your own experience of actually participating in WTO negotiations what problems stand in the way of that?

(Ogawa) Although it has been decided to aim to conclude the WTO Doha Round next year, the current situation does not allow optimism. I have some hope, given significant changes in government in the United States and India. The key will be how politically proactive emerging countries such as China and India are in advancing the negotiations. I think it is at any rate important for Japan to actively proceed with bilateral investment agreements, particularly investment agreements with emerging countries and resource-rich countries.

■Competitive advantage

(Morikawa) There was a discussion about competitive advantage for countries in an environment of intensifying international competition. What areas will be important?

(Kojima) The environment and energy will be areas essential for growth in the future, and these areas need technologies and innovation. Japanese companies and society have sophisticated technologies in their fields, developed in response to tough environmental standards. I hope that the robust efforts of companies and the government alike will enable Japan to respond to growing needs in the environment and energy, and turn these areas into new national powerhouses for the 21st century.

(Wakasugi) China has tremendous capital reserves, and Chinese direct investment is set to surge in the future. Although Japanese companies have had extensive experience with American companies in the process of achieving economic development, relations with East Asia--and particularly with Chinese companies--will likely become very important. I think that it will also be important to conduct our research activities as part of international networks, given the increasing reliance on global networks in economic activities.