II. New Global Imbalances in an Era of Asian Integration

• TOJO Yoshiaki, CF

The U.S. current-account deficit has reached historic highs and is expected to remain at similarly high levels for at least another year or two. Correction of this imbalance, depending on the timing and method, could have a profound economic impact not only on the United States but on the entire world.

This study will begin by deriving the "natural" range for America's current-account deficit on the basis of the overseas propensity to save and the differential in rates of return. It will then derive the hazard rate for dollar adjustment under the formation of expectations of weaker rates, which correlates positively to the current account deficit, adjusted for the natural deficit.

• URATA Shujiro, FF
• KIYOTA Kozo, FF

Around the mid-1980s, Japanese corporations began actively advancing overseas through direct investment. This direct investment by Japanese businesses not only brought about dramatic changes in the behavior patterns of Japanese companies but also had a major impact on the Japanese economy and on the Asian economies that were the recipients of heavy investment. As an increasingly large number of free trade agreements are expected to be established in East Asia, Japanese business is likely to accelerate its expansion in East Asia.

This study will shed light on the current state of Japanese business activity overseas and analyze the economic effect of this activity on both Japan and the rest of East Asia. The findings should provide information that will be helpful in the formulation of the trade and investment policy, as well as domestic policy in Japan and the rest of East Asia.

• OKAMOTO Susumu, CF

In East Asia, the international division of work has been deepening; Japan and newly industrialized economies (NIEs) produce main components for electric, transport, and other machinery which China and ASEAN countries import to assemble them into finished products. Furthermore, these finished products will be exported to their ultimate places of consumption -- namely the United States and Europe -- thereby forming the Triangular Trade Structure (TTS), a primary factor behind the ongoing global imbalance.

In analyzing the trade structure that reflects the deepening division of production process however, there exists no effective methodology of classification for observing and examining the movements of tradable goods according to the production stage. Thus, this study aims to create an appropriate classification system for tradable goods called Boeki-sangyo bunrui (Trade Industry Classification), thereby developing a database (RIETI-TID) that can serve as a useful infrastructure for analyzing division of production process through the flow of those goods.

Furthermore, by utilizing this database, the positioning and roles of each country within the TTS (complementarity, competitiveness, etc.) and the sustainability of such trade structure (i.e. how the trade structure will be affected by China's growth and technology catch-up and what impact it will have on the global imbalance) will be examined.

• Li-Gang Liu, SF

Having become a member of the World Trade Organization, China is now in the process of opening up its financial sector to foreign competition. Owing to the nature of the banking business, the transactions of foreign banks will have a direct impact on the patterns of capital movement in China and, consequently, on the effectiveness of China's capital management. Indeed, the emerging conventional wisdom is that the entry of foreign banks into the market will weaken the effectiveness of the current capital-management system and bring about de facto capital-account convertibility.

This project aims to study this issue from a policy vantage point. It will begin by using China as a case study to examine the relationship between trade liberalization of financial services and its impact on domestic financial liberalization and capital management in the host country. Next, it will empirically analyze the effectiveness of China's current system of capital management by examining the conditions of interest rate arbitrage with respect to the returns on assets in China and Hong Kong.

The insight obtained from this study's empirical analysis should shed light on future adjustments and the institutional design of China's foreign-exchange system as the region moves toward economic integration.

• YOSHITOMI Masaru, President and Chief Research Officer
• TANIKAWA Hiroya, SF

A new global economic imbalance has emerged between the United States, with its huge current-account deficit, and East Asia, including Japan, with its current-account surplus. This situation points to the three-way framework of world trade today and at the same time has given rise to a situation in which East Asia's rapidly growing dollar reserves are capable of affecting U.S. interest rates.

This project will analyze the nature and sustainability of this new global imbalance and clarify the impact of the anticipated adjustment of this imbalance through exchange rate adjustments, financial and fiscal policy, as well as examine the effect of structural reforms on the progress of East Asian economic integration. It will also consider concrete economic policies to correct the global imbalance and maintain sound economic growth in East Asia.

• Willem THORBECKE, SF

• C. H. KWAN, CF

As the Chinese economy speeds ahead and economic relations deepen between Japan and China, an accurate understanding of China's economic transformation has become ever more important for government policymakers and business executives.

The website "China in Transition" takes advantage of the immediacy of the Internet to transmit timely information. The column presents such hot topics as the yuan's possible revaluation, overheating of the economy, and financial risk, in Japanese, Chinese, and English versions. In addition, the site publishes analyses and proposals by various Chinese scholars in Japanese translation. Through this website, I will continue my efforts to foster trust between Japan and China by providing an accurate picture of the Chinese economy and economic relations between the two countries.

• ITO Takatoshi, FF
• OGAWA Eiji, FF

Among the factors believed to have contributed to the East Asian currency crisis of 1997-1998 is the fact that East Asian currencies were pegged to the dollar. With the dollar peg, both foreign investors (the lenders) and domestic financial institutions and businesses (the borrowers) believed they could move capital across national borders without the risk of unfavorable exchange rate fluctuations, and this contributed to the excessive capital flows that set the stage for the currency crisis.

To prevent a recurrence of this problem, East Asian countries should reform their currency regimes and switch to a more flexible "managed float" system. Yet while various studies and proposals have been put forward in regard to such issues as the appropriate target rates around which to manage such a system and the best way for East Asian countries to coordinate and cooperate on exchange rate policy, a consensus has yet to emerge among scholars and policymakers with regard to the specifics of reform.

The most viable options are (1) the YES basket, in which all East Asian countries except Japan would be loosely tied to a basket of currencies consisting of the yen, the euro, and the dollar; (2) a common basket system embracing all participating East Asian nations, including Japan, under which the East Asian currencies would fluctuate very little relative to one another. (In this case, the problem is establishing the range of participation and determining which countries will be part of the basket.)

The purpose of this study is to identify the optimum system from the various options available, to suggest an appropriate range of participation, and to calculate the appropriate weight for each currency in the basket.

• YAMASHITA Kazuhito, SF

Since the discovery of cases of mad-cow disease, or bovine spongiform encephalopathy (BSE), concern over food safety has risen among Japanese consumers and the nation as a whole. The WTO's SPS agreement was intended to prevent countries from deliberately using sanitary and phytosanitary measures to restrict international trade, but consumers in industrialized countries have criticized the agreement for allegedly putting trade profits before human life and health.

This project will attempt to analyze whether certain types of food import regulations are being used as pretexts for protectionism or are reasonable from the standpoint of food safety (reasonable disparities in regulations stemming from differences in consumer demand as opposed to regulations adopted with the intention of protecting domestic industry). It will also propose changes to trade rules designed to maximize economic welfare in each country while minimizing the impact on trade. The method of research and analysis will be the same as for "Trade and the Environment."

• KOTERA Akira, FF
• KAWASE Tsuyoshi, FF

The tremendously slow progress in "the Doha Development Agenda", a new round of World Trade Organization (WTO) negotiations can be taken as signifying a resurgence of protectionism and regionalism on the one hand and countries' flagging interest in maintaining and strengthening the multilateral trade system on the other.

This project will attempt to illuminate the current situation in which the promotion and reinforcement of this system appear to be reaching their limits. It will then consider what form a new multilateral trade system should take and examine the various relevant policy issues, keeping in mind Japan's potential medium-and long-term contribution to such a system.

More specifically, the team will begin with a general analysis and discussion of the multilateral trade system's current situation and issues, using the methodologies of three fields in the social sciences: international economics, international politics, and international law. Next it will explore individual issues, including the interface between regional economic zones and the WTO, the participation of civil society in the WTO, the process by which trade policy is formulated and adopted in Japan, the problem of implementation in the WTO's dispute settlement mechanism, and the issue of greater participation in the WTO system by developing countries. It will also suggest a prescription for the resolution of these problems and propose directions for Japan's participation in the round.

• KAWASE Tsuyoshi, FF

It has been said that the WTO's dispute settlement process has been "juridified" so that it approaches the elaborate procedures of domestic tribunals. At the same time, however, adoption of the panel/Appellate Body's rulings has become virtually automatic, and now that a party to the complaint can no longer "block" a WTO ruling, the spotlight is being focused on cases where implementation of the rulings is politically difficult (for example, the U.S.-EC dispute or the so-called trans-Atlantic issues like the banana and hormone beef cases, the dispute between Brazil and Canada over subsidization of civil aircraft exports, and various steel-related disputes between Japan and the United States).

This project will take up individual cases that showed very distinctive implementation processes, in particular focusing on those cases where implementation has reached a stalemate. It will attempt to analyze the factors that have impeded (or in some cases facilitated) implementation, and search for clues to solving the problem. The hope is that these findings will serve as policy proposals for negotiations on the improvement and clarification of the Dispute Settlement Understanding in the new WTO round.

• YAMASHITA Kazuhito, SF
• TAIRA Satoru, FF

How to reconcile trade interests and environmental interests is a major issue for international commerce. Yet almost no progress has been made in WTO rule-making in this area despite years of debate, and although political and legislative settlement is preferable, juridical settlement is more and more the rule. With this in mind, this study will sort out and analyze the various issues and viewpoints with respect to trade and the environment and offer a set of proposals concerning the adoption of new rules.

In terms of methodology, the project will being by considering what measures would be most desirable from an economic viewpoint, then discuss from a legal standpoint what sort of interpretation of WTO provisions should be adopted in order to realize these measures, and what legislative measures (negotiating proposals) should be adopted if interpretation of existing provisions proves insufficient.

• SHIRAISHI Takashi, FF
• TORII Takashi, FF

The nations of Southeast Asia, particularly Thailand, the Philippines, and Indonesia, have put authoritarian developmentalism behind them; even Malaysia has begun moving toward a softer authoritarianism with the retirement of Prime Minister Mahathir and the inauguration of the Badawi administration. Meanwhile, the technocracies that guided macroeconomic policy and economic development during the years of developmentalism are also undergoing major changes under the impact of democratization and the economic crisis of 1997-1998. This is evident in the collapse of the four-ministry system in Thailand, in the new preeminence of the congress in the budget drafting process in the Philippines, and in major changes in the process for drawing up a national plan and budget in Indonesia since the fall of the Suharto regime.

With these circumstances in mind, this project aims to (1) elucidate the changes in the technocracies of the ASEAN countries, and (2) consider policies for empowering technocracy under these democracies.