A Japan Asia Storm Warning

While a widely anticipated decline in Japan's trade surplus with the U.S. should alleviate tensions between the two nations, economist Joseph Quinlan of Dean Witter Reynolds Inc. thinks Japanese trade frictions with emerging Asia will inevitably grow.

The catalyst, he says, will be Japan's soaring trade surplus with nations in the region. With the four newly industrialized countries (NICs)--South Korea, Taiwan, Singapore, and Hong Kong--this surplus hit a record $63.9 billion last year and is up nearly 20% so far this year, even though Japan's imports from the NICs are booming.

Japan's trade edge with the four leading Association of Southeast Asian Nation (ASEAN) countries--Indonesia, Malaysia, the Philippines, and Thailand--is much smaller, but it's growing a lot faster. With Japan's exports to these nations up 35% so far this year, compared with a 22% gain in imports, its trade surplus with the ASEAN four is running 82% above its pace in 1994, when it weighed in at $8.7 billion.

Behind this picture lies Japan's massive direct investment in Southeast Asia. In the ASEAN countries, this has sparked a huge flow of capital goods to Japanese investment sites. In the NICs, it has led to a heavy dependence on Japanese parts and components. Unless such trends ease, the loudest complaints about Japan's trade policies in future years are likely to come from its developing neighbors.

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