Japan's Economic Chicken Littles

They wail that China's boom will crush their ailing economy. However, this powerhouse neighbor is actually helping Japan

By Brian Bremner

It all seems so long ago and somewhat absurd to recall now, but remember the economic paranoia in the U.S. about Japan back in the late 1970s and 1980s? The pundits of the day viewed Japan as the ultimate economic predator that would colonize one American industry after another. Many also insinuated that the Japanese didn't play fair. The government rigged the game by subsidizing and protecting key export industries so they could undercut Western rivals in their home market.

Some of these ideas had a nugget of truth, but they were largely devoid of economic logic and often bordered on racist. Well, here it is in early 2003, and it's the Japanese that are losing their collective marbles, not about the U.S. but about that new ascendant economic power in the neighborhood, China. Not a day goes by when the business press here doesn't publish some hand-wringing ditty about the economic threat China poses to Japan's financial supremacy in the region.


  Even Japanese Finance Minister Masajuro Shiokawa, at a Group of Seven gabfest in Paris on Feb. 15, took some thinly veiled jabs at China for letting its yuan, which is pegged to the U.S. dollar, depreciate to what the Japanese view as artificially low levels. The yuan's decline has been a huge plus for a major exporter like China, which has built up a massive trade surplus with the U.S. But Japan seems to think it's contributing to the specter of global deflation.

The Japanese have long been trying to pressure Beijing into revaluing its currency to reflect the higher growth of the Chinese economy, which came in at 8% last year. Well, Shiokawa got nowhere with the august central bankers and finance ministers in Paris. For one, the group was consumed with discussions about a possible Iraq war. For another, the Japanese need to take a deep breath, calm down, and realize something about China. It's not an economic threat. Rather, it just may be a godsend for a Japanese economy looking to get its groove back.

However, to get to that point of view requires debunking some of the half-baked analysis that passes for conventional wisdom about why China is an 800-pound guerilla that's going to rob Japan of prosperity. Let's take a look:

Myth: China exports its deflation. It has been fashionable in some circles in Tokyo to blame China for Japan's deflationary headaches. The argument goes something like this: China's massive workforce and low wages give it a huge advantage on cost, and it's flooding Japan and other rich markets with really cheap stuff that's forcing domestic rivals to compete on price.

Never mind that this, more or less, is the same developmental track Japan embarked on during the 1950s and 1960s. Before the Lexus, Japanese companies pumped out trinkets and textiles and cheap transistor radios. The fact is this argument is wrong. Japan's deflation was largely manufactured at home more than a decade ago, when real estate and stock prices collapsed.

Also, as Nikko Salomon/Smith Barney economist Jeffrey Young points out, Chinese import penetration into Japan is about 1.5% of gross domestic product. And the lion's share is on the low end in areas such as clothing, which have a small weighting on Japan's price indexes. The real price wars are on more high-end products like mobile phones, computers, and printers, arenas where the Chinese aren't a huge force yet. Japan would be better off blaming America's Dell (DELL ) and South Korea's Samsung than the Chinese.

Myth: Hollowing out. China is attracting foreign direct investment from all over the planet. And Japanese multinationals have joined the stampede. Investment shifting to coastal China is hollowing out the manufacturing base of industrial Japan. That means plant closures, massive layoffs, and fewer well-paying jobs.

Such critics need to take a chill pill and get a Japanese-language version of Adam Smith's The Wealth of Nations. The economic linkages -- trade and capital flows -- tethering the Japanese and Chinese economies together can often be win-win types of arrangements for both sides.

Goldman Sachs analyst Kathy Matsui points out that 60% of the products China ships to Japan are from labor-intensive areas, such as textiles and basic materials. On the flip side, Japan is high-tech and produces a lot heavy industrial products like electric machinery. Both countries are exploiting their areas of strength to generate wealth.

Of course, if one party throws up barriers to access, the mutual benefits dry up quickly. But though China does have problems -- protection of intellectual property rights comes to mind -- it's hard to argue that Japan is getting a raw deal here. It enjoys a modest trade surplus with China and Hong Kong.

Nor is the tsunami of direct investment into China by corporate Japan necessarily a bad thing for workers back home. But, as Young notes, the laments have a familiar ring to them. The same sort of hair-pulling took place during the 1980s as Japan started to shift production into Southeast Asia. Then, as now, mostly good things are going to happen.


  For starters, a lot of domestic demand will be generated as Japanese outfits order and ship industrial equipment to set up their new factories in China. And the really successful players will sell deeply into China and boost their global earnings. That will enable them to keep well-paid jobs back in Japan, where workers can focus on research and higher-end activities like product development.

Yes, I know, it doesn't always work out as neatly as that. Some uncompetitive companies will be hurt by China's arrival as a developed economy down the road. But when you net it all out, Japan comes out ahead. In fact, if China weren't booming right now, the already anemic Japanese economy would be in even worse shape.

One executive at the construction-equipment giant Komatsu, where domestic sales are expected to fall 10% this year while sales to China will vault by 70%, recently told the Nihon Keizai newspaper, that thanks to China, "It's like a revival of Japan's high-growth era." That's a little over the top, but such comments certainly belie the hysteria these days in Japan about the threat of being flattened by a Chinese economy on a tear.

Bremner, Tokyo bureau chief for BusinessWeek, offers his views every week in Eye on Japan, only for BusinessWeek Online

Edited by Beth Belton

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