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Thirty Years Ago They Ruled The World

How the tide has turned in Japan. Once a powerhouse that sent manufacturing jobs and massive investment abroad, Japan can no longer grow without outside help. The NYT reports that Japanese mayors are now traveling to China to implore manufacturers to come build factories on their jobs-deprived shores.

Trapped in slow growth since the early 1990s and devastated by natural and nuclear disasters in the last two years, Japan’s economy now faces an impasse. The country is finding that it can no longer do without the help foreign manufacturers. The region, however, is not standing still:

The new dynamic in Japan signifies part of a larger regional power shift. A small but rapidly increasing amount of foreign capital comes from its neighbor, China, which last year surpassed Japan as the world’s second-largest economy and seeks to diversify its export-oriented approach to business…“The Chinese are starting to look like saviors,” said Kotaro Masuda, an economist at the government-affiliated Institute for International Trade and Investment in Tokyo. “Any investment Japan gets is basically a plus, wherever it’s from, because it means more jobs, more tax income, more opportunities.”

Chinese investment in Japan has jumped twenty fold in the past four years, but at $314 million in 2010, it remains relatively small as a percentage of overall investment in the country.

Although Japanese officials have been complaining about China’s undervalued yuan for years, on the whole Japan’s problems are home grown. In the past, Japan shunned foreign capital: its strong regulations, high operating costs and taxes, and the absence of any government welcome mat for foreign money meant that Japan has had one of the lowest levels of foreign investment relative to GDP in the world. Even Japanese companies prefer to invest their money abroad.

That needs to change; let’s hope Japan at long last decides to take action and halt its dreary economic slide.

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  • Kris

    [I should resist, but our host has led me into temptation:]

    Let me guess: if rich countries outsource their manufacturing to China, that’s a bad thing, but if China outsources its manufacturing to them, that’s also bad! 🙂

  • Jacksonian Libertarian

    Japan was the original export model economy that the US promoted, by allowing them to manipulate their currency by purchasing US Treasuries. Both the Japanese and those that eventually emulated them used this technique thinking it allowed them to cheat the Americans and gain a price advantage for their products in American markets. All while the Americans seemed oblivious to the fact that they were being cheated. Thus began the development of the American Global Trading System, which lured other nations into trading with America, most especially China, which until then was a closed, culturally backward, and hopelessly impoverished nation. The American Global Trading System has been the most successful economic, social, and cultural program in human history, uplifting billions of people out of abject poverty.
    The problem with the export model economy is that the advantage is an illusion in a world of fiat currency. In order to gain an immediate price advantage your economy must over pay for the Dollars, basically subsidizing the Dollar. Over time, as your supply of Dollars grows they become less and less valuable because of the law of supply and demand. This in turn makes your own currency more and more valuable and therefore harder and harder to manipulate in order to maintain your price advantage. We have now reached the point where $4.5 Trillion of US Treasuries are sitting in the foreign central bank accounts at the Fed, and subsidizing the Dollar to gain a price advantage is becoming almost impossible to do at a reasonable price. The Japanese have basically broken themselves trying to maintain their export model economy, and China is close behind.
    We shouldn’t allow this foolishness to go on any longer, as it is beginning to damage the American Global Trading System, with protectionism and trade restrictions. The System needs to be rebalanced, and the way to do this is to add massive liquidity to the system. The US needs to pay off all the foreign held US Treasuries; this could be done in 5 mins at the Federal Reserve Bank where all of these accounts are stored. This would inject $4.5 Trillion into the world economy, $4.5 Trillion in capital that would have to seek out new investment opportunities, $4.5 Trillion in capital that could be borrowed or used to purchase US goods and services. The US which has suffered a price disadvantage for many decades, would suddenly enjoy a price advantage, at least until most of that $4.5 Trillion got reabsorbed back into the US economy. US businesses that have survived decades of the harshest competition by being the most creative and productive would suddenly find themselves gobbling up world market share. US blue collar workers which have borne the brunt of world competition, would find themselves in great demand as US manufacturing surged to meet as suddenly massive demand. A trade surplus of hundreds of billions per year would develop and possibly last for a decade or more until balance is fully restored. Sure there would be some inflation, but likely a lot less than you might think because as the price of imports rise the demand for them will fall, as the opposite occurs with exports.

  • A Japanese

    Every action Japan is taking in this column has been lectured by the American medias in the past three decades.Be more open to the new ideas about global economy.Deregulate and welcome foreign investors.Have better ties with Asian neighbors.
    And why the tone of the column is how-mighty-has-fallen?

    I also want to point out that no one including both Americans and Chinese have ever seen Japan’s investor as “savior”status

  • gs

    1. This post did not mention the potential effect of Chinese investment on Japan’s military relationship with China—and on Japan’s relationship with its allies. Iirc WRM noted Chinese inaction after apparent US diplomatic triumphs in Asia. Inaction seems to be working out nicely for the Chinese wrt Japan.

    2. As the new millenium dawned at the height of the Internet Bubble, it appeared that the Second American Century was getting underway. Instead, America declined even faster than Japan did. IMO the extent and speed of the decline are not obvious because the USA’s position was so historically unprecedented.

  • Kris

    Jacksonian@2, I agree with your analysis of what got us here. I can only hope that the re-balancing is as painless as you foresee.

  • Toni

    I don’t understand why Japan thinks it needs to import jobs. I thought it was rapidly graying, with too few youths to support the aged — not jobless youths.

    If Japan wants foreign investment, though, maybe it should rethink its opposition to Wal-Mart entering its retail market.

  • cubanbob

    Jacksonian the export model is the only model that works if your country doesn’t have a reserve currency. How else to pay for imports? As for paying the US National debt off as you mentioned, a wonderful idea, just like Weimar Germany paid off it’s debts. But at what a cost. Sometimes the cure can be worse than the disease.

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