After three decades of high economic growth Japan experienced in the 90ies an enduring phase of stagnation, which is characterized and intensified by industrial structural adjustment, by an unresolved crisis of the financial industry and by a sustained gap in private (investment and consumer) demand. Further to the points mentioned above the (long-term) potential economic growth rate of Japan seems to be reduced in the 90ies due to demographic change and the decreased scope for catching-up growth. In this environment the quest for the right macro-management of the economy is a continuous issue of high political priority. Beside the current analysis and prognosis of the Japanese business cycle there are also rather practical questions to be tackled: Which stylized features of business cycles do exist in Japan? Have they changed in the 90ies? How do Japanese economic data, how does empirical methods of business cycle research in Japan compare with the data and the methods in other OECD countries?
Foreign Trade and Investment
Since long the foreign economic relations of Japan are marked by distinct structural characteristics: Japan is a domestic oriented economy. Exports amount to less than 10% of its GDP – a share, which is far below the relative of the industrialized countries in Europe, America and Asia. Also the share of intra-industrial trade in Japan’s total trade is distinctly lower than in other OECD-countries. Since the early 80ies Japan is accumulating high surpluses in its trade and current accounts year by year. Especially Japan’s bilateral trading relations with the industrialized countries are in a high surplus. Japan’s annual direct investment balance is in high surplus, too. The particular features described above tend to change somehow in the 90ies. Trade with the neighboring Asian countries, spurred by Japanese direct investment, has increased rapidly already since the mid 80ies, so that about half of Japan’s present foreign trade is regional. Substitutional competition of the newly industrializing economies of East Asia are making inroad to the domestic market. Furthermore the intra-industrial exchange of goods and services is growing steadily. Even inward investment has increased in the late 90ies.
Economic Integration in East Asia
Traditionally both the industrialized and the newly industrializing countries of East Asia direct their trade to external trading partners (USA, Europe). Since the mid-80ies, however, an empirical trend of intensification of intra-regional trade in East Asia can be recognized. It is striking that East Asia – in contrast to Europe, North America and Latin America – has not concluded a binding regional trade agreement. Obviously it is not trade policy, but a set of other factors, which seems to drive the intensification of regional trade and investment in this region. Of particular importance are the industrialization process in East Asia and the catching-up growth of the NIEs, of the ASEAN-4 countries and of China, the intra-regional investment, the border-crossing agglomeration and the profit-led actions of the Japanese, Chinese and Korean business networks. In this environment especially processed trade increased. The process of intra-regional integration in East Asia cannot be explained solely by neoclassical trade theory. Driving forces, which can be derived from economic growth theory and/or from locational theory come into play and determine the regional integration process. From this theoretical background the essential questions for the region are to be tackled: Where will be the future centers of economic gravity of the region? How will trade and investment relations between Japan, Korea, China and South East Asia evolve? What consequences for trade policy, monetary policy and integration policy can be drawn?