Learning from Japan

September 9, 2013

Once again, Japan is Asia's odd country out. For two decades, as one Asian economy after another boomed, Japan's economy remained virtually stagnant. Now, with gross domestic product (GDP) growth in Asia's two giants, China and India, slowing precipitously (a decline that appears to be contributing to diminishing economic performance in much of the rest of Asia) Japan is recording its strongest growth since its 1980s boom, says Yuriko Koike, Japan's former defense minister and national security adviser.

But, just as Japan's post-war economic model became the template for the Asian economic miracles of recent decades, the reforms currently being implemented by Prime Minister Shinzo Abe ("Abenomics") may offer Asian economies a path back to strong growth. If the fallout from China's slowdown is not to hit the entire region and jeopardize the economic integration that has already taken place, Asia's governments (beginning with China) will need to embrace similar reforms.

How did Asia's boom fade so quickly?

  • Economics is supposedly a cold-blooded subject. Yet successful economies are prone to one of the most dangerous emotions of all: self-satisfaction.
  • Japan has paid a high price for this attitude.
  • Even after its property bubble burst 24 years ago, the authorities continued to believe that the country's growth model needed no adjustment.
  • The result was two lost decades of deflation and introspection before Japan finally embraced the reforms needed to kick-start a new, more open (and hence more vibrant) economic model.

China and India, it seems, have also succumbed to economic hubris. Three decades of success in China and a decade in which India supposedly overcame the old, slow, "Hindu rate of growth," are ending with both economies slowing precipitously. And both are slowing for the same reason: stalled reform, which is a direct result of governments being so satisfied with today's conditions that they fail to address tomorrow's rising dangers.

The Japanese precedent matters all the more, given that, 16 years after the Asian financial crisis nearly wiped out decades of hard-earned growth, Asia's banks and capital markets remain inefficient. Asia's economies need deep, well-regulated capital markets, so that savings can be allocated to where they yield the highest returns. Instead, today's poorly regulated financial sectors -- China is the biggest culprit -- misprice capital. Moreover, banks are too dominant: Asia (including Japan) accounts for more than half of the world's population but barely a quarter of global capital-market capitalization.

Source: Yuriko Koike, "Abenomics for Asia," Project Syndicate, August 29, 2013.

 

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