China and ASEAN Become Free Trade Block

The Bund of Shanghai, China, May 1, 2009
The Bund of Shanghai, China, May 1, 2009 (Flickr/IceNineJon)

A free-trade agreement between China and the ten member states of the Association of Southeast Asian Nations (ASEAN) has come into effect last January 1, liberalizing trade and investment in an economic zone that is home to almost two billion people.

After the European Union and NAFTA, this new free-trade area is the third largest in the world and perhaps the most significant today for many of the countries involved, China foremost among them, are carrying the rest of the industrialized world out of the economic recession that has plagued it throughout the past year or so. Read more “China and ASEAN Become Free Trade Block”

Japan Must Get the F-35

Not too long ago, Richard D. Fisher Jr. writing for The Washington Times, argued in favor of letting Japan in on the groundbreaking F-22 fighter aircraft. Current American law prohibits Lockheed-Martin from selling the plane overseas.

According to Fisher there were two good reasons for letting Japan have the Raptor. “First,” he wrote, “the F-22 will be the only combat aircraft capable of countering China’s expected fifth-generation fighters.” With something of an Asian naval race already underway, selling Japan what is quite probably the most sophisticated fighter plane of our generation might discourage any dreams of acquiring nuclear weapons of which there were rumors last year. That, notes Fisher, is reason number two. “If Washington cannot provide decisive nonnuclear means to deter China, Japan may more quickly consider decisive deterrents such as missiles and nuclear weapons.”

No one can quite be sure what aircraft China is working on but in all likelihood it considers the F-35 stealth multirole fighter as its foremost of future adversaries. No wonder, for besides the United States, Australia, Canada, Denmark, Italy, the Netherlands, Norway, Turkey and the United Kingdom are all participating in the Joint Strike Fighter program.

Although the F-22 is a better plane, the Americans are now considering to allow Japan to take part in the Joint Strike Fighter program instead. Washington may allow Tokyo to participate in the project even without assurances from Japan that it will procure the F-35, reported Kyodo News quoting sources from both governments.

The move might be interpreted as a reassurance toward Japan that the traditional alliance with America is still in place as far as Washington is concerned. The newly-elected Democratic Party of Japan signaled last autumn that it might operate more independently of the United States than it used to. The country is growing more and more dependent on China in economic terms while many in Washington many still seem to fear the communist powerhouse before anything else.

Moreover, for many decades has America shared with Japan its latest defense technologies, giving the country a significant advantage over other East Asian powers. Refusing Japan to have both the F-22 and the F-35 could be taken as offensive in Tokyo and as a sign that the United States no longer consider the country the most important of its partners in the region.

Japan Goes All In

Last time we reported on Japan’s lingering in economic trouble, we identified decades of government interference as the cause of much of the country’s modern-day hardship. With the Democratic Party in power after years of Liberal Democratic leadership, there was reason to hope that the former would undo part of the Keynesian measures the latter had imposed upon Japan throughout decades of almost uninterrupted rule.

Alas, not only did the Democrats distance themselves from the free-market policies of former Prime Minister Junichiro Koizumi; over Christmas they approved a record trillion dollar budget which, according to The New York Times, “encompasses ambitious welfare outlays to help households cope with the country’s deep economic woes.” The paper warns though that “the scale of new spending could renew investor jitters about the government’s burgeoning debt.”

Prime Minister Yukio Hatoyama is hoping that his generous welfare spending will encourage households to increase consumption, providing the economy with a much needed stimulus. “Together with all of you, I want to build a better Japan, a new Japan,” he said at a news conference. “I have adhered to the principle that people matter more than concrete.” Unfortunately for Mr Hatoyama, Japan’s domestic market simply isn’t strong enough to ensure continued growth should exports fail. And it is exactly the country’s mounting debt that worries foreign investors.

Next year Japan is set to borrow more than half of its entire budget, bringing its public debt up to about $9.4 trillion, or 181 percent of GDP, by the end of March 2011 — by far the highest in the industrialized world.

Because the government is utterly unable to balance its budget, promised cuts on a gasoline tax and highway tolls have been abandoned while cash payments to child rearing households and free high school education are still on the agenda. Put another way: measures that might actually help the economy a bit are put on hold while more money is to be spent on programs that could at the very least be suspended while the country is still struggling to climb out of the recession.

No wonder then that within the span of just a few months, the prime minister lost about one in five of his supporters, bringing his approval rating down from a post-election high of 71 percent to below 50 percent.

Japan Lingering in Economic Trouble

Although still the world’s second economy, Japan has taken quite a beating in recent years. The 1990s were a decade of prolonged stagnation with government spending, a steadily increasing public debt and an almost nonexistent interest rate hampering economic progress. The recession came on top of that and hit the country hard.

Urban dissatisfaction with Japan’s traditional ruling party, the Liberal Democrats, had been rampant for several years until this August, rural voters joined them in electing the Democratic Party of Japan to power. Established in 1998, the Democrats claim to be more liberal in the classical sense than their opponents, favoring the taxpayer and “self-reliant individuals”. The government should, in their view, limit itself to “building the necessary systems” for a society that is framed by “transparent, just, and fair rules.” Supposedly they prefer to let the market run its course but even before they won a majority and got to form a government, the Democrats distanced themselves from the small-government policies of former Prime Minister Junichiro Koizumi. His approach was to take the blame for recent job losses and a widening social inequality. Economically then, we do not have to expect a radically different course from these new power-brokers.

In spite of East Asia’s resurgence during the last quarter there are reasons to be cautious about a speedy recovery for Japan, notes Edward Hugh at A Firstful of Euros. Japanese manufacturers continue to curb on capital spending and salaries, making any recovery in domestic demand unlikely in the short run. Moreover, Japan’s long-term prospects are gloomy. The country’s workforce is shrinking and aging, writes Hugh, which, if the new government refuses to compromise on social security, will inevitably demand greater financial sacrifices from the rest of the population not too long from now. Lastly, Japan’s economy still faces the risk of “getting caught in yet another deflationary spiral,” especially after retail prices dropped dramatically last October.

Government stimulus measures did strengthen consumer spending and exports to Asian neighbors during the third quarter of 2009, producing a modest 1.2 percent growth rate over the previous quarter when Japan’s economy had already moved out of recession. Yet retail prices plunged by 2.6 percent during the same period; the fastest pace of price decline recorded since 1958. Consumer spending also fell during the third quarter after it had risen slightly earlier in the year when the government handed out money and rebates for people buying energy saving home appliances. Industrial output is still down by 15 percent compared to last year while Japanese companies are reluctant to invest as uncertainty over exports and a weakening currency persists.

It is exactly this anxiety about Japan’s export driven economy that continues to upset economists and investors alike. Cheaper products from nearby East Asian states, China foremost, threaten to upset the structure of Japan’s economy under which it has prospered for more than half a century. Meanwhile, the country’s domestic market simply isn’t strong enough to ensure continued growth should exports fail.

An aging Japanese workforce is only part of the problem. The long-term effects of repeated shortterm interventions in the private sector during the 1990s are starting to be felt and not just in the shape of a mounting public debt that exceeds GDP twofold. Labor productivity has been impaired due to substantial labor hoarding in non efficient sectors, according to Hugh while “expanded credit guarantees, intended to counter tight credit, have had similar adverse side-effects.”

Unfortunately, in spite of their rhetorics, there is little to suggest that with the Democrats in power, Japan will denounce big government spending to allow its domestic market to gain strength. As is typical during times of economic turmoil, the government feels that it has to fix the problem while especially in Japan’s case, government has been and continues to be the real problem.

The Forgotten Plight of North Korea

“The West still turns a blind eye to the world’s most brutal and systematic abuse of human rights,” notes The Economist. While we worry about North Korean missiles and warheads, the suffering of the almost 24 million people who live under its Stalinist dictatorship is often overlooked.

Because the country is so unbelievably sealed off from the rest of the world, reports about its insane tyranny are sparse. Refugees who escaped into China during the late 1990s spoke of hundreds of thousands of people dying from famine while in recent years, dissidents living in South Korea and satellite surveillance revealed the darkest side of Kim Jong-il’s reign of terror: the gulags. Read more “The Forgotten Plight of North Korea”

The Asian Naval Race

Last week, the Japanese Ministry of Defense announced they would construct a new class of helicopter destroyer — a typical Japanese military euphemism — as a part of the continuing modernization of Japans military capabilities. Complementing the already spacious Hyuga class, this new class will not only hold helicopters for anti-submarine duties but also be capable of refueling naval squadrons at sea and supporting amphibious operations.

The existence of ships that in everything but the name constitute light carriers is somewhat controversial, especially since the postwar Japanese constitution expressible forbids the country from possessing “land, sea, and air forces, as well as other war potential.”

Yet this article has been traditionally circumvented by the formation of the Japanese Self Defense Force, which, despite its deliberately non-threatening dogma, possessed the world’s seventh largest military budget in 2008. And while Japan is still somewhat bereft of offensive military capabilities, the latest decade has seen its forces partake in numerous expeditions abroad, from participation in the early stages of the occupation of Iraq to chasing pirates off the Somali coast. Read more “The Asian Naval Race”