Distinguished Speaker Seminar: Hugh Patrick - Japan's Current Economic Performance and Japan's Role in East Asia

Hugh Patrick, Director, Center on Japanese Economy and Business, and Professor Emeritus of International Business, Columbia University discussed his views on the Japanese economy and the roles of Japan, the People’s Republic of China (PRC) and the United States (US) in Asia’s regional economic integration, as well as the recent initiatives by ASEAN+3 and the East Asia Summit (or ASEAN+6). This seminar was delivered through a panel discussion with Thanong Bidaya and Iwan Azis, ADBI visiting fellows, as discussants.

Using his paper, “Japan's Economy: The Idiosyncratic Recovery Continues” as a starting point, Hugh Patrick introduced a range of issues affecting Japan’s current economic well-being such as its recent economic performance; the decoupling of growth and inflation; macroeconomic policy; corporate restructuring, control, and governance; and external economic relations.

He pointed out that Japan has not yet completely recovered from the stagnation and malaise of the 1990s. The combination of economic expansion with mild deflation is the idiosyncrasy of Japan’s economic performance. The decoupling of growth and deflation could be due primarily to the ongoing structural transformation of the labor market. The likelihood that wage stagnation would persist and that consumption’s share of GDP would continue to decline suggest that inadequate aggregate demand will pose a major constraint on Japan’s growth. This is Japan’s most important macroeconomic policy issue. East Asian economic cooperation is being increasingly promoted, though the main impetus has been political, not economic. Though there have been significant obstacles for significant bilateral or regional preferential trade agreements, Patrick remains fundamentally optimistic about Japan’s ability to solve its basic economic problems.

Patrick stressed that Japan does not handle its relationship with Asia well. Japanese trade policy has shifted to bilateral free trade agreements (FTAs) with protection of domestic agriculture, healthcare and the semi-professional sectors. Japan needs to reform these sectors-to move from bilateral FTA, third best, to regional, second best, and global, first best solution. However, Patrick believes that a region-wide FTA is not going to happen soon because of the different levels of economic development of countries in the region as well as conflicting national interests. With the emergence of the PRC, he suggested that the Japan-PRC relationship should be in between, not too hot nor too cold. In the long term, regional cooperation in Asia should be defined more loosely than the EU model. The US’s Asian policy should embrace regional initiatives within multilateral relationships in the international community.

Thanong reacted that the aggregate demand has increased through market consumption restructured by using more foreign products. As regards economic and political relationships between Japan and East Asia, he said it has developed in a way that has satisfied East Asia, given the condition of no trust. A good sign of regional integration in East Asia is the development of integrated production hubs. However, with the US around, Japan is not able to show leadership in Asia freely. In this context, he suggested that the US must learn to understand Asia better. In terms of political structure, Asia may have to fear more from the US-PRC relationship than the Japan-PRC relationship since Japan is more business-oriented, while the PRC is more politically-oriented.

On the other hand, Azis was more concerned over the issue of aggregate supply rather than aggregate demand, in particular, productivity growth and structural reform in the long run. He also mentioned that Japan so far has handled well the increasing economic interdependence within the Asian region. However, Japan has to carefully handle its relationship with the PRC, while Asia as a whole has to think of how to accommodate the PRC.

Finally, Patrick stated that the most appropriate regional framework for Asia is one of an outward-looking, supportive and non-discriminatory approach, taking into consideration the region’s interests. So far, Asian regional development has been outward-looking. Yet, political relationships and political institutions are very important for Asia because underlying all of these, there is a tremendously creative global economic system that was driving the changes in political side, and there has been very incredible economic progress for the last fifty years.