ECONOMIC TRENDS

Sumitomo Corporation Information Analysis and Research Department ECONOMIC TRENDS No. 143, March 2001 tion lost ¥1,200 trillion in assets. The number of suicides exceeded 30,000 in 1999, of which 30% (9,000, to be precise) are said to have been for financial reasons. Compare U.S. losses during the Vietnam War, when some 5,000 U.S. armed forces personnel died in battle annually. Ironically, the reforms promoted so assiduously in pursuit of affluence for the people exacted a huge cost in terms of lives and assets. Here again we see a warped relationship between means and ends. As a result, society’s value system has begun to fray. The old communal values of homogeneity, harmony, and hard work have gradually weakened, but a new set of values has not yet caught hold. Since stopping the aimless wandering of groups and bringing balance to society is up to individuals who have a strong personal sense of values, a healthy individualism needs to take root in Japanese society as soon as possible. Unfortunately, Japan has never provided fertile ground for individuality. It is not that the individual dimension does not exist in Japanese culture. But unlike the idea of the individual in Western civilization, with its active sense of the smallest unit of society, in Japanese culture the individual has often assumed the guise of the wandering poet-priest who turns his back on society. This has been so from Saigyo (1118–90) to Santoka Taneda (1882–1940). Japanese people have tended to escape into this passive sort of individuality when disillusioned with the community. Edmond Rostand’s play Cyrano de Bergerac provides one useful model of individuality. Cyrano, who has never compromised his integrity OPINION My Plume, My Spirit At the end of March I will be ending my 33 years of corporate life and, albeit it a bit early, embarking on retirement. I have been writing this column for five years. In this final essay I would like to think about the problems facing Japan from the perspective of values. When I began my corporate life, Japan was in the throes of its rapidgrowth period. Japan was still poor, and everyone was focused intently on economic growth. A third of a century later, Japan’s per capita gross domestic product is on a par with America’s. Statistically, Japan has become an affluent nation. But the Japanese people don’t feel affluent. Instead, an overpowering sense of being at an impasse hangs over the nation like a miasma. Augmenting material wealth should have been a means of achieving national well-being, but somewhere along the line it became an end in itself. The strategy of converting nominal wealth to true affluence was forgotten, by both the state and individuals. The structural reforms of the last decade, too, should have been a means of achieving affluence for the people, but during the 1990s the na- ON OTHER PAGES Global Trade International Affairs Inside Washington Japanese Industry World Economy SUMITOMO CORPORATION Information Analysis and Research Department 1-2-2 Hitotsubashi, Chiyoda-ku, Tokyo 100-8601 Japan Tel: +81-3-3217-5073 Fax: +81-3-3217-5079 E-mail: econo@sumitomocorp.co.jp URL: http://www.sumitomocorp.co.jp/econo 2 4 5 6 7 ECONOMIC TRENDS/March 2001 to curry favor with the powers that be and who now faces destitution and death, cries out that he has one thing that can never be taken from him: the plume of his hat, which is to say, his spirit. That plume is the symbol of his dignity. In France, land of individualism, Cyrano still represents one of the favorite human types. Ultimately, a society in which individuality flourishes is not something that can be bestowed from without; it can be achieved only through each person’s efforts to preserve his or her dignity. I too, invoking my plume, my spirit, lay down my pen. Farewell. s Naoyuki Hashimoto REPORT Global Trade: Changes During the 1990s The 1990s were a decade in which the United States enjoyed its longest expansion since the end of World War II and in which a number of Asian economies achieved great advances, though for Japan it was a period of struggling with the aftermath of the “bubble economy” that formed in the previous decade. Overall it was a time of accelerated economic globalization. This report reviews the changes that occurred during this decade in the patterns of world trade. A decade of growth The total value of world trade in 1999 came to $5,643.8 billion. Here let us consider the regional breakGlobal Trade by Region down of this trade among the following: Japan, the European Union (EU), the North American Free Trade Agreement (NAFTA) members, Asia, Latin America, the Middle East, Africa, and Central and Eastern Europe. As presented in the table, the top three places in this breakdown all go to intraregional trade, with the EU accounting for 24.3% of the world total, NAFTA for 10.3%, and Asia for 7.2%. Next in order come NAFTA-EU trade, 6.9%; NAFTA-Asia, 6.6%; and EU-Asia, 5.9%. From 1990 to 1999 the value of world trade increased by $2,257.7 billion. This represents an average annual rate of increase of 5.8%, significantly higher than the average Trade in 1999 Value ($ billion) Within EU Within NAFTA Within Asia NAFTA-EU NAFTA-Asia EU-Asia EU–Central/Eastern Europe Japan-Asia World 1,372 581 404 390 372 334 290 276 5,644 Share (%) 24.3 10.3 7.2 6.9 6.6 5.9 5.1 4.9 Increase from 1990 Value ($ billion) 466 355 254 197 189 173 161 121 2,258 Share (%) 20.6 15.7 11.2 8.7 8.4 7.7 7.1 5.4 growth rate of the world economy over this period, which was 3.1%. We can take this as a sign of the progress in international specialization. By region, Asia showed especially strong growth, with its exports increasing at a rate of 10.0% a year and its imports by 8.6% a year on average; trade within Asia grew at an annual pace of 11.6%. Trade within the NAFTA region also expanded rapidly, recording an average yearly increase of 11.0%. Another fast-growing category was trade between the EU and Central and Eastern Europe. Thanks in part to the collapse of the cold-war setup, this trade more than doubled over the period, expanding by 9.7% a year. The regions whose shares declined were those that rely heavily on primary commodities for their trade, namely, the Middle East and Africa, along with Japan, whose economy was in the doldrums for most of the decade. Japan’s trade was 14.6% of the world total in 1990, but its share declined to 12.3% in 1999. Machinery and equipment lead the expansion What categories of items contributed most to the growth of trade during Sumitomo Corporation 2 ECONOMIC TRENDS/March 2001 World Merchandise Exports by Product, 1990 and 1999 (Share based on value, %) 20 18 16 14 12 10 8 6 4 2 0 Agricultural products Mining products Automotive products Office and telecom equipment Machinery and transport equipment Chemicals 1990 1999 Source: WTO, International Trade Statistics 2000. the 1990s? According to statistics released by the World Trade Organization (WTO), while the trade shares of agricultural products and mining products declined, that of manufactured products rose (see the figure). Particularly large increases were seen in the category of office and telecom equipment, which expanded at an annual rate of 11% and whose share of world trade rose from 8.8% in 1990 to 14.1% in 1999. The share of trade in machinery and equipment increased especially markedly in Asia’s exports and in EU–Central/Eastern Europe trade, both of which expanded rapidly during the 1990s; this share also continued to rise, albeit slowly, in trade among the industrialized countries. In fact, this category can be credited as being the source of the lion’s share of trade growth over the course of the decade. The process of international specialization in the machinery industry—and especially in the production of office and telecommunications equipment—progressed by leaps and bounds in the final decade of the twentieth century. Those countries that were able to get involved in the global division of labor in this Sumitomo Corporation category of production achieved growth rates in their trade that were considerably higher than those of countries that did not; they also enjoyed substantially higher rates of growth in their gross domestic products. The machinery industry is capital intensive, and so its development requires investment from industrial countries. The developing countries that achieved the greatest economic progress during the 1990s were those that took the lead in improving their environment for foreign investors. Notable in this respect were the moves by Asian and Central European countries, along with Mexico, to make the necessary preparations to actively court foreign investment; such moves can be said to have represented a preemptive response to the needs of the times. Another point that was confirmed by the experience of this decade was that the lowering of trade barriers, whether in industrial or developing countries, leads without fail to increased trade volume. Awareness of this fact is probably behind the eagerness with which countries have been moving to set up their own free trade agreements so as to improve their own prospects at a time when multilateral trade negotiations have become bogged down. Global trade has the basic function of providing a smooth supply of the products that are needed when they are needed. As it responds to the shifting conditions created by individual countries’ commercial policies and international agreements, this trade can be expected to continue to change in composition and expand in volume and value. s Fumio Oi, March 5, 2001 Highlights of Recent Issues November–December 2000 (No. 140) Livelier Investment Holds the Key to Japan’s Revival Dealing with the Problems of Heavily Indebted Poor Countries January 2001 (No. 141) Stock Index Funds and Sogo Shosha Forecast for Fiscal 2000 and 2001 February 2001 (No. 142) A Medieval Specter Haunting Today’s Japan The Transformation of Japan-China Trade These issues are on line at our website (http://www.sumitomocorp.co.jp/econo). 3 ECONOMIC TRENDS/March 2001 INTERNATIONAL AFFAIRS This section takes a look at major topics on the international scene, offering an outline of developments together with highlights of media commentary and reports from research institutes. Turkey floats its currency It started out as a spat between Turkey’s President Ahmet Necdet Sezer and Prime Minister Bulent Ecevit. Ordinarily it should have been no more than a fight among political insiders. But the market took it as a sign that the ruling coalition was going to crumble, and capital fled from the country. The lira at one point dropped more than 30% from its precrisis level, and overnight interest rates topped the 4000% mark. To keep the crisis from spreading further, on February 22 the Turkish government announced that it was floating the lira, after which the situation finally began to settle down. The Financial Times’ Alan Beattie suggested the day after this announcement that the International Monetary Fund (IMF) had been mistaken in advising Turkey to peg its currency to the U.S. dollar as part of an antiinflationary package introduced late last year. Such pegs are vulnerable to attack from hedge funds and others when the reliability of the government’s commitment comes into doubt. For this reason, the dollar pegs that were formerly implemented in Southeast Asia, Russia, Mexico, Brazil, and elsewhere have been replaced in almost every case by floating exchange rates. A leading British think tank noted that the main victims of Turkey’s 4 crisis were its banks, especially the state-owned ones. According to the Financial Times (editorial, February 23), Turkey’s debts to Western banks total $44 billion, and Turkish banks have about $10 billion of unhedged borrowing in dollars. This means that they are likely to be left with huge exchange rate losses. The authorities in Ankara have moved to shore up the banking sector with a program of protection for depositors and infusions of public funds for institutions in trouble. Meanwhile, German banks, which have been the biggest lenders to Turkey, now face a new problem to compound the troubles they have experienced with their loans to Russia. Writing in the New York Times on February 27, Robert Kaplan of the New America Foundation warned that—unlike the economic crisis in Thailand, which had only financial repercussions on the United States—the crisis in Turkey could have serious political and strategic implications. Turkey’s neighbors are a volatile mix of countries—Syria, Iraq, Iran, and the Caucasus republics—and it has a large minority of Kurds, who straddle the border regions with Iraq and Iran. In view of the serious geopolitical consequences of a Turkish economic disaster, Kaplan urged the new Bush administration to take an active approach and “chaperone the Turkish political system toward further modernization.” As the above British think tank sees it, the economic outlook for Turkey is as follows: (1) The lira’s decline will push up prices of necessary goods from abroad, such as machinery and oil, putting a squeeze on imports while boosting exports and leading to increased income from tourism; (2) as a result, the current account deficit will fall; and (3) the economy will shrink in the first quarter by comparison with last year, but a recovery is possible later in the year, provided exports grow, import substitution progresses, and a measure of financial stability is maintained. Whither the Thai Rak Thai government? On February 26, Thai Rak Thai (TRT) party leader Thaksin Shinawatra formally launched his administration as prime minister of Thailand. In the January lower house election the TRT won the biggest victory in Thailand’s history of constitutional government, emerging with an outright majority of 254 of the 500 seats. With the addition of two smaller parties that joined forces with it after the election, it gained control of 340 seats, giving it a solid grip on the reins of power. According to a British think tank analysis, Thaksin’s party won thanks to broad public support for its platform of active economic policy. The TRT pledged to stimulate domestic demand mainly through increased government spending, with measures including (1) payments of 1 million baht each to rural villages to promote their revival, (2) a threeyear moratorium on debt repayments by farmers, (3) establishment of a national asset-management corporation to buy up nonperforming loans from banks, (4) creation of a public-sector financial institution to aid smaller businesses, and (5) provision of universal health care at national hospitals at a flat rate of 30 baht per treatment. Keeping these Sumitomo Corporation ECONOMIC TRENDS/March 2001 pledges will require massive fiscal outlays, but the government plans to cover the costs over the short term with transfers from other categories of expenditure, meaning that previously planned spending on infrastructure and other projects will be cut. Thai banks face serious problems with their nonperforming loans. It has been estimated that 30% or more of their outstanding credits have gone bad. The government plans to help them clean up their balance sheets by using public funds to buy up these nonperforming loans, but some have expressed doubts that this approach will significantly improve banks’ operations. As noted in the Wall Street Journal on February 27, the problem, according to the skep- tics, is a lack of creditworthy corporate borrowers. The view is spreading that Southeast Asia’s troubles are fundamentally due to the region’s loss of competitive strength to China, and the Journal expressed concern at Thaksin’s emphasis on protection of domestic industries. With the government in Beijing actively opening up the Chinese market in preparation for membership in the World Trade Organization (WTO), foreign investors are liable to be turned off by moves in Bangkok to impose stricter regulations. The biggest issue for the new government, however, is likely to be the verdict of the Constitutional Court concerning charges that Thaksin concealed some of his assets by fail- ing to disclose shareholdings in subsidiaries. The TRT’s advance has been due in large part to Thaksin’s charismatic leadership, and if the court rules against the prime minister, the political situation could become unsettled. The court’s schedule is still not set, but the situation bears continued observation. s Tsuyoshi Ike, March 6, 2001 INSIDE WASHINGTON Clinton Steals the Limelight It seems the U.S. media just can’t forget Bill Clinton. Almost two months after the inauguration of George W. Bush, his predecessor continues to steal the limelight. There has been plenty to talk about. The chief topic is some of the presidential pardons Clinton granted just before leaving office, but there is more: the $190,000 worth of gifts the Clintons took with them when they left the White House (some have been returned) and Bill Clinton’s intention to rent extravagantly expensive office space in midtown Manhattan at least partly at taxpayers’ expense (later he decided to rent an office in Harlem instead). In connection with the pardons, there are suspicions that fugitive billionaire Marc Rich was pardoned in exchange for hefty donations to the Clintons and to the Democratic Party. To add insult to injury, it turns out that Hillary Clinton’s brother Hugh Rodham received $400,000 for “facilitating” pardons for a drug dealer and a swindler (he has now returned the money). All this has made the Clintons the butt of public scorn. There have been problematic presidential pardons before, including Gerald Ford’s pardon of Richard Nixon, who had been forced to resign as president over the Watergate affair, and the elder George Bush’s pardon of Caspar Weinberger, who had been secretary of defense during the Iran-contra affair in Ronald Reagan’s administration, when Bush himself had come under suspicion of involvement as vice-president. Some say those pardons weren’t questioned as rigorously by the media and Congress as the Clinton pardons. But perhaps the latter were the straw that broke the camel’s back; even the liberal media that had remained sympathetic to Clinton despite a string of earlier scandals have finally turned against him. The new president is attracting some media attention, of course— he has held his first press conference and has delivered a budget proposal to Congress incorporating the big tax cuts he promised during his campaign—but for better or for worse he has not yet magnetized the media. Meanwhile, Clinton has been attracting an extraordinary amount of attention for a president who has just left office. And he is likely to continue to provide the media with things to talk about for some time. s Kunio Tsurumi, Washington March 5, 2001 Sumitomo Corporation 5 ECONOMIC TRENDS/March 2001 JAPANESE INDUSTRY TEXTILES (year-on-year change, %) 40 30 20 20 10 0 -10 -20 -30 98/2 6 10 99/2 6 10 00/2 6 10 01/2 Sources: International Trade and Industry Statistics Association, etc. 100 0 98/1 Production of synthetic fibers (left) 250 60 External demand (left) 40 10 0 -10 150 20 -20 Domestic demand (left) -30 -40 01/1 Polyester fiber market price (right) Outerwear import value (left) (¥/kg) 350 MACHINE TOOLS (¥ billion) 100 (year-on-year change, %) Total orders for machine tools (right) 50 40 300 80 30 200 5 9 99/1 5 9 00/1 5 9 Source: Japan Machine Tool Builders Association. Production of synthetic fibers in January was down 1.8% from the previous year’s level. A process of supplydemand adjustment is continuing with respect to major fiber types, and production levels are on a downtrend. Domestic towel makers have asked for an emergency curb on imports under the WTO’s safeguard provisions. Orders for machine tools were up for the thirteenth straight month in January, rising by 20.5% year on year. Domestic demand swelled by 24.0% thanks to ongoing strength in orders from auto parts makers. External demand was up by 16.7%, but the growth of sales to the U.S. market has been slowing. AUTOMOBILES (year-on-year change, %) 25 20 15 10 5 0 -5 -10 -15 -20 -25 98/2 New vehicle registrations Number of exports Production volume CEMENT (year-on-year change, %) 10 5 Domestic sales (left) 0 -5 -10 -15 -20 Market price (right) 9.0 (¥ thousand/ton) 9.5 8.5 6 10 99/2 6 10 00/2 6 10 01/2 6 10 99/2 6 10 00/2 6 10 01/2 98/2 Sources: Japan Automobile Manufacturers Association, etc. Sources: Japan Cement Association, etc. New car sales registered a year-on-year rise for the fifth consecutive month in February, with the launching of new models pushing up sales of compacts. Standard truck registrations rose for the sixth month in a row, reflecting strong sales of medium-duty trucks. 6 Domestic sales slipped by 6.5% from the previous year’s level in January, after rising in December. Bad weather dampened sales in many parts of the country; declines of 5% or more were recorded in 35 out of 47 prefectures. s Kanji Ishitsuka and Yuko Fujishiro, March 6, 2001 Sumitomo Corporation ECONOMIC TRENDS/March 2001 WORLD ECONOMY Slowdowns have become evident in Japan, North America, and Asia. In particular, production of electrical machinery has been dropping off, and North American auto manufacturers have been scrambling to lower their output levels. Monetary authorities in the affected countries have been relaxing their policy stances, but the consensus is that the downward economic trend will persist at least through the first half of 2001. Japan The economy in Japan has been deteriorating rapidly. In the corporate sector, the outlook for machinery orders has become clouded (Figure 1), and private-sector nonresidential construction starts have been running substantially below year-earlier levels. Industrial production growth has been decelerating, and companies’ Figure 1. Machinery Orders, Japan (¥ trillion, seasonally adjusted, private sector, excluding ships and electric power) 3.5 actual output figures have been falling below planned levels; the shortfalls have been especially great in the electrical machinery industry. Reflecting the darkened prospects for the economy, stock prices on the Tokyo market have fallen to their lowest level in more than a decade. The Bank of Japan has shifted its policy stance to one of countering the risk of recession; during February it announced two discount rate cuts. Retail sales in January were up 1.2% from the previous year. This was the first year-on-year increase in 46 months. Rises in sales of automobiles and fuel pushed up the total, as did the rush to buy large electric appliances before April, when a new law will require consumers to foot recycling costs. Americas The stock market in the United States is nervously responding to the pronouncements of Federal Reserve Board Chairman Allan Greenspan as people try to judge whether the current slowdown will be a relatively short cyclical phase or will turn into a medium-term downturn involving the trimming of excess production capacity. Consumer confidence has been slipping steadily since last September, and as of February it had declined to around the level of four years before (Figure 2). Industrial production in January was down by 0.3% from December; it was the fourth straight month of such declines. The drop in automobile production has been especially sharp, with a monthly fall of 6.6% in January. Canada has also been experiencing an economic slowdown. The real gross domestic product growth rate for October–December 2000 was 2.6% over the previous year, substantially less than the 4.5% rate recorded in the July–September quarter. Capital investment by businesses has shifted to negative growth, and weak auto sales have been pulling down the figures for consumer spending. In Mexico the October–December real GDP growth rate came in at 5.1% year on year, substantially less than had earlier been predicted. And in Argentina industrial production was down 4.2% from the previous year in January; with political developments complicating the situation, international investors have once again become wary of the country’s prospects. 7 3.0 2.5 2.0 1.5 1997 1998 1999 2000 2001 Source: Cabinet Office. Note: The figure for the final quarter is a forecast. Figure 2. U.S. Consumer Confidence Index (1995=100) 150 140 130 120 110 100 1997/1 1998/1 1999/1 2000/1 2001/1 Source: Conference Board. Sumitomo Corporation ECONOMIC TRENDS/March 2001 Europe The strong performance of economies in Europe stands out in contrast to the slowdowns in other regions. The positive contribution of external demand can be expected to lessen in the period ahead, but with support for consumer spending from an improved employment situation and lower taxes, many expect domestic demand to maintain its upward momentum for some time to come. The economic picture for the euro zone remains bright overall. France’s real GDP for October–December was up 0.9% from the previous quarter; this growth, which was faster than in the July–September quarter, was supported by strong business investment. The unemployment rate has been continuing to drop, and consumer spending has been increasing; household consumption expenditures for manufactured goods were up 5% from the previous year in January. The supply side has also been registering a steady expansion. Industrial production was up 0.8% from the previous quarter in October–December. Even in Italy, where the recovery had been seen as lagging, the growth rate picked up in the final quarter of 2000, resulting in a rate of 2.9% for the year as a whole. By contrast, Britain has been recording declines in industrial production since the last quarter of 2000, and higher interest rates have been slowing residential investment. The GDP growth rate for October– December was down from the previous quarter, and in February the Bank of England shifted to a policy of monetary relaxation. Figure 3. Real GDP Growth, Asia (year-on-year change, %) 15 10 5 Philippines 0 -5 -10 -15 -20 1998 Sources: National statistics. 1999 2000 Indonesia Taiwan Hong Kong Asia and Oceania Exports, which had been powering the expansion of many Asia-Pacific economies, have started to slow down, with domestic demand struggling to take up the slack. Growth rates for 2000 were high, but the consensus is that they will decline in the first half of the current year (Figure 3). In Taiwan the January figures for both export or- ders and industrial production were below the previous year’s level. Observers note the downturn in the electronics industry. Hong Kong, however, has continued to experience an economic recovery. Manufacturing production has already bottomed out, and the unemployment rate is on a downward trend. The Philippines had been recording high growth rates in imports, but in December the figure suddenly turned negative, declining by 15.7% from the previous year. The drop in imports of electronic equipment is especially pronounced, suggesting a softening in demand for electronics-related exports. Indonesia achieved a year-on-year GDP growth of 5.2% over the year before in October–December, resulting in a growth rate of 4.8% for 2000 as a whole. Last year’s growth was largely powered by exports, which benefited from high oil prices and the weak rupiah. But this year’s export prospects are not so bright, and concerns about the domestic political situation and civil unrest are causing the inflow of foreign capital to shrink. Meanwhile, a slowdown has become apparent in Australia, where real GDP was down 0.6% from the previous quarter in October–December. s Fumio Oi, March 7, 2001 Economic Trends is the English summary of Keizai Dôkô, a monthly Japanese report on economic trends in Japan and other countries produced by the Information Analysis and Research Department, Sumitomo Corporation. Keizai Dôkô and Economic Trends are also available on the Internet (http://www.sumitomocorp.co.jp/econo). If you have any questions or suggestions concerning Economic Trends, please do not hesitate to contact us (see cover page for contact information). 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