A New Trend in Japan's BOP and the Dynamics of Developing Asia: From ‘Threat of Asia’ to ‘Coexistence with Asia’

Abstract

With the shrinking current account surplus in Japan's BOP in recent years, many have become fearful of a perpetual decline of the Japanese economy. From ‘de-industrialization’, ‘loss of employment’, and ‘shrinking trade and current account balances’ to ‘weakening competitiveness’ and ‘loss of capacity to grow’, one tends to put the blame on the growth dynamics of developing Asia. This article shows that one should not blindly subscribe to this ‘threat of Asia’ argument. One should reconfirm that domestic factors such as saving behaviors and the structural environment for investment set the trend for a country's BOP in the longer term.

In short to medium terms, however, BOP is largely affected by developments in trade, trade arrangements, and foreign direct investment (FDI). In order to cope in a well-balanced manner with this emotionally-charged ‘threat of Asia’ argument in light of the deepening economic integration with developing Asia, this article provides analyses on both sides of the ‘S-I≡X-M’ macro identity as well as on the factors that unite the two sides of this crucial identity. These are the analyses regarding the 1) relative sizes of savings-investment gaps, and 2) trends in age-dependency ratios both in global and Asian scales; 3) changing competitive structure of Asian exporters, and 4) impacts of the emerging free trade agreements in Asia; and 5) interactions between trade and investment flows in the APEC region, and 6) impacts of Japan's FDI to developing Asia.

The saving-investment gap of developing Asia has been relatively small, relative to the size of Japan's saving capacity. However, identified demographic trends point to an existence of time limit of fifteen to twenty years for the self-supported investment dynamism in East and South-East Asia. For Japan to revive and retain its growth dynamism, confronted with competitive pressure from rising Asia, it is imperative for Japan to vitalize inflowing FDI as well as domestic investment. Like international trade, cross-border investment is a positive-sum game. However for any country to benefit from this game, two-way flows should be promoted. The current study confirms that this is the key policy prescription for Japan's ‘coexistence with Asia’.