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Japanese Policy and the East Asian Currency Crisis: Abject Defeat or Quiet Victory?

Christopher W. Hughes

CSGR Working Paper No. 24/99

February 1999



The abiding impression of Japan's involvement in and response to the East Asian currency crisis is one of sorry failure. Japan stands accused of purveying a defective developmental state model of growth to the East Asian states--over-dependent for its functioning upon exports, inflows of capital, and lack of transparency in governance--and then proceeding to undermine this model due to its own domestic economic difficulties and neglect of the economic welfare of other countries in the region. In addition, to triggering the onset of the crises, Japan is also believed to be culpable for prolonging them by providing inappropriate economic leadership in the region--represented most clearly by its failed proposal for the AMF, and its reluctance to stimulate its domestic economy and act as the primary 'absorber' of East Asian exports. As a consequence, Japan's position of economic dominance and nascent political leadership role in the region is seen to be under attack following the currency crises.


This research paper, whilst agreeing that Japan has not necessarily provided effective crisis management or short term rescue packages for East Asia, attempts to re-evaluate some of the criticisms of Japan's role, and argues that over the longer term Japan is continuing to exercise considerable covert economic leadership in the region. Examination of Japanese policy-makers' perceptions of the East Asian crisis reveals that they see the region as hit above all by currency crises which have transmuted into economic ones, but that the basic model of export and FDI-powered growth in the region is still fundamentally sound. Moreover, Japanese policy-makers contend that Japan is neither responsible for the occurrence of the crises, and nor are the US-prescribed solutions of the expansion of domestic demand in Japan likely to hold the key to the immediate restoration of growth in East Asia. Instead, they quietly lay the blame for the crises upon China for undercutting the competitiveness of East Asian exports and moving ahead of the NIES-4 in the regional production cycle.


Hence, Japanese policy-makers have acted to support the IMF in its approach to eliminating speculative bubbles and restoring good financial management in the region, but have directed their own efforts to attempts to re-gear the existing developmental model through the extension of trade and financial credits, and the technology necessary to improve the competitiveness of East Asian exports and to enable these economies to move up the production chain. The paper then moves on to show how these policies have gradually begun to work in Japan's favour, as it has been able to restore a measure of confidence in Japanese economic leadership, to slow the onslaught of convergence theory on the East Asian developmental model, and to set its own agendas in multilateral approaches to the crises. Hence the final outcome of the economic crisis in East Asia may actually be the strengthening of the Japanese model of capitalism, the position of Japanese corporations, and developmental state model, rather than the defeat of these actors and concepts as many commentators have predicted.






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