International | Aug 10 2009
By Chris Shaw
While most experts agree the worst of the global financial crisis has now passed, a global economic recovery remains some way off, so the question for Asian economies according to Standard Chartered is where will be the next growth engine in coming years.
For the likes of China a domestic stimulus package has effectively substituted for lost exports during the downturn, but for Japan, where the domestic economy is far more mature, the group points out such an approach would be of limited benefit unless it was accompanied by major social reforms and this is considered unlikely.
This leaves Japan requiring external growth, but with its current major trading partners in consolidation rather than expansion mode the group takes the view Japan’s best option for achieving such growth will come via a greater focus on emerging markets.
That Japan has already started down this path is evident from looking at Japan’s most recent growth cycle, which began in 2003 and has resulted in emerging markets now accounting for 40% of Japanese exports as well as being the source of 60% of its import requirements. According to Standard Chartered, these numbers highlight what has been a general strengthening of this relationship over the past decade.
As the relationship has grown and strengthened, Japan’s interest in emerging markets has moved beyond simply trade in goods, as foreign direct investment (FDI) data show Japan has also significantly lifted its capacity in such markets in recent years. At the end of 2008 emerging markets accounted for 38.7% of Japan’s total FDI, up from 25% at the start of 2000.
Similarly, Japanese companies have expanded into these markets by way of subsidiaries, the numbers showing that during the downturn sales experienced by such subsidiaries fell in the established markets of North America and Europe but continued to increase in the emerging markets. It has been a similar trend with respect to capital investment by these subsidiaries, the totals falling in developed markets but continuing to surge elsewhere.
According to Standard Chartered, this suggests Japan has for some time been shifting the focus of its overseas activity towards emerging markets, which supports its long-held view the current economic crisis is shifting global economic power to the East.
The group suggests the external operations of the majority of Japanese companies operating in the West is for sales in that country, so the fact most of the Western world is likely to experience sub-par growth rates in coming years could see the reasons behind some of these ventures brought into question, especially given the additional benefits generated from operations in emerging economies.
These benefits include re-imports back into Japan, which allows Japanese companies to take advantage of cheaper production costs abroad and so improves cost competitiveness in their home market. Given this, as the global economy settles down Standard Chartered sees an expansion of the country’s presence in emerging markets.
In the group’s view the emerging market sector of the Japanese economy has now reached a size where there is scope for structural benefits to flow back to the domestic economy as re-import capacity will grow, an effect that should prove disinflationary.
It will also improve the tolerance of Japanese corporations to a stronger yen, while at the same time providing a benefit to growth by boosting Gross National Income, which takes account of net income from the rest of the world. As Standard Chartered notes, this measure accounted for 3.3% of GDP in both 2007 and 2008, up from just 1.7% in 2000.
