JPRI Working Paper No. 50: October 1998
Crisis? What Crisis?
by Edith Terry

If Muhammad Azlan Bin Amran worries about the Asian financial crisis, he doesn't show it. Trained in Japan, the 32-year-old engineer works for Japanese electronics giant Canon Inc. in a factory near Kuala Lumpur, the Malaysian capital. Showing off a brand-new production line for new-format cameras that he helped design, Azlan brags, "We picked up this production line from Japan because we wanted to learn how to do it. It's the first model of APS (advanced photo system) cameras, and it's just a copy. Compared to our parent factory in Oita (Japan), we're just a coffee shop. Oita is like a hotel. But we're the best coffee shop in the world, and our customers like coming to coffee shops."

There are a lot of electronic coffee shops in this neighborhood. Some three thousand miles to the south of Tokyo and Beijing, between Kuala Lumpur and Port Klang, lies the giant industrial estate of Shah Alam. Thirty years ago it was steamy jungle; now it represents one of the largest assemblages of Japanese electronics companies on the planet. Out of 986 Japanese companies based in Malaysia in 1998, 162 were electronics companies, nearly 16 percent, the greatest concentration of Japanese industrial firepower in the world.

China had more Japanese investment by 1998, both overall and in this industry, but in China the Japanese electronics companies are far more dispersed, split between Dalian, Beijing, Tianjin, Shanghai, and the special economic zones close to Hong Kong, Shenzhen and Zhuhai.

In the much smaller Malaysian economy, with its population of 20 million, the effect is far more intense, particularly in Shah Alam. If Penang is dominated by U.S. and European multinationals, Shah Alam is a Japanese town, and even has a village-like quality. People know their neighbors, many of whom were neighbors back home in Tokyo or Osaka, often members of the same keiretsu grouping. As in Japan, subcontractors tend to nestle close to their oyagaisha or lead companies in the keiretsu. Unlike Japan, there is ample space around the factories, and many of them are neat and pretty. Their cafeterias sell the cuisines of Malaysia's three major ethnic groups, Malay, Chinese, and Indian, and there are prayer rooms for religious Muslims. Many boast ample sports facilities. Predominantly young, female workers seem proud of their jobs; a male Malay manager cracks jokes as he leads a visitor around his factory.

The Asian crisis has depressed the Malaysian economy, but few Japanese companies are here to explore the domestic market, and virtually none of the electronics makers. Most of these factories have just one purpose: to export. And in the summer of 1998, a year into the Asian crisis, they are pumping. The Malaysian ringgit is 35 to 40 percent off its July 1997 peak, and the Japanese are adding production lines as fast as they can.

Before the Asia crisis, Japanese companies had already helped turn Malaysia into a world-class exporter of consumer electronics, building on its success as the world's premier semiconductor manufacturing nation, in volume terms. Malaysian exports doubled between 1992 and 1996, from $40 billion to $78 billion. Now Japanese companies are among the principal engines of economic recovery. Japanese affiliates accounted for 19 percent of Malaysian exports in 1996, and the largest, Matsushita, accounts for 3.1 percent of Malaysian exports all by itself. Matsushita exports 71 percent of its Malaysian output, using Malaysia as a global production base for air conditioners and color television sets. In the midst of crisis, Matsushita executives were talking easy street.

Says Katsuro Sakakibara, Matsushita's board member for Asia and the Pacific: "If you look at our 43 production bases in Southeast Asia, there's a vast difference between those which target domestic markets and those which export to Japan, Europe, or North America. It's tough for the former, because the cost of imported parts has gone up with the currency crash, but it's basically smooth sailing for the exporters. If you look at it from a total profit perspective, we come out even."

Koichi Kawakyu, who directs Sony International's Asian business from an office overlooking Singapore's vast container port, echoes this. "Of course, the currency crisis is affecting domestic markets. On the other hand, exports are doing well." Back in Tokyo, Canon president and CEO, Fujio Mitarai, is even more positive: "If there are pluses and minuses to the Asia crisis, for Canon on balance it's a plus."

Japanese exporters based in Asia aren't just benefiting from the collapse of Asian currencies. Yen depreciation has also been a huge windfall for them, and it promises to get better. In July 1998, a new government in Tokyo, with a familiar face as finance minister, Kiichi Miyazawa, promised to let the yen drop without intervening, and drop it did, by nearly one yen to 143.7 to the dollar, on July 31. From its 1995 peak of 79 yen to the dollar, the yen has fallen by 65 percent, but Japanese manufacturers haven't been beating a retreat back to Japan, to take advantage of the weak yen. Instead, they are expanding business in the one part of the world where the yen retains relative strength--Asia, particularly Southeast Asia.

In yen terms, Japanese investment in Malaysia was up by 50 percent in 1997, compared to the previous year--from 64 billion yen to 97 billion yen. Investment in Thailand was up by almost as much, 45 percent, from 158 billion yen in 1996 to 229 billion yen. In Asia overall, Japanese investment was up by 14.6 percent, to 1.5 trillion yen, making Asia once again Japan's chief target for foreign direct investment after the U.S., despite a steep run-up in Japanese investment in Europe and Latin America.

Of course, in dollars, the increase in Japanese investment in Asia is less remarkable, with the yen slipping from 103.38 yen to the dollar at the beginning of 1996 to 130.15 yen to the dollar by the last trading day of 1997 (in dollar terms, Japan's Asian investment in 1997 rose a mere 1.6 percent, from $11.9 billion in 1996 to $12.1 billion in 1997). But that is hardly a worry for Asia-based Japanese exporters whose repatriated profits will also be in inflated US dollars.

Strengthening Japan's Position

Nor is the direct flow of capital from Japan the whole story. In fact, it is getting to be less and less of the story. According to MITI, by 1996-97, based on the Japanese fiscal year which ends in March, Japanese companies were drawing more than half of funds for new investment from local sources, either from profits or local debt markets. In a 1997 survey, MITI estimated total 1996 Japanese investment in manufacturing in Asia at 1.4 trillion yen (in yen terms, total Japanese outflow to Asia that year, including non-manufacturing, was 1.3 trillion yen). The report, based on a survey of 12,806 companies, found that Japanese companies were raising 5.1 yen locally for every 4.9 yen that came from Japan. Thus, Japanese subsidiaries in Asia got 694 billion yen for manufacturing investment from headquarters and raised 747 billion from local sources in fiscal 1996.

The Japan Institute for Overseas Investment had even more detailed estimates of financing sources. According to its 1997 survey, Japanese companies based in Northeast Asia were drawing 67.9 percent of funding from local sources, 41.1 percent from retained earnings and 26.9 percent from local debt markets. In Southeast Asia, 57 percent was from local sources, 26.1 percent from profits and 30.9 percent from local borrowing.

As it turned out, those local borrowings were treacherous, but Asia's strongest lure prior to the Asian currency crash was not easy money but profitability. Both MITI and the Japanese Export-Import Bank keep minute track of the activities of Japanese companies abroad, which they publish in annual surveys. One of the many criteria they track is profitability of overseas ventures, and throughout the 1990s these studies were showing far higher profitability rates in Japan's Asian subsidiaries than anywhere else in the world. MITI's report for 1997, for example, showed profit ratios of 4.1 percent in the Asian manufacturing subsidiaries of Japanese companies, versus 2 percent for North America and 1.3 percent for Europe.

To give some idea of how closely MITI, in particular, tracks these numbers, take its 1997 "basic" survey. This massive tome (which costs 23,800 yen) runs to 751 pages, most of it the detailed answers to survey questions. The report is compiled by a statistical team in MITI's Industrial Policy Bureau, and for anyone who takes the time to wade through it, it contains a wealth of information. One thing its shows particularly clearly is the huge traffic in components trade between Japan and Asia, and the relatively large share of Asian manufactures that leave the region, compared to Europe and North America. Roughly a quarter of the output of Japanese factories based in Asia is exported, just under 3 trillion yen in the 1995 fiscal year, compared to 7.2 percent of the output of Japanese factories in North America and 8.2 percent for Europe. Moreover, the total sales of Japan's Asian factories are getting ever closer to sales of Japan's North American factories. In 1995, Japan's Asian manufacturing sales had reached 12 trillion yen compared to 14.6 trillion yen in the US.

Very little of the export story managed to get out, lost in a torrent of bad news about the Japanese economy. Japanese exports to Asia declined sharply, adding to its domestic woes. A high proportion of Japanese exports to the region were capital goods, ordered by Japanese subsidiaries and affiliates. As Asian markets contracted, the yen appreciated in local currency terms, forcing plant closures and layoffs by Japanese companies primarily selling to local markets, such as the auto companies. The situation was, indeed, awful for some Japanese companies, particularly those dependent on local demand. It was also very bad for any Japanese company with substantial financial exposure to local debt markets.

In Northeast Asia, by 1995 to 1996 Japanese companies were raising up to 27 percent of funds from local sources. In ASEAN, 30.9 percent of financing was local, and even in China the figure was up to 24.8 percent. Much of this local financing was in U.S. dollars, and Japanese borrowers didn't bother to hedge more than a fraction of it, according to the Export-Import Bank of Japan. In Thailand, for example, 70 percent of Japanese corporate borrowings were in U.S. dollars and only 10 percent of the dollar-denominated funds were hedged. Japanese banks were also in deep trouble, particularly in Korea, where they were the lead creditor by mid-1997, with $23.7 billion in outstanding loans. The total exposure of Japanese banks at the start of the crisis was $275.2 billion, representing a 31.8 percent market share, well behind the European banks but an unwelcome addition to Japan's estimated $1 trillion in domestic bad debt. Even worse hit than the auto companies and the banks were trading companies, typically involved in large-scale infrastructure projects. Such deals might have survived a 10 to 15 percent currency devaluation but not 50 percent, as in Indonesia. In May 1998, the Wall Street Journal reported that Japanese trading companies in Indonesia might have a total exposure larger than the $24 billion lent by Japanese banks. The reporter quoted a MITI official as predicting that given "one more degree of meltdown in Indonesia" second-tier trading companies might face bankruptcy. Japanese trading companies typically get involved in the financing of large-scale projects as well as supplying equipment and eventually brokering their output. In Indonesia, the six largest Japanese trading firms had $1.5 billion to $4 billion each in such contingent liabilities, ranging from equity to direct loans and loan guarantees.

Struggling in deep waters too were thousands of small and medium-sized Japanese enterprises. These companies moved to Asia in large numbers in 1993-1995, encouraged by their keiretsu parent companies. Their main function was to supply parts and intermediate components both to Japanese subsidiaries in Asia and to their chief keiretsu contracting companies back in Japan, their oyagaisha. Their real crisis was the sharp deceleration of the Japanese economy in 1997-1998, which cut back orders from Japan. But they were also affected by the shutdowns and retrenchment that affected many Japanese subsidiaries in Asia in the first months of the regional currency collapse.

But then something happened, the hemorrhaging stopped, and companies began to expand again. Isamu Wakamatsu, a young researcher at the Japan External Trade Organization, says that only one auto company "retreated" even from Thailand, and that was a small-scale joint venture to assemble trucks by Daihatsu Motors, a Toyota affiliate. Thailand has the densest concentration of Japanese auto makers in Asia. Wakamatsu conducted a literature search in Japanese newspapers between July 1997 and April 1998, combing for clues to investment trends. His list reveals very few closures in any industry.

The Turn-Around

Things are starting to look up even in the auto industry. Many of the car companies closed production lines temporarily, only to re-open a few months later. Toyota, for example, closed its Hilux pickup truck in Thailand in November, 1997, only to re-open in January, 1998, at one-quarter the capacity, according to Motonobu Takemoto, general manager of Toyota's Asia Division. Takemoto is planning to get the plant back up to at least half-capacity by exporting trucks to Australia and proceed "step by step" to improve production quality to the Japanese level. "We are in a survival mode," Takemoto said. "We are supported by our parent company in Japan. Likewise we will support our subcontractors in Asia."

The worst hit of the Japanese car companies was Mitsubishi Motors. The company took a $410 million dollar loss in its 1997 fiscal year, after writing off costs of its Thai subsidiary, MMC Sittipol, with net losses of $330 million. But MMC also took advantage of the crisis to gain control of the subsidiary. In August 1997, it raised its stake in the Thai company from 48 percent to 98 percent, at a cost of $185 million. However, MMC also became the first Japanese auto maker in Thailand to pump up exports, exporting about 41,000 small trucks to Europe in 1998 compared with 13,000 in 1997. Toyoho Kyoda, MMC's corporate general manager for Southeast Asia says, "We are thinking or hoping that within two years' time the situation in Asia will be back to the previous level. We are concentrating now on how to survive for two or three years." "Japanese companies don't quit," says Tomoyuki Ohkusa, a spokesman for Mitsubishi Motors in Tokyo.

One of the first export sectors to take off, with Japanese help, was auto parts. In February 1998, the Bangkok Nation reported that the Japan External Trade Organization had dispatched 70 industrial experts to counsel local producers in the car parts, plastics, electronics, and metals industries. Toyota Motors simultaneously announced it would push car and car parts exports to 20,000 units, or $160 million, up from $90 million in 1997. Honda said its exports of cars and components would nearly double, to 17 billion baht from 9.2 billion baht in 1997. Leading Japanese auto parts makers affiliated with Honda and Nissan, meanwhile, began raising their stakes in subsidiaries in Thailand and South Korea.

Retail, too, showed signs of a reprieve. In September 1997, the bankruptcy of Yaohan, a major Japanese supermarket chain, seemed to confirm anxieties about the Japanese retail sector in Asia. But meanwhile, at least a few Japanese retailers based in Hong Kong were expanding to take advantage of lower rents.

Japan's Asian empire was quickly getting back on its feet. One of the few major U.S. publications to notice was Business Week. The magazine reported in April, 1998, that Japanese-controlled companies in Southeast Asia were planning to increase production of car parts and electronics by as much as thirty percent. Since Japanese-controlled companies already exported $70 billion worth of goods from the region, the "result could be a major change in global trade flows," Business Week predicted. One out of three products manufactured in Southeast Asia came from Japanese companies or affiliates, the magazine claimed. Now most of them were increasing their investments, either by building new production lines or through buy-outs of cash-strapped local partners. In Thailand alone, the Thai Board of Investment had received 125 applications from Japanese companies to take larger stakes in their joint ventures.

Some economists have gotten the picture, as well. "If you're a Toyota or a Honda or Matsushita or Canon, one of the big killer multinationals, the only thing better than 140 yen [to the U.S. dollar] is 145," says Kenneth Courtis, chief strategist for Deutsche Bank in Tokyo. "At the very moment that some of the banks have been downgraded recently, the debt on Toyota and Sony have been upgraded to Triple A."

So what happened? The answer is fairly straightforward. In classic fashion, the Japanese government jumped into action with a policy-based response to the crisis. Tokyo channeled more than half of Japanese emergency funding for the region into getting exports moving again, and that meant support for Japanese manufacturers. The Japanese did not see this as selfish, and their assets in Asia were too big to lose. If U.S. policy makers were disturbed by it, they showed no sign, despite their vehement opposition to Japan's efforts to get a regional fund going to provide balance of payments support to the distressed Asian economies.

Perhaps Washington saw the Japanese support for its companies in Asia as parallel to U.S. provision of trade and investment finance. But this was not the case, either in terms of scale or intentions. By mid-1998, the U.S. Export-Import Bank had offered $2.75 billion in short-term trade finance, together with $400 million in telecommunications-related loans from the Overseas Private Investment Corporation. The comparable figure from Japan was $21 billion, nearly ten times the U.S. figure.

To be sure, one side of Japanese support efforts has been completely untied. Japan put $19 billion on the line for the IMF's balance of payments support programs for Asia, far ahead of the U.S.'s $8 billion. Japan established its lead early on. It organized the initial $16 billion bailout for Thailand in August, 1997, when the U.S. was still sitting on the sidelines. Japan and the IMF both contributed $4 billion to the package, with Australia, Hong Kong, Malaysia, and Singapore each offering $1 billion and South Korea and Indonesia each pledging $500 million. China subsequently joined the package as well. Eisuke Sakakibara, Japan's vice-minister for international financial affairs, called the pledges "a major step forward. What is important is that it shows that the Asian-Pacific region is approaching these issues with solidarity."

What was remarkable about the rest of Japanese funding was not just the scale, but the philosophy behind it. There was nothing secret about what MITI did, but perhaps nobody bothered to read between the lines, look at it in historical perspective, or check back later. Emergency Measures for the Economic Stabilization of Southeast Asia, a Japanese cabinet decision reached on February 20, 1998, spelled out support for Japanese companies in the form of investment finance and two-step loans to Asian governments to support "local export-related companies in Asia." But in practice, such funds would go primarily to Japanese affiliates. The main import-related measure of the February document offered Eximbank financing for "Japanese companies whose imports are currently being affected by factors such as the credit crunch." Other provisions of this early document included technical training and the dispatch of Japanese "experts" and specific measures for Indonesia.

MITI's Role in Asia

The philosophical backdrop to Japanese support consists of a certain perspective on Japanese investment in the region. MITI views Japanese companies as the catalyst to industrialization on a regional scale. Kozo Yamamura, an economic historian at the University of Washington, and Walter Hatch, a political scientist, came up with the phrase "embraced development" in a 1996 study of Japanese investment and technology transfer patterns in Asia. Yamamura and Hatch argue that Japan began to export its developmental strategies to the rest of Asia once they became obsolescent at home. These were not straight exports of ideas, however, but intra-company trade. Japanese companies moved production off-shore while maintaining tight control of the technology flow. And Japanese government support, one way or another, primarily ended up in the pockets of their own multinationals. The authors quote the marvelous analogy of a cormorant fisherman, using his diving bird to capture fish. The diving bird represents the energy and dynamism of developmental Asia. The Japanese government's role--not expressed in the parable--would be financing the boat.

By the late 1990s, MITI had been actively promoting Asian economic integration for a decade, with Japan as the region's brain trust. An early, controversial MITI paper expressed Japan's role in exactly those terms--as the "Asian Brain." Japanese bureaucrats were evidently to play the role of "brain." A 1988 policy study issued by Japan's Economic Planning Agency using the phrase, is entitled "Promoting Comprehensive Economic Cooperation in an International Economic Environment Undergoing Upheaval: Toward the Construction of an Asian Network." Describing this paper, the Economist observed in 1989, "The Japanese government is now committed to taking the initiative in promoting greater regional economic cooperation, starting in East and Southeast Asia. It would do so not on the basis of bilateral economic relations or even with ASEAN as a block, but by regarding Japan, the NICs [newly industrializing countries] and the new NICs as one economy."

This was precisely the idea behind MITI's package of trade and institutional support for the Asia crisis. By May 1998, MITI's non-IMF financial package consisted of $13.5 billion in short-term trade credit (representing 90 percent of G7 contributions); $2.4 billion in two-step loans and loans to Japanese companies; and $2 billion each in export credits for Thailand and Indonesia.

MITI officials are not shy about explaining the rationale behind the Japanese program. "Of course there's a need to change the Asian financial system, and a need for short-term, blood transfusion type measures," Takato Ojimi, a MITI official in charge of cooperation with developing countries, said in a May 15, 1998, interview. "But such measures, while necessary, are not sufficient. These countries will have to pay back their debts sometime. They have to regain their export powers in order to pay back their debt. This brings us into MITI's area. MITI played an important role in bringing about a good division of labor between Asia and Japan."

Ojimi continued, "Fifteen years ago, when I was in charge of Asia, our prime minister was criticized for visiting Southeast Asia because of Japan's wartime aggression. ASEAN was just five countries, and its growth had just started. I was in Singapore to teach a course on increasing productivity. This was the beginning of Singapore's interest in learning from Japan, and they attached a lot of importance to Japanese strategy and industrial policy. Our interest was in fabricating industrial products using Japanese materials and re-exporting them to the U.S. This was one of the ways out for Japan's difficulties with the U.S. at the time. We switched our surplus with the U.S. to Asia, and whenever the Asians complained about their deficit with us, we always said, because of their deficit, they could run huge surpluses with the rest of the world."

"I don't like to use the words, 'Asian empire,'" Ojimi explained, "but there is a division of labor. We have to grade up our own economy, and get rid of labor intensive industries--this is very difficult--and replace them with infant industries. This is true not just for Japan, but for each of the Asian economies. Otherwise Asia will just continue on as a fabricator. We have to expand supporting industries and strengthen small and medium enterprises. Through the ASEAN Free Trade Area and ASEAN Industrial Cooperation Schemes, we want to have specific production bases in each area, for example, concentrating auto parts in Malaysia."

If the IMF and liberal Western economists looked at the Asia crisis as an opportunity to restructure Asian economies along Western lines, Japanese bureaucrats such as Ojimi saw the crisis as a chance to accelerate "embraced" development. In some ways, MITI's institutional support program was more telling than the straight trade finance offers. On the surface it sounded innocuous. The MITI plan involved technical training to raise productivity of Southeast Asian workers; direct support for small and medium-sized industries as well as "foundation" industries; $1.8 billion in trade-related guarantees for infrastructure projects; and a program to strengthen economic "linkage" through the ASEAN Industrial Cooperation scheme (AICO) and the ASEAN Free Trade Area. Yet each of these programs either had a strong bias towards Japanese companies and their affiliates in Asia, or else developed it early on.

For example, according to Ojimi, MITI initially offered export credits from its $13.5 billion kitty directly to local exporters in Thailand, but found that approvals by the Thai government were taking too long. So MITI changed directions and began offering the funds to Japanese affiliates. "By expanding exports even by Japanese affiliates, we can revive their economies through production linkage," Ojimi explained. "We have the idea that Japanese affiliates in Asia must contribute to the betterment of the economic situation in the area. Of course, they have no special status, but their business is closely related to Japanese companies, in terms of exports back to Japan. So trade finance is more readily available to them. The exchange rate is a positive factor for them, but they may not be able to expand their exports due to credit scarcity. They need money to buy materials. So the Japanese government will support them first. Even if insurance is available from the private sector, Japan has MITI, which can mobilize export credit and insurance for policy purposes."

Or take another example, MITI's idea of human resources development, which is to train Asians working for Japanese companies. As early as March 1998, MITI detailed a director-level official to provide counseling to the Thai government, and invited hundreds of "enterprise people" to Japan for training programs with Japanese companies. According to a document outlining the program, in 1998 MITI would be sending more of its "old boys" to Asia for consultation, and recruit Japanese companies to provide "curricula" for its courses. One aimed at the Thai auto industry was to bring 400 trainees to Japan in 1997 and 1,000 in 1998. MITI also planned to designate particular regions in Thailand for intensive training programs.

Such training programs go right back to the beginnings of Japanese industrial strategy in Asia and its ties with Japanese ODA. Japan's grant-aid arm, the Japan International Cooperation Agency (JICA) began its existence with the sole purpose of providing technical training. The idea was to provide skilled workers for Japanese companies. Until the mid-1980s, when it became more expensive, JICA would bring trainees to Japan; by 1994, according to one official, it had paid the way for more than 100,000 Asian workers to visit Japan, learn some Japanese, and undertake on the job training, often with Japanese companies.

One item that is not in the MITI document despite months of preaching by senior U.S. officials is import promotion. Ojimi is not the least bit ashamed. "That's a tricky question," he says. "There are no strictly effective means to convince consumers to import Asian products. And we can't mobilize additional means to support the industries that might expand imports, because we'd run into both World Trade Organization restrictions and our own political problems. Many of the items that we might expand, such as agricultural products, would run against Japanese interests and politics."

American Triumphalism

Why has the Japanese response to the Asia crisis failed to attract Washington's attention? There are several possible explanations, but the most persuasive is that outside observers had been conditioned to think of Japan as hopelessly weak. Evidence to the contrary drops out of sight, lost in the white noise of cognitive dissonance. In Washington, Treasury Secretary Robert Rubin and his deputy, Larry Summers, were concentrating on pushing through IMF funding against tough congressional opposition. Democrats on the Hill, led by David Bonior, the House Democratic whip, insisted that new IMF funding open up markets for American goods as well as expand democratic rights in Asia.

This forced the Administration to return to a posture adopted in Clinton's first term of pressuring Japan to revive domestic demand, and, of course, imports. With some justification, Japanese felt they were being scapegoated as U.S. rhetoric escalated. By the time of the yen panic in June 1998, U.S. officials were putting the blame for the regional crisis on Japan's weak economy, and demanding structural change as the price of continued yen support. In June, Summers told the Senate Foreign Relations Committee that it was a "pivotal moment for Asia and the global economy. Weakness in Japan is now having a clear impact on the other troubled economies of Asia."

Given the political dynamics, Summers needed to demonstrate to Congress that the U.S. would get something back for its money, and talking tough to Japan usually goes down well on the Hill. At the same time, the Administration was doing its best to fend off protectionists who predicted a huge run-up in Asian exports to the U.S. The last thing anybody needed was to hear that Japanese multinationals might be behind the expected surge in Asian exports.

Perhaps a third factor, in addition to politics and American stereotypes about Japan, is simple ignorance. Americans seem oblivious to the scale of the Japanese presence in Asia, or the enormous buildup of that presence in the mid-1990s, during the second post-Plaza Accord yen spike. By early 1998, Japanese companies had invested a cumulative total of $111 billion in Asia, most of it in a single decade. In 1995, Japanese companies based in Asia represented a market for components alone worth 9.7 trillion yen, or $67.9 billion at ¥142=$1. In 1988, some 38 percent of the foreign subsidiaries and affiliates of Japanese companies were based in Asia, compared to 29 percent in North America, including Canada, and 18 percent in Europe. By 1997, the figures were 60 percent, 20 percent, and 13 percent.

In Malaysia, for example, there were 356 Japanese subsidiaries or affiliates in 1988. By 1997, the figure had tripled. The story was much the same in the rest of Asia, with the most remarkable increase in China, where the number of Japanese companies grew from 159 in 1988 to 2,399 in 1997, a 15-fold increase. In Taiwan, the jump was from 633 companies in 1988 to 1,110 by 1997. In Korea, where Japanese companies are hardly welcome, the figure merely doubled, from 372 to 620. In Hong Kong, too, the number of Japanese companies doubled in ten years, from 680 to 1,480. In Singapore, the number went from 579 to 1,384; in Thailand, from 512 to 1,396; in Indonesia, from 222 to 729; and in the Philippines, from 142 to 464. The total count for Asia, by 1997, was 10,995 Japanese-owned companies, double the 5,270 Japanese companies registered in the US. By the mid-1990s, Japanese companies in East and Southeast Asia, excluding India, employed some 1.3 million people.

Perhaps Americans are also not aware to what extent Japan's Asian multinationals operate as an expanded version of the domestic Japanese economy, lacking nothing but its high costs. Japanese companies, with government cooperation, virtually replicate the familiar keiretsu business structures of the domestic market. The pattern of trade that emerged between 1985 and 1995 was one in which Japanese companies created a vast, largely closed production loop across Asia, with Japanese intra-company trade as its predominant motif. While this is true of regional trade patterns elsewhere, the keiretsu system makes the Japanese regional system virtually impervious to outside suppliers. According to JETRO analyst Toshihisa Nagasaka, the basic configuration of trade is one in which "an eighty percent share of production by Japan-affiliated corporations is being supplied to Japan-affiliated corporations in East Asia and an eighty percent share of materials is being imported from Japan."

The bottom-line is that a year after the Asian economic crisis began, Japan's Asian empire is shaken, but intact. Enough Japanese companies looked to East Asia primarily as an export platform to reverse the brief flirtation of the 1990s with the regional market. Only China had the potential to disrupt the current situation through a currency devaluation, and Beijing has repeatedly assured markets that this won't happen. Meanwhile, the Japanese model may be discredited in theory, but in practice it is thriving--just as Japanese economists had been predicting for the better part of a century--in the developing, hard-struck economies of Asia.

EDITH TERRY is a writer and consultant currently based in Washington, D.C. This paper is adapted from her book Wild Geese: Japan and the Asian Miracle, forthcoming from M.E. Sharpe in the spring of 1999. She is also the author of JPRI Working Paper #10 (June 1995), "How Asia Got Rich: World Bank vs. Japanese Industrial Policy."

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