China and Japan in the Global Economy

Tomoo Kikuchi, Masaya Sakuragawa, Tomoo Kikuchi, Masaya Sakuragawa

• Publisher: Routledge
• Year: 2018
• Print ISBN: 9781138086166
• eBook ISBN: 9781351618045
• Edition: 1
• Topic: Economia
• Subtopic: Teoria economica

This book discusses the necessity for cooperation between China and Japan to provide international public goods to Asia. It provides insight into how China and Japan can redesign the process of economic integration and security architecture to ensure peace and prosperity in Asia, and how China and Japan can cooperate to correct the capital misallocation and channel savings more effectively to investments in Asia. It also suggests how China and Japan can promote free trade to help Asian economies upgrade their industries in the global supply chain.

The book is an invaluable contribution to the existing discussion on China–Japan relations and how their cooperation is beneficial not only for them but also for Asia, and even the world.

1  Introduction

China and Japan in the global economy

Tomoo Kikuchi and Masaya Sakuragawa

The global economic centre of gravity is shifting from the West to the East. Today, Asia is the home to about 60 per cent of the world’s population and produces nearly 40 per cent of the world’s Gross Domestic Product (GDP). Asia is growing rapidly and in the absence of a major distraction is likely to produce more than a half of global GDP by 2050. The dramatic transition in the global economy over the past few decades has resulted in a remarkable shift within the Asian continent as well. For example, in 1995, Japan’s GDP was more than twice that of China, India, and ASEAN combined. Over the last 20 years, China’s GDP has grown more than tenfold, India’s more than fivefold, and ASEAN’s nearly fourfold. Today, China’s GDP alone is more than twice Japan’s GDP. Meanwhile, Japan’s GDP per capita is still four times that of China. While Japan’s status is weakening and China’s strengthening, there is increasing uncertainty over leadership in Asia which prompts major concerns over regional economic integration and development.

Against this backdrop, we initiated a research project – “Economic Cooperation in Asia Based on Japan-China Relationship” – to examine Japan and China’s leadership role in regional economic integration and development. The project sought to investigate topics relevant to economic cooperation, not only from an economic perspective, but also taking into account the international relations perspective in the face of the complex geopolitical environment and China’s rise. Funded generously by the Japan Society for the Promotion of Science and the National University of Singapore from April 2016 to March 2018, the Keio Global Research Institute at Keio University and the Lee Kuan Yew School of Public Policy at the National University of Singapore signed a memorandum of understanding to facilitate the project and to promote cooperation in research and education through workshops and a visiting program for young scholars.

This edited volume is the outcome of a workshop titled “The Asian Century and China-Japan Cooperation,” which was held at Keio University in Tokyo from 16th to 17th January 2017. The workshop coalesced a diverse mix of prominent and young scholars in the field of international economics and international relations to answer three main questions: first, how can China and Japan redesign the economic integration process and security architecture to ensure peace and prosperity in Asia? Second, how can China and Japan cooperate to correct capital misallocation and channel savings more effectively towards investments in Asia? Third, how can China and Japan promote free trade to help Asian economies upgrade their industries in the global supply chain?

This edited volumes’ chapters were presented and revised based on feedback given at the workshop and in response to the three questions. The edited volume additionally features a discussion section after each chapter, which highlights the lively discussions that took place during the workshop. The goal of this volume is to raise public awareness, especially in China and Japan, that their competition and cooperation are not only beneficial for them but also for Asia and the wider world. To the best of our knowledge, there is no book that discusses the necessity of the cooperation between China and Japan to provide international public goods to Asia in a comprehensive manner. To make the content accessible to a wide readership, including students, scholars, business people, policymakers, and the general public, the authors presume only basic knowledge of economics and politics is necessary to understand each chapter. We also recommend this volume for students of Asian studies, international economics, and international relations, and for anyone who is interested in political and economic development in Asia and China–Japan relations.

While trade integration has deepened in the region, financial integration lags far behind. This asymmetry is reflected in the so-called global imbalances. China and Japan together hold 50 per cent of the global foreign reserves and 40 per cent of U.S. Treasury bills held by foreign entities. China and Japan have emerged as the world’s largest creditors, while the U.S. has become the world’s largest debtor in terms of net foreign assets. Nevertheless, the U.S. dollar has maintained its dominant role as the world’s reserve currency, whereas the Japanese yen and the Chinese yuan continue to play only a marginal role. Working closely with the Association of Southeast Asian Nations (ASEAN), China, Japan, and South Korea, collectively known as ASEAN+3, the Asian Development Bank (ADB) launched the Asian Bond Markets Initiative in 2002 to develop local currency bond markets in order to become less dependent on foreign currency-denominated, short-term bank loans for long-term investment financing. Furthermore, the Japanese government’s Research Institute of Economy, Trade, and Industry is proposing the Asian Monetary Unit, which is a common currency basket composed of the ASEAN+3 currencies. These initiatives require strong leadership to be successful and must be re-examined in Asia’s rapidly changing geopolitical landscape.

Lastly, the editors’ own research shows that economic integration between countries at different levels of financial development may even amplify existing inequalities (Sakuragawa and Hamada, 2001; Kikuchi, 2008; Kikuchi and Stachurski, 2009). These works suggest that financial development in each country is a prerequisite for the convergence of GDP per capita across states during the regional economic integration process. In fact, the financial markets across Asia are at differing stages of development despite their high growth potential. Focussing on China, the country’s reforms of its domestic financial markets not only represent a significant challenge internally but also in its pursuit of regional and global leadership, and ultimately may impact the welfare of the Asia–Pacific region.

This edited volume covers a variety of topics in order to provide a platform for understanding how Japan and China can jointly contribute to regional economic development and integration. Chapter Two examines whether the 21st century will be an Asian Century from a global perspective. Chapter Three discusses the geopolitical dynamics confronting the U.S., China, and Japan. These two chapters provide the context for the following topic-oriented chapters. Chapter Four draws on Europe’s own experience with regional integration and prompts new ideas about integration in Asia. Chapter Five reviews the current status of the Chinese economy and the challenges it faces. Chapter Six discusses the bottlenecks in infrastructure development in the region and possible solutions. Chapter Seven analyses the role of China and Japan in supporting ASEAN’s regional integration. Chapter Eight examines the Japanese experience with the internationalisation of the Japanese yen. Chapter Nine investigates China’s strategy to internationalise the Chinese yuan. Chapter Ten poses a multi-currency clearing system in Asia. Chapter Eleven concludes the edited volume.

Acknowledgements

We acknowledge financial support from the Japan Society for the Promotion of Science and the National University of Singapore for the project “Japan-China Relationship and its Impact on Regional Economic Integration.” The editors thank Akshay Sunil Agrawal, Blake H. Berger, and Wang Zi for their editorial assistance and Serene Teang, Esther Yeoh, Sachiko Nakanishi, and Tetsuro Hirano for their organisational assistance to hold the workshop “The Asian Century and China-Japan Cooperation” at Keio University in Tokyo on January 16–17, 2017.

References

Kikuchi, Tomoo (2008). “International Asset Market, Nonconvergence, and Endogenous Fluctuations.” Journal of Economic Theory, 139(1), 310–334.

Kikuchi, Tomoo and John Stachurski (2009). “Endogenous Inequality and Fluctuations in a Two-Country Model.” Journal of Economic Theory, 144(4), 1560–1571.

Sakuragawa, Masaya and Koichi Hamada (2001). “Capital Flight, North-South Lending, and Stages of Economic Development.” International Economic Review, 42(1), 1–24.

2 Will the 21st century be an Asian century?

A global perspective

Masahiro Kawai

2.1 Introduction

Emerging economies, particularly those in Asia, have grown fast over the past four decades. Because of Asia’s high potential for further sustained economic growth, an Asian Development Bank (ADB)-commissioned report (Kohli, Sharma and Sood, 2011) has predicted the 21st century to be an “Asian Century,” in which Asia produces 52 per cent of global GDP.

This chapter provides an overall assessment of the issues surrounding the 21st century becoming an “Asian Century.” There are several questions the chapter posits. Will the “Asian Century” scenario be realised, and what is needed to realise it? What are the factors that can impede the fruition of the “Asian Century?” More fundamentally, what is an “Asian Century?” Does it mean that Asia will dominate the world economically, politically, and militarily? What are alternative scenarios and how can Japan support the realisation of an Asian Century? What is needed to avoid major conflicts between the rising powers in Asia, such as China, and the existing powers, such as the United States (U.S.), and to maintain peaceful relations?

The structure of this chapter is as follows. Section two focusses on the re-emergence of Asia and presents a baseline projection for the world economy (measured at PPP in 2011 international prices) up to 2050. Section three explains the optimistic “Asian Century” scenario as having high growth projections. Section four provides the pessimistic “Asian Stagnation” scenario, which may arise due to the middle-income trap and/or conflict in Asia. This scenario may be viewed as having low growth projections. Section five discusses the challenges and policy priorities for developing Asia in achieving the “Asian Century.” Section six considers the political implications of the “Asian Century” scenario and presents global governance structures that are alternative to an Asia-dominant world. Section seven explores the role of Japan in supporting the realisation of the “Asian Century” and how China and Japan can cooperate. Section eight concludes the chapter.

2.2 Re-emergence of Asia in the world economy

Many Asian economies have achieved rapid economic growth over the last forty or more years. This strong performance has led to significant increases in real gross domestic product (GDP) in many countries, particularly China, India, and the Association of Southeast Asian Nations (ASEAN) countries. Given that further strong growth is expected for Asia, the 21st century is sometimes called the “Asian Century.” This section provides growth projections for various countries in Asia and the rest of the world.

2.2.1 Asia’s long-term economic growth

Asian economies have achieved remarkable economic success over the last several decades. Growth has occurred in a sequential manner, one country after another, following the well-known flying geese pattern. In the post-World War II period, Japan was the first country that started to grow successfully out of the destruction caused by the war, and this was followed by the newly industrialised economies (NIEs) of Asia (Hong Kong, the Republic of Korea (ROK), Singapore, and Taiwan), China, and ASEAN countries (Indonesia, Malaysia, Thailand, the Philippines, and Vietnam). These countries have pursued outward-oriented industrialisation strategies. More recently, India has joined this group, although the country has grown based on its domestic consumption and service sectors. The rapid economic growth of these economies has been accompanied by impressive poverty reduction and overall social and human development.

A World Bank study (World Bank, 1993) called the earlier success of Japan, the NIEs, and some ASEAN countries the “East Asian Miracle,” and identified several factors behind the miracle: (1) ensuring low inflation and competitive exchange rates to support outward-oriented growth; (2) building human capital, a critical factor for rapid growth with equity; (3) creating effective and secure financial systems to mobilise savings and channel them into productive investment; (4) limiting price distortions to draw resources into labour-intensive production in the early stages of development and then into capital-intensive and knowledge-intensive activities later; (5) absorbing foreign technology via licensing and/or inward foreign direct investment (FDI); and (6) supporting agriculture to promote food security and reduce rural–urban income differentials.

This World Bank study was completed before fully observing China’s and India’s success stories. China, in particular, has achieved its own economic miracle, and India is currently creating one. From these more recent experiences, some additional factors behind Asia’s miracle can be pointed out: (7) the ability to flexibly expand supply capacity in response to favourable external environments; (8) pragmatism in learning lessons from successful neighbours; (9) institutional development and business predictability; (10) good communication and coordination between the public and private sectors; and (11) use of Official Development Assistance (ODA) to support trade and inward FDI through infrastructure development (transport, power, energy, water, and information and communication technology (ICT)).

Krugman (1994) observed that East Asian economies achieved rapid growth in large part through the mobilisation of resources (factor inputs), as in the former Soviet Union, and concluded that the miracle was based on perspiration, not inspiration, and that the growth contribution of total factor productivity (TFP) was limited. However, one needs to appreciate the fact that in the early stages of economic development, growth tends to be induced by factor accumulation and rapid migration of labour from rural to urban areas, which tends to raise observed TFP growth. Thus, the miracle was no myth.

Developing Asia’s clustered sequential development is expected to continue and other relatively large Asian countries in terms of population, such as Pakistan, Bangladesh, and Myanmar, will likely grow fast over the next few decades. Urbanisation and rising middle-class consumers will be the basic drivers of growth in these countries. With the progress of further urbanisation, many more new mega-cities will be created in Asia. According to the projection by the United Nations (2014), Asia will host twenty-three mega-cities out of forty globally in 2030.

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Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Notes on contributors
• 1 Introduction: China and Japan in the global economy
• 2 Will the 21st century be an Asian century? A global perspective
• 3 Geopolitics in East Asia
• 4 Regional integration: is Europe special?
• 5 The Chinese economy and the Sino–Japanese economic relations
• 6 Infrastructure and development in Asia: the quality of infrastructure and project implementation
• 7 Advancing the ASEAN Economic Community: the role of China and Japan in supporting ASEAN’s regional integration
• 8 Internationalisation of the yen in Asia: has regional economic integration promoted yen-invoiced trade?
• 9 A cautionary tale of market power and foreign policy: beyond the geoeconomics of renminbi internationalisation
• 10 Prospects for a multi-currency clearing system in Asia
• 11 Concluding policy proposals
• Index