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Sun May Be Setting on Japan's Fiscal Dominance Over Asia

Business: While the troubled giant struggles to revive its stalled economy, many regional neighbors are on the rise.


TOKYO — In the past, Japan has been a powerful engine of growth that led its Asian neighbors out of recession like a locomotive dragging its many boxcars. Thus, many have presumed that the rest of Asia cannot truly recover from its current crisis until Japan is back on its feet.

But that dependence is weakening, say economists and financial analysts. In a significant break that arguably puts them more in charge of their own destinies--and underscores Japan's waning influence--Asian nations now seem fully capable of staging a recovery without their former mentor.

Indeed, it has already begun. In recent months, Japan's neighbors from South Korea to Indonesia have seen industrial production indicators turn positive, economic growth forecasts upgraded and capital markets restructured while a few regional stock markets have hit post-crisis highs. Yet Japan, Asia's economic giant and the world's second-largest economy, remains mired in gloom.

"Today, it's no longer the case that Japan will lead Asia out," said Makoto Ebina, chief economist with Fuji Research Institute Corp. "Japan is not contributing these days, but it's not hurting."

A key reason for the new dynamic, analysts say, is that Japan's three traditional drivers of Asian growth--its investments abroad, its consumption at home and the tourists it sends overseas--are now less important for its Asian neighbors.

To be sure, the links between Japan and the rest of Asia are by no means decoupled. Japan is still a huge regional and global powerhouse that produces twice as much as the rest of Asia combined.

In general, however, the ties are far more elastic than they once were, in part because the rest of Asia is now more economically mature.

"I think the whole relationship, while it has not totally disappeared, has far less influence," said Frederick Au, Hong Kong-based senior vice president with State Street Bank of Boston.

In recent months, spring has brought a wave of optimism to much of East Asia amid signs that the worst of the Asian financial crisis is over. Across the region, currencies have stabilized and partially rebounded, providing more security for investors, even as interest rates fall sharply. Stock markets in Hong Kong, South Korea and Singapore are returning to the levels seen before the crisis. Foreigners are back investing in banks and companies in South Korea and Thailand--the first two victims of the "Asian flu"--even as those nations start socking away foreign reserves again.

Economists caution that such positive financial yardsticks do not necessarily lead to the humming factories, new hiring and ringing cash registers associated with a broad-based economic recovery. Still, the worst appears to be over.

South Korea, the furthest along the recovery path, now believes it may grow 4% this year, while even laggard Indonesia saw its economy grow 1.34% in the first quarter. Japan has been slow to reform, and its economy shows few signs of life after an eight-year downturn.

Traditionally, Japan's greatest importance to Asia has been its loans and direct investment in the region. After the yen's value grew sharply higher in the mid-1980s, Japanese companies funneled billions of dollars into Taiwan, South Korea, Hong Kong, Singapore and the rest of Southeast Asia.

The flood of money expanded East Asian factories making everything from television sets and cars to computer parts, as Americans grew more used to seeing "Made in Malaysia" and "Made in Indonesia" on their athletic shoes, disk drives and garments. It also helped create new Asian middle classes that became significant buyers of goods produced locally.

But in the depths of the latest crisis, Japan's direct investment in Asia has plummeted--declining 48.3% to $3.42 billion from April to September 1998, the latest figures available, according to Japan's Finance Ministry. Japanese banks have also retreated as the credit crunch back home worsened.

As many Japanese players pull in their wings, American and Europeans have moved in. Britain's Standard Chartered Bank agreed to take over Thailand's Nakornthon Bank after acquiring a controlling stake in Indonesia's PT Bank Bali. Britain's HSBC Holdings PLC in February bought South Korea's Seoul Bank, and U.S. investment firm Newbridge Capital is trying to buy Korea First Bank.

GE Capital has spent $15 billion to buy stakes in Thailand's Central Card Co., Asia Finance Public Co. and GS Capital Corp.; Indonesia's GE Astra Finance; Philippine Asia Life; various banking and leasing assets in Hong Kong; and Japan Leasing Corp., Lake Co. and Koei Credit in Japan. Morgan Stanley also just announced that it would become a lender in the Japanese market.

More fundamental, Japanese investments in factories may be less important in the near term for Asia, some analysts believe, because Asia now suffers from industrial overcapacity and must pare back and restructure, skills that Western companies are far better versed at than their Japanese counterparts.

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