Distinguished Speaker Seminar: Eisuke Sakakibara - Market-driven Integration in East Asia

Eisuke Sakakibara, Professor at Waseda University, Tokyo and former Vice Minister of Finance, Japan delivered a lecture on "Market-driven Integration in East Asia" at a Distinguished Speaker Seminar on 24 June 2009 in Tokyo.

Mr. Sakakibara started his discussion on integration in the European Union (EU). What started out as the European Coal and Steel Community—a six nation organization, proposed by France in 1950 to prevent further wars with Germany—now has 27 member countries and is still expanding. The EU is currently facing its most challenging and final phase of integration—political integration.

Unlike the institution-driven integration of the EU, markets have played a pivotal role in making Asian regional integration what it is today. Although market-driven, Asian integration has proceeded surprisingly well. In a span of roughly 15 years, intra-regional trade rose from 40% in 1990 to 55% in 2006. But compared to Europe, institution-building still lags in the region, and the public sector is also slow in facilitating integration.

For Mr. Sakakibara, Asian integration may have been mainly the fortuitous effect of the Plaza Agreement signed in 1985 to help the United States (US) reduce its current account deficit and to facilitate its recovery from a recession. It resulted in the doubling of the Japanese yen's (JPY) value vis-à-vis the US dollar, from JPY250 in 1985 to JPY125 in two years; the precipitous decline of the US dollar was only halted with the 1987 Louvre Accord.

Faced with increasing costs at home and armed with an appreciated currency, Japanese firms found it attractive to expand their business operations overseas. According to Mr. Sakakibara, deflation in Japan at the turn of the century could have been an offshoot of Japanese outsourcing. Simply put, Japanese firms, as well as other East Asian corporations exported parts and components, assembled them in the region, mainly in the People's Republic of China (PRC), and re-exported the goods back to their respective home countries. An international division of labor which is one of the characteristics of production networks in this region has emerged. In fact, intra-regional trade in parts and components is much higher in the Asian region than in the EU and the North American Free Trade Area. East Asia has become the world's factory.

Mr. Sakakibara also discussed his role in regional initiatives that could institutionalize regional integration. In retrospect, he admitted that the idea of an Asian Monetary Fund (AMF) he floated 10 years ago did not take off the ground as it lacked the PRC's backing. The ideal scenario would have been for the AMF to be initiated by ASEAN, supported by both Japan and the PRC. However as it was strongly identified with Japan, the dictates of geo-politics discounted the PRC's support. The US was also strongly opposed to the Asian version of the International Monetary Fund.

Learning from the AMF experience, the Chiang Mai Initiative operates in a consultative framework with the support of both Japan and the PRC. From a bilateral swap arrangement, it has now been multilateralized. If an agreement on jointly managing earmarked foreign reserves could be reached, this would be something close to an AMF. Presently, Asia's huge reserves are invested in US securities, which are, in effect, financing US consumption of Asian exports. Mr. Sakakibara believes that this cycle cannot continue and called for an immediate need to diversify away from US treasuries. Creating an Asian currency-denominated bond to generate new channels of finance in the region is long overdue.

On the "green shoots" touted early this quarter, they may simply be a response to the massive fiscal stimulus in the US and other major economies. In Japan, while recent spending on consumer durables experienced a slight increase, this may be temporary as the unemployment rate has climbed to over 5% and bonuses slashed by 20%. Gone are the days when being eighteen years old meant getting yourself "behind the wheel". Car sales in Japan would be halved if this trend continues. Moreover, Japan's GDP contracted by 15%, twice that of the US.

Mr. Sakakibara continued that the US savings rate has now turned positive and is expected to return to its 1970-1980s level of 9%, from zero in 2003-2004. The economic recovery of 2002 after the IT bubble was more a matter of timing. Given the rapacious consumption in the US and a growing Chinese economy, Japan was able to export its way out of the recession. But as these countries are facing their own economic woes, Japan needs to change its export-oriented model to one that is domestically-oriented.

One way to stimulate and structurally transform domestic demand is by expanding the services sector whose products are not easily exportable. There also appears to be a paradigm shift in consumption as consumers alter their spending from consumer durables to medical services, education, environment, and health. Firms too, should change their focus and business models accordingly. On the supply side, the Japanese government should support local food manufacturers. One way is through deregulation and encouraging private corporations to go into agriculture to improve the efficiency level of this highly protected sector. This may even solve the rural depopulation problem as the change in the business model could attract the young to engage in rural industries. But in the short-run, the government must be prepared to subsidize heavily-hit farmers to facilitate the sector's transformation.

In conclusion, Mr. Sakakibara believes that regional integration is irreversible. Intra-regional trade will continue to increase, which makes regional cooperation even more compelling. Given this backdrop, some rapprochement between the PRC and Japan should be achieved. The lack of consultation and communication between Japan and the PRC could stymie regional efforts. If trade in the region reached 60%, a common market could be forged. Perhaps this may happen in the next 30 to 40 years. He is optimistic that the continued promotion of regional trade may one day create a common market in Asia, albeit different from the path and form of the EU.

Presentation by Eisuke Sakakibara

Open Floor Discussion

Moderator: Masahiro Kawai, Dean ADBI