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U.S.'s economic rival in 2006 isn't China, but Japan

U.S.'s economic rival in 2006 isn't China, but Japan

If you think the Bush administration does a poor job sizing up politics overseas, check out its flawed intelligence on the global economy.

Judging by the administration's comments, 2006 is the year of China. It's a year in which the U.S. will step up calls for a stronger yuan, fairer trade and improved human rights in Asia's No. 2 economy. In other words, remind officials in Beijing who's the boss.

The focus may seem understandable considering the future; China's economy may well surpass that of the U.S. in a few decades. Yet the Bush administration's focus on China ignores the U.S.'s real competitor in 2006: Japan.

No, a replay of the 1980s isn't brewing. That Toyota Motor Corp. may overtake General Motors Corp. as early as this year is indeed a psychological blow to the world's biggest economy. That doesn't mean New York's Rockefeller Center and California's Pebble Beach will fall into Japanese hands again.

Nor will bubble-crazed Japanese necessarily buy your favorite Renoir or Picasso, as they did in the 1980s. Best- selling authors such as Tom Clancy and Michael Crichton can forget getting much mileage out of paranoia that Japan threatens the West's way of life. And yet the consumer-led recovery investors waited 15 years for is afoot.

Don't expect Japan to grow 5 percent a year, or anything near it. Tokyo forecasts 1.9 percent in the year starting in April, from an annualized 1 percent in the third quarter.

Nor have Japan's long-term problems haven't vanished. They include reducing the world's biggest public debt, funding huge public pension liabilities and increasing the birthrate amid a rapidly aging population. Without progress in these and other areas, Japan's revival might fizzle a few years from now.

For now, though, things are looking decidedly up.

Japan got this far after its banks disposed of bad loans and corporations restructured. The missing ingredient was getting Japan's aggressive savers to stop stashing money under tatami mats and to spend.

"For the first time since the 1980s, domestic demand seems likely to sustain growth," said Charles Dumas, London-based head of international research at Lombard Street Research.

If the implications of a revived Japan are being chewed over in Washington it's hardly obvious. Sure, U.S. Treasury Secretary John Snow and his team make the obligatory Japan-is- looking-good remarks when asked by reporters. That makes it hard to understand why the Bush team has maintained a relentless focus on China's rise in Asia.

Four reasons

Here are four reasons why Japan's recovery should be a far bigger blip on the U.S.'s radar screen in 2006.

One, more competition for global capital. At a time when stock markets are playing unprecedented roles in economies, attracting foreign capital has never been more important.

Few investors will miss how Japan's Nikkei 225 Stock Average closed out 2005 with its biggest annual gain - 40 percent - since 1986. Nor will it escape them that the Dow Jones Industrial Average ended 2005 little changed. The upshot is that U.S. financial assets now have to work even harder for attention thanks to Japan.

Two, demand for U.S. Treasuries. Japanese hold roughly US$690 billion, making them the biggest investors in U.S. public debt by far. The question is whether the recovery encourages normally conservative Japanese investors - that includes the central bank - to take greater risks abroad.

Any large-scale dollar selling may raise U.S. yields, posing problems for the U.S. economy. At a time when the U.S. is carrying a record budget deficit, higher borrowing costs are among the last thing Bush's economic team needs in 2006.

Three, Japanese inflation. It's a classic be-careful-what- you-wish-for situation: Japan wants inflation, but what happens when it gets it?

Last week's report that consumer prices rose for the first time in two years stoked speculation that Japan's seven-year- plus bout with deflation was over. The 0.1 percent gain in core prices in November doesn't mean deflation has been beaten. Even so, it unnerved bond traders bracing for the day the Bank of Japan abandons its policy of keeping short-term rates at zero.

Volatile global debt markets may make it harder for U.S. companies to tap capital markets. They may also affect global growth prospects and undermine stock markets such as the Dow.

Four, geopolitical tensions in Asia. Japan's return to economic health is emboldening politicians who have no intention of deferring to China. Many watched uneasily in recent years as China became the Asian growth engine Japan was once. Now, officials in Tokyo are anxious to flex their muscles, a phenomenon that may revive old animosities in Asia.

Japan's Foreign Minister Taro Aso, for example, enraged China recently by saying its increasing military presence is "beginning to be a considerable threat" to Japan. China, of course, is still fuming over Japan's military exploits during World War II and the prime minister's visits to a Tokyo shrine honoring some convicted war criminals among war dead.

The past is an enduring historical impediment to cooperation among Japan, China and South Korea. While there's plenty of blame to go around, a more assertive Japan may stir things up. That's hardly in the best interest of the U.S. or global trade.

The U.S. has been waiting for the day when Japan would again carry its weight in the global economy. Oddly, now that it's poised to do so, leaders in Washington don't seem to notice or care.

William Pesek Jr. is a columnist for Bloomberg News.

Updated : 2021-06-15 11:58 GMT+08:00