Then you sober up. Before the day was out, Asian economists were pointing out that the threat of an American recession is not gone, and help is unlikely to come from closer quarters. After the crisis of ‘97, Asia hoped its largest economy would pull the region into recovery like “a locomotive.” But Japan remained stuck in place, and Japanese investors sat out the party last week, again. Tokyo fell while other Asian markets were rising, giving added support to a scary new line of argument, articulated most forcefully in a November study by the Fed’s own branch in Minneapolis: that Japan’s “lost decade” may last indefinitely. The nation’s normal growth rate may be slowing to an anemic pace, the Fed concluded, due to weak productivity. That is bad news for all of Japan’s neighbors, from Taiwan to Thailand. Without an engine in Asia, they are more vulnerable than ever to consumer confidence and spending whims in the West.
The reaction in Tokyo was glum even by Japan’s gloomy standards. The financial daily Nihon Keizai Shinbun wrote that the market fall had exposed “the weakness of the Japanese economy.” A decade of growing burdens, including a mountain of corporate debts, made it impossible for Japanese investors to respond enthusiastically to Greenspan’s “New Year’s gift,” said the paper. The same malaise has stymied repeated attempts to jump-start the economy with public spending, says Tokyo economist Yasuharu Ishizawa. “The government has repeatedly given blood transfusions without removing the cancer. Now they have no blood left and the cancer has spread all over the body.”
Official Japan also reacted warily. Finance Minister Kiichi Miyazawa warned that Greenspan was moved by predictions that the U.S. economy would “go a little downward,” and his deputy advised Japan to keep “careful watch” on the United States. Why? Japan and other Asian nations are heavily reliant on exports to America, far more so than Europe (chart). So any fall in American spending will hit Asia hard–and an upturn won’t necessarily ease its deeper problems.
The threat has changed since ‘97. Few Asian nations are still hooked on easy short-term Western loans, which were the first financial card to fall when the Asian house came down in 1997. Yet none of the nations hit by the crisis has completed the job of taking politics out of the domestic banking business or cleaning up bad loans to favored corporations. The economies of Thailand, the Philippines, Indonesia and Malaysia are still dominated by family-run companies that are overbuilt, overextended and propped up by secretive ties to friendly banks or the government treasury. As for reform, “there’s been a fair amount of talk, but not much action,” says David O’Rear, a regional economist based in Hong Kong.
That’s true even in South Korea, perhaps the regional leader in reform. The government has done much to open the stock market to foreigners, who now control 30 percent of Korean stocks, up from 20 percent a year ago. That’s a welcome new source of capital, but also a new vulnerability. Analysts worry that Americans could flee the stock market the next time Seoul steps in to bail out a major bank or prolong the life of a dying conglomerate like Daewoo. “Korea is more dependent on the U.S. economy than any other Asian nation,” says Brian Hunsacker, head of research at the Seoul office of Dresdner Kleinwort Benson. “If the U.S. economy improves, the Korean economy booms. And if the U.S. economy falls, the Korean economy crashes.”
What many Asian nations yearn for is a guiding hand, much like Greenspan’s. Koreans call him the “global economic president,” and compare him favorably to their own powerless central banker, who is beholden to politicians and bureaucrats. Even if Greenspan headed Korea’s central bank, they say, he couldn’t achieve much in a country where connections matter more than market signals. “We envy Greenspan because he rules the global economy by sticking to his principles,” says Chung Ki Yung, director of Samsung Research Institute of Finance in Seoul, “but what we envy more is the U.S. system which allows him to do so.” It will take intervention from a higher power than Greenspan to put Asia straight.
