Asiaweek October 16, 1998

LOOKING BACK ON THE panic triggered by the currency crisis in Thailand and the inroads made by the International Monetary Fund (IMF), we can see the subtle strategy America is employing to dominate the world. And we can discern the pathetic role that Japan is made to play. If things continue as they are, Japan and the other nations of East Asia will be nothing more than financial slaves to the U.S. The problem is, most are unaware of it.

Once America had overwhelmed its Soviet rival in the arms race, it came up with a plan to supplement military superiority with control of energy resources. This involved singling out Saddam Hussein of Iraq as the fall guy to win control over the world's largest oil reserves. The U.S. lured him into making a conquest of Kuwait, crushed the invasion and succeeded in its real objective - stationing over 100,000 U.S. troops in the region, mainly in Saudi Arabia.

Now America is embarking on a new phase of its conquest, this time by financial means. Besides its overseas ambitions, there is an important consideration which prompted the U.S. to come up with this step - the crisis in its economy. This was demonstrated a couple of years ago when then Japanese prime minister Hashimoto Ryutaro stated that Japan wished to sell off its U.S. treasury bonds. The next day Wall Street stocks went down on the news. But rather than follow up [its advantage], Japan deferred to its rival. Experts calculated that if Japan sold its entire T-bond portfolio, the dollar could plummet to a mere 50 yen.

What America fears most is a fall in the value of the dollar and its stocks. One of the reasons is that the U.S. government has sidestepped its social security obligations, shifting the pension burden to the private sector. Due to this change, [many Americans] are joining plans managed by private enterprises and buying into mutual funds via their pensions. People assume that such investments are sound, but that's far from the case. Investing in a mutual fund is no safer than purchasing stock. To ensure this dangerous shift ends with a soft landing, the U.S. is advocating "Big Bangs" that are really only attempts to prevent the dollar and U.S. stocks from falling.

Economic activities around the world can be classified into two broad types: one dealing with [tangible] products, machine-made or agricultural; and another involving invisibles such as negotiable instruments and futures. In terms of capital movement in the world, the money economy, which trades in these vague financial products, is 25 times the size of the other. So international economic trends today are driven not by traditional activities, but by operations that are simple yet not easily grasped by the uninitiated. This is the trade in derivatives: warrants, options, swaps and other instruments that involve uncertainty. Derivatives - or risk - will be a key concept in understanding the world economy. To condemn such operations as immoral is fruitless. Inasmuch as derivative dealing has appeared as a new economic activity, we have no choice but to come up with ways of competing in this dimension.

There's no reason to think that Japan, the second-largest economy in the world, can't give the U.S. a run for its money. But to do that, it has first to locate its weak points. America's Achilles heel is its pension myth, which, once exploded, could easily lead from social instability to wholesale disintegration. Another related chink in the armor is the rapid decline in America's middle class. Then there is the growing gap between the middle and upper classes. The rise in prices means wages are dropping in real terms, and many Americans are putting up with low-wage, dead-end jobs just to get by.

[Now that] the euro has appeared, Japan has to ponder how best to profit from this. Its huge holdings in American T-bonds means the yen is at risk when the dollar drops. Not only that, when U.S. interest rates go up, potential T-bond buyers will wait for a new, higher coupon rather than buy bonds pegged at a lower rate. This reduces the demand for existing bonds, sending down the value of T-bond portfolios. Thus, Japanese holders are exposed to the double risk of falling currencies and falling bond prices. If Japan were to protect the yen by raising domestic interest rates, there would be a shift from dollars, and a correspondingly large, adverse impact on U.S. stock and T-bonds. That's why America is dead set against it.

TO SAVE [LOCAL] FINANCIAL institutions on the verge of crisis, the Japanese government allowed them to [lend] at old, high rates while driving down interest on deposits. This made it possible for banks to pay next to nothing on deposits while boosting profits from their loans. But the resulting credit crunch has made it hard for Japan's mid-sized firms, the dynamos of its economy, to find financing. Meanwhile, the largest depositors - senior citizens who depend on their pensions and interest on savings - are forced to live in insecurity. Since their deposits yield almost no return, pensioner consumption isn't going to give much of a boost to its economy. I believe Japan's best chance of revival lies in a reversal towards higher rates [on deposits].

In retrospect, we can see how [East Asian] nations were enticed into America's con game. The first step was to pour in huge quantities of intentionally short-term capital from America and Europe. Since this is perfect funding for a developing nation with a will to succeed, everyone jumped at the opportunity. Such funding is most effective when invested in production, but local businesses grew intoxicated as their economies took off, and were drawn into speculations that created bubbles in real estate and other areas.

In the next step, [hedge-fund managers] cried "Danger!" and triggered a panic by arbitrarily withdrawing short-term capital. At a single stroke, the Japanese banks which had managed to penetrate local markets were saddled with huge portfolios of bad debt. The severe downgrading credit-rating agencies gave to Japanese financial institutions and local manufacturers only heightened the sense of crisis.

The short-term capital that Western financiers injected into East Asia was really like the opium that the British brought into China. But this time the object of plunder is the economic potential that Japan and the other countries in the region have toiled to create. Japanese firms which had teamed up with local enterprises were forced to withdraw and take stock. This provided an opening for American capital to move into the markets that Japan pioneered. Men like [George] Soros merely make way for the arrival of other elements in America's overall strategy. Not knowing this, East Asian countries accepted their financial opiates and ended up addicted.

But it' s not enough to condemn America's outrageous behavior. The real point is whether [Japan has] any response. This being an era of interdependent economies, the targets of its new strategy should be countries that suffered the greatest damage in the recent crisis - East Asian nations with which Japan has been actively engaged.

[When the various] governments were in paralysis, the IMF came in and, like an army of occupation, placed whole countries under its jurisdiction. The IMF will never deviate from the prescription laid down by the contingencies of U.S. self-protection, which commands fiscal austerity and control of inflation. But this isn't a remedy that works for every patient. Indiscriminate application ignores the dynamics of economic reality. Each country has a different political landscape, a society with special features. To do as the IMF does, ignores this diversity.

It's time that Japan asks what are the options in using its funds to benefit itself and East Asia. But first let's assess the financial assets of the Japanese people. They turn out to be about $6 trillion after personal debts are subtracted. Add to that the financial assets held by private companies, and the figure reaches $12 trillion.

INSIGHT INTO THE REAL reasons behind the recent economic panics ought to bring a new sense of solidarity to Asian countries. And if Japan moved forward in a big way, providing, among other things, more sophisticated technology than it ever has, there would no doubt be an economic revival and expansion in East Asia.

South Korea's top steel producer, Pohang, is in trouble, and American industrialists have set their sights on it. It's obvious that Japan should take the lead in helping out when a basic industry in a neighboring country is threatened like this. Given the region's economic situation, this sort of assistance will be one basic pattern in the cooperation Japan extends to other Asian countries in anticipation of a better future.

There could be financial products which make use of the characteristics of Japan's economy. For example, Japan, being one of the largest oil importers in the world, suffers every time oil prices rise, while the producing nations benefit. On the basis of this structure, Japan could issue utility bonds whose coupon would rise whenever oil prices fell and vice versa, a product that producers would be only too happy to purchase.

Japan should create a fund to absorb the bad debts that are a product of U.S. strategy in the region. One has been set up to cover the debt burden of domestic banks, but it's important to realize that a large portion of that money has been flowing overseas to service bad debts incurred in their East Asian operations.

Japan should put its glut of financial capital to good use by transforming it into an effective investment. There are numerous ways of creating products more attractive than U.S. treasury bonds. Under a sort of Marshall Plan for Asia, an Asian Recovery Bank could be established on Japan's initiative. As East Asia has more energy than any other developing region, it ought to be possible to get people to buy into its future, especially if the Japanese government showed confidence by guaranteeing investments in [the bank].

I believe that such efforts will also bring about a yen-denomination zone in Asia, which in turn will lead to a flow of yen back to Japan. The real question is whether the Japanese political system can forge ahead with its implementation. There are sure to be people who ask why a new bank is necessary when there already is an Asian [Development] Bank; but that is being led by the Japanese Ministry of Finance, whose World Bank and IMF devotees would never dream of taking steps contrary to America's wishes.

This is a battle of minds and money. Japan has a historical responsibility toward the East Asian countries which, as America's prey, are being slaughtered en masse. It needs a new strategy. We should challenge Asia with an Asian standard that exists within a fair and free framework.