November 4th, 2009. Professor Frank Upham, of the NYU Law School spoke on the role of property rights in economic development. Using primarily the examples of China and Japan, he challenged the notion that creation of legally defined and enforceable property rights are essential for getting a nation started on the path of economic growth and development. The importance of property rights has been part of economic development theory and World Bank policy. However, Prof. Upham argued that every society has some form of property rights (often informal as opposed to legalistic), and that destroying those existing property rights is a critical step in starting economic growth.

Creation of private property rights in villages in Japan after the Meiji Restoration of 1868, for example, deprived one group of pre-existing informal property rights and granted them to others (farmers). More recently, China has produced very high economic growth without well-defined property rights. Transfer of land from agricultural use by farmers to urban or industrial uses has been facilitated by the lack of strong property rights. This situation has caused social problems (as local officials rather than the farmers generally reap the financial benefit in transferring the land), but may help measured economic growth. In conclusion, Prof. Upham noted that while destruction of property rights might be important for economic growth, legally defined and enforceable property rights are very important for social justice. 

October 14, 2009. Robert Fallon of Columbia University spoke about the impact of the current global financial crisis and recession on Korean banks. He began with a review of what had happened in the 1997 Asian financial crisis, which hit Korea very hard. At that time, Korean banks had borrowed heavily short-term from international markets. When foreign lenders became concerned about the Korean economy in the wake of the collapse of the Thai baht, they became more cautious on rolling over short-term loans. As this put downward pressure on the exchange rate, the government intervened in the exchange market and by late in the year was within two weeks of running out of foreign exchange reserves. The subsequent IMF rescue involved pressure on foreign lenders to roll over their loans, and the Korean government provided loan guarantees. Coming into the current crisis, Korean banks looked quite strong on the surface. In 2007, profits in the banking sector were high, they had more than adequate capital by international standards, and they had low levels of non-performing loans.

However, fierce competition for market share in lending resulted in rapid loan expansion and a falling spread (the net interest margin or NIM) between lending rates and rates paid to depositors. Furthermore, since deposits were growing slowly, banks once again turned to international markets to obtain the funds to finance their expanded lending. Once again, they borrowed short-term abroad to finance long-term lending at home. Now profits are down (with most banks losing money in late 2008 and early 2009, the net interest margin was still falling, non-performing loans were rising, and the non-performing loan coverage ration was falling. Going forward, banks face challenges in improving their NIM, increasing deposit growth, and pursuing strategies for survival in the mature Korean financial sector. Such strategies may include further consolidation among banks, an expansion of international business, creation of “financial supermarkets,” and more discipline in their core banking operations. Robert Fallon is an adjunct professor of finance and economics at the Columbia University Business School. He has had a long and distinguished career in international banking, spending a total of 33 years living in Asia (including a number of years in Tokyo). Prior to coming to Columbia in 2003, he was CEO of Exchange Bank, the first foreigner ever to head a public company in Korea.

October 1, 2009. Dr. Sheila Smith of the Council on Foreign Relations discussed “Japan’s Historic Election.” After 54 years during which the Liberal Democratic was in power for all except 11 months, an historic election on August 30 removed them from power and swept in a government headed by the Democratic Party of Japan (DPJ). The DPJ gained 308 out of 480 seats in the lower house of the Diet. Dr. Smith noted that voter turnout was quite high, the highest since the mood of reform began to build 15 years ago. In Japan’s parliamentary system, the convincing majority won by the DPJ implies that they should remain in power at least four years (the maximum time between lower house elections). Three leaders in the party are critical for how it will approach policy issues: Prime Minister Yukio Hatoyama, National Strategy Bureau head Naoto Kan, and Secretary General Ichiro Ozawa. How the political system develops from this point depends on two issues: a) the capacity of the DPJ to govern (still largely unknown), and b) the ability of the LDP to reorganize and rethink its priorities.

Dr. Smith discussed possible policy shifts in three areas. First, a primary goal of the DPJ is reform of governance, with a desire to increase the role of politicians relative to bureaucrats. The creation of the National Strategy Bureau headed by Naoto Kan is a key element in this policy (and the choice of Kan, a strong reform figure, to head it confirms the seriousness of the party). Second, the DPJ wants to tilt government policy away from big business toward households. The party has proposed a variety of policies, including a subsidy to be paid to families with children under high school age, to accomplish this goal. Whether these proposed policies would be good or bad for the economy, however, remains unclear. Third, on foreign policy, the DPJ wants to step back from the policies of former Prime Minister Koizumi. Changes are likely to include cessation of deployment of ships to the Indian Ocean (to refuel NATO vessels off Pakistan), discussion with the U.S. government concerning financial support for American bases in Japan (as well as renegotiation of an agreement to relocate Futenma airbase in Okinawa) and further efforts to improve relations with Japan’s Asian neighbors (especially China and South Korea). Despite concerns by some in Washington that this shift in Japan’s foreign policy might put tension into the U.S.-Japan relationship, Dr. Smith felt Washington should welcome the basic approach of the Hatoyama government. However, on the issue of rebalancing the power relationship between politicians and bureaucrats, she wondered where the politicians will get their policy expertise (since each Diet member has only three staffers), and speculated that private think tanks could potentially fulfill this role.

Dr. Smith is a Senior Fellow at the Council on Foreign Relations office in Washington, DC. Prior to coming to the Council in 2008, she was with the East-West Center in Honolulu.

The Asian Development Bank, based in Manila, is dedicated to reducing poverty in the Asia and Pacific region through pro-poor sustainable economic growth, social development, and good governance. Established in 1966, it is owned by 67 member governments, 48 of which are from the region. In 2008, it approved $10.5 billion of loans, $811.4 million of grant projects and technical assistance amounting to $274.5 million. For video of Jong-Wha Lee's lecture, please click here.

Japan, he noted, also experienced a prolonged deflation during the 1990s (though not as sever as the U.S. experience in the Depression). Lucas noted that today, unlike in 1933, there haven't been commercial bank runs. Regulation of commercial banks since the Great Depression, including deposit insurance, led to this better outcome. However, the lower rates of return in regulated commercial banks led large depositors to gradually shift away from bank deposits to unregulated (and uninsured) securities. The eventual collapse of Lehman Brothers and other investment banks was similar to the collapse of commercial banks in the Great Depression. To prevent this situation leading to an outcome similar to 1920-1933, the Fed needs to increase money supply. He believes that the Fed is doing this cting boldly as the lender of last resort, causing M1 and M2 to accelerate. Although rapid growth of money supply could lead to future inflation, he believes that reversing money growth in the future to prevent this outcome should be easy. For a variety of reasons, relying on monetary policy is superior to other approaches (such as fiscal policy) to the current problems. Dean Cooley was somewhat less optimistic. Monetary policy may be the best approach, but the actual approach of the government has been far broader and somewhat more problematical. He noted that the policies taken by government to prop up the financial sector have shifted the risk to the taxpayers and gradually over time undermined the soundness of the FDIC. Policy has also been rather ad hoc and inconsistent over time (such as rescuing AIG while allowing Lehman Brothers to collapse).

Unfortunately, household income was not rising, despite some increase in employment, as firms were replacing full-time, regular employees with part-timers and temporary employees (at lower wages and benefits) He showed, for example, that wage income has been lagging behind increases in labor productivity since 1998.  Heavy reliance on exports (and associated domestic investment) for overall economic growth made the economy extraordinarily vulnerable to a downturn in the U.S. or global economy.  Until late 2008, many in Japan believed in “decoupling,” meaning that a downturn in the U.S. economy would not affect the economy much because China had replaced the United States as Japan’s largest export market. Mr. Katz showed that this hope turned out to be false, with Japan’s exports to China tracking closely China’s exports to the U.S. (rather than tracking domestic economic growth in China).  In sum, Mr. Katz provided a rather gloomy picture of economic developments in Japan.

Meanwhile, other government programs, including an increase in transfer payments and increased national health insurance coverage, should help sustain household income and consumption.  In total, the government is doing a great deal to offset the negative impact of the global downturn.  As a result, the economy should be able to sustain an economic growth rate of seven-to-eight percent in the 2009-2010 period.  Dr. Lardy added that China has been less adversely affected than other emerging markets and will recover more quickly because the household sector is not deeply in debt (and, therefore, does not need to de-leverage), the corporate sector debt is moderate, government debt is low, and the banking sector has improved capital adequacy.  Therefore, the government is in a position to provide stimulus, and the private sector is in a position to respond to the stimulus over the next year.  China should be able to move relatively quickly back to its growth potential of 9-10 percent annual growth.

February 13, 2009.The Center continued its co-sponsorship of this series of meetings for the local New York Japanese business community (in Japanese), following two previously successful meetings in the past academic year. This meeting featured a panel on the topic of “U.S. Consumption and the U.S. Economic Outlook.” Panelists included Mr. Shuhei Aoki (General Manager for the Americas and Chief Representative in New York, Bank of Japan), Mr. Hiroshi Nukaga (Senior Vice President, Mitsui and Company U.S.A.), and Mr. Iwao Kimura (Group Vice President and Coordinating Officer, Toyota North America). Mr. Hiroya Maruyama, Chief Representative, Rating and Investment Information, Inc. served as moderator. This provided an opportunity to hear how different sectors of the U.S. economy were reacting. Mr. Nukaga, for example, emphasized aggressive price cutting by retailers, and Mr. Kimura provided information on the melt-down in automobile sales in the United States (which was hitting Toyota about as hard as the Big Three).

Professor Grimes is Associate Professor of International Relations and Director of the Center for the Study of Asia at Boston University.  His book Currency and Contest in East Asia: The Great Power Politics of Financial Regionalism was published by Cornell University Press in late 2008.   He is also the author of Unmaking the Japanese Miracle: Macroeconomic Politics, 1985-2000 (Cornell University Press, 2001) and co-editor (with Ulrike Schaede) of Japan's Managed Globalization: Adapting to the 21st Century (ME Sharpe, 2003). 

December 4th, 2008.The Center re-launched its Luncheon Lecture Series with a presentation by Sheldon Garon of Princeton University.  Professor Garon’s lecture titled "Keep on Saving:  How Japan and Other Nations Forged Cultures of Thrift When America Didn't" compared America's financial melt-down with the bursting of the Japanese bubble in 1991, with at least one difference.  Many Japanese households cushioned the blow with high savings, whereas few Americans today have such savings.  Garon described how states in Europe and Japan systematically encouraged household saving since the 19th century, and how other nations emulated the Japanese model of savings-promotion in recent decades.  Professor Garon is Dodge Professor of History and East Asian Studies at Princeton University.  He specializes on modern Japanese history, and economic affairs.

September 11-18, 2008.The Center co-hosted a major conference with the Korea Economic Institute on strategic, political, and economic developments on the Korean peninsula and relations with both the United States and China. The Korea Economic Institute is located in Washington, DC, and co-hosts an academic conference each year with a major American university. The Center served as the co-host this year. Papers presented at the conference included problems of dealing with North Korea’s nuclear weapons program (with the conference occurring just as North Korea announced its intention to restart its nuclear reactor at Yongbyong, the U.S.-Japan and U.S.-South Korean alliances, economic conditions and business opportunities in South Korea, the problems in the strategic relationship between Japan and South Korea, the impact of the Korea-U.S. Free Trade Agreement (if passed by Congress) and the consequences if it is not approved, and Japan and South Korean interactions in the broader East Asian region. Considerable uncertainty surrounded the analysis of the South Korean economy given the rather dramatic events unfolding in the U.S. financial sector as the conference was taking place; recession in the United States would have, for example, negative consequences for South Korea through trade linkages.  The 10 papers presented and discussed at the conference will be available once the authors have completed revisions of their drafts.

April 29, 2008.Robert Lucas, the Shinsei Visiting Professor of Economics at Stern gave a lecture on “Japan and the World Economy in the Twentieth Century. The Center for Japan-U.S. Business and Economic Studies invites a distinguished economist to spend two weeks at the Stern School each year. This year the visitor was Robert Lucas of the University of Chicago, and winner of the Nobel Prize in Economics for his development of the concept of rational expectations in economic theory. Professor Lucas spoke about the growth and development of Japan in the twentieth century in comparison to other industrial nations. He used a simple economic model in which growth of GDP per person in a late-developing country depends on technology transfer from advanced nations, the migration of people out of agriculture, and the population in urban centers. This model helps explain why Japan, a highly successful latecomer to modern economic growth, grew more rapidly after World War II than before.

In the early phases of economic growth, such a high portion of the population was in agriculture, that overall growth was slowed (even with an effective absorption of foreign technology by the small modern sector). By the 1950s, the share of population in agriculture was lower, enabling a higher overall rate of growth. Lucas also argued that the absorption of technology postwar may have been higher as well, due to lower trade barriers around the world, which enabled countries choosing to be relatively open to trade to absorb more technology and grow faster than those that did not. This simple model also helped explain the experiences of other countries (such as Italy, Germany, France, the United Kingdom, and Canada) that have converged toward the level of GDP per person in the United States since the 1950s.

Professor Lucas's Presentation File

View a recording of Professor Lucas's lecture (requires flash) 

On April 8, 2008. Dr. Ifzal Ali, Chief Economist of the Asian Development Bank, presented the principal conclusions of the Banks 2007 annual report on the economic health of Asian nations.  In general, the region experienced the highest level of economic growth in almost two decades, spread across many countries—with the average growth for the developing countries in the region at 8.7 percent.  The region is not immune to the negative impact of the turmoil in global financial markets and the slowdown in the United States, Europe, and Japan, despite a popular notion around the region in the recent past that its economic performance had “decoupled” from the big developed countries. 

April 1, 2008 Bruce Stokes of the National Journal spoke on Trade Policy in the Next Presidential Administration.”  He noted that trade policy has become an issue in the presidential campaign, with John McCain speaking out in favor of free trade, and both Hillary Clinton and Barack Obama criticizing the North American Free Trade Area.  He suggested that Democrats often sound protectionist sounding themes during elections but generally do not act upon them when elected.  Therefore, he does not anticipate that if one of the Democrats were elected that the United States would move in a protectionist direction.  However, he did express concern that political support for further market opening measures has waned.  This means that the group of free trade agreements up for ratification by Congress may not be approved.  Furthermore, the next President will need to have so-called “Fast Track” authority extended in order to negotiate further agreements. Since the Constitution grants Congress the authority over tariffs, due to the fact that they are revenue generating measures, “Fast Track” legislation grants the President the right to negotiate trade agreements subject only to an up or down vote (without modification) by Congress.  Stokes suggested that improved benefits under Trade Adjustment Assistance (a law that provides extended unemployment benefits, relocation help, and retraining funds for workers who lose their jobs due to competition from imports.

Click Here For Stokes Presentation File

On March 25, 2008 Professor Charles Horioka of the Institute of Social and Economic Research at Osaka University addressed the topic “Aging and Saving in Asia.”  Economies across Asia are aging (part of a global trend), defined by an increase in the portion of the population over age 65. According to the life-cycle savings hypothesis in economics, this trend should reduce household savings since the elderly tend to dissave(since they are no longer working and draw down the stock of their savings). Prof. Horioka agrees with this hypothesis, but noted that it is also affected by the youth dependency ratio as well; lower birth rates have reduced the number of (non-working) children that households support. Children put downward pressure on household savings, so the fall in youth dependency ratios should boost household savings.

February 27, 2008. Professor Andrei Hagiui of Harvard Business School talked about "Animation and Video Games: Creativity and Market Failures in Japan's Content Industries. Although Japanese animation as it known by aficionados is successful in the sense of global market penetration, the structure of the industry shows important weaknesses. Professor Hagiui focused on the dominance of television stations and publishers and weakness of the actual animation studios. Since the television and publishing industries are not globally oriented, most of the industry does not perform as well in international markets as it could. He contrasted these weaknesses with the strengths of the computer game industry (dominated by large hardware manufacturers who are heavily engaged in global markets). Professor Hagiu is an Assistant Professor in the Strategy group at Harvard Business School, where he works on multi-sided market, as well as research and advisory projects on industrial policy in Japan, China and the United States. In 2004-2005, he spent 18 months in Tokyo as a fellow at the Research Institute of Economy Trade and Industry (RIETI), an economic policy think-tank affiliated with the Japanese Ministry of Economy Trade and Industry.

Click here for Professor Andrei Hagiu Presentation File.