Pacific Perspective
Pacific Perspective
Has Asia turned the economic corner? This question would certainly seem to be premature, amidst an avalanche of reports of flat or even declining GDP growth in the countries of the region, and news of widespread layoffs, even in world-class Japanese firms. But employment data is always an indicator that lags the business cycle. Asia’s economic lifelines
Asia's recovery from the 1997-98 financial crisis was driven by three engines: the strong U.S. economy; the information technology boom; and a yen that remained strong, permitting exports from other countries in the region to remain competitive. All three engines have stalled in the last 12 months.
In recent weeks, however, prospects have improved for restarting two of the three engines. In the United States, the index of leading economic indicators has risen for four months in a row. $40 billion of tax relief is on its way to consumers' pockets. Most importantly, the Federal Reserve is resolutely continuing with its program of interest rate reductions. This week's quarter-point cut in the key federal funds rate brought it to 3.5 percent, 3 full percentage points below its level at the beginning of the year.
Moreover, the Fed will certainly be willing to take rates down further. In the early 1990s, our central bank dropped the Fed funds rate to 3 percent to overcome the effects of recession and the savings and loan crisis. With our productivity performance today better than 10 years ago, Alan Greenspan and company might well countenance taking the Fed funds rate to 2.5 percent.
In Japan, Prime Minister Junichiro Koizumi, having led the Liberal Democratic Party to victory in the Upper House elections, has introduced his program to reform the economy. The plan's short-term deflationary character has frightened the stock market, but notice what's happened to the yen. The Japanese currency is now trading at 120 to the dollar, an appreciation in value from the 125 level that prevailed most of the summer. This rise in the yen's value may signal investors' assessment that Koizumi's leadership has a better chance of pulling the Japanese economy out of its doldrums.
To be sure, in this first investment-led recession since the 1930s, we're still waiting on the Godot of high-tech to work off its excesses, and they are considerable. My soundings among the chief economists of several marquee information technology firms suggests they're not looking for a turn in their industry's fortunes until next spring. Still, two out of three isn't bad, and the resolution of political uncertainties in Indonesia, where Megawati Sukarnoputri has succeeded Abdurrahman Wahid, and in Thailand, where Thaksin Shinawatra has been cleared to complete his term, will help regional confidence. Next year brings more leadership transitions in South Korea and in China, but by then Japan's path to reform will be clearer and, thanks to the venerable Greenspan efforts, the American economy should be recovering nicely. Asia's not on the way back yet, but in recent weeks the stars have moved into closer alignment.
David McClain is dean and First Hawaiian Bank Distinguished Professor of Leadership and Management at the College of Business Administration, University of Hawaii at Manoa.