A Looming Entry Barrier
Japan's Production Networks in Asia

In 1991, before Japan’s economy began to sputter badly, several American reporters marked the 50th anniversary of Pearl Harbor Day by describing what they viewed as Japanese efforts to create “a new co-prosperity sphere” in Asia this time by commercial, not military, means. They painted a stark, even frightening picture of a potentially autarkic bloc.

Today, as Japan struggles to pull itself out of its serious post-“bubble” recession, agitated “Japan bashing” has yielded to lackadaisical “Japan passing.” Opinion leaders in the West are obsessed with China and the overseas Chinese, and seem increasingly disinterested in Japan’s investment in and aid to Asian nations. Meanwhile, neoclassical analysis holding that disparate economic systems will converge; capital and technology will move in search of the highest possible returns for the benefit of both foreign multinational firms and host economies; and large trade imbalances will disappear sooner rather than later suddenly seems to enjoy renewed popular credibility.

Yet the current U.S. policy toward Asia, guided by a sanguine, neoclassical analysis of Japanese business activity in the region, is no less misguided than yesterday’s journalistic hysteria. The basis for this argument is our view that the Japanese government and multinational firms are not promoting an inward-looking trading regime in Asia but are in fact building a high technology production alliance that tends to be exclusionary. In other words, they are regionalizing the web of political and industrial ties that have made Japan itself so difficult to penetrate. Unless this trend is recognized and strategic initiatives to counter it are undertaken, “outsiders” (including U.S. multinationals) could find themselves increasingly and seriously disadvantaged in their efforts to compete with Japanese “insiders” in this, the most economically dynamic region of the world. In addition, the stability of the global trading regime would be seriously threatened by the trade effects of Japan’s production networks in Asia.

An inevitable result of such trade effects will be persistent and increasing trade conflict in the very near future between Japan and its trading partners. The conflict will be extremely difficult to solve because it will arise not from ongoing trade practices but from the economic realities that have become embedded because of Japan’s policy toward Asia and the behavior of Japanese firms in Asia.

In Section I of this article, we describe the dominant view of Japanese economic activity in Asia and outline our own dissenting view. The latter is spelled out more fully in our recent book, Asia in Japan’s Embrace: Building a Regional Production Alliance. In Section II, we summarize the findings of a study we conducted in 1995 and 1996 that sought to update and broaden the book’s analysis. In Section III, we explore the policy implications of our findings.