Why Japan Matters

Morgan Stanley's Robert Alan Feldman points out, at a time when many seem to have forgotten that Japan exits, why Japan continues to matter.

Yet another way Japan matters is in helping to integrate China into the world economy. Compared to other countries, Japan trade with China is more complementary. Japan produces many things that China cannot produce for itself yet, and China produces many things in which Japan has no comparative advantage at all. The gains from trade between capital-intensive Japan and labor-intensive China are huge. Of course, the commodity producers will also reap major gains from trade with China. However, compared to many manufacturing-oriented economies, Japan is in a rather good position, even if there are still some industries where Chinese products will replace Japanese ones. In addition, Japan is one of the few countries that benefit from the interaction of demographics and trade. The working-age population in Japan has already begun to decline, and so inexpensive Chinese products are crucial in supporting the Japanese standard of living. The business opportunities from this trade complementarity are legion. True, many in Japan are scared of China. Surprisingly to me, these fears are shared -- and amplified -- in other countries. My colleagues who cover Latin America were particularly anxious about Chinese competition in some of their industries.

Finally, Japan has a prominent place in the debate about how macroeconomic theory should be applied in financial markets. Is deflation solely a monetary phenomenon, or is it also a real phenomenon -- e.g., due to insufficient structural adjustment that has prevented the absorption of redundant workers? Countries around the world, faced with structural rigidities (e.g., Germany) or rising imports from China (everywhere), will face the same problem that Japan has grappled with for a decade. Japan’s experience is precious. Moreover, investors in many markets now face the issue of valuation of equities in a deflationary world. Who has more experience in this than Japan?
Source: Morgan Stanley Global Economic Forum
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