Lame-goose Japan

Christoph Neidhart
14 November 2008

Geese flying in formation, led by the strongest, this paradigm, taken from classical Chinese poetry, has been used by Japanese scholars to symbolize their nation's leadership in East Asia.


The geese represent the East Asian nations, the stronger leading the weaker to rise.

With the world financial system in turmoil, no other country is better suited to take leadership in shaping a new financial system than Japan. Yet, the once self-promoted leading goose is grounded, nervously preening its own feathers. The renowned economist Kaname Akamatsu introduced the Flying-Geese-model in the 1930s to justify Japan's colonization of her neighbors. After WWII, he adjusted the model to represent the “alignment of nations along the different stages of development”.

While Japan was moving away from her initial industries, in particular textile production, into heavy industries, then into machinery, and later to high-tech and services, a second, third and forth generation of rapidly industrializing nations followed in her steps; these were the geese of the second, third and forth row of the flying formation. (Thanks to Grips for the picture.)

In the form of war-reparations, investments and advisers, Japan has indeed contributed to the economic rise of her neighbors, China and particularly Vietnam. Tokyo has thus acted as the leading goose Akamatsu had envisioned. As the world's second largest economy, Japan has now a chance to global leadership. With the Bush administration a lame duck, the US heavily indebted and the origin of the current crisis, there will be no obvious leader at the upcoming financial crisis summit of the G-20. Nevertheless, the meeting of world leaders, due in Washington this weekend, has been labeled “Bretton Woods II” by the hopeful media.

Bretton Woods, the conference held in July 1944 in a skiing resort of the same name in New Hampshire, shaped the world's financial system. It made the US-Dollar the world's reserve currency. Before WWII, this was the pound sterling.

Empires impose their own currency throughout their sphere of influence as the currency for settlement of international debts. For trade within the empire, currency union has many mutual benefits. However, in history, declining empires have seen their currency first overstretched and then lose their leading roles. 1971, President Nixon managed to extend the overstretched Dollar's leading role by abolishing the gold standard; President Bush has no such trick up his sleeve anymore.

The US's economic power is waning, the industrial base shrinking. With Wall Street on its knees, the impressive growth rates of the US-economy in the last few years look less convincing. A substantial part of that growth was generated by those financial “perpetua mobilia,” that helped to bring their inventors down, the investment banks. Historically, empires have seen their centers focusing increasingly on financial services. Until the currency weakened.

Japan has large currency reserves, the Japanese banking system is comparably healthy. Too conservative to invest in opaque financial instruments, despite their promise of high returns, Japan's major banks did not directly suffer from the subprime crisis. After Japan's own credit crunch, following the burst of a real estate bubble, Japan overhauled the financial system, learning from initial mistakes. Thus, Japan is fit to lead, and more importantly, as the only non-Western member of the G-7, Japan could assume to be the link to the predominantly non-Western G-20 countries, such as China, India and Brazil.

The US-Dollar cannot remain the world's major reserve currency for much longer. China, the future powerhouse, is ages away from being able to replace the dollar. The economies China and Japan, however, are tightly integrated; most of their trade is Yen-denominated. Together, they form the engine of the future world economy, with Japan's role gradually diminishing. Asia scholars have been discussing the creation of a common currency, or rather a currency unit, similar to the Ecu in Europe before the launch of the Euro. Here, Japan would be called upon to show creative leadership.

But Japan is likely to disappoint. At the G20 summit, Prime minister Taro Aso will announce a 100 billion-dollar credit line for the IMF, call for improved monitoring and tighter regulations, but refrain from suggesting a complete overhaul of the financial system. Rather, he is expected to ask his fellow heads of government to support the dollar based currency system. As in domestic politics, he tries to brush up a failed old system, instead of daring new steps. In office for seven weeks, Aso has yet to show a grasp of the financial crisis. Nor does Shoichi Nakagawa, Tokyo's third finance minister this year, who is better known as a hard-line nationalist.

In the fall of 1997, during the Asian Financial Crisis (in Asia known as the IMF-crisis), Japan's financial authorities, made a bid for leadership. They suggested the creation of an Asian Monetary Fund, AMF, to shelter the Asian currencies from the US-Dollar and the dollar-denominated Wall Street speculation. The proposal was rebuked by the IMF and the US-Treasury. Two years later, Tokyo launched a system of bilateral agreements for currency-swaps; they have constantly been extended since then. From its very launch, this so-called Chiang-Mai-initiative was intended as more then currency swaps, the foundations of a regional monetary system through the back door. Thus, ten years ago, Tokyo attempted to show leadership. Not any more.

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