Japan and China could forge an alliance that will boost fiscal stimulus to offset recession

  • Japan and China could demonstrate to the world that fiscal stimulus is the only way out of the monetary mess we are now in
  • Cooperation on building third-country infrastructure could bolster their joint ability to withstand the coming recession
PUBLISHED : Sunday, 30 December, 2018, 10:01am
UPDATED : Monday, 31 December, 2018, 12:13am

The old year is not ending on an exactly happy note for international relations and it seems that the only thing which might bind major powers (outside the US) closer together in 2019 is their common mistrust of US President Donald Trump. In the case of Sino-Japanese relations, this could be a bigger factor for the common good than is generally realised.

Trade friction between Washington and Beijing is certain to carry over into the New Year and an increasingly isolated and irate US president now looks more likely to pick a trade fight with Tokyo, despite Japanese Prime Minister Shinzo Abe’s illusions about a “special relationship.” China and Japan will thus have good reason to find common cause.

One way this is likely to manifest itself is a willingness by Japan to assist China with its Belt and Road Initiative and a Chinese acceptance of the fact that it could use some help. In a year when Japan will be chairing the G20 process among the world’s leading advanced and emerging economies this could work to the advantage of both nations.

Cooperation between the world’s second biggest economy, China, and the third biggest, Japan, on infrastructure may appear marginal to the economic health of both, and more so to that of the global economy. But given the near certainty of slowing overall economic growth in the US, China, Japan and Europe (to name but a few) it could in fact be very important.

It is almost certain that sales of motor vehicles will take a heavy hit everywhere in the New Year, including the US, Japan and China, even without any “help” from the tariffs that Trump has threatened as part of his reckless trade wars. Cars are often the No 1 consumer item to get hit by a recession of the kind that we face now.

This will be bad news for export-dependent Japan, especially for its already embattled Nissan Motor Corp, as well as for China, and it is a near certainty also that sales and production of most other consumer durables that Japan and China produce in great quantity will take a nasty knock too in early 2019.

The notion subscribed to by Trump and some of his closest aides along with legions of economists and financial analysts that the US economy could continue sailing on smartly as the rest of the world fell into the doldrums of trade wars and recession was always absurd.

The slowdown is not the fault of the US Fed. “It’s the economy, stupid,” as a strategist for former US President Bill Clinton famously scrawled on a whiteboard during a strategy session for the 1992 presidential campaign. In particular, it’s the fault of the Trump-induced collapse in consumer and investor confidence. Clinton would do well to remind Mr Trump of this simple fact.

But to get back to how improved Sino-Japanese relations could help the global economy, Infrastructure is a key element of Keynesian economic stimulus and a hefty dose of fiscal stimulus is what the economy is going to need.

Monetary stimulus has had its day and applying it now would be like “pushing on a piece of string”, to quote Keynes.

By contrast, and as chairman of the Asian Infrastructure Investment Bank Jin Liqun has remarked, “there is empirical evidence showing an undeniable link between infrastructure investment and economic growth.” Nowhere is this more apparent than in China itself which has led the world in creating domestic transport, energy and communications networks.

China, however, has run into problems now that it is seeking to “export” its infrastructure model. It is being accused of “debt trap” diplomacy everywhere from Sri Lanka and Pakistan to Greece and Ecuador by over lending to infrastructure projects so that defaulting borrowers are forced to hand over equity ownership and control.

Hiroshi Watanabe a former Japanese vice finance minister for international affairs and who headed the Japan Bank for International Cooperation for many years argues, however, that China is not so much guilty of debt trap diplomacy as of “poor due diligence” in approving infrastructure projects.

Japan, says Watanabe is willing to help China improve its due diligence and provided that China supports Japan’s “quality infrastructure” standards, is willing also to cooperate with China on building third-country infrastructure projects.

Japan’s Abe had already hinted in October when he visited China but it seems that the proposal is now being taken up more formally between Tokyo and Beijing. Instead of simply crying “debt trap”, as the US and India especially have done, Japan aims to “change the position” by actively assisting China, according to Watanabe.

This has implications that go beyond the diplomatic rapprochement between Japan and China. It could open the way for a concerted infrastructure building drive by two of the world’s biggest economies across a wide swathe of the developing world. That in turn implies a significant upturn in capital good exports to offset the likely drop-off in consumer goods demand.

The impact of infrastructure investment should not be underestimated. To quote Amar Bhattacharya, senior fellow at the Brookings Institution, “infrastructure is key to driving economic growth. It boosts domestic demand and spurs productivity growth and innovation, and that is important at this time of trade wars”.

Infrastructure building is not a million dollar business; it is about trillions of dollars of spending and not least in Asia. If Japan and China can combine their expertise and financial muscle in pursuit of this objective their joint ability to withstand the coming recession could be enhanced significantly.

Such cooperation could not help but impress the G20 which will be meeting many times (and in many formats) in Japan during 2019 at a time when the US is hell bent on unilateralism, Europe and parts of Latin America are succumbing to nationalism and populism and when the UK is headed for a suicidal Brexit.

Maybe Japan’s Abe and Chinese President Xi Jinping can shame the G20 into doing things for the common good rather than putting their own countries’ interests first. One lesson they can demonstrate is that fiscal stimulus is the only way out of the monetary mess we are now in and that bold fiscal gestures can pay dividends.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs