JAPAN IN THE ASIAN ECONOMIC CRISIS(Collaborative Research Project)

The Asian economic crisis starting in the summer of 1997 has been widely referred to as a "21st century type crisis" in which countries with relatively sound macroeconomic fundamentals suffered sudden and very large outflows of short-term foreign funds leading to the collapse of de facto fixed exchange-rate regimes and widespread financial-sector turmoil throughout the region. Under normal circumstances, this capital-account based crisis would have provided Japan with an excellent opportunity to further the goals of its economic diplomacy in the Asian region, including the promotion of the internationalization of the yen to counter-balance the global presence of the dollar and the euro. In fact, however, Japan was forced to adopt a defensive stance countering persistent allegations that it was in some way responsible for triggering the Asian crisis. This paper considers how developments in Japanese trade, foreign direct investments, and bank lending may have contributed to setting the stage for the crisis, and how domestic economic conditions in Japan may have opened up channels for the spread of the regional contagion once the crisis had started. It finds that the withdrawal of Japanese banks in the early stages of the crisis may have acted as a signaling mechanism for other investors in the region. In addition, the paper reviews Japanese responses to the crisis consisting of a "re-active program" geared to controlling the impact of the crisis on the Japanese economy, and a more ambitious "pro-active program" for pursuling regional goals under the aegis of the Asian Monetary Fund and related initiatives