there will always be problems of physicaldistribution. The chief prerequisite forskillful on-line business is seamless fusion
with off-line business, and this is precisely
where integrated trading firms come in.
Prospective approaches on this front may be
exemplified by the establishment of cybermarkets for international commodities,
construction of on-line settlement systems
linking car dealers and their buyers, joint
development of “smart card” systems, andmanagement of logistics using networks.

The 21st Century as an Age of Advancement with the Rest of Asia – New Roles for Japanese Trading Firms –However highly developed EC becomes,

Japan Foreign Trade Council, Inc.
C0033 ¥800E

JFTC

ISBN4-931574-02-5

The 21st Century
as an Age of Advancementwith the Rest of Asia
– New Roles for Japanese Trading Firms –— Summary of the final reportfrom Japan Foreign Trade Council, Inc. (JFTC) Taskforce
on the activities of “shosha” in Asian economies– their past, present, and future

The 21st Century as an Age of Advancementwith the Rest of Asia
– New Roles for Japanese Trading Firms –— Summary of the final reportfrom Japan Foreign Trade Council, Inc. (JFTC) Taskforce
on the activities of “shosha” in Asian economies– their past, present, and future

The 21st Century as an Age of Advancement with the Rest of Asia
– New Roles for Japanese Trading Firms –Published by Japan Foreign Trade Council, Inc.
All rights researved.
Copyright © 2000 by Japan Foreign Trade Council, Inc.
No part of this publication may be reproduced in any form or by anymeans, without the prior written permission of the publisher.
ISBN4–931574–02–5 C0033 ¥800E
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Members of Japan Foreign Trade Council, Inc. (JFTC) Taskforce
on the Activities of “shosha” in Asian Economies— its past, present, and future
Fuminori MASUBUCHI (Chairman), General Manager, Center for Economic &International Affairs, Mitsubishi Corporation
Toru FUJITA (Vice Chairman), General Manager, Regional Strategy & Coordination
Dept., Sumitomo Corporation
Tsugimoto GOTO, General Manager, North East Asia Team, International
Coordination Group, Itochu Management Consulting Co., Ltd.
Satoshi ISHIMOTO, Deputy General Manager, Information & Policy Analysis Dept.,
Itochu Management Consulting Co., Ltd.
Satoshi TAKABAYASHI (Former member), General Manager, Research &Intelligence Office, Tomen Corporation
Miyoshi KAMIJO, Manager, Research & Intelligence Office, Tomen Corporation
Katsuro NAMBU (Former member), General Manager, Overseas Dept., Group
Support Div., Nichimen Business Support Corporation
Koichi KAMAKURA (Former member), General Manager, Research & PR Dept.,
Nichimen Business Support Corporation
Yasuhiro HAYASHI, General Manager, Research & PR Dept., Nichimen Service Co.,Ltd.
Satoshi NAKAMURA, Research & PR Dept., Nichimen Service Co., Ltd.
Tatsuhiko YOSHIZAKI, Research Fellow, Nissho Iwai Business Strategy Center,
Nissho Iwai Corporation
Takashi IMAMURA, Senior Economist, Economic Research Institute, Marubeni
Corporation
Hiroshi MATSUO, General Manager, Planning & Coordinating Dept., Mitsui Global
Strategic Studies InstituteTaro ONO, Economic Research Unit, Corporate Strategy & Research Dept.,
Mitsubishi Corporation
Mitsuru HIYAMA, Corporate Planning Dept., Mitsubishi Corporation
Keisuke TAKANASHI, Executive Managing Director, Japan Foreign Trade Council,
Inc.
Hisao IKEGAMI. Managing Director, Japan Foreign Trade Council, Inc.
Yutaka TAKAHASHI (Chief Coordinator), Director of Board, General ManagerPlanning and Coordination, Japan Foreign Trade Council, Inc.
Takao KOJIMA (Coordinator), Deputy General Manager, Planning and Coordination
Group, Japan Foreign Trade Council, Inc.
Kyoko OHNISHI (Coordinator), Chief, Planning and Coordination Group, Japan
Foreign Trade Council, Inc.
Generaly, titles were made up as of June 30th, 2000.

Foreword
After achieving miraculous economic growth in the late 20th century, Asia
was rocked by the currency and financial crisis that struck in the middle of1997. Taking a retrospective look at the crisis as a member of Japaneseindustry, I believe that it served not only to rekindle awareness of the problems
saddling Asia but also to drive home once again the magnitude of Japan’s
involvement in the region.

While some of them were even faced with social instability as a result, thecountries of Asia have taken a lesson from the crisis and embarked uponrecovery in a remarkably short time. As they enter the new century, they are
returning to the path of sustained growth.

Japanese trading firms, which have long developed business in all kinds offields in Asia, have grown up along with Asian economies and supported theiradvancement. In addition, through their business activities in the various
countries, they have paved the way for communication and interchange withdifferent cultures, and also helped to deepen bonds of mutual understanding
between Japan and the rest of Asia.

This report was prepared by the Taskforce on the activities of Japanesetrading firms (“shosha”) in Asian countries instituted in June 1999 as a special
project of Japan Foreign Trade Council, Inc. Besides engaging in a wideranging exchange of opinion with representatives of academia and government
as well as the trading firm and manufacturer personnel with experience of workand life in the countries in question, the Taskforce also sent an ad-hoc mission
to a total of nine Asian economies for field surveys from February to March
2000 and otherwise promoted extensive activities of study and research.

It is our hope that the results of this work will stimulate renewed andfurther discussion about the role of Japanese trading firms in the new age.

Finally, I would like to express our deep gratitude to Chairman
Masubuchi, Vice-Chairman Fujita, and other members of the Taskforce for
their tireless efforts on behalf of its assignment and the preparation of thisreport.

Kenji Miyahara
ChairmanJapan Foreign Trade Council, Inc.
July 2000

Table of contents
Foreword(by Kenji MIYAHARA, Chairman, Japan Foreign Trade Council, Inc.)

Chapter 1
Macro analysis of the Asian economy – from the perspective of “shosha”
Section 1 Toward revival after the economic crisis ･･････････････････････････ 1
Section 2 Japan in the Asian context ･･････････････････････････････････････ 10

Chapter 2
Trading firm business rooted in Asia – profiles
Section 1 Brief history of integrated trading firms ･････････････････････････ 17
Section 2 Trading firm profiles ････････････････････････････････････････････ 19

Chapter 3
Asia’s future
Section 1 Asia in 20XX ････････････････････････････････････････････････････ 27
Section 2 Country study - current status and outlook ･････････････････････ 32
Section 3 Issues to be resolved ･････････････････････････････････････････････ 39
Section 4 Involvement with other Asia
on the part of Japan and Japanese trading firms ･････････････････ 42

JFTC regular member companies

Abbreviations:
ASEAN Association of Southeast Asian Nations
NIEs
Newly Industrializing Economies

Notes:The term “billion” indicates 1,000 million.
The term “dollar” (and the dollar sign) indicates the United States dollar.
The term “five affected countries” refers to Korea, Thailand, Indonesia, Malaysia,
and the Philippines. These countries were the ones most affected by the Asian
economic crisis, which broke out in July 1997.
As used in this report, the term “country” does not in all cases refer to a territorial
entity that is a state as understood in international law and practice.
Unless otherwise specified, the terms “rest of Asia” and “other Asian countries”
refer to the following nine countries: the four Asian NIEs, i.e., Korea, Taiwan, Hong
Kong, and Singapore; the four major members of the ASEAN, i.e., Indonesia,
Thailand, the Philippines, and Malaysia; and China.

Chapter 1
Macro analysis of the Asian economy– from the perspective of “shosha”

Chapter 1
Macro analysis of the Asian economy– from the perspective of “shosha”
Section 1
Toward revival after the economic crisis
In 1993, the World Bank released a report in which it gave high marks togrowth in East Asia, which it dubbed “the East Asian miracle”. The currency crisis
that broke out in Thailand just four years later in July 1997 soon spread as if bycontagion to neighboring economies and plunged the whole region into a state of
economic crisis. This section examines the question of why this happened andhow Asia was able to recover from these troubles.

1. Miracle, crisis, and revival– the evolution of the Asian economy in the 1990s(1) From “miracle” to “crisis”
The steep economic growth achieved by the region from the late 1980s to theearly 1990s was driven by two engines: investment backed by high savings rates,and export. The growth fired expectations that the 21st century would belong toAsia, and this quickened the flow of capital into the region. It was the jump in theinflux of short-term funding in particular that triggered the subsequent currency
and financial crisis. An additional mechanism, which came into play, is mostevident in the case of Thailand. National currencies that were in effect pegged tothe dollar appreciated, and this combined with the excess production of electronics
products worldwide to brake export, which had been booming up to the mid
1990s. In Thailand, this widened the deficit in the current balance andculminated in the devaluation of the baht in July 1997. The crisis eventually
spread to other countries including Korea and Indonesia.
—1—Mechanism of the currency crisis in the main ASEAN countries
Currencies in effectpegged to the dollar
１９９５Policy on incentives
for foreign investment
Confidence of foreign investors

Disadvantage of
the weakened Yen

Huge increase in influx of foreign capital
Outbreak of excessive liquidity

１
９
９
６

Maintenance of highlevel economic growth“Catch up” byless-developed
countries

Inflationarypressure

Overheateddomestic demand

Effective
appreciationof currencies

Increasein import

Decline in export
competitivenessImmature
supporting
industry

Thailand/Malaysia

Increased investment
in real estate

Jump in land prices,build-up of the bubble

Plunge in land prices,collapse of the bubble

Expansion of the current
account deficit

Increase in bad debt and failurein the management of someinstitutions at financial institutions

Loss of confidence in monetary and economic policies
of various countries among domestic and foreign investors
１９９７Selling storm in the currency market and exodus of foreign reserves
Currency devaluation(transition to a managed floating exchange rate system)

Source: Marubeni Economic Research Institute(2) Quick recovery from crisis
The conditionality applied by the International Monetary Fund in its aid
prescriptions had the adverse side effect of causing a serious recession, but it
undeniably also helped to stabilize currencies. More stable currency led to morestable money markets, and stock prices also recovered due to the resumption of
investment in Asian stocks by institutional investors, mainly from the UnitedStates.
The real economy also recovered at an unexpectedly fast pace. This was madepossible by, first, the hard-hitting fiscal and financial measures and, second, the—2—rebounding of export. Besides the advantage of the weak currencies, the export
turn-around was supported by the sharp expansion of the global demand related to
information technology (IT). This delivered a great benefit to ASEAN countries,
which are major sites of IT hardware production for supply to the global market.
It should be added that export within Asia (inclusive of Japan) has been gathering
momentum since the second half of 1999.
The key factors for the future are personal consumption and capital
investment in production facilities, i.e., the recovery of the domestic demand.
Personal consumption is projected to revive in Korea, but full-fledged recovery in
ASEAN countries will probably take another two or three years. In the latter,
capital investment has sunk to only 50–60 percent of its peak levels. There is somerecoil from the surplus investments made into the mid 1990s, and the levels
recorded in the early 1990s will probably not be reached again for the foreseeable
future. However, in economies with a high proportion of IT-related industry, theworst was over by the first half of 1999 and a trend toward additional investment
has surfaced.
In light of the firm tone of export, the revival (albeit sluggish) of personal
consumption, and the upturn in capital investment, the region is anticipated toachieve growth in the neighborhood of 5 percent as a whole. This forecast
envisions growth rates on the order of 4 percent in Indonesia, Thailand, thePhilippines, and Hong Kong; of 5 percent in Korea and Malaysia; and of 6 percent
in Taiwan, Singapore, and China.
Real economic growth rates in major Asian countries（change from a year ago, %）
1996

1997

1998

1999

1998
Q1

Q2

Q3

1999
Q4

2000

Q1

Q2

Q3

Q4

Q1

Singapore
Malaysia
ThailandPhilippines
Indonesia

6.9
8.6
5.9
5.8
7.8

8.0
0.3
7.7 -7.5-1.7 -10.2
5.2 -0.5
4.9 -13.2

5.4
5.4
4.2
3.2
0.2

6.2
1.6 -0.6 -0.8
0.8
-3.1 -5.2 -10.9 -10.3 -1.3
-7.5 -13.7 -12.8 -6.8
0.2
1.1 -1.0 -0.1 -2.0
1.2
-4.0 -12.3 -18.4 -19.5 -10.3

6.7
4.1
2.6
3.6
1.8

6.7
8.1
7.4
3.1
0.5

7.1
10.6
6.5
4.6
5.8

9.1
11.7
5.2
3.4
3.2

K o r e aT a i w a nHong Kong
C h i n a

6.8
6.1
4.5
9.6

5.0
6.7
5.0
8.8

10.7
5.7
2.9
7.1

-4.6
5.9
-2.6
7.2

10.8
6.6
1.1
7.1

12.8
5.1
4.4
7.0

13.0
6.8
8.7
6.8

12.8
7.9
14.3
8.1

-6.7
4.6
-5.1
7.8

-8.0
5.2
-5.1
7.0

Source: Each government

—3—

-8.1
4.7
-6.9
7.2

-5.9
3.7
-5.6
7.8

5.4
4.2
-3.0
8.3

(3) Two remaining issues① Reconstruction of the financial sector
Of the major Asian economies, serious problems involving bad debt held byfinancial institutions appeared in Thailand, Indonesia, Malaysia, and Korea.
These four countries were hit by a sharp drop in financial brokerage capabilities
and decline in the real economy as well. In response, their governments embarked
on programs for an extensive reshaping of the financial system including thereorganization of financial institutions (with some being closed or temporarily
nationalized), buy-up of bad debt, and injection of funds into ailing financial
institutions.
In Thailand and Indonesia, the bad debt rate declined from last year and thereform is steadily making headway, but neither the government nor financial
institutions are of the opinion that a complete resolution is already on the horizon.
The reform is moving more slowly than expected for two major reasons: 1) the
huge scale of bad debt, which at its peak was more than half as large as the grossdomestic product (GDP); and 2) the existence of numerous debtors that feel
resistance to the idea of reform accompanied by pain.
In Malaysia and the Philippines as well, financial brokerage capabilities havestagnated, mainly because financial institutions are continuing to be extremely
cautious about expanded lending.
Nevertheless, the financial reform in Thailand and Indonesia is moving ahead,if sluggishly. The market does not like a slow-paced reform, and this sentiment isencouraging reform, which will probably proceed with a push by investors.
In 1997 and 1998, there was much talk of an impending M&A offensive byWestern financial institutions in Thailand, Indonesia, and Korea. However, suchmoves were discouraged by the lack of transparency in the assets portfolio of
possible targets and the unconditioned state of M&A-related legislation. Thus far,
M&A transactions have actually been executed against only one Korean bank andfour Thai banks. They will probably be more widely applied as the financial
reform proceeds.
It should be noted that, in Indonesia, the public domestic debt, which was
zero before the crisis, came to about 19 billion dollars in fiscal 1998, partly
because of the huge injections of public funds for the reform. A similar
phenomenon is occurring in Thailand. Coupled with the public external debt,—4—this is causing apprehension about the heavy burden of debt repayment.
② The problem of private-sector debt and corporate restructuring
In Indonesia, Thailand, and Malaysia, the problem of bad debt at financial
institutions was paralleled by serious debt problems at private enterprises. These
unfolded in two major phases. First, prior to the crisis, the corporate sector wasmarked by a high rate of debt to capital (i.e., leverage), and heavy dependence on
foreign-currency borrowing without hedges for exchange rate fluctuation. The
crash of the national currency consequently had the effect of swelling the debt
denominated in it, and firms fell into a situation of a surplus of debt in rapid
succession. Second, business results also worsened after the outbreak of the crisis,
and many firms became saddled with debt that far outweighed their earning
power. Thereafter, national currency values came to settle at levels considerably
lower than before the crisis, and this left firms with commensurate surplus debt.
The holding of excess debt generally puts constraints on the raising of funds,
investment in growth fields, and other sorts of corporate activities. It also works
against extensive M&A by foreign capital. In fact, amid the burst of M&A activity
worldwide in 1999, Asia was the arena of fewer M&A cases than other regions,especially Europe. Nevertheless, there is a strong possibility of a gradual pick-up
in the pace of debt rehabilitation, which has been prone to delay thus far. The
coming years should bring the disappearance of firms deserving such a fate andpromotion of information disclosure and management reform by surviving firms
in order to attract participation by foreign capital. More transparent management
should increase confidence in the company among foreign firms and thereby
stimulate resort to full-fledged M&A tactics. Such a development would spell an
end to the kind of “crony capitalism” that was so prevalent before the crisis.

2. The essence of the Asian economic crisis
from the “shosha” standpoint
This section considers the essence of the crisis as viewed from the standpointof “shosha” activity in Asia.

(1) Huge capital drain① Capital influx before the crisis
The combination of high-level growth, effectively dollar-pegged currencies,—5—Composition of external debt in the five affected countries (as of the end of 1996)(US$ bil)External Debt(a)Short-term Debt (b)(b) / (a)Foreign Reserves (c)(b) / (c)Korea

ThailandIndonesia

Malaysia

131.7
65.7
50%
33.2
198%

90.6
37.6
42%
37.2
101%

128.9
32.2
25%
17.8
181%

39.7
28.6
72%
26.2
109%

Philippines Five affected
countries
40.1
8.0
20%
9.9
80%

431.1
172.1
40%
124.3
138%

China
146.7
31.5
21%
139.9
22%

Source: ADB, Key Indicators of Developing Asian and Pacific Countries

and capital liberalization induced a smooth increase in the flow of private-sector
capital in the five main crisis-affected countries into the mid 1990s. A fairly highproportion of this influx was occupied by short-term funds; while direct
investment had leveled off, there was a jump in bank loans and portfolio
investment. In late 1996, short-term debt in the five countries taken together
accounted for about 40 percent of their entire external debt, and came to 138
percent of their combined foreign reserves. Particularly notable is the latter ratio;
the vulnerability of the position of the five countries at the time is underscored by
the fact that the corresponding figure for China was only 22 percent.
② Outline of capital efflux since 1997
In terms of the total for the five countries, the net influx of 65.8 billion
dollars in private-sector funds posted in 1996 was replaced by a net efflux of 20.4

International bank loans in the five affected countries(change relative to the previous year, US$ 100mil)
60
40
20
Short-term loan
Medium-&Long-term loan

-20
-40
-60
-80

1991

1992

1993

1994

1995

1996

1997

Source: BIS

—6—

1998

1999

billion dollars in 1997. More than 90 percent of this immense efflux was occupied
by funds in the “other” category consisting mainly of short-term bank loans. The
flow in this category worked out to a net influx of 37.1 billion dollars in 1996 anda net efflux of 43.6 billion dollars in 1997, for a remarkable decrease of 80.8
billion dollars.

(2) Causes of the capital efflux① Scrutiny on the fundamentals-based theory
Some observers trace the crisis to the economic fundamentals of the affected
countries. In this view, problems in the economic structure and mistaken policy
decisions caused a worsening of the macroeconomic fundamentals (or signs of thesame). Wary of these changes, foreign banks felt anxiety over the future course of
the economy in these countries and refused to roll over their short-term loans.
Mechanism of the fundamentals-based theory
Incidence of structural problems and mistaken policydWorsening of the macroeconomic fundamentalsdLoss of confidence in the economies by banksdRefusal to roll over short-term loans
Source: Marubeni Economic Research Institute

The fundamentals-based theory rests on the existence of five structuralproblems. Firstly, the financial system in the affected countries was lacking in thefollowing three respects: 1) risk-management provisions in the financial
institutions as the players, 2) rigorous surveillance by the authorities, and 3)
schemes for long-term lending. Secondly, although the corporate sector
aggressively expanded its investment while riding the wave of strong growth into
the mid 1990s, this also produced a surplus supply of property and production
facilities, and rapidly worsened the balance sheet in this sector. Thirdly, due to thelack of transparency in the style of management, companies were harshly criticizedfor crony capitalism by developed-country investors as soon as business results
slumped due to the economic and financial crisis. Fourthly, in 1996, the year
before the crisis struck, the current balance showed an expanding deficit in most of—7—

the countries, and this set two problems in motion in national industrial
structures: 1) a jump in import of raw materials and intermediate goods due to theimbalance create by the growth of processing and assembly industries and theunderdeveloped state of supporting industry, and 2) a drop in export of laborintensive goods due to a wage spiral. And fifthly, export was also slowed by theexcessive competition among countries in the region.
Up until the mid 1990s, the various Asian economies had developed andstrengthened industry in roughly the same fields, e.g., electrical machinery,automobiles, and petrochemicals. However, a look at actual indicators for the fivecountries reveals that the economic fundamentals clearly deteriorated because ofsuch structural problems only in Thailand. It follows that factors other thanunsound fundamentals were at work in the spread of the crisis to other countries
and the huge capital exodus from them.
② Scrutiny on the financial panic-based theory
Mechanism of international financial panic
Recovery of loans by certain banksdOperation of a herd mentality among other banksdJump in loan recoverydRun on national finances
Source: Marubeni Economic Research Institute

The four affected countries other than Thailand actually experienced a huge
capital drain that cannot be explained by the fundamentals-based theory, and thisindicates the action of a financial panic. In other words, bank perceptions ofThailand were also applied to other Asian economies. The panic was given added
impetus by the lack of means to counter or prevent an efflux, as well as the lack offoreign currency reserves large enough to stem the tide.
③ Japan’s influence on the financial system crisis
In addition to those associated with economic fundamentals and the financial
situation, another major factor behind the capital efflux was the sharp reduction inloans to other Asian economies by Japanese banks under restructuring pressures in
the home market. Bank loans to the five countries have been in continuous—8—

decline since 1997, and Japanese banks have made the biggest cuts. By the end of
1999, the combined amount of their loans outstanding to the five countries had
sunk to 47.1 billion dollars, or about half as much as at the end of 1996, and theNo. 1 position was taken over by European banks at 59.1 billion yen. The great
decrease in lending by Japanese banks could not be attributed entirely to thefinancial panic.
In sum, the vast capital exodus that triggered the economic crisis in Asia isthought to have been caused by a combination of three factors: 1) thedeterioration of the macroeconomic fundamentals in Thailand, 2) the outbreakof international financial panic in the four countries, and 3) the big cutback ofloans by Japanese banks due to the financial crisis in Japan.

(3) Essence of the economic crisis
The Asian economic crisis was an amalgam of the currency and financial crisisand crisis in the real economy. The latter crisis stemmed from structural problems.
Once the capital exodus was set in motion by the aforementioned mechanism ofcontagion, the frail state of the financial system and the corporate disposition ofexcess borrowing and spending were manifested in the form of a quick rise in bad
debt held by the domestic financial institutions and surplus liabilities held bycompanies, respectively. It was precisely because of these deep-seated structuralproblems that the currency crisis in Thailand mushroomed into an economic crisis
afflicting all of Asia.
If certain plus factors come into play, Asian economies could very well recovertemporarily even without much structural reform. Nevertheless, only when thesestructural problems have been conquered, will they truly get on the path of new
and sustained growth.

3. Tasks for a new round of sustained growthin Asian economies
For the immediate future, the main tasks for the rest of Asian economies inpursuit of a new round of sustained growth are as follows: 1) resolute promotionof structural reform, and 2) catching up with the IT revolution.

—9—Section 2
Japan in the Asian context
1. Deepening of economic ties with the rest of Asia
(1) Before the Plaza Accord
In the 1960s, raw materials and fuel accounted for about 80 percent of Japan’s
import from other Asian economies, and direct investment from Japan in these
economies was basically confined to the resource development division, e.g.,
exploitation of crude oil deposits in Indonesia. The sharp appreciation of the yen
following then-president Nixon’s 1971 decision to halt the dollar’s convertibility togold spurred siting in NIEs and ASEAN countries by Japan’s labor-intensive
industries. More specifically, industries in fields such as textiles, sundries, andelectrical equipment began to move into these countries in order to preserve thecost competitiveness of their export to the United States. Direct investment fromJapan into other countries, chiefly in the rest of Asia, ballooned from 860 million
dollars in 1971 to 3.5 billion dollars in 1973 as the country entered its first foreign
investment rush. Thereafter, however, economic ties between Japan and the rest of
Asia entered a phase of temporary stagnation.

(2) After the Plaza Accord
This stagnation was broken by the 1985 Plaza Accord. The upward revisionof the yen’s value accelerated the shift to production in other Asian economies byJapan’s fabricating and assembly industries, especially in the field of electricalequipment. The 1990 investment in these economies reached 7.05 billion dollars,or about three times as much as in 1986, when the corresponding figure was 2.33
billion dollars. Beginning around 1988, the focus of this Japanese investment inother Asian economies shifted from the NIEs to ASEAN countries, andparticularly Thailand and Malaysia.
Quotations for the yen started to rise even higher in 1993 and reached thelevel of 80 yen to the dollar in 1995. Backed by the record-high strength of theyen, Japanese investment in other Asian economies began to boom in earnest in
the mid 1990s. It continued to be led by the manufacturing sector; there was a— 10 —

particularly pronounced migration of production to ASEAN countries by small
and medium enterprises (SMEs) and component manufacturers. There was also
increased siting in ASEAN countries by automakers, largely with a view to supplyof the demand in them. The acceleration of manufacturing sector siting in other
Asian economies not only deepened the in-house networks linking domestic
offices with ASEAN plants but also amplified intercorporate networks with SMEs
which had also made the move. In addition, it steadily expanded the volume oftrade between Japan and these other economies.
In this period, the combined investment by the nine integrated Japanesetrading firms (termed “sogo-shosha”) rose from 102.1 billion yen in fiscal 1988 to415.4 billion yen in fiscal 1996, for a 4.1-fold increase. The combined
outstanding balance of loans to the five affected countries by Japanese banks,
which went mainly to the locations of Japanese (or Japanese-affiliated) companies
in these countries, grew at a remarkably fast pace averaging 15 percent annually.
As a result, it rose from 34.5 billion dollars as of the end of 1989 to 97.2 billion
dollars as of the end of June 1997, on the eve of the currency crisis.

(3) Developments since the economic crisis① The crisis – a direct blow to Japanese locations
The problem first faced by Japanese firms as a result of the currency andfinancial crisis was a tremendous exchange rate loss associated with obligations inforeign currencies. In time, however, a difference emerged in respect of the degreeof damage owing to differences involving the target market and make-up ofmaterial sourcing. Industries oriented toward sourcing within the crisis-affected
Asia and export were less seriously affected than those oriented toward sourcing
from other regions and supply of the home market. Many of those in the latter
category, which including automotive firms, had moved into other Asian
economies relatively recently and were badly hurt by the crisis. Meanwhile, thesudden contraction of credit in the region exerted an adverse influence on many
firms in all industries.
② Japanese firms – staying on
In spite of this harsh business climate, very few Japanese firms took the step ofpulling out of other Asian economies. The vast majority, particularly in the
manufacturing sector, believed in Asia’s economic revival and elected to maintaintheir locations. Many of the firms which decided to continue operating in other— 11 —

Asian economies increased the capital of their local affiliates or expanded funding
from the parent in order to combat the balance sheet deterioration and the credit
crunch. The amount of investment, financing, and guarantees provided byintegrated trading firms (“sogo-shosha”) in other Asian economies remained on ahigh level even in fiscal 1998, when economies were at their worst; indeed, it
actually increased in Thailand. At a time of extensive capital efflux from otherAsia, the supply of long-term funds by Japanese manufacturers and integrated
trading firms must be rated as having made a valuable contribution to thestabilization of the host-economies.
③ Japanese firms – leading the recovery
Trade activities of Japanese manufacturers in the ASEAN Four countries (1996)(US$ mil)ExportThailandIndonesia
Malaysia
Philippines

ImportTotal(a)Japanesefirms (b) (b)/(a)

Total
(c)

Japanesefirms (d) (d)/(c)55,78948,05978,246
20,54325,091
11,157
14,884
5,604

73,48442,94577,79731,756

11,0796,586
10,520
3,686

45.0%
23.2%
19.0%
27.3%

15.1%
15.3%
13.5%
11.6%

Trade balanceof Japanese
firms
14,012
4,571
4,364
1,918

Source: JETRO, White Paper on International Trade 1999

The recovery of other Asian economies has been led by export, and this is anindirect indication of the magnitude of the role played by Japanese firms.
According to a survey by the Japan External Trade Organization (JETRO),
Japanese manufacturing plants account for anywhere from 20 to 40 percent of thetotal export in the ASEAN Four countries. The leadership of Japanese operations
is also clearly evidenced by the trend of the export mix, e.g., the expanding sharesof the total export occupied by automobiles in Thailand and electronics productsin the Philippines. On the whole, Japanese firms are playing a considerably vitalrole in the recovery of other Asian economies.

— 12 —

2. Japanese firms– integrated into the Asian economic engine(1) Presence of Japanese firms in other Asian economies① Manufacturing sector
In the ASEAN Four countries, Japanese manufacturing locations constitute a
key presence; their share of the total export ranges from 19 percent in Malaysia to
45 percent in Thailand. In the electrical equipment industry, Japanese firms
account for about 30 percent of the total and make a big contribution to eachcountry’s export. Similarly, the share of all auto sales in their home markets
occupied by Japanese production taken together has been overwhelmingly
dominant, in excess of 80 percent since the late 1970s. There was also increased
siting in ASEAN countries by Japanese automotive component manufacturers.
Two major motivations were the yen’s continued strength and the scheme forbrand-to-brand complementation (BBC) in supply of components among ASEAN
countries begun in 1988.
One of the reasons for the clearly superior position of Japanese automakers in
the ASEAN market was their efforts, beginning from an early date, to constructsales networks and to develop and supply affordable models adapted to thecountries in question. Behind the scenes, trading firms played key roles in thebuilding of networks and marketing campaigns.
Direct investments outstanding in Thailand and Malaysia
Thailand

Malaysia

Japan
26%

Japan
28%

others40%

others
50%
EU
15%

USA
17%

EU
11%

USA
13%

Source: Each government② Financial and service sector
Siting by Japanese financial and service enterprises (here excluding integrated
trading firms) in other Asian economies began by way of support for siting— 13 —

manufacturers. The 1990s brought a rapid increase in siting attracted by theburgeoning growth in the local markets. In the mid 1990s, Japanese banks
became the top lenders in other Asia with balances that far outstripped those ofWestern counterparts. And in the retail industry, the major Japanese department
stores and supermarkets avidly opened locations in the choicest districts of major
Asian cities. In contrast to those in the manufacturing sector, which kept theirplants going, many Japanese firms in the financial and service sector closed theselocations and withdrew from other Asian economies in the wake of the crisis. Thiswas one of the few sectors in which a sizable exodus occurred. The balance ofloans made by Japanese banks to concerns in other Asian economies plunged, andis currently lower than that of European banks, which are now the leading lenders
in the region. Securities firms and other financial institutions contracted the scaleof their business or withdrew one after the other. And in an increasing number ofcases, Japanese retailers closed stores in other Asia as the economic troubles
deepened.
③ Integrated Japanese trading firms (“sogo-shosha”)
Integrated Japanese trading firms began moving into other parts of Asia even
earlier than its manufacturers. Their involvement with the rest of the region haschanged along with the economic ties between Japan and other Asian economies.
When Japan was enjoying rapid economic growth, they were engaged mainly inthe development and import of natural resources. And beginning around thesecond half of the 1980s, they upped their investment for infrastructural
conditioning and in conjunction with partnership with Japanese manufacturers.
In 1998, at the height of the crisis, they played a definite role in maintaining
financial brokerage capabilities in the affected economies. They actively extended
financial assistance not only to Japanese manufacturers but also to their local joint
ventures and transaction partners. Amid the disruption of the crisis, they acted asunderwriters for credit risks and helped to put a halt to the sharp contraction of
credit in these economies.

(2) Difference between Japanese and Western firms
in respect of the strategy in the rest of Asia
In each of the five affected countries, the crisis was followed by an increase in
M&A cases in the fields of banking, telecommunications, and retailing, where
government controls on foreign capital had been relaxed. Nevertheless, in terms of— 14 —

both the numbers of cases and the sums involved, the M&A transactions in Asia
fell far short of those in North America and Europe, which have been experiencing
an unprecedentedly widespread resort to them.
While some predicted at the outbreak of the crisis that Western firms would
wrest the Asian market away from Japanese firms, this has not happened. The
major change has been a decrease in the Japanese share and increase in the Western
share in certain industries, such as banking and retailing. Far from weakening, thepresence of Japanese firms in the manufacturing sector (and especially in the fields
of automobiles and electrical equipment) has strengthened thanks to the successful
shift in the export mix. Japanese firms have a solid and definite strategy for other
Asian markets as well as international competitiveness, and this, together with theassistance of public financing from Japan, enabled them to maintain their stature.

(3) Japanese government – supporting the economy
and Japanese firms in other Asian economies
About half of Japan’s entire official development assistance (ODA) is directed
to other Asian economies, and has been of valuable use for the improvement of
their socioeconomic infrastructures. Even during the economic crisis, the Japanese
government announced a new package of aid totaling 97 billion dollars for other
Asian economies, such as the New Miyazawa Plan and special yen loans. Of thistotal, about 68 billion dollars has already being implemented. Such assistance has
provided crucial support for the economy and activities of Japanese firms in theaffected countries.

3. Japan’s tasks for other Asia’s revival(1) The new role to be played by Japanese companies
Today, when Asian economies are striving to conquer the economic crisis,
Japanese firms have a big role to play for the next round of sustained advancement.
Taking a lesson from the crisis, all firms must, first of all, build schemes for risk
management. Secondly, they must make time one of their standards of judgment
in investment decisions. In Asia, which is largely a developing region, there islatent demand in virtually all industries. However, it will take considerable time
for this demand to be actualized. The costs of mistaken decisions caused low
operating rates and surplus facilities. And thirdly, they must be aware of the— 15 —

magnitude of their presence and influence in the small markets of developing
countries. If markets are entered by numerous Japanese firms which become
locked in competition with each other, it could very well distort the entire
economy and also create fallacy of composition.

(2) The role to be played by the Japanese government
Other Asian economies generally have a high opinion of the support provided
by the Japanese government. Nevertheless, the current steps should be positioned
as no more than emergency measures. It would be more efficient to direct funds
to measures for preventing recurrence of such crisis. One means to this end is the
preparation of provisions to counter international financial panic. In addition,
economic policies in these countries should undergo rigorous evaluation and be
made the subject of constructive discussion in forums such as APEC and meetingsof ASEAN financial ministers.
There is also a need for the construction of schemes for collaboration between
government and business in this regard. For example, to obtain a correct
perception of the operation of the economy in each country, the government
should make arrangements for timely supply of detailed information fromJapanese firms actually developing business on sites and heavily involved in them.

— 16 —

Chapter 2
Trading firm business rooted in Asia
– profiles

Chapter 2
Trading firm business rooted in Asia
– profiles
Section 1
Brief history of integrated trading firms
The developing countries of Asia entered the phase of booming growth in thelate 1970s and went on to make rapid economic strides. Boasting high growth
rates that provoked talk about an “Asian miracle,” the region became a growthcenter for the global economy and was the focus of worldwide attention.
However, Japanese trading firms had been focusing on other Asian economies
from a much earlier time. After their establishment during the Meiji (1866–1912)
and Taisho (1912–1926) eras, they swiftly developed trade transactions with other
Asian economies and actively invested in them.
In the Meiji and Taisho years, Japanese trading firms gradually establishedlocations in Hong Kong, Singapore, India (Calcutta and Bombay; now Mumbai),
the Philippines (Manila), and Indonesia. They expanded their trade transactions
with other Asian economies along with the modernization of the Japanese
economy. Similarly, their role and capabilities increased as the Japanese economy
advanced.
During the reconstruction following the Second World War and the rapid
economic growth that ensued, integrated trading firms built up their export of the
products manufactured in Japan and import of resources based on schemes fordevelopment in the source countries. They also came to act as industrialorganizers involved in areas such as mediation for import of technology, plant
construction, supply of materials, sales of products, and cultivation of export
markets. Backed by their high credibility and risk management capabilities, theyalso increasingly extended credit and financing to wholesalers and customers, andtheir business as integrated trading firms was further advanced by the acquisition— 17 —

of financing functions. In other Asian economies, too, they cultivated markets thatwere still in the process of development, promoted large-scale projects exercising
their organizing skills, and devised new projects that would showcase trading firm
talents.
Following then-president Nixon’s 1971 decision to cancel the dollar’s
convertibility to gold (thereby forcing a revaluation of the yen) and the two oil
crises, Japanese industry moved toward higher VA levels, innovative technology,
electronics, high-tech products, and increasing degrees of sophistication. Its
vaunted international competitiveness in fields such as VCRs, electronics,
automobiles, and steel brought Japan strong growth powered mainly by export, inwhich integrated trading firms played a leading role.
The sharp appreciation of the yen that began in 1985 stimulated purchase ofoverseas components by Japanese firms as well as offshore siting in the
manufacturing industry. Japanese production migrated from the NIEs toSoutheast Asian countries and China. To support this activity, integrated trading
firms developed new business in other Asian economies, including consulting
work, total services encompassing construction of industrial estates, andcomponent sourcing and logistics.
In the current age of economic internationalization, the advancement of the
global economy depends on the activities of integrated trading firms. The
Japanese economy is becoming increasingly globalized, and international divisionsof labor in production are widening and deepening. For integrated trading firms,
this fundamental change represents an opportunity for building new relationships
with transaction partners, both foreign and domestic, and for generating new
business. While making investments to diversify their activities, they are also
reinforcing their capabilities in commercial transactions and aiming for a synergy
between their business and commercial dealings.
The chief strength of integrated trading firms lies in their exercise of a total
power for creation of business by taking full advantage of the comprehensive
nature of their assortment of products, markets, and capabilities. Integrated
trading firms are not mere brokers selling goods; they work to unearth and nurture
new business through close collaboration with other companies in Japan and othereconomies.

— 18 —

Section 2
Trading firm profiles
This section profiles the role played by integrated Japanese trading firms inother Asian economies and the way in which they expanded and exercised theircapabilities and functions, with reference to the actual recent doings of various
firms in various countries.

1. LNG projects and cooperation in Brunei(Mitsubishi Corporation)
In 1967, Mitsubishi Corporation began marketing liquefied natural gas(LNG) produced in Brunei to Japanese concerns in collaboration with Shell. In
June 1970, it concluded a long-term sales contract for supply of some 5.14 million
tons per year with three big customers; Tokyo Electric Power Company, Tokyo
Gas Co., Ltd., and Osaka Gas Co., Ltd. This contract was subsequently extendedfor 20 years, from April 1993 to March 2013 (the annual volume was increased to
6.01 million tons, and a different long-term contract was also concluded with
KOGAS, Korea Gas Corp.).
As a subscriber to the project, Mitsubishi negotiated with customers jointlywith Shell Petroleum. At present, it is a shareholder in Brunei LNG Ltd. (BLNG),
which handles everything from liquefaction to LNG sales. In this capacity,
Mitsubishi contributes to the smooth operation of BLNG and advises the Brunei
government and Shell, which are also BLNG shareholders, about the marketingend. Furthermore, in accordance with a service agreement with BLNG, it provides
that company with all sorts of information and engages in parley with customers
for the smooth execution of the project.
At the same time, Mitsubishi has concluded import agency contracts withcustomers and represents their interests while also playing a coordinating role forsellers. The specific duties performed on behalf of customers include attendance atthe shipping port of cargo in Japan, payment of LNG fees, customs clearance, andpayment of duties.
Mitsubishi brings the necessary functions into play in each of these roles andhelps to ensure the smoothness of supply from BLNG to the customer.
— 19 —

It has also reached an agreement with the government of Brunei on joint
promotion of a beef cattle project. In March 1978, it made outlays for theestablishment of the wholly-owned subsidiary MC Farm Sdn. Bhd., and began
preparing land for ranching on a hilly site about 10 kilometers to the west of
Bandar Sari Bagawan, the national capital. After five years of testing, MC Farmconcluded that large-scale livestock industry in a tropical setting – something
without parallel worldwide – was fully possible as far as the technology wasconcerned. In parallel with this project, it also embarked on the cultivation of leaf
and fruit vegetables by hydroponic farming in 1986. At present, it is making plansfor business in tourism farming.

2. Modernization of agriculture in China(Nichimen Corporation)
It was in 1979 that Nichimen Corporation Foodstuffs Division relayed its
strong desire to contribute to the modernization of China’s agriculture to theChinese government. This message evoked keen interest at Ministry of State
Farms and Land Reclamation in China, which had been given the mission ofturning wild fields into farmland, and managing and operating it in the form ofstate-run farms. The idea moved toward materialization beginning in 1980, andgrew into the plan for construction of a huge, modern state-run farm throughjoint efforts by Japan and China on the Sanjiang plain in the northeastern part ofHeilongjiang Province.
The project made full use of the capabilities unique to integrated trading
firms for total organization of action to meet needs on the Chinese side in thethree major areas of financing, provision of machinery and know-how, and buyoutof products. The funds required for the farm’s construction were procured
through Nichimen from a syndicate including the Export-Import Bank of Japan(the current Japan Bank for International Cooperation; JBIC) and The Sanwa
Bank Limited, and furnished to the Chinese side in the form of yen-denominatedloans. These funds were used for the purchase, again through Nichimen, of highperformance construction equipment and large agricultural machinery from theleading machinery manufacturers in Japan and the United States. This equipment
was accompanied by the requisite know-how for its operation, and the Chineseside used it to transform some 20,000 hectares of undeveloped land into animmense farm, which was named “Honghe Farm.” The soybeans produced there— 20 —

are being imported to Japan by Nichimen, and the foreign currency received fromthis business is applied to repayment of the loan. This type of scheme is termed“production sharing method.”
Honghe Farm was built to be a large, modern farm of the type found in the
United States. At the time, it was a model of progressive mechanized farming in
China, which then attached top priority to the modernization of agriculture. A
slogan urged agriculture to “learn from Honghe,” and leaders from the central
government as well as agricultural authorities from other parts of the country
flocked to the farm to inspect its operations. Honghe was enlarged thereafter andnow covers more than 100,000 hectares. Similarly, wheat, rice, and other products
were added to soybeans on the list of crops. Once regarded as part of the vast
northern wasteland, the Sanjiang plain in Heilongjiang province is now one of the
key centers of agricultural production for 21st-century in China.

3. Management setup for apparel production in Asia
(Tomen Corporation)
Right from the early Meiji years until the period of reconstruction after thewar, apparel products were one of Japan’s major export items. Their production
was gradually transplanted offshore as wages in Japan rose, and the yen’s sharp
appreciation in the wake of the 1985 Plaza Accord turned the domestic textile
industry into a net importer. There was a particularly pronounced shift toproduction in China, mainly in the Huanan (southern) region, and the Japanese
integrated trading firms discharged a big role in this shift. Whereas the words“made in China” used to be equated with bargain-basement merchandise, theapparel now produced in China is of high quality and is helping to reduce retailprices in the Japanese market. One of the factors behind this qualitative
improvement was the work of Japanese trading firms to implant Japanese-stylesystems of quality control and provide instruction on the site of production.
As a center of logistics, financing, and information, Hong Kong is the key
port for export of the goods made in the Huanan and other parts of China, andthe apparel divisions of Japan’s integrated trading firms began to move some of
their departments there. Established in 1983, Tomen Hot-Line (H.K.) Ltd. hasproduction plants in 12 Asian economies. It also functions as a manufacturer,
constructing systems for integrated control of these plants and development of
products attuned to needs and preferences in Western markets. Japanese trading— 21 —

firms now active in Hong Kong are engaged not only in mediation of consigned
processing but also in all steps from sourcing of materials to production
management and from product development to construction of sales channels. In
this sense, they could be described as apparel manufacturers without their own
factories. Their efforts are mirrored in the character of Hong Kong, which
continues to advance as a global center of business that is backed by the gigantic
production bases in China and takes the whole world as its market.

4. Development of an industrial park in Indonesia(Sumitomo Corporation)
In August 1987, Sumitomo Corporation commenced the construction of anindustrial park in accordance with a proposal made by the Indonesian authorities.
The park was the first in Indonesia to be prepared by a private enterprise.
Drawing on its experience in attracting Japanese tenants to an industrial park in
Thailand and catalyzing new transactions with them, Sumitomo studied
approaches that would go beyond mere construction and link the project tocontinuing business for it as an integrated trading firm. This led to theestablishment of an investment firm in Japan through outlays by a consortium
centered around Sumitomo and including banks, general construction contractors,
insurance firms, and enterprises in other concerned industries as well as the Japan
International Development Organization (JAIDO). This was followed by theestablishment of P.T. East Jakarta Industrial Park (EJIP) through joint outlays withthe major members of the Indonesia Chamber of Commerce and Industry(KADIN) in April 1990.
The EJIP industrial park lies in the Bekasi area, about 40 kilometers eastward
from central Jakarta. It is accessible by expressway, and measures some 320
hectares. The sales campaign began with the site preparation, and the lot had beensold by 1996. About 80 export-oriented firms, mainly Japanese, have sited in thepark. The park is now one of the major bases for export of manufactured products
in all of Indonesia, and some 70 percent of its entire production is exported.
As the enterprise running the park, EJIP manages matters such as supply ofindustrial-use water and treatment of wastewater, and also operates plants for lease.
In addition, it is responsible for security, maintenance of appearance and roads,
and control of nighttime illumination. For its part, Sumitomo provides a wide
range of services to the tenant companies. On the park grounds, it built and— 22 —

operates an import-export cargo distribution center featuring the latest cargohandling machinery. The park has also attracted siting by trading firms handlingelectronic components that source them from other Asian economies, andpackaging firm which is handling exporting products from the park. In addition,
the premises contain a steel service center for steel processing to meet the needs ofcustomers, companies that lease property to individuals and corporate entities, andservice suppliers ready to develop accounting and salary management software or
to construct local area networks (LANs) for tenant firms on consignment. In
character, the project is not a simple real estate project; it is a composite one
encompassing various fields, and therefore best showcasing the personality ofintegrated trading firms.

5. Eastern Sea Laem Chabang Terminal(Marubeni Corporation)
Situated on the coast of the Gulf of Siam (Thailand) about 110 kilometers
south of Bangkok, Laem Chabang is Thailand’s biggest port and its only deepwater port. Marubeni Corporation founded the Eastern Sea Laem Chabang
Terminal Co., Ltd. (ESCO) together with Thai Cranes International Co., Ltd. andJapanese firms such as Kamigumi Co., Ltd. ESCO began operating a container
terminal at the port in January 1992.
The ESCO terminal has a berth with a total length of 300 meters and depthof 14 meters, and can accommodate mooring and cargo work for large container
ships with a freight capacity of up to 50,000 tons. The terminal is equipped withthree wharf cranes, each capable of hoisting about 30 containers per hour. Unlike
Japanese ports, the terminal is ready to load or unload cargo at any time of day,365 days a year, and therefore is highly convenient for customers (shipping
companies).
Although the terminal handled only 15,000 containers (in terms of equivalent
in 20-foot containers) in 1992, its first year, the volume rapidly rose along with thecountry’s export-driven economic growth and hit the 492,000 mark in 1999. The
overall Thai economy was badly hurt by the currency crisis, but the export volume
has followed a favorable trend since 1997 due to the recovery of pricecompetitiveness.
In this project, Marubeni has a 29-percent interest in ESCO and plays amanagement role. With its wealth of experience as a shipping company customer,— 23 —

Marubeni has a good knowledge of the kind of services and information customers
want, and ESCO’s management is consequently more customer-oriented than thatof other container terminals affiliated with the major container ship operators.
This is a result of effective use of the information powers of trading firm andimprovements in this respect will probably become even more in demand in the
future.

6. Taiwan FamilyMart(Itochu Corporation)
In Japan, convenience stores began to spread around 1974. Taiwan
FamilyMart Co., Ltd. opened its first store in 1988 and was followed by a host ofother entrants which ushered in the convenience store culture in Taiwan. Whileconvenience stores based on the U.S. system were first planted in Taiwan around1978, this system was not entirely adapted to Taiwanese soil. In spite of the factthat it would make the required initial investment much higher, FamilyMart
decided to bring in a complete logistics system that consisted of an electronicordering system (EOS) and shipment setup, including distribution centers. It took
this step in the conviction that the construction of logistics was indispensable forthe execution of its strategy for Taiwan, which from the start envisioned theopening of many stores. The system laid the foundation for the ensuing fast-paced
increase in the number of locations.
In moving into Taiwan, FamilyMart joined hands with Itochu Corporation insetting up a joint venture with a Taiwanese firm and introducing Japanese-style
convenience store know-how into Taiwan. This choice was made in light of
Itochu’s track record in logistics for the FamilyMart operation in Japan and in
anticipation of the advantages represented by its international business networkand risk-dispersing capabilities as a trading firm. The convenience store expertisethat was born in the United States and bred in Japan is blossoming in other Asianmarket.
Convenience stores have enjoyed remarkable growth in Taiwan, and Taiwan
Familymart is hoping to have 1,000 stores in operation by the end of 2000. As in
Japan, they are taking solid root in the market and appear poised for evolution
from a mere type of retail store to business locations offering a diverse range ofservices.

— 24 —

7. Forestry project in Vietnam(Nissho Iwai Corporation)
Although Vietnam lies in the tropical and temperate monsoon zones, forests
cover only about 9.3 million hectares, or 28 percent, of the national land. The
effects of destruction of forest during the Vietnam War linger on today.
In 1986, when it instated its “Doi Moi” policy of economic reform, theVietnamese government asked Nissho Iwai Corporation for aid with reforestation
projects. In response, Nissho Iwai proposed a scheme under which the lumber
taken from the resulting forest would be exported back to Japan for use inpapermaking. It also gained the cooperation of Oji Paper Co., Ltd., one of Japan’s
leading companies in the industry, for serving as a customer for chips. A site in
the area of Danang, which is situated in the central part of the country and is its
third-largest city, was selected for the project. A joint venture was established at
capital subscription rates of 60 percent for Nissho Iwai and 40 percent for five
Forest Companies public forestry corporations, and the chip productioncommenced in 1994.
Although the trees planted were quick-growing eucalyptus, it neverthelesstakes about seven years for their trunks to reach the thickness prescribed for
logging. Reforestation must be a long-sustained effort and cannot be continued
on the strength of good intentions alone. If it is to be sustainable, the project
must be designed so that it benefits all concerned parties.
In short, through the production of chips and their export to Japan, theVietnamese government gains foreign currency and the local community gains
jobs. Farmers also benefit from the extra income earned from reforestation work.
And for the Japanese side, the project means a new source of chips. Obviously, it
is also gradually increasing the amount forestland in Vietnam.
The project has steadily progressed, thanks largely to the expansion of thedemand for chips in Japan. The Vietnamese government, too, is enthusiastic
about planting forests. In 2001, the first eucalyptus trees planted by Nissho Iwai
will be ready for logging. Once the cycle is set in motion, the project should becompletely sustainable. Restoration of the natural environment and economic
recovery are not necessarily mutually conflicting ends, and the reforestation projectin Vietnam is an eloquent testimony to this fact.

— 25 —

8. Asia Investment Ltd. in Singapore(Mitsui & Co., Ltd.)On December 7, 1995, Mitsui & Co., Ltd. established Mitsui & Co., Asia
Investment Ltd. in Singapore for investment activities throughout Asia.
Conventionally, investments have been made mainly by sales divisions andoverseas offices, and chiefly for intervention in the flow of goods. However,
Mitsui decided to establish a new type of dedicated investment company in orderto take full advantage of the wide range of investment opportunities opening up in
Asia as a center of business growth in the throes of fast-paced, momentous change.
The activities of the company are not limited or specified as regards the subject
fields of industry; its mission is to make sound judgments and decisions on
investments in new industries with promising growth prospects in other Asia, andwith a speed that cannot be matched by the ordinary corporate organization. Itsboard of directors is allowed to make decisions on propositions for investment
within the limits of its capital (U.S. 100 million dollars in terms of authorized
capital) and surplus funds at its own discretion, i.e., without seeking the approvalof or petitioning the parent. Its sphere of activity encompasses all of Asia outside
Japan, from China and Korea in the north to India and Pakistan in the west andIndonesia in the south.
Its major activities are as follows: 1) dispatch of experts as its staff forassessment of investment proposals, and provision of effective investment
information service based on swift collection of information and analysis of thetrends in the business and market; 2) assistance for promising new projects andtechnology transfer, and capital participation in joint ventures, in light of thestrong growth potential in the region; 3) close coordination with major corporategroups in the region for collaborative investment in promising growth firms andfor public offering of their stock; 4) short-term investment in stock markets; and5) the raising of funds from the money and capital markets of other Asia for inhouse banking, i.e., financing for Mitsui’s local affiliates, branches, and related
firms in Asia.
As of the end of 1999, China had the largest share of the total outstanding
investment at 27 percent, and was followed by Taiwan at 23 percent, Thailand at
21 percent, the Philippines at 11 percent, Singapore at 7 percent, India at 7
percent, and Hong Kong at 3 percent.
— 26 —

Chapter 3
Asia’s futureChapter 3
Asia’s future
Section 1
Asia in 20XX
1. Continued status as a world growth centerin the early 21st century(1) A numerical forecast of Asia from 10 to 20 years in the future
East Asia (here excluding Japan and regarded as consisting of China, NIEs,
and the ten members of ASEAN) currently has a total population of 1.84 billion(the world population being 6.1 billion). In 2020, it is projected to have a
population of some 2.16 billion, and therefore to remain one of the most densely
populated regions in the world. This population size and density is a tool for
growth in the region, which has already broken through the poverty line. Its
growth in the 21st century should be further accelerated by the increasing
utilization of information technology.
The forecast also envisions two mass migrations of population, one fromfarming villages and rural areas to urban areas in each Asian economy, and theForecast of GDP growth rates
(%)

NIES
ASEAN
A s i a
U S A
Japan
China

1995

2000

2005

2010

2015

2020

7.1
7.7
8.0
2.0
1.4
12.0

4.0
1.1
3.8
3.4
1.1
7.9

5.0
5.9
5.4
1.8
1.7
6.2

5.2
6.9
5.8
2.0
1.7
6.8

4.7
6.6
5.6
2.2
2.0
7.7

4.5
6.6
5.5
2.4
2.1
8.0

Note:

figures indicate average real GDP growth
rates over the preceding five years“Asia” consists of NIEs, ASEAN, and China
Source: Japan Economic Research Center— 27 —

other from the less to the more developed countries. These migrations are
expected to be major factors for maintaining the dynamism of the region’s growth.
According to a forecast released by the Japan Economic Research Center inJanuary 2000, East Asia (here consisting of the four major ASEAN countries, thefour NIEs, and China, for a total of nine economies) may be expected to achieve
economic growth averaging 5.6 percent annually from 2000 to 2020. JFTC
Taskforce estimates that this is a floor figure and that growth will probably behigher in reality.

(2) Emergence as a center of global production of goods
With its abundant supply of labor that manages to be both low-cost and highquality (in terms of educational level, dexterity, and motivations for advancement),other Asia should loom even larger in the eyes of developed-country industries as asite for production of goods. In this connection, it will be vital for other Asia toobtain the support of capital and technology from Japan as the reigning champion
as far as quality manufacturing is concerned.
Two of the focal industries in the early 21st centur y will be theelectric/electronics industry and the auto industry. In the former, production andexport of electronic products and components is rapidly increasing in Taiwan,
Korea, China, Malaysia, Thailand, and the Philippines, and it is a certainty thatthese economies will continue to be centers of supply of these items to the global
market in the early 21st century. And in the latter, production is likely to be
increasingly directed to other Asian market in response to the explosive growth ofthe demand for automobiles in the countries themselves.

(3) Asian strengths
Other Asian region has at least seven major features that should function as
key strengths in the global market. The first is high savings rates, which support
investment for the future. Second, many Asian economies and their populations
have extremely strong desires for growth and betterment, as was the case inyesteryear’s Japan. The powerful desires to get ahead and energy expended to thatend are bound to be at the roots of Asian growth in the new century as well. A
third feature is wage levels. Although labor costs are rising in Asian economies,
they should remain on relatively low levels in the region as a whole for the next
twenty years or so.
— 28 —

Fourth is the political stability and the tone of liberalization which have beenat the foundation of the high economic growth enjoyed by other Asia since the1970s. There is thought to be little risk of widespread turmoil in the ASEAN
countries, NIEs, or China, and the main tasks on this front are the reinstatementof North Korea in the international community and the stabilization of relations
between China and Taiwan.
Fifth, no discussion of other Asia could afford to ignore the presence of
ethnic Chinese businesses throughout the region. As key principals in other
Asian economy of the 21st century, today’s ethnic Chinese executives might beenvisioned as having MBAs from U.S. universities, being versed in information
technology, practicing U.S.-style corporate governance, and drawing on human
networks that stretch around the globe. In the networked society of the new age,
their human, financial, and commercial connections should become moresophisticated and constitute a crucial support of Asian economic growth.
A sixth factor working in Asia’s favor is the presence of the U.S. economy,
whose solid demand was a major reason for Asia’s recovery from the currency crisis
more quickly than expected. The region’s economic growth would not be possible
without political stability, which depends heavily on the United States. Asia has
important ties with the United States not only in the economic area but also in the
military, cultural, and educational ones. Indications are that the United States willcontinue to be Asia’s most important partner in the 21st century.
Besides the aforementioned benefits of the United States as the world’s biggest
economy, a seventh strength of other Asian economy is the existence of Japan as
the world’s second-ranked economy, and the one which is interlocked with theoverall other Asian economy. It is Japan which is in the best position to play therole of spearheading production in the region, mainly in the automobiles andelectronics industries as the key engines of advancement in the early 21st century.
By the same token, other Asia holds considerable significance for Japan as a market
and as part of the home ground of Japanese companies. In short, just as other Asia
needs Japan, so Japan needs other Asia.
Quite often, items that become popular in Japan eventually find favor inother Asian economies. In contrast, it is unthinkable that Western models in allsorts of fields, from housing and life space to entertainment, TV, and even welfare
services, would take root in other Asia without modification. In various areas, theJapanese models will probably be used as guiding precedents in many other Asian— 29 —

economies. In this sense, as they try to navigate the rough waters of the 21st
century, Japan and the rest of Asia will be in the same boat.

2. IT will change Asia
(1) Spread of IT in Asia
Society is being cyberized at a remarkably fast rate in Korea, Taiwan, Hong
Kong, and China. At the same time, U.S. and Japanese companies are step pingup activities aimed at acquisition of or capital participation in promising IT-related
firms in China and NIEs. Cellular telephones are in widespread diffusion in theregion, as in Japan. With the arrival of the mobile Internet age, it may not be long
before the region, led by Japan, has an Internet society on a par with that of theUnited States. Asia has a huge corps of budding IT engineers with degrees from
U.S. universities and has positioned the electronics industry at the center of its
policies for economic advancement. As such, it makes fertile soil for the rapid
spread of IT.

(2) IT-induced change (e-Asia)
It will probably take some time for IT penetration to reach the level
permitting all people, even in rural areas, to access the Internet for business-toconsumer (B2C) transactions. However, change can be set in motion if just one
youngster in a village of 100, for example, utilizes the Internet to obtain the latest
information. Network information also presumably has an extremely great effectfor raising consciousness of the surrounding world.
Because of large income gaps and interregional disparities, Asia faces serious
problems in the aspect of education and access to medical services, and diffusion of
the Internet could help to solve them.
For the time being, however, Internet utilization will be propelled by businessto-business (B2B) transactions. Automakers, mainly from Japan, are trying tobuild optimal sourcing and delivery setups for materials and components in theregion. As their schemes for complementary production spanning various Asian
economies take shape, they are developing network management systems for all
steps of the process, from component sourcing to production and inventory.
With Asia’s growth as a worldwide center of manufacturing, IT will function
as a crucial infrastructural element not only in the auto industry but also in all— 30 —

other industries. In addition, it will play an important role in commerce, i.e., thesales of goods. The Internet is finding extensive use as a means of supply anddemand matching as well as settlement of fees and exchange of information,
particularly in the fields of general-purpose products and internationalcommodities. Such utilization is going to change the face of business in Asia.

3. Toward formation of a regional economic sphere
At present, the only intraregional trade agreement in Asia is that for the
ASEAN Free Trade Area (AFTA). Although the existence of a formal regional
economic sphere is somewhat tenuous, there can be no doubt that ties of mutual
economic dependence are deepening among Asian economies. In the aftermath ofthe currency crisis, these countries are coming to realize the need for intraregional
economic cooperation.

E

U
NAFTA
ASEAN

APEC

MELCOSUR

A more concrete economic sphere will probably arise in the region in the early
21st century. A likely prospect is that AFTA will be supplemented by several
bilateral free trade agreements established in the larger APEC context. Whereas
precedence is accorded to the formulation of doctrine, conclusion of agreements,
and construction of frameworks in the European economic sphere, actual
economic activities tend to move ahead of rule-making and agreements in Asia,and this is not expected to change substantially in the future. The question is how
much initiative Japan will be able to exercise in this sphere.

— 31 —

Section 2Country study – current status and outlook(1) Hong Kong
Under the impact of the currency crisis, Hong Kong recorded its first-everminus growth in 1998, when the real GDP growth rate was down by 5.1 percent
from 1997. Since 1999, however, the economy has been swiftly recovering its
vitality. The fast recovery derives from the assets effect induced by the rise in stock
prices powered by IT-related investment. The real economy continues to exhibit a
deflationary trend, and the unemployment rate has leveled off on the plateau of 6
percent. However, this may be more a manifestation of the quickness with which
Hong Kong businesses leave slumping industries to find other business.
It would make no sense to view the Hong Kong economy in isolation; it must
be viewed literally in consolidation with the Huanan (southern China) economic
sphere. The Huanan area is becoming one of the biggest sites of production in theentire world, and it may not be going to far to characterize Hong Kong as a
trading firm with this immense Huanan production in its hinterland. In thiscapacity, its role will presumably deepen as China’s economic liberalization
proceeds. A particular focus is the precious infrastructures for financing, logistics,
and information built up over the years by Hong Kong’s laissez-faire economy. In
order to preserve these infrastructures, the authorities must make a clear
commitment, to the international community as well, to the subsistence of Hong
Kong’s free economic tradition. In outlooks on Hong Kong’s future, the focal
points are the further evolution of the Huanan area as an immense center ofcomponent supply to the rest of the world and the prospects for a reinforcement ofHong Kong’s trading firm capabilities.

(2) China
There is a consensus among Japanese business persons stationed in Shanghai
and Beijing that China has changed rapidly over the last few years. Observers who
continue to associate business in China with a lack of transparency, abrupt change,
irrationality, and inconsistency are liable to misread its future course. For example,
although the “Made in China” tag used to be synonymous with cheap goods, it is— 32 —

now being equated withhigh quality at low cost.
The rise in income levels
is leading to an increasein consumption inclinations and rise inconsciousness of quality.
In addition, one forecast
is projecting China’s
Internet population to
The spread of IT is accelerating the pace ofreach 20 million in 2000
change in society; Zhong Guan Cun, near Beijing
and 80 million in 2005.
It is the dominant view that, by 2020, the country will assume a major role in the
global economy as an immense site of production for supply worldwide.

(3) Taiwan
Taiwan is the world’s third-largest producer of semiconductors, and has
established a solid position for itself in the worldwide context as an economy
grounded in computers and driven by export. It would be no exaggeration to saythat Taiwan’s electronic component industry is supporting the spread of the IT
revolution worldwide.
China is already Taiwan’s biggest trade partner (when indirect trade isincluded) and also the major destination of its investment. As such, Taiwan ishoping that there will not be any radical change in China given the importance ofits market. The further deepening of economic interchange
between China and Taiwan isacting to alleviate politicaltensions. The outlook for the
future is hard to discern, seeingthat neglect to present anational identity may be thewisest way to ensure subsistence
as an effectively independent
The immense scientific and industrial complex
country, and that hiding behindat Hsin Chu continues to grow; near Taipei— 33 —

the names of major firms as an OEM supplier may be the key to further economic
advancement. Although the Taiwanese economy appears to be relying a little tooheavily on high-tech industry at present, it is expected to grow steadily for the time
being along with the spread of the IT revolution.

(4) Korea
The sharp economic
recovery from an equally sharp
decline seems to mirror thetemperament of the typical
Korean, who is said to be quick
to heat up and cool down. For
this reason, some observers havelikened the economy to “chige
The rebound of private consumption evidences
pot-dish”, the spicy hot-pot dishthe swift economic recovery; Myongdong, Seoulin traditional Korean cuisine.
However, there is a danger that the job of dissolving the “chaebol” conglomerates
will be left unfinished as capital investment rebounds, mainly in the IT field.
Moreover, the biggest roadblock to genuine recovery, which is the problem of bad
debt at financial institutions, still remains unremoved. As such, the future courseof the Korean economy is clouded by much uncertainty. But in spite of thisuncertainty, the economy is vibrant.
Many Korean observers have stated that the economic crisis was necessary forthe promotion of structural reform by the chaebol and for acquisition ofautonomy by corporate entities. Numerous restraints on the activities of foreign
capital in Korea have been lifted under the policy of active encouragement ofincoming foreign investment instated by the administration of Kim Dae Jung after
the crisis. In relations with Japan in particular, the government has also abolishedthe system for diversification of import sources, which had the effect of regulating
import from Japan. The change of generations is another force for change intoday’s Korea. The country has additional advantages in the form of a populationthat is not as aged as Japan’s, an economy in the growth phase, keen enthusiasm
about new developments, and a wealth of independent spirit.
However, the political picture is especially unclear. President Kim is actively
pursuing rapprochement with North Korea under his “Sunshine Policy,” and the— 34 —

historic North-South summit conference of June 2000 culminated in the signatureof a joint communique. Relations between the two countries are anticipated to
improve gradually through economic cooperation. Nevertheless, the future
prospects are highly unsure; the South does not have the strength to support theNorth, whose economy is in serious trouble, and the ties are bound to be
influenced by larger players such as the United States, Russia, China, and Japan.
If it is to acquire a developed-country status and discharge the corresponding
responsibilities, Korea must promote not only economic advancement but also
further socio-political liberalization with a view to establishing a more solid
national identity and powers of independent action.

(5) Indonesia
Ever since the inauguration of the Abdurrahman Wahid administration in
October 1999, Indonesia has been making the transition to a more democraticsystem. Inside Indonesia, at least, there are no worries about a political and social“melt-down” of the kind often voiced in news reports in Japan and other countries.
With its abundance of buried resources and population of over 200 million,
Indonesia has a tremendous future potential that is universally recognized.
Indonesia was hit hardest by the currency crisis, and some estimate that a
return to conditions before the crisis will take three or four years if all goes rightand seven or eight if it does not. By the same token, the labor environment still
has margin for future development, and wages are on lower levels than in even
Vietnam. Additional benefits are the ease of recruiting employees and the virtually
non-existence of strikes.

(6) Singapore
Singapore has been likened
to a joint-stock “company”
whose chief shareholder is thegovernment. Decisions foradvantage in the “soft” aspects
are also made at the top; forexample, the government has
taken measures to see that thetrip from Changi International

After going through airport immigration,
the journey to a downtown hotel takes
only an hour at most; Singapore— 35 —

Airport to the hotel district takes less than an hour. In order to continue concentrating its resources in high-VA fields, the government is spearheading thedevelopment of such business through government-linked companies (GLCs).
Although some skeptics have pointed out the limits of economic advancement
based on government’s initiative, the government is exercising firm control overthe situation. While finding positions for retiring bureaucrats on corporateboards, it is forging ahead with a relentless program of deregulation, dismemberment, and privatization with a view to strengthening the country’s international
competitiveness, which it has posted as an objective of the highest priority.
Singapore has been described as a small island-country that is constantly
asking itself what it must do for its continued survival. Its situation gives thecountry a somewhat charged atmosphere and enables resolute operation of theeconomy with government leadership. In its dealings with neighboring countries,
it is ever mindful of the need to maintain a certain balance in the region, and takes
great care not to stand out too much even against the ASEAN background.
Singapore is also characterized by good skills of communication in English(which is the official language) and a well-developed infrastructure. Moreover, it
has a high number of graduates of U.S. universities and good familiarity with
U.S.-style management. Aiming to make IT the foundation of its economy, it
consequently appears, when viewed from the standpoint of venture capital, to be
in a completely different world from other ASEAN countries.
In respect of IT, there is a strong possibility that Asian economies (excluding
Japan) will be segmented into three major groups, as follows: 1) the leading groupconsisting of Hong Kong (B2C level), Singapore (B2B level) and Taiwan(hardwares), 2) the intermediate group consisting of Malaysia (depending on the
results of the MSC project) and the Philippines (which is striving to grow into a
center of labor-intensive IT activities); and 3) the last group consisting of the othereconomies (which have low rates of computer diffusion and do not have goodprospects for rapid diffusion of IT). There are apprehensions that this “digital
divide” will widen economic disparities in the region.

(7) Thailand
In the field of textiles, Thailand is regarded as content with a position in the“better zone” of production. And in the field of automobiles, there is a consensus— 36 —

that the country is the hub of ASEAN
production.
Thailand is often said to progress at
its own gradual pace. Economically,
opinions are divided on the question ofwhether it will strive to emulate theWestern model or adhere to the Asianone. At any rate, there are some signs of
the waning of the distinctively Asian
brand of “crony capitalism” in Thailand,
as in other countries in the region.

(8) Malaysia

Sky Train is expected to do muchto ease traffic jams; Bangkok

As is well known, Malaysia took adifferent approach of its own in responding to the economic crisis: it put restrictions on foreign capital by controlling foreign exchange.
Malaysia attaches importance to manufacturing activities that could
contribute to export; it has a relatively low opinion of the capabilities of trading
firms, which it views as members of the service industry. For this reason, problems
related to issuance of visas for trading firm employees are still a major issue at The
Japanese Chamber of Trade & Industry, Malaysia (JACTIM).
In general, however, the Japanese business community in Malaysia gives highmarks to Prime Minister Mahathir Mohamad. Japanese executives typicallyremark that he is the “only one who understands,” and that, although he is open to
the charge of one-man decisions
and inconstant policy, he has
the flexibility to “listen to us
and change the rules in
response.” Certainly one of the
focuses of interest is thegrooming of his successor overthe five years he has left in
office.
Under the Multimedia
The magnificent view from the world's tallest
Super Corridor (MSC) project,twin-tower skyscrapers; Kuala Lumpur— 37 —

many IT firms of international standing are being drawn to the Cyberjaya district,which is to become a “cybercity” and offers incentives to siting tenants. However,even if they breed landmark technology, the results of the research and development being conducted in the MSC project may very well be transferred overseas
without having any influence on industry or everyday life in Malaysia. Thissuggests that the government has positioned the project as no more than a meansof attracting foreign investment. This notwithstanding, the MSC definitely holds
the key to attainment of the national goal, set forth in the Vision 2020 policy
announced in 1991, of achieving a developed-country status by 2020.

(9) Vietnam
Although the economy inVietnam boomed over the years
1991–1996, the peak has
passed, and many are now
somewhat pessimistic about the
future trend of the economy.
Nevertheless, there has been nochange in the temperament of
Employees are hard at work in
the typical Vietnamese worker,
a well-lit textile factory; Vietnam
who is given high marks;
foreign executives are virtually unanimous in their praise for the performance of
their Vietnamese employees, and particularly for their efficiency once they masterthe job.
In Vietnam, about 380,000 motorcycles and motorscooters are sold each year.
The massive tide of two-wheeled vehicles moving down the road during themorning and evening rush hour is an impressive sight. In contrast, sales ofautomobiles nationwide numbered only about 6,000 in 1998 and 7,000 in 1999.
As this indicates, the country is almost completely undeveloped as an automobile
market.

(10) Philippines
Amid the worldwide spread of the IT revolution, the competitive strength of
the Philippines is being boosted by factors such as the English-language
capabilities of its populous, high levels of education, and low wage costs. In fact,— 38 —

siting by some of the world’s leading IT firms, including America Online, IBM,and Citicorp, is gathering momentum, and there is a growing view that thePhilippines is a promising site for IT industry in the Asian region.
For the time being, one of the major tasks is an improvement in transparency
on the governmental level. Similarly, one of the key agenda items for advancement
over the medium and long terms is an upgrading of the industrial structure. In
addition, the country must make the conversion to market-oriented laws andregulations in legislation governing economic activity and labor.

Section 3
Issues to be resolved(1) Foodstuff
Even at present, East Asia is a net importer of grains. As of 2010, its rate ofself-sufficiency in grain supply is projected to stay at 96.7 %, or about the same asat present. However, there is not expected to be a serious shortage of food in Asia
in the early 21st century.

(2) Energy
For the first part of the 21st century, Asia will have to depend on supply fromother regions to meet more than 65 percent of its demand for oil. Most of this
supply will be occupied by import from the Mideast. It will therefore be
increasingly important for the region to maintain friendly relations with the
Mideast oil producers.
Forecast of oil supply and demand(million barrels)
demandChina
Other Asia
Mideastsupplynet imports

1996

2010

2020

1996

2010

2020

1996

2010

2020

3.6
8.5
4.1

7.1
14.2
4.9

10.1
19.5
6.3

3.1
3.7
20.4

3.2
2.9
44.7

2.0
0.5
3.9
8.1
2.4
4.8 11.3 17.2
49.2 -16.3 -39.7 -42.9

Source: OECD/IEA, World Energy Outlook in 2020

The breakdown of power generation capacity in Asia by fuel (or source) is led
by coal, which accounts for the majority at some 60 percent, followed by— 39 —

hydropower at about 13 percent, oil and natural gas at just under 10 percent each,and nuclear power at about 6 percent. Given the status of coal as by far the chief
fuel, there is a crucial need for the implementation of measures to counter
emissions of sulfur oxides; it is estimated that roughly 90 percent of China’s
nationwide atmospheric emissions of SO2 come from combustion of coal.
Development of natural gas resources is lagging due to technical and costproblems. Natural gas consumption is scant in countries other than Japan, but is
expected to expand, beginning with Taiwan, Korea, and other NIEs. Nuclear
power ranks ahead of all other available energy resources in point of cleanlinessand does not evoke much psychological resistance in Asia outside Japan. It is
likely to find expanded application, especially in China and NIEs.

(3) The environment
According to a 1999 white paper on the environment, the developing
countries in the Asia-Pacific region are faced with some of the most criticalenvironmental problems in the world owing to fast-paced population growth andindustrialization. The problems in question include soil deterioration, contraction
and deterioration of forestland, reduction of biodiversity, ecological division,shortage and pollution of freshwater, pollution of the sea and air, and pollution
and increased waste caused by urbanization and industrialization. Forestland isdecreasing at an especially rapid rate in the ASEAN countries. Since they arebehind it, only human beings can put an end to the reckless depletion of Asian
forests in the 21st century.
Problems of air pollution due to SOx and NOx emissions are worsening
because of the widespread use of coal as a fuel in power plants and other facilities,
and the increasing ownership of automobiles. Because countermeasures carry aconsiderable cost, the environment is apt to be sacrificed in favor of economic
growth. Even if appropriate environmental action is not being taken in other
Asian economies, Japan should be ready to offer advice and funding.

(4) Political risks
The economic advancement enjoyed by Asia toward the close of the 20th
century was supported by political stability. The major remaining political risks
are in Northeast Asia, in the form of the direction taken by North Korea and thedelicate status of relations between China and Taiwan. Overall, the situation is— 40 —

expected to become even more stable in the early 21st century. The real key topeace in Asia in the broad sense, inclusive of its relations with India, is probably in
China.
Japan is unfortunately not going to play the leading role in the politicalstabilization of Asia. Collective security involving the United States and goodpolitical relations between the United States and Asian economies areindispensable for stability.
Unlike Europe, Asia presents certain diversity in respect of the politicalorientation of each country. Even among democratic countries, the shape of thesystem varies from country to country. As such, Asia is not amenable totransformation into a homogeneous community like the European Union. If it
could be said that politics leads and economies follow in the EU, the reverse is true
in Asia. This is why, in Asia, economic growth is the wellspring of politicalstability.

(5) Logistics and arrangements in other areas
The main issues in logistics in Asia at present are the plethora of official
regulations and the underdeveloped state of infrastructures. Asia has two distinct
aspects; it is both a site of supply of products, components, and materials to therest of the world, and the world’s biggest latent market. Hopes are pinned on an
ongoing expansion of physical distribution through trade (import and export) andtransactions (both with other countries in the region and purely domestic) over the
next 10 or 20 years. The construction of logistic networks to support such
expansion is essential for other Asia’s advancement.
As exemplified most importantly by Manila and Jakarta, Asia’s major cities are
becoming increasingly congested, and there is concern about a drain of populationfrom rural communities. One of the key issues for future advancement is how to
support the sound development of rural areas. The major requirements to this end
are assurance of a sufficient standard of living, provision of cultural stimulation,and creation of jobs for youth. In this connection, there are great expectations forthe results of the plans for the growth of small cities in rural parts of China as well
as for the development of its central and western regions.
The currency crisis exposed the vulnerability, albeit to varying degrees, of thefinancial systems in all of the affected countries. One approach to mitigation ofthis vulnerability is to throw the door open wider to foreign financial institutions.
— 41 —

In Asia, government has an integral role to play for economic advancement.
Official advice and intervention of the kind associated with developing economies
are still required in the areas of urban planning, human resource development, andimprovement of the public welfare. An arrangement resembling that in Japan,
which has been called “a socialistic market economy,” may be the suitable one forother Asian economies.

Section 4
Involvement with other Asia on the partof Japan and Japanese trading firms
1. Japan’s role
Relations between Japan and the rest of Asia may be coming to a turning
point. Thus far, Japan’s contribution to other Asian economies has undeniably
supported the region’s economic advancement. However, Asia has grown up, andchanged in the process. In the 21st century, the relationship between Japan andthe rest of Asia cannot remain the same as it was in the 20th century.
If it continues in the same line, Japan will probably see its presence fadefurther. For the future, Japan must rethink its role in the 21st century toward thegoal of building relations of truly mutual interdependence with other Asian
economies.
From late August to early September 1999, a mission headed by Hiroshi
Okuda, Chairman of the Japan Federation of Employers’ Association (better
known as “Nikkeiren”), visited various Asian economies to probe approaches tothe region’s economic revival. Upon its return, this “Okuda Mission” prepared a
final report and submitted it to ex-Prime Minister Keizo Obuchi. In this report, itsuggested that Japan must move beyond cooperation mainly in the aspects ofmoney and “hard” elements, and promote assistance in those of human resourcesand “soft” elements. Similarly, in March 2000, a Keidanren Mission led by
Chairman Takashi Imai (and including four Vice Chairmen, one of whom was
Naohiko Kumagai, Chairman of Mitsui & Co., Ltd.) visited the four countries ofThailand, Indonesia, Singapore, and Malaysia, partly for discussion of cooperation
with human resource development and technology transfer as was proposed by— 42 —

Prime Minister Obuchi. This mission reaffirmed the importance of aid in the“soft” aspects alongside that in the funding aspect.
While recognizing the worth of conventional assistance in the “hard” aspects,
the JFTC Taskforce, too, is keenly aware of the need for Japan to provide other
Asian economies with support in the “soft” aspects as well in the 21st century.
Japan will remain very important both as a supplier of funds, capital, andtechnology and as a market for products from other Asian economies. It isparticularly vital for Japan to retain its posture of developing, and fostering the
growth of, leading industry in Asia for the 21st century. A primary issue in thisarea is how to go about bringing the e-ASIA concept to fruition. For this purpose,
Japan must endeavor to deepen ties of mutual understanding with other Asian
economies on all fronts, including cultural exchange.

2. Asia and trading firms(1) Traditional fields of trade and investment
As long as there exists unsatisfied demand, the procurement of goods fromsupply sources and their provision to consumers around the world will be thefundamental activity of Japan’s integrated trading firms. One of their major
prospective fields of activity is supply of energy to other Asian economies. Afterthe war, they worked to assure Japan of a sufficient supply of resources and energy.
In the future, however, the circle of customers will not be confined to Japan;
trading firms will have to supply demand throughout Asia.
Another notable field is supply of food to Japan. In many cases, integrated
trading firms have developed export of food items to Japan; examples include
shipments of frozen shrimp and air transport of chilled vegetables. In the 21st
century as well, there should be many openings for trading firm participation in all
links of the supply chain, from production in other Asian economies to shipment
and sales in Japan. Conversely, products developed for Japan largely by integrated
trading firms should gradually make their way into the markets of other countries
in the region.

(2) Organizing capabilities
At the base of the fund-raising activities of integrated trading firms are their— 43 —

capabilities for organizing various principals. Unlike banks and investment firms,
they take actual part in the projects (with a role that is, moreover, close to the mainone), and assume all associated risks. The 21st century will probably see increasing
adoption of private finance initiative (PFI) schemes for large-scale projects. In
such schemes, integrated trading firms act as project owners responsible for all
work from operation to planning and management, and must demonstrate theircapabilities as all-around players.
Integrated trading firms are not mere brokers; they are perfectly suited to becoordinators for projects spanning different regions. In this sense, they resemble
orchestra leaders, and will undoubtedly have many opportunities to conduct on
the world stage in the new century as well.

(3) Logistics and commercial distribution
To a great extent, the further economic advancement of Asia could depend on
modern logistic systems harnessing IT for physical distribution. Integrated trading
firms are already pioneering this field. In the 21st century, many logistic centers
now in Japan could be moved to China or Korea, and integrated trading firms willprobably play a leading role in this connection. Their wholesaling capabilities will
be particularly valuable for distribution and retailing throughout Asia. In the 21st
century, application of IT should enable the operation of more sophisticatedwholesaling functions in Asia.

(4) The environment
Many integrated trading firms are actively participating in reforestation
projects. While they take a long time, such projects are solidly linked to regional
growth more at harmony with the environment in the region.
Although recycling may be performed at a single plant, there can be no
solution without a total system. Indeed, recycling may be impossible without aconsiderable stock of industry. The industrial parks in which trading firms areextensively involved are nothing less than concentrated industrial sites, and so are
conducive to the erection of systems for recycling and waste treatment applying
the experience accumulated in Japan. Integrated trading firms should be able toexercise initiative in this field.
It might be added that it was a trading firm which developed food trays madefrom wild grass grown in China instead of styrofoam. Under conditions of high— 44 —

humidity and temperature, this type of grass comes up in a single day. It may not
be long before supermarkets around the world are selling food in trays that are
products of the lush natural climate of Southeast Asia.

(5) All-around pioneers① “E-shosha”
All integrated trading firms are currently putting resources into electroniccommerce (EC), which is at the core of their strategy for the 21st century. They
are in the best position to take up the challenge of emerging fields, and willprobably be at the vanguard of operations in many areas of e-business. However
highly developed EC becomes, there will always be problems of physicaldistribution. The chief prerequisite for skillful on-line business is seamless fusion
with off-line business, and this is precisely where integrated trading firms come in.
Prospective approaches on this front may be exemplified by the establishment ofcyber markets for international commodities, construction of on-line settlement
systems linking car dealers and their buyers, joint development of “smart card”
systems, and management of logistics using networks.
② “Bio-shosha”
Integrated trading firms are also collaborating with world-class think tanks
that have special competence in the field of biotechnology. They should use theseties to promote bio-projects that draw on their in-depth knowledge of problems inother Asia. Some possible subjects are the establishment of methods of preventing
soil deterioration, improvement of water quality, and the development of
bioproducts alternative to agricultural chemicals and fertilizer.
③ “Aerospace-shosha”
Integrated trading firms are deeply involved in the development of businessapplying communications satellites. In other Asia, where the terrestrial
communications infrastructure is generally underdeveloped, communications andbroadcasting satellites have a big role to play. Satellites could also be used forphotography to determine changes in soil condition, the trend of sea-current
temperature, and insect-induced blight, and so help to prevent damage anddisasters. In such ways, integrated trading firms could begin providing services
that would enhance the quality of life in Asian communities.

— 45 —

(6) Shift in emphasis from financial and “hard” aspects to humanand “soft” aspects① Intelligent multiapproaches
An assertion to the effect that the parties with the best knowledge of the Asian
region are integrated trading firms would presumably evoke some dissent but notwidespread opposition. Integrated trading firms meet customer needs and furnish
solutions in the actual conduct of their business. They are especially adept at
anticipating the needs and requirements of other Asian economies and turningthem into business. They must further refine this talent in order to make a bigger
contribution to Asia’s economic advancement in the 21st century. The Taskforce
is convinced that reconstruction of setups for knowledge management, i.e., theamassing and editing of a wealth of knowledge, will pave the way to new
approaches for other Asia by integrated trading firms.
② Grassroots activities
Through their work, many “shosha-men”, or trading firm personnels, havetaken a close look at the situation in other Asian economies from various angles,
and are fervently hoping for progress in them and closer ties with Japan. These
employees are also involved in various activities of contribution to the local
community in the host country. In Vietnam, for example, they are taking part in
the movement to preserve historical documents and volunteering to teach classeson the trading practices and procedures.
Japan’s integrated trading firms wield great power in other Asia, and desires
among them to make a collective contribution as well as individual ones motivated
the founding of the Action for a Better International Community (ABIC) Centerin Japan Foreign Trade Council, Inc. in April 2000 (the scope of activities is notconfined to other Asia). The Center is registering retired trading firm employees
in possession of all kinds of special skills, and intends to promote cooperation
mainly in the area of human resources. The Center is scheduled to acquire an
NPO status in 2001 and then to embark on a wide range of activities forcontribution. Besides the dispatch of experts, these will include the acceptance of
trainees from other Asian economies for programs in Japan, improvement of living
conditions in Japan for students from other Asian economies, and translation andinterpretation services for Chinese and other languages. Such grassroots activities
are indispensable for the growth of mutual understanding between Japan and— 46 —

other Asian economies.
Japan and the rest of Asia are in the same boat and must be equal partners
that deal with each other as friends and neighbors. Integrated trading firms (“sogoshosha”) have to be opinion leaders to this end.

(7) As principals of private-sector diplomacy
toward other Asian economies
Integrated trading firms ought to develop multifaceted approaches for other
Asian economies with an awareness that they are the main principals in privatesector dealings with them. Japanese support for the rest of Asia will emphasize
three major fields: 1) IT, 2) the environment, and 3) human resources. Integrated
trading firms must determine what they can do in these fields and set about
devising, proposing, and executing all kinds of ideas formulated from theperspective of other Asian economies.
Integrated trading firms are actively engaged in resident Japanese societies orchambers of commerce and industry in other Asian economies. Through suchforums, they make proposals to the government of Japan and the host-country
governments on commercial problems of concern to both, and also endeavor to
improve the business and residential infrastructure in host countries. They also
lend a hand to programs for exchange with local communities and presentations ofJapanese culture in the host countries as well as presentations of host-country
culture in Japan. The aforementioned NPO activities of the Council will be
another arm of this quasi-diplomacy in other Asia conducted by integrated trading
firms. With a determination to lead the formation of a deeper and wider
relationship between Japan and other Asian economies in the 21st century throughthis multifaceted approach and engagement, integrated trading firms must
continue to promote mutually beneficial dealings with them as partners on equal
footing.

— 47 —

there will always be problems of physicaldistribution. The chief prerequisite forskillful on-line business is seamless fusion
with off-line business, and this is precisely
where integrated trading firms come in.
Prospective approaches on this front may be
exemplified by the establishment of cybermarkets for international commodities,
construction of on-line settlement systems
linking car dealers and their buyers, joint
development of “smart card” systems, andmanagement of logistics using networks.

The 21st Century as an Age of Advancement with the Rest of Asia – New Roles for Japanese Trading Firms –However highly developed EC becomes,

Japan Foreign Trade Council, Inc.
C0033 ¥800E

JFTC

ISBN4-931574-02-5

The 21st Century
as an Age of Advancementwith the Rest of Asia
– New Roles for Japanese Trading Firms –— Summary of the final reportfrom Japan Foreign Trade Council, Inc. (JFTC) Taskforce
on the activities of “shosha” in Asian economies– their past, present, and future