Increased exports to the United States played an important role in Asia's relatively swift recovery from the Asian financial crisis 12 years ago, and helped China along with India become an economic giant. Advanced Asia, which relies heavily on technologically sophisticated manufacturing exports, has been hit hard by the collapse in trade as well as rising domestic financial problems.

Since last fall, the International Monetary Fund (IMF) has sharply slashed its growth outlook for Asia due to large inventory buildup and the crunch in trade finance, predicting a "long and severe recession" for the region's wealthier but export-reliant economies. In its Regional Economic Outlook: Asia and Pacific this month, the IMF projects growth for Asia will decelerate to 1.3 percent in 2009 from 5.1 percent in 2008, returning to 4.3 percent in 2010.

"Asia's tiger economies have suffered some of the sharpest declines in output during the global recession, and some fear that, because of their dependence on exports, they will not see a sustained recovery until demand rebounds in America and Europe," a report from The Economist says.

"However, their doughty resilience should not be underestimated," The Economist continues. "They came roaring back unexpectedly fast after the Asian crisis of the late-1990s. They could surprise again."

Japan
The sharpest export decline in the Japanese economy's post-war history is resulting in a steep contraction of production and business investment, two main engines of the country's growth in recent years. After seven years of modest expansion, Japan's exports and corporate investment have plummeted, while the yen has appreciated substantially and equity prices have fallen by half, according to the March 2009 Interim Economic Outlook of Japan from the Organization for Economic Cooperation and Development (OECD).

An example of demand for advanced manufacturing can be found in Japanese auto exports, which fell by nearly 70 percent between September 2008 and March 2009.

Moving forward, the IMF's Regional Economic Outlook: Asia and Pacific says:

[L]arge excess capacity in key manufacturing and export sectors, such as cars and electronics, means the production adjustment will be particularly difficult, especially since Japan's financial conditions have become tighter by the global crisis, owing to their higher dependence on advanced manufacturing exports and large spillovers from the external sector to domestic demand, affecting consumers and investor confidence.

In industrial Asia, "most analysts agree that economic recovery depends upon the future course of Japan's exports," Forbes says. "That means a recovery will depend heavily on an upturn in overseas economies or a restructuring of Japan's domestic economy."

In March, industrial production rose 1.6 percent month over month — the first gain in six months — while exports were up 2.2 percent. Japan's Economy Watchers Survey has picked up from its record-low in December 2008.

The three successive fiscal packages introduced since August 2008, which together total about 2 percent of gross domestic product (GDP), coupled with the impact of the automatic stabilizers, are expected to mitigate the depth and length of the recession. The government's roughly $150 billion fiscal stimulus package, announced in April, is expected to provide a noticeable jolt to the economy.

Still, worsening unemployment shows that there are still fears that the job market is weak and has not yet bottomed out, according to recent data from the Ministry of Internal Affairs and Communications. The number of unemployed in February was 12.9 percent higher than a year ago, as the unemployment rate increased to 4.4 percent in February from 4.1 percent in January. (Source: Japan Economy News)

In the near-term, Japan is expected to suffer "a severe recession throughout 2009, experiencing its worst annual performance on record," according to the IMF. "The strong fiscal response to the crisis will bring quarterly GDP growth back to positive territory in the second half of this year, but underlying growth will remain weak as the export collapse spills over to private domestic demand. Sustained positive growth will reemerge only in late 2010, after the external environment improves."

Meanwhile, China, the world's third-largest economy after the U.S. and Japan, is one of the only major economies still growing, though its growth slowed sharply in the past year.

China
Although the slump of the region as a whole has been as bad as it was in 1998, China (like India) has continued to grow.

In November 2008, the government announced a major investment plan for 2009-2010, with total expenditure amounting to 4 trillion yuan ($586 billion). The new government budget shows that the increase in central and local government spending amounts to a projected 2.6 percent of GDP in 2009. Additionally, the rate of value-added tax charged on exports and investment is to be cut to zero, which would bring China in line with standard international practice. Part of these tax reductions will be offset by the introduction of a 20 percent tax on petroleum products.

Although exports contracted in late 2008 and real GDP growth decelerated to its slowest pace in years, the Chinese government's investment program and massive credit extension so far are leading to a quarter-over-quarter acceleration of growth from the near stall of Q4 2008 and Q1 2009.

The OECD's composite leading indicators since the beginning of 2009 suggest the slowdown may be bottoming up. In January and February, signs showed that "buoyant private consumption and investment" have led to domestic demand, offsetting the impact of much lower imports.

Now indicators suggest the country's output may have reached a trough in March, rising the most of any of the OECD and non-OECD economy the organization tracks.

For one, China's Purchasing Managers Index (PMI) has risen above the 50 threshold for two consecutive months (March-April), indicating that the manufacturing sector has been expanding. In April, China's industrial production rose 7.3 percent from a year earlier, due to stronger output growth of automobiles, cement, air-conditioners and oil products, the statistics bureau reported this month. April's rise followed March's 8.3 percent gain, "the latest reminder that while the country's economy is on a relatively firm footing, the pace of growth is unlikely to bounce back to the levels seen in the last few years," the New York Times notes.

Meanwhile, job losses seem to have slowed and credit extension may be financing investment rather than merely plugging balance sheets. Also showing signs of improvement is the residential property market, at least in transaction volumes and the erosion of the large inventories, and property investment rose slightly in April. Standard & Poor's expects that China will expand at a 6.5 percent pace in 2009. Though healthy, that rate is well below the 9 percent growth the nation posted in 2008. (Source: BusinessWeek)

Although Asian exports have been contracting at a slower pace in the last few months, and while GDP growth is expected to slow notably from the average pace of the recent past, China's aggressive policy response "is expected to support domestic demand and maintain growth at rates close to the level authorities consider necessary to generate jobs consistent with social stability," the IMF says.

Whereas history shows that Asia has required improved demand from advanced economies to escape the crisis, today it is home to an enormous emerging middle class, which has been estimated to grow by more than 800 million people within the next decade. Yet, in China alone, private consumption accounts for only 35 percent of GDP, compared with more than 70 percent in the U.S. If it does boost demand at home, it can reshape the entire global consumer market.

China and Japan may not be immune to the worldwide recession, but they are more resilient to external shocks and are continuing measures to sustain growth. Their leaders have stated that the best contribution they can make to offset the current crisis is to keep their economy growing.

Resources

World Economic Outlook: Crisis and Recovery
International Monetary Fund, April 2009

Regional Economic Outlook - Asia and Pacific Global Crisis: The Asian Context
International Monetary Fund, May 2009

IMF Sees Long Path to Asian Recovery
International Monetary Fund, May 6, 2009

Crouching Tigers
The Economist, May 13, 2009

Interim Economic Outlook, Mars 2009: Country Note - Japan
Organization for Economic Cooperation and Development, March 31, 2009

Green Shoots Or Yellow Weeds?
by Nouriel Roubini
Forbes, May 14, 2009

Japan's Economy Watchers Survey

Japan Household Spending Down 3.5% in February
by Ken Worsley
Japan Economy News & Blog, March 31, 2009

Interim Economic Outlook, Mars 2009: Country Note - China
Organization for Economic Cooperation and Development, March 31, 2009

Industry Survey Shows China Economy Gaining Strength
by Langi Chiang and Alan Wheatley
Reuters, May 1, 2009

Industrial Production Rises Slightly in China
by Bettina Wassener
The New York Times, May 13, 2009

The Global Economy: Strong Headwinds for Europe and Asia
by Beth Ann Bovino
BusinessWeek, March 11, 2009

Asia's Future and the Financial Crisis (registration required)
by Dominic Barton
The McKinsey Quarterly, December 2008

Long-Term Challenges Test China's Growth (registration required)
by Andrew Batson
The Wall Street Journal, May 11, 2009

World Economic Outlook Update
International Monetary Fund, Nov. 6, 2008

The Chance to Make a Difference
by Lee Kuan Yew
Forbes Magazine, Dec. 8, 2008

Global Sourcing Trends in 2009 (Asia)
by Alistair Maughan, Julian S. Millstein and Nigel Stamp
Morrison Foerster, January 2009