The Economist Cites Me on Japan's Anorexic Demand
Part of an essay on Japan, Taiwan, Korea Putting Too Many Eggs in the AI Basket
Ethan Wu cites me in an Economist essay arguing that, despite rosy headlines, these three countries are “suffering from industrial rot.” He makes the following points:
Northeast Asia’s export industries increasingly operate on two tracks. On one track, the boom in artificial intelligence is driving high-tech exports by the all-conquering chipmakers of South Korea and Taiwan, and by Japanese makers of equipment and materials used in chipmaking. On the second track, the rest of industry is clapped out. If you exclude semiconductors and AI servers, Taiwanese exports have actually fallen by 40% since 2022. In South Korea, non-AI exports have stagnated, and Japan’s industry is in decline. In areas such as cars and chemicals, China is lapping the trio.
China once absorbed northeast Asian capital and intermediate goods, which its factories assembled into finished products. It is now a direct rival. South Korea’s exports overlap most with China’s in products in which China’s market share is growing fastest, calculates Adam Wolfe of Absolute Strategy Research, a consultancy. Japan is the third-closest (after Vietnam, which is gaining ground on China in some lower-tech industries).
The result is that northeast Asian manufacturing is getting narrower. Chips and other gear related to AI make up over 40% of South Korean exports, more than double their share just two years ago. In Taiwan, it accounts for 80% of exports, compared with about half before the pandemic. After accounting for firms not neatly captured as AI -linked in official statistics, like Japan’s Advantest (which makes chip-testing gear) and Taiwan’s Foxconn (which produces data-center servers, among other electronics), The Economist finds that all 15% of the region’s rise in industrial output since 2019 is thanks to AI. In Japan, South Korea, and Taiwan, output at factories unrelated to AI has shrunk in recent years. Northeast Asia’s reliance on AI is likely to become more pronounced, both because of intensifying competition from China in lower-tech industries and because of industrial policies at home.
To make matters worse, domestic demand in the region is too weak to offer a buffer against an increasingly hostile outside world. Despite their wealth, northeast Asian households consume far less of what their economies produce than is typical in rich places. In Japan private consumption is 53% of output; in South Korea and Taiwan it is closer to 40% than to the rich-country average of 60%. This is all the more striking given the region’s aging populations, which should push up the ratio of consumption to GDP. After all, pensioners have stopped producing but still consume.
The higher share of consumption in Japan is better explained by protracted weakness in the rest of the economy than by consumer strength. After decades of deflating wages, private consumption accounted for a tiny 3% of Japan’s (sluggish) growth over the past decade, notes Richard Katz of Japan Economy Watch, a newsletter (58% came from ballooning government spending). Wu is referring to this post.
Those with a subscription to The Economist can read the full essay here.
Support the Blog
Paid subscribers will be eligible for my new memos, an addition to these regular posts. Beyond that, if you feel you’ve gained insight from this blog, ever restacked it, if you ever subscribed to my previous publication, The Oriental Economist Report, and certainly, if you or your firm have gained insights that helped guide your investments, please support the blog with a subscription or by “buying me a cup of coffee.” You can buy a cup or two on a one-time basis, or once a year, or once a month.
