Japan and Britain view their own backyards with new interest

There were once two proud island nations - great powers with trade routes that stretched around the globe. But the two, Japan and Britain, are now finding their own backyards more and more attractive. A ``yen zone'' is emerging from the dynamic labor, capital, and consumer market of East Asia. A ``mark zone'' is forming in the gradually coalescing European Community. These parallel the ``dollar zone'' of the Western Hemisphere. As a result, thinking regionally, rather than globally, is becoming very important for Britain and Japan.

Britain and Europe

Like other Europeans, the British are eagerly anticipating 1992, when sweeping new free-trade rules will make Europe into one market from the North Sea to the Aegean. But Britain is wondering how far to go in becoming part of an economically integrated Europe.

Prime Minister Margaret Thatcher is reluctant to take what many European leaders consider the next step to a united Europe - joining the ``exchange-rate mechanism'' that is part of the European Monetary System.

The 10-year-old EMS may be a predecessor to a central bank for the 12-nation European Community. It aligns European economies through the European Currency Unit (ECU, pronounced ``ek-ew''), a formula to which eight European currencies are now pegged.

The fathers of the EMS, former West German Chancellor Helmut Schmidt and former French President Val'ery Giscard d'Estaing, recently advocated creation of a European Central Bank. Following that could be the metamorphosis of the ECU into a true pan-European currency.

Among many other Europeans who are now actively urging Britain to join this process are Karl Otto P"ohl, president of the West German central bank, the Bundesbank, as well as British government officials, including Robin Leigh-Pemberton, governor of the Bank of England, and Nigel Lawson, chancellor of the Exchequer. Mrs. Thatcher, however, is adamant in her opposition.

``We're really talking about politics,'' says a Washington-based observer of European monetary union.

Thatcher's big concern is that Britain would have to give up some control over the domestic economy. Sterling, once the premier international currency and a symbol of imperial Britain, would be in the gravitational field of the West German mark, Europe's strongest currency. Although this might be good discipline, given the anti-inflationary resolve of West Germany's central bank, it could force the British government to make painful decisions to support the pound at politically disadvantageous times.

Locking into the EMS could also create new torques in Britain's trade relations with the 49-nation British Commonwealth, with North America, and with the European Community itself. European currencies are already bound together to some extent in international finance. In the past week, the pound's rapid rise put pressure on other EMS currencies.

Thus far, Thatcher has not been interested in changing Britain's relations with the EMS. As with its late entry into the European Community, Britain prefers to wait and see.

At a Harvard University speech last week, former Federal Reserve chief Paul Volcker said he did not think a European central bank would be born before the end of the century. Europe, he added wryly, has already ``gone a long way toward a common central bank - it's called the Bundesbank.''

Japan and Asia

Japan's problem is different. Tokyo wouldn't mind seeing more regional economic unity in the Asian Pacific, but memories of World War II get in the way. The Philippines, Malaysia, Indonesia, and other nations in the region remain anxious about Japanese power. Still, the tug of regionalization is great, and Japan is under pressure from around the world to restrain its exports and stimulate its imports. This will make Japan pay much more attention to its Asian backyard.

A recent report prepared by leading Japanese economists and industrialists for the Japan Economic Research Institute notes that as the Asia-Pacific region becomes more economically important, Japan will have to be both ``Japan of the World'' and ``Japan of Asia.''

The yen is rapidly becoming the regional trading currency. There is talk, too, of a ``Pacific Economic Community.'' For instance, Thomas Arai, president of Tokyu Hotels International in Tokyo, says a Pacific Economic Community would ``promote freer movement of goods, capital, technology, and people.''

Masahiro Kawai, an international monetary economist at Tokyo University, says the current restructuring of Japan away from exports and toward domestic demand cause Japan to buy more goods and services from the Asian Pacific region.

Mr. Kawai, Mr. Arai, and other Pacific Basin specialists were in Boston recently for a Japan Society forum.

Kawai says the Bank of Japan's Institute of Monetary and Economic Studies has been studying what might happen if a ``Pacific Currency Unit'' (which he calls a ``Pac-ew'') were created with the yen as the central currency. But many Japanese are apprehensive about where this might lead, remembering imperial Japan's attempt to create an ``East Asia Co-Prosperity Sphere.''

``We know from history that a great [economic] hegemony is accompanied by great military power,'' Kawai says. ``If Japan's big external assets perhaps become the core of a Pacific Economic Community, there may be pressure on Japan to establish itself as a military power. We don't want to think about that question very much.''

Like Britain, Japanese economic ties with neighbors will keep evolving bit by bit. Anything more could be counterproductive.