Who's afraid of the new Japan? By Malcolm Cook and Huw McKay
Mar 16, 2006
For decades the question was, why wouldn't Japan grasp the empty mantle of Asian leadership? Today the question should be, how will Asia cope with Japan and China simultaneously competing for regional leadership and global influence?
The entrenched view of Japan is of a fragile economy held down by a moribund financial sector, a weak political system run by unaccountable shadow shoguns, and a meek international policy characterized by ineffectual checkbook diplomacy and pacifist isolation. Japan clearly has heft, but it lacks the will to use it.
However, the Japan of today is significantly different from the Japan of only a decade ago. Things are occurring now that even five years ago would have seemed impossible.
Last year the Japanese stock market topped its G7 peers, delivering a 41% return. Japan has signed a free-trade agreement with Mexico, a significant agricultural exporter, and is negotiating a slew of others. Undiplomatically, Japan is threatening to cut its funding to the United Nations, labeling China a "considerable threat", and issuing visitor visas to Taiwanese independence firebrands. Japanese Self-Defense Forces are in the midst of an extended mission in Iraq with no UN sanction. Fifteen years ago, Japan refused to contribute troops to the first Gulf War despite UN sanction and extreme US pressure.
Transformative changes sweeping across Japan's economy, political system and international policy explain the previously unexplainable. These transformations are making Japan more confident, assertive, self-interested and controversial. At the same time, Japan's strategic environment is becoming more uncertain with the rise of China and continued North Korean belligerence. Japan's internal transformations are building up the will to use its undoubted economic and military power, and changing strategic environments in Northeast Asia and globally are increasing the potential reasons to use it.
Political renewal Japanese political transformation is truly eye-opening. Today, there is no institutional voice for pacifist isolation as the Social Democratic Party is now an empty shell. The Liberal Democratic Party won its second-largest share of seats ever in last year's election despite extending Japan's commitment to Iraq. Both Prime Minister Junichiro Koizumi and the leader of the opposition, Seiji Maehara, publicly contemplate revising the war-renouncing Article 9 of the constitution.
The deflated Democratic Party of Japan's choice of Maehara, a young, telegenic, right-leaning politician, as leader after its election debacle shows that it learned from the charismatic Koizumi, Japan's most powerful and colorful politician in decades. Today, Japan has two youngish, confident, hawkish political leaders willing to challenge party traditions and speak their minds. Each came to power by challenging his respective party's traditions. How the world of Japanese politics has changed since the days of prime ministers Tomiichi Murayama and Kiichi Miyazawa.
Japanese political leaders represent a new generation less burdened by memories of World War II and the US occupation, less sensitive to regional criticisms of Japanese assertiveness and more in tune with Japan's decisive and autonomous urban electorate. This new generation of leaders is also grasping the reins of state power away from the long-dominant but conservative bureaucracy. Japanese politics today is younger, edgier, more right-leaning and more executive-driven.
Foreign policy International policy is where Japan's more assertive tone is clearest and most controversial. The four pillars of Japan's traditional power-shy international policy - no involvement in foreign military operations and collective security, strong support for the United Nations, heavy use of development aid, and a conciliatory approach to China - are all under serious review.
From the end of the postwar occupation Japan had a defensive international outlook primarily concerned with improving its image in East Asia. Today, Japan is more willing to use its power and to offend others, even its closest neighbors, and less willing to spend money to buy favor. Alliance relations with the US are tightening, while Japan's interests in Asia are becoming more competitive and increasingly driven by domestic political considerations.
Japan's checkbook is closing, while the government is keeping closer tabs on what it gets for its money. Japan's aid budget has been more than halved in the past seven years, falling from US$15.5 billion in 1999 to $6.8 billion in 2005. Aid to India, though, is rising. Japan is still the world's largest creditor, but it is no longer the largest source of country-to-country development aid.
At the same time that Japan has been cutting back on aid, it has been flexing its muscles. Defense Agency director Fukushiro Nukaga recently called for international peacekeeping to be one of the main duties of the Self-Defense Forces. Japan has committed to support the US ballistic-missile defense system, acquired in-air refueling capability, and launched its own state-of-the-art spy satellites, and it is considering lifting its ban on arms exports. Japan is increasingly a willing actor in regional and global security rather than simply a subject of it.
Economy transformed Japan's economy is in the midst of its longest uninterrupted expansion in four decades, and all the trend lines are pointing in the right direction.
Business confidence has shown a marked improvement over the past seven years, with the respected Tankan survey reporting highs not seen since the 1980s bubble economy. Unemployment rates are falling, while Tokyo's residential and commercial land prices are rising. Construction cranes once again grace the central Tokyo skyline after years in enforced hibernation. Last year, Japan's gross domestic product growth roughly doubled that of the European Union.
Beneath this flood of revitalized economic indicators are three important transformations that mean this is not another false dawn but the sign of things to come. First, unlike in the stillborn expansions of 1993 and 1998, private demand, in the form of consumption and capital expenditure, is fueling growth. This time, fiscal consolidation is acting as a slight overall drag on the Japanese economy, as is the net export position.
Second, the ice age in bank lending is thawing. Last month, systemwide bank lending was in positive territory for the first time in more than five years. The major banks have cut their deadweight non-performing loans by two-thirds, freeing them up to lend again. Third, and most important, corporate balance sheets have finally recovered from the excesses of the bubble economy, whose collapse triggered a decade or more of debt retirement and corporate retraction.
Today, corporate debt is below pre-bubble levels and firms are borrowing to expand.
Deflation, the bugbear of Japan's long stagnation, appears to have been banished. Last week, the ultra-cautious Bank of Japan agreed to roll back its heterodox quantitative easing policy that has regularly pumped trillions of yen into the Japanese money supply. Officials are now contemplating the end of Japan's zero-interest-rate policy.
The end of quantitative easing and a return to positive nominal interest rates will put upward pressure on the yen. The currency may again challenge the 100-yen-to-$1 barrier that was last seriously tested more than a decade ago. A higher-interest, confident domestic economy will likely reduce the outflow of Japanese savings as returns at home improve. The economic recovery is boosting imports and encouraging Japanese firms to ramp up investment.
However, the recovery may reduce Japan's willingness to fund the indulgences of others, leading to downward pressure on Anglo-Saxon exchange rates and upward pressure on global interest rates. Japanese savers may no longer subsidize US profligacy.
These internal transformations and the changes to Japan's security environment are more structural than cyclical, meaning that Japan is likely to continue to grow more comfortable using its heft and acquiring more. In the next decade it is quite conceivable that a Japanese defense minister with leadership pretensions back home will be a regular visitor to Washington, Canberra, Singapore and beyond, promoting the newest Japanese military export and presenting the hardest line on China and North Korea. The US-Japan alliance would be stronger, more externally focussed, with Japan voicing its own national interest concerns more clearly. The United Nations may be poorer and China more fearful of containment.
Northeast Asia, the region with the largest number of powerful neighbors, is about to witness the greatest power game in the world, and Japan will not be watching from the sidelines.
Dr Malcolm Cook is the Asia-Pacific program director at the Lowy Institute for International Policy. Huw McKay is the senior international economist at Westpac Banking Corp.
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