Japan at a crossroads?

Article 1: Can Japan forge a tripolar Asia?

Colin James for the New Zealand Herald for 1 October 2003
First of three on Japan, with a fourth for the Business Herald

Down here at the end of the world we know what it is like to be an outlier nation. We see Japan as part of Asia. But Japan acts like an outlier too.

Japan’s genius through history has been to open itself periodically to outside ideas and influences, adapting them to its own uses on its own terms but keeping at bay the foreigners themselves.

This was the secret of its rapid industrialisation and military ascendancy from 1868 to 1941 and of its economic miracle from the 1950s. It was what many Maori mistakenly thought they could pull off through the Treaty of Waitangi in 1840.

But interspersed with Japan’s periods of infusion of outside ideas have been periods of nationalism and/or self-absorption. In the 1930s and 1940s this drove its conquest of east Asia. In recent decades, though economically powerful, its role in international security and trade affairs has been unassertive, even passive.

And it has been choosy about immigrants. Koreans who immigrated, some as forced labour, between 1911 and 1945 when Japan colonised Korea never got citizenship (though children of mixed marriages may claim it). Even descendants of Japanese who emigrated to Brazil and Peru during the depressed 1920s and 1930s are denied citizenship (though are welcome as residents).

And this is despite a looming desperate need for workers as Japan’s already aged society becomes top-heavy with retirees.

There is an advantage, which Winston Peters has understood. Homogeneous Japan can move quickly once action is agreed. Several analysts I spoke to in the past two weeks contrasted Japan’s still peaceable and united society with the disjunctions multicultural immigration is bringing, along with diversity and energy, to nations such as ours.

But the flipside of homogeneity is insulation, which has limited development of the international networks that can enhance a nation’s security. Though geographically Japan is in Asia, it does not seem really to be of Asia. Its 1930s-40s history as an oppressor doesn’t help.

Contrast its wartime ally Germany, which has deeply integrated into the new Europe, socially, culturally, politically and economically.

If Japan has a parallel — and it is distant — it may be with Britain. The British originated in Europe but for centuries stood aloof. Symptomatically, Britain has not adopted the euro as its currency. It sees its relationship with the United States at least as important as its membership of the European Union — more important in security terms, as joining in George Bush’s Iraq adventure demonstrated.

Japan, too, clings tightly to its special relationship with the United States, the alliance forged after 1945 and updated in 1996, which it now promotes as a regional alliance.

Thus, from the vantage point of Tokyo (to summarise and paraphrase several analysts’ assessments), the Asia of the future presents a tripolar region: the Chinese empire resurgent; India emerging as an economic power and centre of gravity in the southwest; and Japan with the United States at its back.

For this to be true, however, Japan needs deeper connections with the other peripheral states in Asia. It is a big aid donor to and investor in south-east Asia, for example, but has been slow to build trade agreements.

Only when China announced its framework agreement with the ASEAN nations did Japan put urgency into developing its own arrangement with that region. To this Japan has at times added the notion of a region that includes Australia and New Zealand, which bulks up the list of countries that have never been in China’s direct sphere of influence.

It hasn’t helped Japan that its nationals have not dispersed through the region as China’s have. Japanese companies send envoys to run branches, including in China; ethnic Chinese are the drivers of economic development in much of south-east Asia. (In a small but growing way, they are here, too.)

Nevertheless, Japan is economically powerful. Linked with the United States, it has the potential to counterbalance China and India on east Asia’s periphery.

Indonesia, for example, has a huge but very poor population that is becoming susceptible to Islamic extremist messages. It desperately needs investment, which Japan could supply in abundance. Singapore worries it may get left behind as China sucks in investment it once cornered. High-tech cooperation is a logical option.

So if Japan is to be one pole of a truly tripolar Asia and not isolated by a massively powerful China, it will need to shed its characteristic passivity.

But that will require an internal political upheaval. In the past such upheavals have been triggered by outside shocks. Recent developments under Prime Minister Junichiro Koizumi suggest Japan may again be becoming receptive to a new shock. China might just be the catalyst.

* Tomorrow: Feeling the weight of China


Article 2: Japan’s military conundrum

Colin James for the New Zealand Herald for 2 October 2003
Second of three on Japan, with a fourth for the Business Herald

If you want to feel the weight of China, go to Japan.

Much of Japan’s traditional culture was imported from China, though it was long ago made distinctly Japanese. It is visible in the script, religion and, deep down, in the arts.

China’s weight is felt, second, in the economy. China’s size and entrepreneurial spirit, coupled with low wages, are hollowing out Japan’s traditional manufacturing industry.

And China’s weight is felt, third, in international relations.

Japan’s immediate preoccupation is Korea, where centuries of conflict and Japan’s none-too-gentle twentieth-century occupation present an obstacle.

South Korea has been warming, though a measure of the residual coolness is that only two weeks ago did it officially allow imports of Japanese movies, pop songs and video games. Relations with impoverished North Korea are very prickly, principally because of its nuclear ambitions. Half a million ethnic Koreans live in Japan.

Japan’s problem is that when the Koreas will unite — maybe in a decade, maybe suddenly — there is no certainty about the terms.

One certainty is that Japan will feel a need to foot much of the massive cost of meshing two hugely different societies and economies. Wealthy Germany got indigestion with a far simpler absorption. South Koreans I have spoken to say medium-rich South Korea can’t afford it on its own.

But aid alone may not ensure a Japan-friendly Korea. China wants a China-friendly Korea. Such a Korea, Japanese analysts worry, might even be nuclear-capable. The best to hope for is a Korea “equidistant” between China and Japan, said Professor Hajime Izumi.

Japan worries, too, about the day Japan-friendly Taiwan is absorbed into China. Analysts also note China’s army modernisation programme.

Japan would be less nervous if it could be confident China would take an internationalist approach, as it notably has in the World Trade Organisation. Some China-watchers I spoke to see the current leadership as of that ilk, eager to court the United States for economic reasons.

But pre-nineteenth-century imperial China treated surrounding states as tributaries and absorbed many of them. Some in Japan worry that mentality may redevelop in a stronger China.

This is not a fear of invasion. A white paper in August rated that prospect low. But Japan nonetheless feels vulnerable.

How can Japan respond?

Economic engagement with China and other Asian countries is an option (see tomorrow’s article). So is a more active diplomacy. “Only when Japan makes a daily effort in establishing peace and stability in international society can it build a solid foundation for its own security,” leading diplomatic journalist Yoichi Funabashi wrote last month.

In fact Japan is doing more peacemaking and peacekeeping, including a lightly armed regiment in East Timor. It is to send unarmed logistic support troops to aid occupation forces in Iraq, partly responding to American pressure and partly because it depends 88 per cent on Middle East oil.

But all this hangs on an increasingly inventive interpretation of Japan’s constitutional constraint on assertive deployment of its military. Moreover, Japan’s blind eye on United States activity at its Japanese bases has tacitly breached its “three principles” rejecting nuclear arms.

Few want nuclear arms — though if things turned ugly, Japan has the technology to go nuclear quickly and some I spoke to think it would. It is on the point of installing sophisticated missile defences and could quickly acquire offensive missiles.

But three generations after the horrors of Hiroshima and Nagasaki, public opinion is shifting, said Ken Jimbo, a 30-year-old who advises corporations and the government on strategic issues. Younger Japanese want a more internationally proactive government, said Izumi. Jimbo said they are also less scarred by the pre-1945 legacy, about which their elders — and politicians in countries Japan occupied — remain highly sensitive.

Those mutual sensitivities prompt most among those I met to doubt Japan will change the constitution.

But the environment is changing: the rise of terrorism; the United States threat to withdraw troops from Korea to send to Iraq if other nations don’t; China’s rise and the potential for a unipolar east Asia unless Japan is more diplomatically assertive.

And Japanese politics might also be changing. The ruling Liberal Democratic party’s (LDP) factions, a force for stasis, are not the arbiters they were. The anti-war parties are mere shadows and the opposition, much of it on the LDP’s right, is hawkish.

Younger MPs are less wedded to the status quo. Newly reappointed Foreign Minister Yoriko Kawaguchi has pledged more peacekeeping contributions and more inventive interpretations. A parliamentary committee is exploring the constitutional issue.

So bit by bit Japan is changing. Whether it junks the constitutional constraint remains to be seen. But its growing wish to prove itself a good and active international citizen might well counterbalance China.

* Tomorrow: The politics of the economy.


Article 3: Can Japan reform its economy?

Colin James for the New Zealand Herald for 3 October 2003
Third of three on Japan, with a fourth for the Business Herald

For 13 years Japan has been economically stagnant, yet for all those 13 years it has resisted reform, its government “at the centre of an iron triangle of vested interests”, to quote Professor Eisuke Sakakibura, director of the Global Security Research Centre.

By western lights, Japan’s lethal cocktail of technically insolvent banks and debt-strapped corporations, coddled agriculture, sclerotic distribution systems and towering public debt should have sunk the economy years ago.

And now Japan also faces intensifying competition from a resurgent China which is hollowing the manufacturing industry which made Japan rich. The digital recorder I used on my visit carries a famous Japanese brand but was made in China.

Yet Japan is still the world’s second biggest national economy, with impressive depth. It is a very wealthy society. So if it chooses, it is well-placed to take on the deep challenges it faces.

One challenge stems from the very success of the post-1945 “economic miracle”. Japan set out to catch up with the west, copying then improving on western products, most spectacularly in automobiles and consumer electronics. It also developed production techniques which Americans in the 1980s judged superior.

But what do you do when you have caught up — especially when other Asian countries, and now notably China, are emulating the catchup trick? To get richer requires a new leap, as rich Singapore has also found.

In a sense, the answer is to emulate the west again — to, Nobuhiko Kawamoto, executive adviser to the Honda Motor Company, said, develop distinct new world-leading industries.

That requires, Kawamoto said, a sort of Japanese “individuality” — not cut-throat American individualism but greater reliance on and reward for individual initiative and less on seniority and group activity: in short, a change of culture. You might read that as a need to shift from superb organisation based on straight-line thinking to inventive lateral thinking.

Apart from a change in the education system, of which some say there is some evidence, this is a challenge for business.

But that is only part of the answer. Japan also needs policy reform, a refrain I have heard now for 15 years from Japanese business leaders and economists. Again last month I was treated to scathing dismissals of politicians subservient to the money of vested interests which feed off state spending, such as construction, or off trade protection, such as agriculture.

But Japan is never wholly predictable. A number of analysts told me reform is now possible, even probable.

The focal point is Prime Minister Junichiro Koizumi, newly reinstalled on 20 September as Liberal Democratic party (LDP) president (and so Prime Minister) and likely to keep the LDP in a majority in an election in November.

Koizumi has been long on reform rhetoric in his two years at the top but short on action. “Privatisation” of postal services, for example, biodegraded into simple corporatisation of the state monopoly. He has not significantly cut into the massive road-building programme by which the government has forlornly attempted to stimulate the economy. He has failed to loosen Japan’s rigid trading stance, even towards China which former Ambassador in Wellington Tetsuya Endo urged in an interview.

“Koizumi talks a lot but doesn’t deliver,” Sakakibura said.

So the safe prediction, which I heard a lot, is that he will fritter away his prime ministership over the next few years. This analysis says the anti-reform LDP factions are just lying doggo until the election to capitalise on Koizumi’s populist attraction and will reassert their traditional control.

But there is another view — that Koizumi has drawn the factions’ teeth, partly helped by changes in the electoral system from multi-member to single-member electorates, supplemented by seats elected by proportional representation.

Koizumi was able to detach the votes of many younger, reform-minded MPs from opposing factional leaders in his presidential re-election and their futures may lie more with the central party — and Koizumi — than with the factions. He has appointed his own man party secretary-general. So he has his opportunity.

Moreover, Koizumi defied all predictions to reappoint his reforming economy minister Heizo Takenaka, a non-politician economist. Takenaka has put pressure on the banks to clean up their balance sheets.

An alternative pro-reform view is that the LDP is actually breaking up and some MPs might defect to the newly merged main opposition grouping which might then form a government. That opposition has pledged reform.

Japan’s history is replete with sudden changes of direction: twice in the past 125 years Japan imbibed massive change from outside. As Sakakibura, a reform advocate, said: “When we start to move it will be very quick.”

Maybe. From outside — even from inside — it is near impossible to tell. But don’t rule it out.

* Tomorrow in the Business Herald: Is the Japanese economy reviving?


Article 4: Is Japan’s economy at last on the mend?

Colin James for the Business Herald for 4 October 2003
Fourth in a series on Japan

It takes nearly an hour to get from Hiroshima to its airport along a sleek, low-traffic motorway that zips through tunnels and across ravines. The airport is a flattened off hilltop, shiny new. It sports five airbridges but, even at 5pm only one plane is parked, a 747 bound for Tokyo. When it takes off the passengers rattle around in a sea of empty seats.

That is one summary of Japan’s economy: stinking rich and heavily over-endowed with infrastructure. Roads to nowhere, airports in the middle of nowhere that even a super-dense population can’t use up. Government debt which paid for all this is 70 per cent of GDP net. We got frightened when ours got over one-half that.

A second summary of Japan is that all this works. Sure, the banks are technically insolvent, public debt is set rise a while yet and farmers are mind-blowingly inefficient. Where we have one person at a desk, Japan has two. Yet it all hangs together.

It is that resilience that gives some credence to those who think Japan is at last on the way back.

The property market is gradually returning to balance. Prices fell in the year to June for the twelfth year in a row: average house prices are at 1987 levels and commercial property prices at 1978 levels.

And, while in the early years of the 1990s deflation real wages rose because prices fell while nominal wages held up, now average nominal wages are falling — at least in part evidence that Japanese industry has begun to restructure, analysts say.

The once unshakeable seniority system is beginning to give way here and there to appointment and payment on merit. An unprecedented number of smaller and medium-sized firms have been going bankrupt. That cuts jobs and wages but frees up resources.

There is also some sign SMEs are thinking more broadly. According to Nobuhiko Kawamoto, executive adviser to the Honda Motor Company, medium-sized companies are now starting to invest in China to stay competitive.

And, while the government of Junichiro Koizumi has not exactly done a Roger Douglas — its “reforms” would not have registered on Douglas’s radar — it has applied some pressure to the banks, which in turn have put pressure on indebted companies.

One of my interviewees calmly explained his father’s fate when he took over the family medium-sized drill-making firm four years ago. He got the firm profitable but the bank called in its debt anyway; it had to. A German company now owns the firm.

Another sign: the stockmarket has been rising. That has been at least partly on the back of the lift in the Dow, which might reverse. But the rise has improved banks’ balance sheets.

Also, company operating profits have risen — by 17 per cent between the March years of 2002 and 2003, according to Noboru Hatakeyama, chairman and chief executive of the Japan Economic Foundation.

That this happened even though sales didn’t rise reflects the restructuring, Hatakeyama said. And higher profits might encourage companies to turn from paying down debt to take up new loans, Hatakeyama said. That would improve the interest rate market and banks’ position.

So there is some reason to join those who think that the 3.9 per cent growth in the June quarter (on an annualised basis) was not just one more recovery mirage of which there have been several since 1990.

Moreover, there is evidence that consumers have been dipping into their legendarily high savings to fund consumption. If that persists, it might reverse the vicious cycle of the past 13 years, when consumers have saved rather than spend, expecting prices to drop.

And, while the retail and service sectors remain inefficient, foreign retailers are now beginning to move in and provide competition.

Some even argue the government’s massive debt is not the frightener it would be elsewhere. “It is absorbed by savers,” Professor Eisuke Sakakibura said. “Japan is still a net creditor.”

But there are caveats. The production index has not lifted, which Hatakeyama sees as a “bad omen”. Consumer spending in August fell for the twenty-ninth month in a row and the price index for the forty-seventh month in a row. The yen has been rising, which will take the gloss off exports.

And, while there are now special trial zones where regulation is relaxed, Japan remains paralysingly reticent about free trade, though a deal might be done with Mexico if objections to pork imports are overcome.

So is the June lift just another mirage? One shimmering number this week suggests not: business confidence crept into the black last quarter. That was before the yen went up but it is on the back of the other good news. Japan might just be on the turn.

Colin James visited Japan as the guest of the Japanese government.