Who's afraid of the new
Japan? By Malcolm Cook and Huw
McKay
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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