Understanding Tomorrow's Japan

Date January 23, 2002
Speaker Gregory TREVERTON(Senior Fellow, Pacific Council on International Policy (PCIP))
Moderator KITANO Mitsuru(Visiting Senior Fellow, RIETI / Director, Loan Aid Division, Economic Cooperation Bureau, MOFA)


I am not a Japan specialist. This is more of a report on a work in progress. PCIP is the west coast version of New York's Council on Foreign Relations. We are an organization of leaders from up and down the west coast. The have a partnership with the Council on Foreign Relations. The difference between the two organizations is that while many fellows at east coast institutions come from the government, many of the scholars at our group come from the private sector and non-governmental organizations. In California, Mexico and Japan feel closer than Washington does. From where we are, Washington looks sometimes like insurance and other times like entertainment.

The premise of the PCIP project is this: Japan is more important than it is understood. The task force includes Americans and Japanese; we have met twice and will meet three more times. The four sets are drivers are the following: politics and reform; Japanese integration in the global economy; long-term social and demographic forces; and the geopolitical environment. Today, I would like to touch on Japan's politics, its civil society, its demographics, and how the country is performing after 9/11.

Regarding Japan's politics, it seems the country has non-performing politicians. Japan has an efficient government, but it is not accountable. The party structure has disintegrated, but nothing has replaced it. There are several hereditary politicians (mostly the sons of politicians). Even Prime Minister Koizumi is a third generation politician. Young politicians feel powerless. There is agreement that dramatic reshuffling is needed, but no one can agree on how to do it. The people are nervous, but not suitably angry to demand change. Will it take a crisis to get change in politics? People in the information technology avoid eye contact with politicians because they don't want anything to do with Japanese politics.

What are the civil society forces in Japan? There is powerful change in Japanese society, but the change is gradual. The shift in the role of women has been dramatic, but female participation in the work force is still low. Nevertheless, companies are becoming aware that they need talented people (including women) and they can no longer overpay senior employees if they are not performing. Non-profit organizations generally have to choose between having independence or to receiving government support.

Looking at economic demographics, the success of Japan's old model was high enough to cover up the mistakes of uncompetitive companies. Now we are seeing the distinction between those firms that are competitive and those that are not. Of Japanese export capacity, 42% is outside Japan. It is twice as profitable for exporters to be located outside of Japan than inside. According to the latest consumer price index (CPI) data, deflation is at a record 0.8% (Japan Times, January 26, 2002). But a lot of these falling prices are from Japanese companies producing outside of and importing back into Japan.

Aging is an issue: if things kept going the way they are, says Jesper Koll of Merrill Lynch, in 600 years there would only be 500 Japanese. There are sectoral labor shortages occurring amid rising unemployment. The new system requires more specialists, such as bankruptcy lawyers. The US has a surplus of lawyers; maybe we can realize some gains from trade.

Capital costs are too low in Japan and they must go up. Despite the mergers of financial institutions in Japan, it does not seem that practices have changed. The automobiles industry is different, as there is more foreign control and presence. Japan is gradually moving toward an Anglo-American model, with accents.

Japan and 9/11: this time was much different than Desert Storm. Japan had to deliberate quite a bit during Desert Storm and it got very little credit. This time, Japan acted relatively and even changed its law to support the anti-terrorism effort. Its response was impressive. It seemed that the awfulness of the terrorism made it easier for Japan to respond and it made Japan's neighbors more acquiescent.

Where does this lead in US-Japan relations? In the short term, it does not mean much, as Okinawa and other issues with come up again. Japan and the US are ambivalent about policy toward China. Even the Rand Corporation's reports are ambivalent about what to do. Will there be a chance for Japan to reconcile with its neighbors?

Questions and Answers

Q: I am interested in the management of think tanks. In the US, it seems, political change (shifts between Republican and Democrat) benefits think tanks. Is this true?

Turnover of power turns people over and they go to think tanks, especially in economic and foreign policy. The people incubate in these institutions. The bad side is you get a churning-change for the sake of change and not much historical memory. Government is 98% execution and 2% ideas. Tax law (deductions) help think tanks too.

Q: Social mobility is more difficult in Japan than it is in the US. There is a perception element too. It is hard to change jobs in Japan.

Japan is near the bottom in the developed world in terms of safety nets. Portfolio careers are coming to Japan, but are still at an early stage. The US government cannot attract specialists to stay in the government for their entire career, so it tries to employ them for a couple of years at least. But it is a challenge for the US too.

Q: Change in Japan must come from a fundamental change in attitude. Japan was able to respond to 9/11 because the terrorists attacked general citizens in the US. Also, Japan feared that the same might happen in Japan. In Japan, good companies protected the bad; and talented people protected the less talented too. It is hard to make lifestyle changes. Why have foreign financial instructions failed in Japan?

Life is good in Japan, so it is hard to get people to take short-term pain. Part of the labor problem is that you have productive people in unproductive firms. As for the financial sector, it is hard to get people to change their habits (and to take their money out of the postal savings service).

Q: There are non-performing politicians and political parties in Japan. Contrary to practice in Great Britain, contact between civil servants and politicians is seen as essential in Japan. The opinion of backbenchers in England is irrelevant for decision-making.

In parliamentary systems, backbenchers are less important. In Japan, power lies with the party barons, not the ministers.

Q: In Japan, we do not know whether the government or the politicians should have the power to run the country. Are we angry enough for reform? Not yet. Unemployment is at 5.5%, but this number is lower than it is in Europe and the US. We need angry mobs for change.

Things do need to get worse before they can get better.

Q: The government should carry out what it was elected to carry out.

Q: More and more policy is decided in the party. For ministries, diet deliberation used to be important, but more energy is now devoted to answering party members' questions. It is a bigger headache.

The party has become more important even as they have become creakier and less representative.

Q: Mr. Koizumi is trying to outflank party politics with his popularity. As for the general public, I see a rise in nationalism in Japan. Mr. Koizumi is doing both: reform and addressing nationalism.

The problem for Mr. Koizumi is that if he does reform, he risks losing his popularity. In the US, Koizumi is regarded as an intriguing reformer; in Korea he is seen as a return to nationalism. Some nationalism is not bad, depending on the regional reverberations. The US connection becomes more important, therefore, to calm Japan's neighbors.

Q: Koizumi has done a good job at raising key, previously taboo, issues. The implementation is what is lacking.

Q: To what extent is Japan's economic failure a result of too much democracy (vested interests have too much power) or of Japanese culture (the preference for consensus building)?

Japan is shifting from one set of successful economic policies, with the vested interests that were established around that system, to different set. Culture may compound the difficulty. It is hard to change something that was so successful.

Q: A think tank's job is to educate politicians. Does academic quality have to be sacrificed in order to create documents that are simple enough for politicians to understand?

Politicians are not analytical thinkers; they think about what will go right and hope for good luck. They don't think about the worst-case scenarios. Trying to help them requires getting into their heads. Politicians think verbally and about the short run.

Q: Japan is searching its soul for its role after the Cold War. 9/11 forced the US to expand its military, but the US may withdraw from the world (from Japan and Korea for example) in the long run. Maybe nationality is on the rise in Asia because there are so many young countries here.

In the long run, the US is becoming more engaged with the world, actually. Look at trade statistics. And the silver lining to 9/11 is that Americans are much more interested in what is happening abroad.

Q: The US will not withdraw from the world; rather it will just move its presence around-onto aircraft carriers, destroyers, etc. For every Japanese crisis scenario I can think of, I can think of a possible solution. If a crisis is needed to cause a dramatic change of attitude in Japan, it is difficult to think where the crisis will come from.

*This summary was compiled by RIETI Editorial staff.