Can Japan Come Back?

Gregory F. Treverton

Our report, by a Pacific Council on International Policy task force, is titled "Can Japan Come Back?" and will be published tomorrow. It asks, what will drive Japan's future over the next decade? So we start from the inside out. It was an effort to understand the critical factors that will shape Japan's future.

Andrew Oros

Our starting point was this: It is a good bet that Japan will be back. There is over-pessimism on Japan in the media and elsewhere. Japan still has a lot going for it, which are the very drivers for Japan's future. We looked at the balance between the forces for reform and roadblocks. Unless there is reform, there could be accelerated decline. The lost decade has been a time of comfortable stagnation, but it cannot continue.

Why will Japan be back? First of all, at the micro level, there is cause for optimism. The revision of the commercial code and other legislative initiatives are good signs. Demographics, the first category in this list of potential assets, could be seen negatively. On the surface, people simply think of the problems associated with an aging population, such as decreasing tax revenues and increasing social security costs. But Japan's demographics present opportunities: women, Japan's undervalued asset, must be utilized to address the labor shortage, thus giving women a bigger role in society. And foreigners-only 0.2% of Japan's population is foreign born-can also play a role. While it is estimated that 600,000 immigrants a year would be needed to solve Japan's labor problem, the bottom line is that at least there is more acceptance of foreign ideas and this is part of a bigger trend.

Second, there is a greater acceptance of foreign investment and practices. Carlos Ghosn is a national hero in Japan. And there has been a fourfold increase in foreign investment since the early 1990s. Third, small and medium sized enterprises have been overlooked. The problems of the large corporations, though these corporations represent a small fraction of the total number of companies in Japan, do not reflect the dynamism of smaller companies. Fourth, the next generation of Japanese people is more accepting of more information and ideas in the workplace. There is a new generation of politicians emerging that are not yet in power. The LDP appears to understand that youth sells. Attitudes of younger politicians differ from their seniors. For example, 90% of Diet Members under 45 years old favor a revision of Article 9 of the Constitution.

Gregory F. Treverton

While past areas of conflict were trade related, future conflicts will have to do with security. First, trade issues have been laid to rest. Second, there has been a convergence of the Japanese and American economic systems. Third, security issues will become more contentious because of the following factors: there is a shift in generations and a more nationalistic feeling in Japan; the international arena has changed after the Cold War, Japan feels less threatened, and, therefore, Japan needs the US less; and there is ambivalence towards China, some seeing a threat, some seeing an opportunity.

Looking ahead, the US-Japan security alliance will be insurance for Japan, but the nature of it will change. Overall, there needs to be a wider debate on security in Japan. Within this context, the nature of consultation between governments may also change as China becomes more salient. I would expect the size of US forces in Japan to come into question as well.

Our conclusion is that Japan will be back. In the recent past, Japan has become invisible to the US, but our bet is reinforced by the fact that comfortable stagnation cannot continue forever.

Q: How did the task force evaluate Japan's structural reforms?

Gregory F. Treverton: More has happened than meets the eye in investment, non-profit organizations, and other areas. These developments are part of our optimism. But we still have not seen the political will to make the tough decisions.

Andrew Oros: New means for financing new firms are needed, as financing is still bank driven.

Q: What was the methodology of this task force study?

Gregory F. Treverton: We organized study group sessions around particular topics, such as new forces in the economy, business, and non-profit organizations. The final meeting, in San Francisco, focused on security.

Q: Does Japan need a revolution to see real change?

Gregory F. Treverton: The revolution during the Meiji era was called a restoration. I believe that when dramatic change does occur, it will be called something other than a revolution. In any case, a crisis may be needed.

Andrew Oros: There are positive and negative shocks that are possible. A banking crisis would be negative. External shocks, like those during the Meiji Era and the period after World War II, may come from China. We believe that a single shock, such as a successful space program, would be needed rather than a gradual rise of the Chinese economy, for example.

Q: How do you view APEC or ASEAN as a forum for changing Japan?

Gregory F. Treverton: Regional institutions are relatively weak in Asia, especially when compared to the challenge they face. Building up these institutions would be good and we need to see more of Japan.

Andrew Oros: Once again we see the presence of China in these discussions. Who will lead Asia? There are at least three obstacles to Japan being the leader: one is Japan's decade of economic stagnation; the second is that Japan lags in foreign direct investment or openness; and the third is the historical legacy of World War II.

Q: How has the debate gone from "Japan as the next Argentina" to "Japan bouncing back"?

Gregory F. Treverton: The emergence of Koizumi is a factor. One of our purposes is to add nuance.

Andrew Oros: It is not a change in perception; it is that we are ahead of the curve.

Q: Did the US experience a period of poor macro performance and micro innovation?

Gregory F. Treverton: Macro and micro are metaphors for on and beneath the surface. There is a delay between innovation or deregulation (for example, the US in the 1970s) and what comes to fruition.