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Can Japan Thrive?

By Michael Auslin | April 28, 2009

Target Tokyo. (CC).

In the early 1970s, when Japan was battered by the oil shock, a global downturn, and political scandals, the national mood was summed up by a blockbuster disaster film called Japan Sinks, in which volcanoes, earthquakes, tidal waves, and—yes—plate tectonics conspire to submerge the Japanese home islands. Today, as the Japanese economy collapses and national politics is paralyzed, a new film might be entitled Can Japan Survive?

The year 2009 may transform Japan both politically and economically. Not only is the half-century political dominance of the Liberal Democratic Party (LDP) at risk, an increasingly severe recession may also permanently cripple some of Japan's leading export industries. Yet Japan's current problems are also being driven by long-term social, economic, and political changes. So far, the Japanese social fabric has been strong enough to absorb these changes, but what type of country it becomes, and how the Japanese will react, is still very much an open question.

An Economic Crisis

No one should dismiss the perfect economic storm facing Japan today. For nearly twenty years, the country has struggled to recover the magic of the postwar economic growth model. That policy was based on the export of consumer goods, driven by an artificially weak yen, a moderately successful government approach to identifying and supporting technological breakthroughs, low worker wages in exchange for nearly lifetime employment and a social safety net, and a high household savings rate that was plowed back into investment.

That model came crashing down in 1991. Land and asset values, which had been propped up by excess cash stemming from a permanent account surplus, collapsed. At the same time, Japanese exporters saw their share of the market shrink as other Asian countries—including South Korea, Taiwan, and China—became major exporters. Over the next decade, Japan would suffer from tentative reforms, failed stimulus packages, and constant shrinking of its share of global output. Relief came only when financial and regulatory reform was undertaken in the early 2000s, leading to a steady but moderate economic recovery.

The nation finds itself once again facing economic troubles: export markets have collapsed, the yen has skyrocketed, and reform has stalled. Exports plunged nearly 50 percent in February year-on-year, and the spiral is only deepening. The government has frantically tried to stanch the bleeding, passing a $53 billion stimulus package and now considering another $100 billion plan.

The shock and trauma of this recession—Japan's worst since the end of World War II—mask structural weaknesses in its economy. For instance, the economic recovery of the early part of this decade did not result in the creation of stable, permanent jobs. In fact, much of the job creation occurred through the hiring of temporary workers. Close to 30 percent of Japan's workforce—nearly 18 million people—are temps.

Most importantly, structural reform undertaken by Japan's popular former Prime Minister, Junichiro Koizumi, has ground to a halt under his weak and ineffective successors. Indeed, much of the blame for Japan's ineffective economic policies can be placed on its politicians.

The Politics of Indecision

Japan's economic struggles parallel the unraveling of its postwar political system since 1993. The LDP has ruled Japan since 1955 almost uninterruptedly, except for several months in 1993-94, when it lost power to a fleeting coalition of so-called reform parties, many of which were established by disaffected ex-LDP members. By 2005, the LDP was again in sole control of the government under the leadership of the maverick Koizumi.

Koizumi's popularity was tied in equal parts to his charisma and to his championing of regulatory and structural reform. While many of the building blocks that made the economy stronger under Koizumi had been laid in the previous decade, he was the first prime minister to articulate a compelling case for changing the way Japan worked. Under his watch, the Bank of Japan became more independent of the Ministry of Finance, the government encouraged greater market access for foreign investors, and the country's financial system was put on a sounder footing.

All that came to a halt once Koizumi stepped down in September 2006. His successor, Shinzo Abe, was mired in scandal and unformulated policies beset his administration. The main opposition party the Democratic Party of Japan (DPJ), headed by former LDP heavyweight Ichiro Ozawa, took control of the upper house of the National Diet in July 2007.

The result of a divided Diet, however, was not a strengthening of a viable two-party system, but rather political paralysis. The DPJ used its position to block LDP appointments and initiatives, ultimately driving Abe to resign his position a mere two months after the July election. His replacement, Yasuo Fukuda, a compromise placeholder, resigned within a year, leading to the appointment of Taro Aso, a former foreign minister, as premier.

The level of public frustration with Japan's politicians is palpable, as is anger that the reforms and progress of the Koizumi years have been wasted. Japan's political leaders are seen as increasingly out of touch and incapable of running the country. The problem is that few voters believe anyone in the political world, including Ozawa, can successfully reinvigorate the legislative process and turn Japan's fortunes around.

At some point, the old guard of LDP and DPJ kingmakers will retire. Even if the next generation of politicians can come up with successful policies, they will be dealing with a society much different from that of the postwar period.

Social Change and Disquiet

The economic crisis, along with ongoing political ineffectiveness, has engendered significant levels of public concern, including fears that the once-praised Japanese model is breaking down. Because most Japanese still remember when their country was much poorer than it is currently, and continue to take considerable pride in the achievements that made it the world's second-largest economy, it is unlikely that the problems of today will result in destabilizing dramatic outbursts.

Nonetheless, fast-running currents have been changing the social seabed for years. The aging of the country is a well-known phenomenon. Beginning in 2006, Japan began losing population year-on-year. The number of citizens aged sixty-five and older now accounts for 20 percent of the population and will soon be putting a major strain on social services, just when the tax base will be shrinking. This has led to years of debate over how to raise Japan's birthrate or whether to loosen immigration restrictions. Yet fears over the influx of foreign cultures have thus far hindered meaningful immigration reform.

The cause of the demographic decline is a combination of fewer children per marriage and a much later marriage age for Japanese women. Japan's birthrate actually fell below replacement rate nearly forty years ago, in the early 1970s. By 2007, Japan's natural increase rate was at -0.1 percent, with women having a fertility rate of 1.34. More dramatically, in 1970, half of all babies born in Japan were to women in their mid- to late-twenties; today, fully 38 percent of babies are born to women in their early thirties. The average age of marriage in Japan also is steadily increasing, up to 28.3 for women and 30.1 for men.

Those who remain unmarried are referred to as "parasite singles," often living at home with their aging parents. They purchase fewer durable goods than their predecessors, since they are not buying houses, major appliances, or (often) cars. Still, they account for a significant segment of consumer spending on goods like clothing and accessories and services like travel, dining, and entertainment. At both ends of the demographic spectrum, single-person households are increasing rapidly in Japan, from just 600,000 in 1975 to over 4 million today, with the majority of these households being single, elderly women.

Demographics are not the only current of social change in Japan today. A trend of young people essentially opting out of education and careers is beginning to attract notice. The proportion of young people working in low-skilled jobs in the service industry has also risen steadily through the past decade. With an aging and slowing economy, any segment of the working-age population not engaged in productive activity or failing to gain advanced skills is of concern to policymakers.

A New Japan?

Many around the world have written Japan off, seeing it in the midst of a gradual decline into second-class status; others advise Japan to embrace a "middle power" strategy. In recent decades, economic observers have bounced back and forth between calling Japan a failed power and celebrating its comebacks. To many, it is baffling that the country has been unable to solve its problems for nearly two decades.

A longer historical perspective, however, suggests that Japan is not suffering from some inherent defect in its socioeconomic system, but rather that it is in the midst of working through the post-Cold War phase of its history. The growth rates of the 1960s through 1980s were unsustainable once the costs of Japan's protected production system were undermined by the rise of low-cost producers, the introduction of floating exchange rates, and the greater global economic interdependence fostered by globalization in the 1990s. The political relationships that supported this economic system also came under attack and have been reshaping themselves since the early 1990s.

Yet, during this extended, two-decade period of flux, the country has remained remarkably stable. Japan remains a highly cohesive, low-crime society. National growth on average since 1990 has been a lackluster 1.3 percent. But the crime rate has edged upward only modestly to 1,493.6 per 100,000. The murder rate continues to be astoundingly low at 0.5 per 100,000. Similarly, Japan's academic system continues to turn out literate, well-educated adolescents, despite the many legitimate critiques of Japan's schools.

The changes occurring in Japan seem in many cases to have been absorbed by the social system with less shock than might have been expected. People are clearly frustrated with the lack of economic growth; worried about the future; and angry at a self-absorbed, ineffective political system. Yet, statistics show that voter participation in general elections held for the lower house has remained steady in the upper sixtieth percentile over the past fifteen years. While voting patterns reveal a deep desire for change, the Japanese are neither despondent, drinking themselves to death like the Russians, nor so outraged at inequality that they riot, as the Chinese do several thousand times each year.

Nevertheless, some observers worry that the problems Japan faces will result in the country reducing its global role, having less international influence, and becoming a less reliable ally of the United States. As with their adaptation to domestic changes, however, the Japanese of 2020 may be completely comfortable with their nation playing an important, yet relatively smaller, global economic and political role, as long as they have jobs, income stability, and some growth.

Quality versus Quantity

If one is skeptical that the public will embrace such reduced expectations, then consider that few Japanese today talk about their country being a great power in the way they did throughout the 1980s. The national accommodation to new conditions has already taken place with minimum disruption.

Even with a new outlook, Japan still plays a significant role in global affairs through its foreign aid programs, participation in international organizations, and security cooperation with the United States. Its highly capable Self-Defense Forces will maintain a role in overall planning for operations ranging from humanitarian relief to defending the freedom of the seas. Japanese intellectuals often talk about contributing to transnational issues like global health or climate change.

Given the size of Japan's economy, as well as the benefits it gains from the international trading system, many analysts inside Japan and out (including the author) applaud its decision to expand its global role gradually. However, given its declining population, continued political uncertainties, and economic stresses, Japan will likely reassess which international activities are most beneficial to its national interests. It will be the job of U.S. policymakers to maintain the U.S.-Japanese relationship as a core of Washington's Asian strategy in light of Tokyo's policy choices.

Japan's future matters deeply to Asia, as well as other parts of the globe. Thus, political, social, and economic analysts need to continue to pay attention to the ways in which Japan's leaders and citizens are (successfully or unsuccessfully) responding to the challenges their country faces. Democracies throughout Asia will automatically look to some degree to the path chosen by the region's oldest representative system, even if they do not pattern their own electoral mechanisms after it. Businesses throughout the world will continue to study the successes of Japan's global export companies, while educators in the Asia-Pacific region will remain interested in how Japan continues to provide high-quality education for its citizens.

In short, the choices made by Japan, both to pull itself out of the current economic slump as well as to deal with the deeper changes in its society, will reverberate throughout Asia and help determine the future of the most dynamic region on earth.

Michael Auslin is a resident scholar at AEI. This article is a revised version of an "Asian Outlook" originally published by the American Enterprise Institute.

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Read More: Business, Culture, Debt, Democracy, Economy, Education, Globalization, Governance, Jobs, Security, Technology, Trade, Japan, Asia

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