On Jan. 10, Japan's new government unveiled a $117 billion stimulus package, meant to jumpstart an economy that long ago ran out of gas. Japan's economy has been stuck in what its people call the "lost decades" since the early 1990s, when the stock market and real estate prices collapsed and the country entered a period of economic anemia. Japan has not gone through great hardships: Even without economic growth, most Japanese enjoy good public services, little social decay, and a low crime rate compared with the United States and Europe. But as the "Era of High Growth," as the boom days of the 60s, 70s, and 80s are known in Japan, is receding into distant memory at home, Japan's stock has crashed overseas. Gone are the days of "Japan as No. 1: Lessons for America," the title of a best-selling 1980 book, or when Chinese leaders went on pilgrimage to Japan to study the secrets of economic development. Few Japanese corporations enjoy global prestige, and the once-mighty Tokyo Stock Exchange is now seen as a hopeless backwater.
Could Japan's stimulus, focusing on public works, incentivizing companies to invest, and providing aid to small firms, make a difference? Like his predecessors, Shinzo Abe, who returned to the position of prime minister in December 2012, has a plan to revitalize Japan. He wants the Bank of Japan to implement inflation targeting and intends to combine a "soft" monetary policy with a fiscal stimulus. Abe shows little inclination to tackle the structural failures responsible for the country's lackluster performance, including a social system that under-employs women, insufficient immigration, inefficient oligopolistic and protected industries, and a value-destroying farm sector. Success is far from certain.
And yet, one could imagine this stimulus, especially if accompanied by measures to tackle the roots of Japan's ailments, could return Japan to an orbit of high growth. This isn't as outlandish an idea as it sounds: New York Times columnist Paul Krugman entitled a recent blog post "Is Japan the Country of the Future Again?" and in a different post argues that "it sure looks like" the Japanese economy is taking the right steps towards growth."
Different countries have distinct sources of national power. North Korea matters because of its weapons and nuisance capabilities. Iran utilizes its religious zeal, covert action, and its armed forces, while Saudi Arabia relies on its oil. A combination of military, economic, technological, educational, and ideological resources makes the United States a superpower. China's cards are its economy, but also its aggressive political-military actions and its huge population.
The only arrow in Japan's quiver is its economy. It has a strong military, the Self-Defense Forces, but has always been extremely reluctant to use it even in peacekeeping operations. Moreover, its military is tailored to operate in association with the United States, making it hard for Tokyo to take advantage of its hard power unilaterally. As for soft power, Japanese academia has little influence outside the archipelago, there are no Japanese NGOs that matter in international affairs, and no Japanese media reaches an overseas audience of any real size. Pop culture and cuisine hardly contribute. But when it comes to economics, Japan is still, despite everything, a big power. China surpassed it as the world's No. 2 in late 2010, but Japan's $5.9 trillion economy is still the world's third largest by more than $2 trillion. It's the world leader in areas like materials science -- many of the most sophisticated inputs in items such as iPhones are made in Japan --and it boasts the world's most impressive transportation infrastructure, despite what you read about all those fancy Chinese trains.