What if Japan actually gets its economic act together?
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.
And that's after two decades of little to no growth. If Abe were able to turn Japan around, it might find itself again as a power, with its voice carrying weight in Washington and other capitals. And that would have a profound effect on the geopolitics of Asia and beyond.
Though a stronger Japanese economy would not in itself lead to a massive increase in Japanese military capabilities, it would make it easier to spend more on defense, and also to boost foreign assistance programs to U.S. allies such as the Philippines, a move that a cash-strapped Washington would welcome. In early January, Philippine Foreign Secretary Albert del Rosario said that to help it counter the threat posed by China, Japan would supply the Philippines with 10 coast-guard vessels as well as communications equipment. A wealthier and more assertive Japan could enlarge these assistance programs throughout Southeast Asia so that countries in the region might decide to court Tokyo rather than appease Beijing.
Tokyo's increased assertiveness would also make it easier to play hardball with Beijing. China applied unilateral sanctions against Japan in the wake of the 2010 and 2012 crises over the Senkakus, the disputed islands in the East China Sea that the Chinese call the Diaoyus. These included restrictions on exports of rare earths, delays at customs for Japanese goods, and support for boycotts of Japanese goods and services.
Japan barely responded to China's provocations. But an economically more self-confident Japanese cabinet might have counterattacked with its own "administrative guidance" on Chinese imports, curtailed the export of Japanese technological inputs to Chinese state-owned conglomerates, and made customs checks for Japanese tourists returning from China sufficiently long to induce them to vacation in other countries. Japanese technology and foreign investment are more important to China than Chinese trade is to Japan. That doesn't mean China would back down, of course -- more assertiveness by Japan raises the odds that Chinese leaders, fearing that appearing soft on Japan would make them vulnerable, could decide to escalate tensions. But it would make such showdowns more of an even fight.
All of this depends, of course, on whether Abe can succeed where his 15 recent predecessors -- including himself -- have failed. The Japanese establishment has no interest in being the England of Asia and joining the United States in its wars, or of returning to its imperial past. But a healthy Japanese economy would remind China it's not the only game in town.
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