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Can Abe Revive Japan?

By Defense & Foreign Affairs | Sun, 21 July 2013 00:00 | 0

Prime Minister Shinzo Abe’s determination to revive Japan’s global influence faces considerable constraints, not least of which is the country’s persistent economic malaise. Although Abe is seeking to amend Japan’s constitution to ease restrictions on the rôle of the Self Defense Forces (SDF), his failure to put the economy on the path of a sustained recovery would jeopardise all efforts to enhance the country, strategically.

Abe and his Liberal Democratic Party (LDP) have been preparing for elections to Japan's House of Councillors (Upper House) on July 21, 2013, in which the LDP-led Coalition was expected to win a majority. This would leave Mr Abe well placed to pursue his ambitious political and economic goals.

Prime Minister Abe has had a highly successful first six months in office after being elected to power in December 2012. The landslide victory of the LDP restored Japan’s traditional ruling party to power after three years in opposition, during which the Democratic Party of Japan (DPJ) governed the country. Unlike his immediate two predecessors, who were encumbered with the aftermath of the Tohoku earthquake, tsunami, and nuclear disaster of March 2011, Mr Abe came to office with a far greater determination to revive Japan strategically.

Indeed, his election followed a period of heightened tensions with the People’s Republic of China (PRC) over the disputed Senkaku Islands (known in the People’s Republic of China as the Diaoyu Islands and in the Republic of China as the Diaoyutai Islands) in the East China Sea. The re-emergence of the dispute, coming only a year after the Tohoku disaster and the People’s Republic of China’s surpassing of Japan to become the world’s second-largest economy, heightened Japan’s sense of vulnerability, and helped pave the way for Abe’s victory. More recently, in early 2013, two PRC scholars even questioned Japan’s sovereignty over the Ryukyu Islands, which include Okinawa, where the majority of US forces in Japan are based.

Prime Minister Abe, for his part, has vowed to use force to defend islands claimed by the PRC.

The Sources Of Japan’s Economic Malaise

Japan’s strategic decline stems from the long-term weakness of its economy since the bursting of the financial bubble in 1990.

The subsequent “lost decade” of the 1990s sapped Japan of economic and geopolitical vitality, leading to a diminished role on the world stage. Japan showed signs of revival under LDP Prime Minister Junichiro Koizumi (2001-2006), who presided over a period of relatively robust economic growth. During that time, Koizumi sought to strengthen Japan’s military capabilities in the face of a rising China and a now formally nuclear armed Democratic People’s Republic of Korea (DPRK, North Korea).

Koizumi also sought to deregulate Japan’s economy to enhance its competitiveness and dynamism. However, after Koizumi retired, Japan experienced a rapid turnover of prime ministers, each lasting barely a year in office (including Abe himself in his first stint as premier from September 2006 until September 2007), which left the country ill-positioned to pursue a growth strategy.

Japan was especially hard hit by the global recession of 2008-2009, during which the yen appreciated rapidly in value, thus sapping its export competitiveness. The Tohoku disaster exacerbated the country’s economic woes. By the early 2000s, Japan had accumulated one of the largest public debt burdens in the world as a result of massive government spending packages in the 1990s to keep the economy afloat.

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This debt is now forecast to exceed 240 percent of GDP in 2013, according to the International Monetary Fund (IMF). At the same time, Japan’s demographic outlook is bleak, with the UN forecasting the population to shrink by 15 percent to 108.33mn by 2050, by which time the percentage of the population aged 65 and above will have risen from 26.4 percent in 2015 to 36.5 percent.

Can Abe’s ‘Third Arrow’ Deliver?

Since returning to office, Abe has pursued a “three arrow” economic strategy dubbed “Abenomics” by the international media. Abe’s Administration has already fired the first two “arrows”, namely extreme “quantitative easing” by the Bank of Japan, coupled with a de facto devaluation of the yen, and additional fiscal stimulus from the Government. These measures delivered robust growth in the first quarter of 2013, but are recognised as being only short-term prescriptions. Abe’s “third arrow”, which was tentatively unveiled in June 2013, is the most crucial aspect of his recovery plan.

The “third arrow” consists of an ambitious strategy to deregulate Japan’s economy and open it up to greater competition. A key element of this policy is Japan’s membership of the planned Trans-Pacific Partnership (TPP), a free trade organization which is intended to include Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. However, powerful vested interest groups in Japan have resisted structural reforms, at least in practice if not rhetorically, thereby prolonging the economic malaise.

Therefore, the key to Abe pressing ahead with economic reforms lies with a solid mandate for the LDP in the July 21, 2013, election to the Upper House, where it has lacked a majority
Even so, Prime Minister Abe’s own commitment to structural reforms is questionable, for in order to implement these, he would have to challenge vested interest groups with close ties to his own party. Former Prime Minister Koizumi was willing to do this, but it is unclear if Abe has the willingness to stay the course.

Moreover, Mr Abe has long favored amending the Constitution to enhance the status and rôle of Japan’s armed forces. In particular, he would like to amend Article 9, under which Japan forever renounced the right to wage war and the use of military force to settle disputes. (Mr Abe also wishes to amend Article 96, thereby making it easier for Japan to alter its constitution.) Although this would be a logical step for the country’s strategic revival, the Japanese public is still cautious about any significant changes to the status quo. In addition, due to perceptions of Japan’s lack of repentance for atrocities committed by the Imperial Army in Asia in the 1930s and 1940s, any constitutional revision would be vigorously criticised and opposed by the PRC and the Republic of Korea (RoK).

There is a risk now that if Mr Abe rushed ahead with attempts at constitutional revision shortly after the Upper House election, he could expend valuable political capital which would be needed to pursue economic reforms. Implementing constitutional reform to unshackle the SDF would certainly be a significant change to Japan’s strategic posture, but without the concomitant sustained economic revival, any new guidelines for the SDF would ultimately be undermined by the prospect of extended economic malaise.

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Demographics Poses Formidable Constraints

Even if Prime Minister Abe was able to implement economic restructuring, Japan would still face a bleak demographic outlook.

The key to mitigating this would be to increase female participation in the Japanese labor force, and to boost immigration. There is widespread recognition of the need for such policies, but there is also considerable cultural resistance to immigration. Japan is the most ethnically homogenous country among the world’s advanced economies, with foreigners accounting for less than two percent of the population. Therefore, if Japan’s population continued to age and decline, as projected, this would almost certainly require greater public expenditures on healthcare and treatment of the elderly, and public support for higher defense spending would wane.

In addition, an older Japan would probably become more risk-averse, thus undermining its enthusiasm for a more assertive and militarily activist foreign policy. Furthermore, if Japan fails to regain its economic dynamism, its appeal as a destination for potential immigrants would also wane.

Japan’s Search For Allies

Japanese policymakers are increasingly concerned about the rise of the PRC, and thus Tokyo has been seeking to cultivate closer ties with Asian nations that also feel threatened by Beijing’s growing influence. These include the Philippines, Vietnam, and India, as well as Myanmar. The Abe Administration has pursued a more active diplomacy in South-East Asia so that Tokyo could serve as a counterweight to Beijing.

Indeed, despite the rise of the PRC, Japan carries considerable economic weight in the region. Japan is the biggest export destination and import source for the Philippines; the top export destination for Indonesia and its third-biggest source of imports; the third-ranked trade partner of Malaysia; the second or third biggest export destination of Thailand and its top source of imports; one of the top three trade partners of Vietnam; and Myanmar’s fourth-ranked export destination. Japan is also a major foreign direct investor in South-East Asia, and is keen to invest more there to diversify its external manufacturing operations away from the PRC.

Therefore, any sustained revival of Japan’s economy would benefit South-East Asia. However, Japan’s desirability as an economic and geopolitical partner will depend on its ability to sustain its economic revival.

As regards Japan’s rôle in regional security, Prime Minister Abe in December 2012 called for his country’s participation in the Five Power Defence Arrangement (FPDA) between the United Kingdom, Malaysia, Singapore, Australia, and New Zealand. Mr Abe has also spoken of creating a “security diamond” between Japan, India, Australia, and the US state of Hawaii, linking the Indian and Pacific Oceans. Essentially, he sees both initiatives as aimed at counterbalancing the PRC. Nonetheless, these proposals are ambitious to say the least.

The severe fiscal problems in the UK would almost certainly preclude it playing a bigger rôle in the Five Power Defence Arrangement. Meanwhile, Asian nations and the US are reluctant to create a formal NATO-style security alliance for fear that this would be an overly provocative move towards the PRC. Therefore, any enhanced Japanese rôle in the region’s security would likely be loosely organised for the foreseeable future. 

Possible ‘Game Changers’ For Japan

Although Japan would appear to face colossal challenges in reviving its strategic fortunes, there are several “game changers” which could contribute to its recovery over the long term.

Resource Bonanza: Japan could mitigate its dependency on imported energy if it developed its considerable reserves of offshore methane hydrates. The Japan Oil, Gas, and Metals National Corporation (JOGMEC) has been actively pursuing this option, with a view to commencing production by 2018. If Japan were to develop indigenous sources of energy, this would reduce its vulnerability to geopolitical shocks in the Middle East (which typically cause sharp increases in oil prices) and its dependency on the sea lanes from the Persian Gulf to Japan via the Malacca Strait and South and East China Seas (where the PRC has been expanding its naval presence).

Japan is also exploring the possibility of developing rare earth metal deposits on its seabed. These metals are crucial for the manufacture of a variety of high-tech goods, and at present, the PRC produces more than 95 percent of these commodities. During a diplomatic stand-off between Japan and the PRC over a collision incident between Japanese coast guard vessels and a PRC trawler in the East China Sea in September 2010, Beijing reportedly threatened to suspend rare earth shipments to Japan (although the PRC subsequently denied the claim), thus increasing Tokyo's sense of vulnerability. 

Immigration Strategy: In June 2008, a group of legislators in the LDP outlined a bold program to transform Japan into a multi-ethnic society by 2050, which would require taking in 10-million immigrants, by which time they would account for about 10 percent of the total population. Although no action was taken on this front, due to the politically sensitive nature of the subject and Japan’s severe recession, the possibility exists that the country would gradually receive more immigrant workers, especially if the economy revived. Moreover, the sheer necessity of immigration as the population declined and aged could force a gradual change of policy.

Nuclear Weapons: There is a possibility that Japan could abandon its long-held non-nuclear principles, if it felt sufficiently threatened by the PRC or North Korea. Japan has the technological capabilities to develop a nuclear arsenal. In fact, as far back as 2002, Ichiro Ozawa, a senior power broker in several previous Japanese governments, warned that Japan could build 3,000 to 4,000 nuclear warheads to counterbalance the PRC. Any decision by Japan to go nuclear would be extremely controversial, both within the country and abroad, but this cannot be precluded indefinitely, especially if Tokyo were to lose confidence in the US nuclear umbrella. 

Financial Crisis: Finally, the possibility exists that Japan could experience a severe financial crisis over the coming years, as a result of its colossal debt burden. Clearly such a crisis would be negative for Japan’s strategic position, at least in the short term. However, the psychological shock of such an event could provide the catalyst for a broader rethinking of society that could pave the way for a Japanese rebirth over the longer term.

Conclusion

Even after two decades of almost persistent economic weakness, Japan is still the third largest economy in the world and has a formidable industrial-technological base, a skilled workforce, and modern armed forces. If Prime Minister Abe can lay the foundations for a sustained economic revival, then Japan could once again be an important player in the Asia-Pacific region. However, if Mr Abe failed, Japan would not necessarily face disaster, but it would slide further down the rankings of world powers.  

The Author: Yoel Sano is Head of Political Risk at Business Monitor International (BMI), a leading provider of independent political, economic, financial, and industry analysis. The views expressed in this article are his own.

By. Yoel Sano

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