Currencies, Stocks

A New Rise Of Japan? – OpEd

Japan is trying to increase its influence by reinventing itself in the areas of foreign policy, security and economics and by repositioning itself in the global order. However, while it is observed that the country’s foreign and security policies are going through a tough test, it also would be difficult to say that developments in the country’s economy are contributing to the process.

Japan Flag

By Selçuk Çolakoğlu and Altay Atlı

Journalist and author David Pilling, who worked in Japan for many years, recently published a book entitled “Bending Adversity: Japan and the Art of Survival”. In his book, Pilling tells the story of a country and its people who have encountered difficulties all throughout history, yet they have always been able to “bend” challenges into opportunities, managing to survive and maintain the course of progress. Looking at recent Japanese history, we see World War II, the dropping of the atomic bomb, the economic crisis, and the nuclear power plant catastrophe. Yet for the Japanese living in these times of disaster, every challenge can be seen as a new turning point. As the country of the rising sun, Japan has managed to pick itself up and continue its path each and every time.

Today, after the ongoing economic recession that began in the 1990s and the later meltdown at the Fukushima nuclear power facility, the country finds itself at another critical turning point. Japan is trying to increase its influence by reinventing itself in the areas of foreign policy, security and economics and by repositioning itself in the global order. When it comes to the ongoing processes in these areas – or Pilling’s conceptualization of “bending” these challenges into opportunities – it is useful for us to look at the current developments in a historical context.

Japans foreign policy and security paradigms

Since its defeat in World War II, Japan has pursued a foreign policy and national security strategy that has rested upon its alliance with the United States as outlined by the San Francisco Treaty of 1951. This is reflected in Article 9 of the new post-war Japanese constitution, which prohibited Japan from building an army in the traditional sense. With these constitutional limitations in mind, Japan subsequently created a unit under the name of the Self-Defense Force (SDF) to meet the country’s minimum security requirements. Nonetheless, it was an impossibility for the nonexistent Japanese army to deploy troops abroad. During the Cold War, Tokyo developed its entire strategy under the security umbrella provided by Washington. In those times, the situation coincided with the interests of Tokyo because the US security assurances allowed Japan to decrease its defense spending and fully prioritize economic development while also preventing Asian countries from worrying about a resurgence of Japanese expansionism, which had been seen in the country’s colonial past.

With the dawning of the 1990s, two important transformations began to take place. First, with the end of the Cold War and the dissolution of the Soviet Union, the security framework in Asia began to change. In this context, with the disappearance of the perceived common enemy, the US began to develop independent relationships with all global actors. The second transformation can be seen in the Japanese economy entering a long period of stagnation, which still continues today, coupled with the swift rise of China in the world economy. Proudly bearing the title of the second largest economy in the world, Japan was surpassed by China in 2009, and thus pushed into third place. Currently, the economic gap between the two countries shows no sign of contraction. Furthermore, as it grew more powerful economically, China has also increased its influence in the region and across the globe. Beijing began to act more assertive towards Japan with regard to issues surrounding disputed islands and rights to maritime areas in the East China Sea; the same behavior has been exhibited by China in the South China Sea opposite member countries of the Association of Southeast Asian Nations (ASEAN).

Under these difficult circumstances, after a short-term as prime minister in 2006-2007, Shinzo Abe once again came to power in December 2012 after his Liberal Democratic Party (LDP) won elections. Here, the prime minister has pushed two critical items onto the agenda. First, he has aimed to lift the Japanese economy out of its slump and increase the country’s economic weight on a global scale, and second, he has sought to develop a new Japanese foreign policy and security framework that meets the changing dynamics of the world order. It is worth noting that Japan’s perceived security threats have seriously increased throughout this process.

With respect to the perceived security risks that have emerged in recent years, Japan has begun to voice concerns over the US’s official capacity to assist Japan in times of dire need. This situation has provoked Japan to reevaluate its place in the alliance with the US while also sparking a country-wide discussion about growing the capacity of a Japanese national military. China, with its rapid economic growth and increasing military capacity, has come to top the list of Japan’s security concerns. Beijing’s approach to the Senkaku Islands (or Diaoyu Islands in Chinese) and its declaration of an Air Defense Identification Zone (ADIZ) in the East China Sea have become a concrete indicator of the growing tensions between China and Japan. Furthermore, Japan is concerned that North Korea, as an unpredictable neighbor on Japan’s doorstep, may be a potential source of regional instability. In 1998, North Korea launched a missile into the Pacific Ocean beyond Japanese territory, thus signifying that Pyongyang had attained the military capacity to strike any area of Japan. In addition, North Korea announced to the world in 2009 that it had attained nuclear weapons, and it continues to carry out provocative nuclear tests. In other words, Japan sees itself as being encircled by threats, a perception that has been shaped based on sufficient and justified grounds.

Abe’s foreign policy principles

Four core principles seem to constitute Prime Minister Shinzo Abe’s foreign policy strategy in the current context. These are: (1) improving the US-Japan security alliance; 2) deepening and further strengthening Japan’s relations with Australia, India, ASEAN countries, Africa and Europe; (3) promoting peaceful resolutions to international problems; and (4) fulfilling the obligations laid out by international law. While the latter two principles illustrate the normative values of Japanese foreign policy in general, the former two principles reflect Japan’s foreign policy priorities in the new era.

The top priority of the Abe government is to strengthen the military alliance with the United States. Not only US President Barack Obama, but also Prime Minister Abe believes that a rebalancing policy should be executed in Asia to offset a rising China. In this regard, from a military perspective, Japan is striving to make the US-Japan alliance more powerful and dissuasive in order to avoid being left to stand alone against China. Meanwhile, strategies are also being developed to transform the Japanese SDF into a deterrent army. In this context, the Abe administration has opted to reinterpret Article 9 of the constitution, as opposed to amending its restrictive provisions. Currently, the interpretations of the article have already been softened to allow the deployment of Japanese troops abroad. Indeed, there have been similar examples of this type of action in the past. Deemed as “checkbook diplomacy” in the literature, Tokyo reacted to the 1990 Gulf Crisis by offering substantial financial support to the coalition in lieu of troops, justifying its actions based on Article 9 of the constitution. However, that Japan was not listed among the countries that supported the coalition against Iraq was a serious jolt for Tokyo. Later, an exception to the Article was created that allowed Japanese troops to participate in overseas peacekeeping operations. Now, Abe is considering making similar exceptions that would allow Japanese participation in international military cooperation, with the end of improving alliance relations.

Prime Minister Abe also foresees the formulation of Japan’s own rebalancing strategy in Asia. In this respect, he has placed great importance on bolstering cooperation with India, Australia and ASEAN countries. Extremely uncomfortable with China’s South China Sea policy, the ASEAN member states of Vietnam and the Philippines have become a particular focus of Japan’s drive to increase cooperation. Additionally, the attitudes of Indonesia as a leader of ASEAN have been granted great importance. Therefore, after strengthening the military alliance with the US, if Japan can develop a strategic partnership with India, Australia, Vietnam, the Philippines and Indonesia, it would feel more comfortable in the face of China.

So far the greatest deficiency in Japan’s rebalancing strategy is South Korea. In the Abe period, far from developing, Tokyo-Seoul relations actually began to decline. The fallout of Prime Minister Abe’s visit to Yasukuni Shrine in December 2013, as a response to China’s ADIZ moves, stressed relations with South Korea. Seeing that Yasukuni Shrine, which commemorates nearly two and a half million Japanese who died as a result of war, houses the names of Japanese generals who were alleged to have committed war crimes during the Second World War, Abe’s visit to the controversial site drew fierce reactions from China and South Korea. Indeed, as a prime minister of Japan, Abe’s visit to this temple in the wake of China’s ADIZ announcement has weakened the possibility of political cooperation between Japan and South Korea. To summarize, in terms of foreign policy and security issues, Japan is going through a difficult period. The process in economics fields in terms of confronted challenges was ever left behind.

How successful is “Abenomics”?

After the Second World War the Japanese economy experienced fast and strong growth at first, nonetheless, it then entered a period of prolonged recession. As shown in Figure 1, the Japanese economy has experienced this recession since the early 1990s, and even though occasional growth spikes can be seen in the 2000s, the general trend points to a loss of momentum. Faced with this reality, since the first day he took power, Prime Minister Abe set out to apply a package of policies which have become popularly known as “Abenomics”. This package is shaped around three basic measures: (1) to give a massive fiscal stimulus to economic activity by way of financial incentives; (2) to lower the Japanese yen’s value via monetary easing on the one hand, and to break the deflationary cycle, providing a rate of inflation around 2 percent on the other; and (3) within the positive environment created by the above two measures, to implement much needed structural reforms.

The fact that the LDP has a majority in both chambers of parliament represents an advantage in terms of implementing the economic stimulus packages and reform program, especially when we take into account that eight prime ministers have lost their seats over last decade. Although the first two elements of Abenomics, i.e. fiscal stimulus and monetary easing, have provided positive results during the first two years of the Abe government, there are still doubts as to how these results can be turned into sustainable growth. More importantly, however, the question still remains how the third element, i.e. structural reform, can be effectively realized. The dilemmas of the Japanese economy exhibit structural peculiarities, and consequently, solutions to these problems also require structural transformation. However, the fiscal and monetary measures only provide an appropriate basis for this transformation, nothing more.

Since the Abe government came to power in December 2012, major public investment projects have been realized and a monthly average of 5-6 trillion yen has been injected into market by the Central Bank. Throughout this process, the Japanese yen has depreciated against other major currencies by approximately 26 percent. The inflation rate is over 1 percent and is moving towards 2 percent. However, these developments have not yet led to positive readings in a macroeconomic sense. As seen in Figure 2, Japan’s exports are declining. While the country has traditionally exhibited trade surpluses, it now has an unfavorable balance of trade. The decline in the yen’s value failed to provide sufficient drive to the uncompetitive export sector. In addition, the fact that Japan had to increase its fuel imports because of the closure of nuclear power plants after the Fukushima disaster and that the share of total imports occupied by fossil fuels increased from 19 percent to 34 percent over the last decade has had considerable negative impacts on the country’s trade balance. On the other hand, an increase in the inflation of company revenues has been witnessed. Therefore, it is expected that consumption and investment will increase due to the resultant impact on wages and increase of disposable income, although this has not yet become the complete reality.

While Abenomics helped the Japanese economy to take a breath, structural reforms must be effectively implemented for sustainable growth. The main reason for weak production and export rates is the loss of the Japanese economy’s competitiveness, productivity and innovation. This is supplemented by the fact that the labor pool has aged and shrank. Companies not only stopped investing in innovation and technology, but also moved their production and investments to other Asian countries at the expense of Japan. Japanese exports increasingly lose their power as they are is increasingly realized via third countries. On the other hand, the Abe government wants to cut the cost of fuel imports that have resulted from the closure of the country’s nuclear facilities and depreciating currency by once again commencing the operation of nuclear plants, a plan that has drawn serious opposition from society.

Beginning of the road for structural reform

First and foremost, Abenomics requires the launching of a restructuring process that will encourage companies to enact measures which will provide added value, and that means to encourage them to invest and produce. When it comes to a company’s productivity, the labor force is undoubtedly one of the most important inputs. Japan’s aging population has a negative effect on the economy. While only 5-6 percent of the population was over the age of 65 in 1960 at the beginning of the so-called “Japanese Miracle”, today this rate has reached 25 percent. According to data collected in 2013, the population growth rate is -0.2. In other words, the Japanese population is aging and shrinking; while the amount of people who produce, provide added value and pay taxes is decreasing, the amount of people who depend on social services and do not produce is increasing. As the labor pool decreases, companies’ employment policies give preference to loyalty rather than performance, the work force exhibits a gender imbalance (according to official data 70 percent of men participate in the work force while this rate is only 48 percent for women) and legislation on immigration which does not open the doors to skilled workers and brain power from abroad leads to Japan’s inability to increase productivity and thus sustains the weakness of its labor force. When there is no increase in productivity, there is no increase in production, competitiveness, wages, or investment. While the Abe government has begun structural reforms to amend these economic woes, such as the realization of some measures that aim to increase the participation of women in the economy, the third element of Abenomics is still at the beginning of the road.

How successful can Abe be in realizing these reforms? What is the credibility of Abe in a country where governments and prime minister can so easily lose their seats? The bad news for the Japanese prime minister is that the approval rating which was 76 percent when he took office is now at 48 percent. The rise in the excise tax, which came into force in early April in order to reduce the burden of public debt in Japan that had reached a whopping 240 percent of GDP, was not received positively by the public. In addition, in April, as producers and consumers braced for the taxes that would be implemented in the upcoming quarter, the growth rate fell to 6.7 percent in second quarter, whereas it had been 7.1 percent in the previous quarter. This situation undermines Abe’s position, yet the lack of a strong opposition is a significant political advantage for the prime minister.

In order to achieve the goals set out in its foreign and security policies, it is essential for Japan to strengthen its economy. To do this, structural reforms are necessary, and for that purpose Abe should preserve his political power. The changes that Abe made to his cabinet in early September by replacing 12 of 18 ministers can be read as his way of trying to inject new impetus into his policies. Nonetheless, the resignation of two ministers because of various political scandals was a serious blow to the prime minister. Abe’s Japan once again is trying to meet challenges and continue on its path. Yet to do this, the government of Abe has to get a firm footing on the slippery surface of Japanese politics.

10 February 2015

Journal of Turkish Weekly

Courtesy of JTW

JTW – The Journal of Turkish Weekly – is a respected Turkish news source in English language on international politics. Established in 2004, JTW is published by Ankara-based Turkish think tank International Strategic Research Organization (USAK).  For more information, please visit


About ETFalpha

Chief ETF Strategist & Co-Founder at EMerging Equity


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