How clear is Japan’s future?

by Hugh Cortazzi

The editors of three leading British journals (The Times, The Financial Times and The Economist) have recently visited Japan and reported positively on Japan’s economic prospects. They noted that Japan had largely recovered from “the lost decade.” The Economist was bullish, heading its recent supplement on Japan, “The Sun also rises.”

Increased labor flexibility, rising employment and wages, as well as growth in GDP and in consumption, have all been taken as positive signs for the future. The increasing importance of shareholder value and the number of mergers and acquisitions have also been interpreted as signs of the health of Japanese capitalism. Prime Minister Junichiro Koizumi is thought to have made significant progress in moving the economy away from dependence on state-sponsored projects and to have pressed ahead with essential reforms of the Japanese bureaucracy. The Japanese have been depicted as more confident and hopeful for the future.

All these signs of renewed strength in the world’s second-largest economy are good news for Japan and the rest of the developed world. But it would be a mistake to overlook the real problems that still lie ahead for Japan’s economy and politics.

The planned privatization of the postal services will take many years to complete, and when Koizumi is replaced it remains to be seen whether any successor will be as keen to push ahead in the face of continuing opposition. Privatization of other government controlled financial institutions will be difficult to achieve and opposition to further deregulation will be tough. In particular, reform of agriculture, which is necessary for progress in international trade negotiations, will arouse fierce criticism in rural communities that are no longer as prosperous as they used to be.

More needs to be done to promote competition and to restrain monopolistic organizations. This will require a stronger Fair Trade Commission, one more willing than in the past to curb cartels and price fixing. At the same time obstacles to mergers and acquisitions will need to be further reduced.

The budget deficit will have to be tackled fairly soon. This will inevitably lead to an increase in the consumption tax but the government must be conscious of the damage done to economic recovery if the increase is too sudden and too great. Further tax reform if only in the form of improved incentives is needed.

Japan’s pension problem will be difficult to solve but it is not unique. With increasing longevity the retirement age will have to go up and benefits reduced.

The pension problem is exacerbated by the likely decline in the working population as ultra-low net reproduction rates in recent years impact on the number of young people entering employment. Smaller families also mean fewer people to look after the elderly. More women want to work and will be needed. This means that much more will have to be done to help with child care. The costs involved will add to the budget deficit.

Japanese educational standards have been high and need to be kept up if only to maintain Japan’s overall ability to compete with other countries, including China. Further educational reform is needed but it will be difficult to reach a consensus on how and what needs to be done.

Other economic issues that will have to be tackled include reform of Japan’s health services and social security.

Japan’s political system has not changed as much as some observers had expected, but it has coped reasonably well with the strains placed on it, and Japanese parliamentary democracy remains healthy even if the electoral system is still slewed in favor of rural constituencies.

Many foreign observers had hoped that as a result of recent elections, Japan would develop a two-party parliamentary system. This did not happen partly because the opposition parties could not find acceptable alternative policies and partly because Koizumi was willing to engineer a split in his own party to achieve his goal of postal privatization. In effect he changed the LDP to meet what he saw as the needs of Japan. He has undoubtedly undermined the power of the factions within the party and increased that of the prime minister in the Japanese Cabinet. But will these changes be maintained by his successors?

There has been speculation that the LDP rules by which Koizumi has to stand down next year may be changed to enable him to stay on as prime minister, although he has denied any such intention. The issue of who follows Koizumi could cause tempers to rise. One danger is a compromise choice who might be tempted to delay reforms to appease his rivals.

One of the political issues that Japan cannot afford to postpone for much longer is a necessary change to the succession law allowing a female heir to succeed to the Imperial throne. This should be easier to achieve than constitutional reform where a consensus will be more difficult to find, but a modification of Article 9 to make it explicit that Japan can give military and naval support to operations sponsored and supported by the United Nations is surely desirable.

There are also political issues in Japanese foreign policy that need urgent attention. The deterioration in Japan’s relations with China and South Korea is a cause for concern not only Asia. Koizumi’s visits to the Yasukuni Shrine are regrettable for various reasons, but to exaggerate their significance, as Chinese and Korean leaders and the media have done, is mistaken. Japan is not returning to militarism and aggressive policies abroad. One fundamental problem in relations between Japan and China lies in the lack of democracy in China. This fact makes it very difficult to create an Asia Pacific Community, based on democratic principles, as Japan wants. The growth in Chinese military spending is another cause for concern in Japan. There is no easy and speedy way to improve relations, and patient diplomacy will be needed.

Japan is justified in its wish for a permanent seat on the U.N. Security Council and for a reduction in the excessive rate of the country’s financial contribution to the U.N. The United States supports Japan’s claim to a Security Council seat but its unwillingness to back a package plan, supported by Britain, for permanent seats for Japan, Germany, Brazil and India, helped to scupper a settlement of this issue at this year’s General Assembly.

Despite the real problems facing Japan, portents for the country’s future look reasonably good for the next few years, barring some unforeseeable catastrophe.